Reforms 3.0 to drive growth: Reforms being initiated now are going to push India back to 8 per cent plus annual growth over the next three year period. A bottom has been made and a slow recovery is underway. FY14 GDP may rise to 6.7 per cent from 5.6 per cent in FY13.
Pre-election budget may not by populist: The introduction "cash transfers" in lieu of in-kind subsidies is a step in the right direction. The government is also looking to rationalise the number of centrally sponsored schemes from current 147 to just 59, to make them more impactful while reducing the quantum of subsidies by better targeting.
Investment cycle set to pick up: Completion of existing projects has picked up and a pick-up in new orders is expected over the next few quarters. Asset turnover of BSE 100 companies has risen to all-time high, and companies are getting constrained on capacity. New orders have already started from cement, fertilisers, mining, etc.
Earnings upgrades to boost optimism: Earnings growth in FY14 may surprise on the upside at 16-17 per cent against consensus estimates of 13-14 per cent. The street is still not factoring in improvement in EBITDA margins with falling core inflation and neither the reduction in interest costs is getting built in.
Valuations re-rating will continue: The market at 13.6-times price earnings is below 10-year average. Cyclical sectors are even cheaper and are at 10-year low as compared to defensives. The undervaluation is even starker when one looks at price by book ratio.
Macquarie has replaced ICICI Bank, Dr Reddy's and HDFC Bank with Axis Bank, SBI and DLF to its top 10 ideas. It has increased overweight in financials by 400 basis points and reduced its weight on materials, IT and Consumer Staples.