CSFB cuts India to neutral, prefers Singapore

MUMBAI: Credit Suisse First Boston has cut India to Neutral from Overweight, citing an economic slowdown, rising inflation, slowing earnings, falling fund investments and concerns over technology sector valuations.

In a research report dated October 10, CSFB said it was recommending a switch from India to the more defensive Singapore.

"The key point is that the market is being supported by tech earnings which, given the global outlook, could come under pressure," the report said.

"Elsewhere, we are concerned by the slowdown in consumption and with much depending upon the monsoon, (this) implies that the next quarter or two could be difficult," it said.

The benchmark Bombay index ended Tuesday 0.59 per cent higher at 3,711.02 points. It is 39.7 per cent off its 2000 peak of 6,150.69 in February. On October 10, the index closed at 3,945.28.

CSFB said excessive capacity and the lack of pricing power would put pressure on margins in the domestic cyclical sectors.

Market liquidity was also coming under pressure, its report said.

"The main bullish scenario that we had believed in was the reallocation of money from bank deposits to equities. However, we are not so convinced," it said.

It said mutual fund sales had fallen, the aggressive foreign buying seen earlier in the year had petered out and retail investors had also lost their appetite to buy equities.

Data from the Securities and Exchange Board of India shows foreign funds which had bought over Rs 1.6 billion worth of equities in the first five months of 2000 turned big sellers in three of the next four months.

"If there is little impetus to buy equities, then valuations have to be something special to attract money into this market. While the market is cheap, so are other markets elsewhere in the region," it said.

The report said Singapore, Malaysia, Taiwan and Hong Kong were cheaper than India in terms of implied cost of equity.

"We are Neutral on the Indian market preferring Singapore on defensive grounds given that we believe that Asian markets will come under pressure from further concerns on the tech sector," it said.

"While the market as a whole is not expensive, stocks with good underlying businesses are," it said.

While earnings were not a problem for information technology services, the sector was trading at an average P/E of 75 times FY3/01 earnings, leaving little on the table, it said. CSFB recommended an overweight rating on the consumer and pharmaceutical sectors but said these stocks, while more reasonable and lower than historial averages, were no bargains at 25-35 times earnings.

It said the valuations for most industrial and commodity stocks were near their lows, but there was little reason to buy them in the current economic environment, except for their asset values.

CSFB said it would advise investors to pick stocks and not themes.

On its buy list are: ITC, Hindustan Lever Ltd., Nestle India, Asian Paints, Dr. Reddy's Laboratories, Ranbaxy Laboratories, Hoechst Marion Roussel, Infosys Technologies, Hughes Software, Zee Telefilms, Hindalco Industries, Grasim Industries, HDFC Bank and Housing Development Finance Corp.

(C) Reuters Limited 2000.