abcGlobal Research The backdrop is a bit better in 2014, but is it enough? Although signs of economic stabilization are emerging, any recovery will be slow to take hold given the lingering structural constraints on growth. A necessary fiscal spending squeeze will also pose headwinds. Inflation is still high and external fragilities remain (high current account deficit), though the magnitude has eased. The emergence of the Aam Aadmi Party (AAP) in state elections has added a twist to the election tale, increasing the likelihood that no party may get to the 200-seat mark in the General Election in 2014. In addition, India remains an expensive market within Asia Pacific. Four themes going into the year. In 2014, we think India will be dominated by the following themes: (1) reforms and elections – any party coming into power will need to address the ‘millstone’ of subsidies and other pending reform needs. We recommend energy, utilities, and some industrial subsectors as ways to play this. (2) Our macro team forecasts a 50bp in policy rate hikes, but the impact on effective lending rates may be more subdued. Selectivity in financials would be a way to play this theme. (3) An early cyclical recovery usually comes with higher utilisation rates for existing capacity rather than new capex. We recommend exposure to operating leverage themes via telcos, metals, and autos. (4) USD revenues is a theme we carry forward from 2013. We continue to like IT, healthcare, and manufactured exports via auto ancillaries. A weak Indian rupee (INR) stands to benefit multinationals’ consolidating minority stakes in India. We view Colgate Palmolive as a way to play this theme. We remain underweight India in an Asian context, with an end-2014 Sensex forecast of 21,750. We prefer export-oriented sectors (IT, healthcare) or USD proxy plays (energy). We reduce our weighting on private banks to underweight (from neutral) and retain our underweight on state-owned banks. We are neutral on autos, materials, and telecoms. India Equity Strategy India Equity Insights Quarterly Slow upward trajectory 10 January 2014 Jitendra Sriram* Equity Strategist and Head of Research, India HSBC Securities and Capital Markets (India) Private Limited +91 22 2268 1271 jitendrasriram@hsbc.co.in Herald van der Linde* Head of Equity Strategy, Asia Pacific The Hongkong and Shanghai Banking Corporation Limited +852 2996 6575 heraldvanderlinde@hsbc.com.hk Vikas Ahuja* Associate Bangalore  Economy on a slow rebound; election-led news flow to hold centre stage into 1H14  2014 themes: (1) reforms and elections, (2) firm interest rates, (3) operational leverage plays, (4) INR plays – exporters and multinational buybacks  We are underweight India within Asia; our end-CY14 Sensex target is 21,750 – only 5% above the current level View HSBC Global Research at: http://www.research.hsbc.com *Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA regulations Issuer of report: HSBC Securities and Capital Markets (India) Private Limited Disclaimer & Disclosures This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it 2 Equity Strategy India 10 January 2014 abc HSBC strategy recommendations Themes and stocks highlighted in the report Theme Company Bloomberg code Sector 7-Jan closing price (INR)Target price (INR)Rating HSBC analyst Reforms & elections Oil & Natural Gas ONGC IN Oil & Gas 276400OW Kumar Manish Tata Power TPWR IN Electric Utilities8298OW Arun Kumar SinghLarsen & Toubro LT IN Construction & Engineering1,0201,210OW Ashutosh NarkarFirm interest rates HDFC HDFC IN Thrifts & Mortgage Finance798966OW Sachin ShethKotak Mahindra BankKMB IN Commercial Banks708855OW Tejas MehtaOperational leverage Bharti Airtel BHARTI IN Wireless Telecoms332399OW Rajiv SharmaSesa Sterlite SSLT IN IT Services195240OW(V) Jigar Mistry Maruti Suzuki India MSIL IN Autos1,8462,100OW Yogesh AggarwalExporters, multinational buyback plays Sun Pharma* SUNP IN Pharmaceuticals594725OW Girish BakhruTCS TCS IN IT Services2,2062,540OW Yogesh AggarwalMotherson Sumi MSS IN Machinery193253OW Puneet GulatiColgate-Palmolive CLGT IN Household Products1,3411,650OW Amit Sachdeva*A member of the Asia Super Ten and GEMs Super 15 portfolios Source: Thomson Reuters Datastream, HSBC Our sector views Sector Sub-sector Weight WeightingForward PE (x)Forward PB (x)HSBC comment Consumer Discretionary Autos 6.0% Neutral12.13.0Rising fuel prices and slower growth in auto sales make us neutral on the sector Media 0.5% Overweight27.25.4 Subscription revenues to multiply for TV broadcasters after digitisation Consumer Staples 10.9% Neutral30.39.1Expensive valuation, with growth slowing down Energy 11.8% O