Indian outlook remains encouraging, says Mahtani

India continues to be one of the strongest domestic demand stories in Asia - for the first time in several years the outlook for all three key segments of the economy (services, rural, manufacturing) is positive. Sam Mahtani, Director, Emerging Markets Equities at F&C has just returned from a trip to Asia that included India, and believes that the Indian domestic demand story remains robust and will support the economy if external demand weakens in 2011.

"Private consumption is strong from both urban and rural areas and this may also not be reflected in official data. First quarter GDP growth came in at 8.8% p.a.. Consensus is currently at 8.4% GDP growth in financial year 2011 and 8-8.5% for FY12. The key is that we could be entering a new range of 9-10% p.a. GDP growth from FY13 onwards," Mahtani commented.

The Indian stockmarket has rerated over the past year and the MSCI India Index is trading a price/earnings ratio of 14.4x 2011 earnings. Mahtani believes that a 14-15x forward PE multiple can be justified as long as the domestic demand story continues and earnings per share can grow at 15-20% a year.

In an uncertain global macroeconomic environment, Mahtani has kept faith with large cap, high-quality, stocks with balance sheet strength and a focus on shareholder returns. His key portfolio themes are pharmaceuticals, automobiles, banks and technology. His key ideas going forward include Bajaj Auto and TVS Motor Co, with both stocks benefiting from strong structural demand for their 2-wheeler vehicles, and pharmaceutical manufacturer Lupin Laboratories, which has benefited from new product launches in the US.

"The current recovery in India is broad based and can gather further momentum as we see corporate capex increase and the agricultural sector recover. Valuations should be supported by strong earnings growth. In our view, India continues to be a high conviction play," Mahtani concluded.