Accumulate stocks with attractive valuations, strong balance sheets By DIPEN SHAH, KOTAK SECURITIES Markets witnessed an eventful month with important news coming from both global and domestic front. Liquidity easing measures from ECB and Fed coupled with reform initiatives in India (notification of FDI in several sectors, fuel subsidy reduction, reduction of withholding tax, etc) boosted sentiments and FII inflows sharply. Inflation rate in India increased slightly to 7.55% in Aug 2012 (data declared in September) from 6.87% in July 2012. IIP for the month of July also grew marginally by 0.06% dragged by negative growth in capital goods. Though RBI reciprocated the recent reform measures by reducing CRR by 25 bps, but it stopped short of cutting key policy rates due to persistent stickiness in inflation. Further action on core reforms will increase the flexibility with RBI in dealing with interest rates. We had been stating that in near to medium term, market direction would be dependent on fiscal initiatives from government and developments in US and euro zone. Markets have also been trending higher over the past few months on expectations of global liquidity and domestic reforms. Post this rise, valuations are at about 15x FY13 earnings, which is the average of the long term PE band for the benchmarks. Further sustainable rise in the markets will be led only by further initiatives on the core reforms. These core reforms are necessary to encourage more investments and help sustain the earnings and valuations at current levels. Post the recent action taken by government, we are optimistic on further reforms to improve the investment climate. We continue to recommend a bottoms-up approach and would recommend investors to accumulate stocks having attractive valuations, strong balance sheet and ethical management across sectors. We believe that, the recent rally in sectors like banking, infrastructure, capital goods, etc will be likely supported only if further core reforms are announced. Key risk to our recommendation may come from spike in crude oil prices or inaction by government in taking ahead further reforms.