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% of reserves<br />
2004Q3<br />
2005Q1<br />
2005Q3<br />
2006Q1<br />
2006Q3<br />
2007Q1<br />
2007Q3<br />
2008Q1<br />
2008Q3<br />
2009Q1<br />
2009Q3<br />
2010Q1<br />
2010Q3<br />
2011Q1<br />
2011Q3<br />
2012Q1<br />
2012Q3<br />
2013Q1<br />
2013Q3<br />
2014Q1<br />
2014Q3<br />
2015Q1<br />
2015Q3<br />
2016Q1<br />
2016Q3<br />
2017Q1<br />
2017Q3<br />
2018Q1<br />
% of reserve<br />
Strategy Note India January 1, 2019<br />
India<br />
Highlighted Companies<br />
Axis Bank<br />
ADD, TP Rs740.0, Rs619.9 close<br />
We believe asset quality will improve<br />
further from FY20 onwards as a large<br />
part of the stress is already recognised.<br />
The high provisioning coverage ratio<br />
(PCR) of +65% offers comfort. Operating<br />
profit could bounce back in FY20-21F. In<br />
our view, Axis’s strong retail franchise as<br />
well as robust current account and<br />
savings account (CASA) accruals are<br />
likely to continue.<br />
Bharat Petroleum<br />
ADD, TP Rs475.0, Rs362.8 close<br />
The fall in crude oil prices and stabilising<br />
currency are the biggest tailwinds for<br />
Indian OMCs. Among the pack, Bharat<br />
Petroleum remains our top pick.<br />
Britannia Industries Ltd<br />
HOLD, TP Rs3,354, Rs3,115 close<br />
We like Britannia from a long-term<br />
perspective as it offers multiple channels<br />
of earnings growth and would be a<br />
beneficiary of the shift from the<br />
unorganised to organised sector.<br />
Insert<br />
India Strategy<br />
USD: Trump shock; brace for volatile CY19<br />
■ The US$ is undergoing a structural adjustment; global demand for US$ may<br />
fall. Brace for volatility in equities. Gold may be the best asset class in CY19.<br />
■ Avoid anything related to American discretionary demand. Underweight IT. A<br />
slowing global economy is negative for commodities; stay Underweight.<br />
■ Indian domestic stories should do well. We like banks, consumption (despite<br />
bubble valuations), capital goods, utilities and oil marketing companies.<br />
Global headwinds; brace for volatility<br />
The status of the US$ as a global reserve currency is being threatened as large trading<br />
countries like China and Russia are making bilateral agreements to trade in their own<br />
currencies. Petrodollar, which was a primary source of US deficit funding, is losing its<br />
hegemony (albeit at a very sedate pace) to EM currencies. As a global reserve currency,<br />
the greenback is down 4% (from 64% in 2015 to 60% in 2Q18) but the euro has not taken<br />
its place. The Chinese yuan and yen are dominating now. Predicting the equilibrium level<br />
among these multiple forces is beyond the scope of this report. Brace for a volatile 2019.<br />
Tailwinds for India but need strong stomach to make money in 2019<br />
There are apparent tailwinds for India given falling crude oil prices and the worst of<br />
banking NPA already over. The capital goods sector is showing signs of a revival as well.<br />
However, currency could remain volatile, not because of current account deficit (CAD) or<br />
India-specific factors, but as part of the process of forming a new equilibrium. New trade<br />
agreements by India will open doors for Indian export companies. Add to that, the topsyturvy<br />
political equations that could emerge from the 2019 general elections, one needs a<br />
strong stomach to weather 2019, though we believe there is still money to be made.<br />
Go Underweight on IT but Overweight on banks and capital goods<br />
After all the hullabaloo about limiting H1B visas, etc., what the US has managed to do is<br />
increase services exports by US$10bn (or 4.5% increase yoy YTD Oct), certainly not<br />
enough but sufficient for political leaders to boast and create an overhang over Indian IT.<br />
Add to that the prospect of a slowing US economy, and IT becomes a clear underweight.<br />
The worst of the banks’ NPA cycle is over and prospects of a revival in the capex cycle<br />
make capital goods as well as corporate banks clear overweights.<br />
Underweight commodities; Overweight gold, FMCG, Auto and OMC<br />
Slowing global growth is negative for commodities; go underweight. This volatility and<br />
slowly but steadily rising dollar inflation are good for gold. In our view, gold is the asset<br />
class for 2019. Despite high valuations (we called it a bubble previously), FMCG is likely<br />
to do well. Falling crude prices are good for India’s oil marketing companies (OMCs).<br />
Figure 1: US$ is losing its status as the premier reserve currency but its position has<br />
not been taken up by the euro. The Chinese yuan is a new favourite and yen is making<br />
a comeback. Multiple trade agreements could also bring the rouble to the fore.<br />
Analyst(s)<br />
68<br />
67<br />
66<br />
U.S. dollars ( LHS) euros ( RHS)<br />
28<br />
26<br />
65<br />
64<br />
63<br />
24<br />
22<br />
Satish KUMAR<br />
T (91) 22 4880 5185<br />
E satish.kumar@cgs-cimb.com<br />
Siddharth GADEKAR<br />
T (91) 22 4880 5171<br />
E siddharth.gadekar@cgs-cimb.com<br />
62<br />
61<br />
60<br />
SOURCES: CGS-CIMB RESEARCH, IMF<br />
[ #Do Not Leave 'ANY UNUSED TEXT etc.’ After this Line OR they will appear in the Email]<br />
IMPORTANT DISCLOSURES, INCLUDING ANY REQUIRED RESEARCH CERTIFICATIONS, ARE PROVIDED AT THE END OF THIS REPORT. IF THIS REPORT IS DISTRIBUTED IN<br />
THE UNITED STATES IT IS DISTRIBUTED BY CGS-CIMB SECURITIES (USA), INC. AND IS CONSIDERED THIRD-PARTY AFFILIATED RESEARCH.<br />
20<br />
18<br />
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