The gush of foreign inflows that we are seeing in the country right now and the movement that we

have seen with the equity market, does it justify the move that we have seen looking at the macro
picture and would we see the all-time highs anytime soon? 

Just in terms of the 6000 level for the Nifty, that is around 1% point away. So difficult to handicap when
exactly we get there but it flows, stays strong given you have already had more than $2.5 billion of FII
flows. This month, the same pace continues. 1% move would not be out of the question. As to getting to
new highs, we are still around 7-8% points away from those levels.

Our take currently on the markets is that we would be a bit cautious at these levels and there are 4 key
reasons for that. One, valuations are a bit rich, especially relative to the region. Two, there is some
downside risk to earnings estimate. We see a roughly 3% to 6% downside risk to earnings estimate and
the 3rd point is that although the RBI’s recent policy statement suggests that they are probably more
comfortable with normalisation of rates, our economics team still expects roughly 100 basis points of rate
hike going forward. 

So that could also be a risk and finally just from a trade deficit perspective given the trade deficit numbers
we are seeing, we do think the RBI does need to tamper down domestic demand a little bit and finally
from a sectoral leadership perspective, financials have run up quite a bit and I do expect
underperformance from that sector specifically. 

Industrials we are not seeing much upside from here per se and in the energy sector mainly due to a view
on Reliance, we do expect underperformance and these 3 sectors are more than 50% of the index and
have been the leadership sectors in the last bull market. So also given the rich valuations downside risk to
earnings estimate, the macro picture we are seeing right now and the lack of sector leadership makes this
a bit cautious on these markets at these levels. Our published targets suggest roughly around 20%
downside from current levels. 

You mentioned Reliance Industries. What to your mind is the root reason while Reliance
Industries this year and of late is actually massively underperforming now? 

In terms of just the earnings picture, earnings estimates have come down quite significantly and they will
continue to come down because our analysts expect earnings estimates, their earnings estimates are
roughly 15% to 25% below what the street consensus says. Given that, the stock could continue to
underperform from here too. 

What is your sense with the entire auto space because that is the one that is really driven and led
the rally really. Does it seem like that sector post in terms of the equity market performance and in
terms of the corporate earnings growth has more steam to it? 

You have to be a bit selective in this sector. This sector as a whole I do not think is that big enough to
drive the market on its own, but within the sector, we do like Mahindra & Mahindra. Valuations are still
reasonable even post the recent run up and given the normal monsoon we are having, it will be a
beneficiary of the uptick in rural demand. So we still like selected names there, especially Mahindra &
Mahindra, but do not think the sector as such is big enough to drive the market higher all by itself. 

You have an overweight bias towards the telecom sector. Is this more like a tactical trade, a sector
which has not moved up makes sense to buy it because liquidity indeed is chasing Indian
stocks? 
Just to specify our overweight call in telecoms, it is mainly a single stock call essentially on Bharti. We
upgraded the stock recently and it has been a good call for us. There were two factors to it. One of course
tactical and the stock had underperformed quite significantly and was in the value zone, but also on the
fundamentals, we see improvement. The worst in domestic competition is behind us on the domestic side
and on the international side, there could be upside especially on the margin front from the Zain
acquisition that the company has made and even now looking at valuations on our numbers which are
significantly above consensus for fiscal 2012, this stock is still trading at a discount to the broader market.
So that is why we like Bharti but just to clarify, it is more a single stock call given the fact is that I just
mentioned with the added international kicker rather than a positive call on the whole sector per se. 

Bharti is up from levels of 230 to 240 to current levels of about 360-370. Do you still see there is
potential for the Bharti stock to go up in the immedia You are also overweight on a couple of
these technology companies. Would it be the regular blue chip index heavyweights or would it be
the smaller players? 

Sure, we are overweight the regular blue chip names and Infosys is our top pick there. The rationale for
being overweight tech right now is I do not think we are going to see a lot of core earnings upgrades,
although I do think near this quarter earnings will be pretty good for Infosys. But if you look at the rupee
estimate, there are a number of analysts using in terms of forecasting earnings for these companies. I
think they are still using probably 44-45 and given where the rupee is right now even post the recent run
up, I do think you could get earnings upgrades just because of the rupee factor. So that’s the rationale for
the overweight there. 

If I could be a devil’s advocate and if I just look at the PE multiples for Infosys Technologies or for
that matter large cap IT, you have bought telecom because telecom was trading at a discount to
the Sensex but Infosys Technologies is trading at a 50% premium to the Sensex stock at an all
time high and PE multiples one year forward 20 times plus? 

Yes, so the stocks trading at 20 times prospect. I do take the point that its growth rates are probably not
as strong as they have been, but if you look at historical PE, absolute PE multiples and multiples relative
to the market they do not look that rich and at least in the near term I do think you will get pretty good
earnings visibility although there could be some political noise regarding the visa issues through
November. 

What is the call then on the commodity plays, the likes of metals, sugar, fertilizer and the rest? 

Sure, I mean, specifically on the metal names actually let me step back a bit on the materials name,
generally materials commodities names, we have a slight underweight and although it’s a high beta sector
given that the slight underweight might seem a bit counter intuitive, but I will give you the rationale for that
one was that the sector has been an underperformer versus rest of the market year to date and secondly
if you look at the sector versus regional peers, it’s one of the few sectors in India that is trading at a
discount to regional peers. 

That is why we are modest underweight rather than a very large underweight given the high beta nature
of the sector. Ambuja Cements would be a key underweight and the rationale for being underweight
cement is that you will see significant kind of supply demand mismatch especially going into fiscal 2012
and that in our view would cause pricing to come under pressure. 
Our analyst estimates for some of these cement names are roughly 16% below consensus for fiscal 2012
given that and given the run up these stocks will had so far. I think I would be quite cautious on these
names. Stuff we like in the space on the metal side we have been pushing Tata Steel a bit especially
given input prices that have been coming up for the European business especially on the coking coal
side. We have also been pushing Hindalco and we do think just because the business is stabilizing, that
is still to be fully appreciated by the market per se.te future? 

Well, I think it is difficult in the immediate future but as you think over a longer time-frame which would
probably be 6 to 9 months, the stock could outperform the broad market especially given valuations are
still at a discount to the broader market. The other point would be I think if you get the market is still
concerned about what happens with M&P, I think if investors get more comfortable at M&P is not going to
be a significant issue that could also lead to some rerating of the stock higher.