[T.S.R:15919] Indian Banks: Keep An Eye On The Exits...JPMorgan

JPMorgan Indian Banks: Keep An On The Exits Banks are now the beta play: We also believe that banks are benefiting from investors' lack of options, and are now favorites on the macro theme. Soft commodity prices mean that the option of playing the India growth story is restricted to industrials and financials, and the latter scores on valuations and visibility of growth.   EPS the key driver, earnings upgrades limited: We see the scope for earnings upgrades as limited in FY11. At best, we expect a 10-15% positive surprise on NPL provisions, which would have a <5% impact on prices. We raise our PTs by moving to P/E as the defining valuation metric, rather than P/BV vs ROE. The caveat is that we see this as strictly a bull-market valuation, which will not hold across the cycle. Stock recommendations: ICICI Bank, KMB, BOI are our top picks:   Our new recommendation table largely reflects the macro nature of the trade, with stocks moving in a pack. We upgrade SBI to N, BOB to OW, and ICICI to OW. ICICI is our top pick along with KMB and BOI.   Keep your eye on the exit door: Our view now reflects what we believe to be a near-perfect macro, and we see large downside risk should the cycle turn prematurely. We advise investors to remain watchful for evidence of the cycle turning, with capital flows providing a critical cue.   Indian banks have significantly outperformed the local market and regional banks, and valuations now look quite demanding. However, we see a confluence of positives on fundamentals, and banks should remain a favorite sector for investors on the overall macro theme. We stay positive on the sector, with ICICI, KMB, and BOI our favorites.   Confluence of macro positives: Recent macro news has been supportive, despite rising rates – good monsoons, accelerating growth, and slowing inflation. There is an increased probability of the sector hitting a sweet spot, in our view, with high domestic growth and moderate rates, if RBI hits the pause after "normalization".     Safe Harbor Statement: Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.   Nothing in this article is, or should be construed as, investment advice.

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