Ahead of the government's plan to increase an average 33 percent fuel price hike, the market has continued to forge ahead breaking through the 5,150 year-end index target. While we believe that less government fuel subsidies will improve Indonesia's longer-term macro fundamentals, we think that short-term pain in the form of slower growth on the back of higher inflation and increased interest rates will mean profit taking in the near-term for the market.

Assuming a 33 percent (Rp 1,500/liter) fuel price hike to Rp 6,000/liter, inflation would jump to nearly 9 percent y-y, dragging down 2013 GDP growth to slightly below 6 percent.

This is particularly true given the lofty 2013 price-earning (PE) ratio of 20x, some 35 percent premium to the region with market earning per share (EPS) growth of just 8.8 percent, translating to price-earning to growth (PEG) of 2.3x.

Thus, we retain our 2013-end bottom-up index target at 5,150, particularly given our Underweight call on the auto sector with Astra International (ASII) as a REDUCE with target price (TP) of Rp 6,200 representing 14 percent downside potential from current share price level. In our view, given that inflationary pressures are on the cards, profit taking will occur on interest rate sensitive stocks (e.g. banks and property).

Assuming sizeable market correction, nothing will be spared, but those hurt most would be counters which have been the best performing year-to-date. On the flip side, we expect defensive stocks to outperform on the way down.

As we expect short-term profit taking to occur, we have further trimmed our top 10 picks to just five picks as some share prices have reached our targets. We have further raised TPs on three stocks: TLKM, ICBP and JSMR, as we believe their price rerating remains justified given their defensive nature amid current pick up in local inflationary pressures.

Telkom Indonesia's (TLKM-BUY-Rp 12,350-TP:Rp 14,500) new growth strategy hinges on data development, a mix of broadband and Wi-Fi, which are expected to account for some 15 percent of revenues by 2015.

In the lead up to the 2013-2014 elections, we expect increased phone usage to coordinate political campaigns and meetings to the benefit of TLKM. On valuation, the stock remains undemanding on 2013 EV/EBITDA of 6.1x. Our revised-up Rp14,500 TP reflects a re-rating to regional telco EV/EBITDA of 7.1x.

Indofood Consumer Branded Products (ICBP-BUY-Rp 12,550-TP:Rp 14,700) is set to benefit from low flour prices due to intense competition stemming from 11 new entrants into the flour market in 2013-2014. Additionally, margin support will come from substantial minimum wage increases, which will in turn allow not only higher prices but also improved sales mix as consumers migrate into higher-priced products. At our revised-up target price of Rp 14,700, ICBP would trade in line with the regional consumer sector's 2014 PE of 31x.

Jasa Marga's (JSMR-BUY-Rp 6,700-TP:Rp 8,500) periodic tariff adjustments (inflation-based) will provide earnings support while additional new toll roads being operational in the coming years will mean continued benefit from increased government projects in toll-road development. Our new DCF-based TP of Rp 8,500 uses WACC of 12 percent.

Adhi Karya's (ADHI-BUY-Rp 3,500-TP:Rp 4,400) increased construction (infrastructure) projects coupled with margin support from its property business will help to maintain growth momentum. Additionally, positive sentiment on the counter will stem from monorail-related settlements amounting to at least Rp 150 billion in 2013. On valuation, our target price is based on 2014 PE of 14.0x, 20 percent discount to the market.

Wijaya Karya's (WIKA-BUY-Rp 2,625-TP: Rp 3,200) higher construction projects in the pipeline coupled with margin support from its sales of electricity and property business will help to improve bottom line. Additionally, WIKA has won the Mass Rapid Transit (MRT) project tender with 15 percent of total project shares, amounting to Rp 313 billion. On valuation, our target price Rp 3,200 is based on a further 2014 PE resrating to 20x.

The writer is the head of research at PT Bahana Securities

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