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UBS Investment Research
India Market Strategy
2QFY11 - Sensex earnings growth inline
„ UBS India coverage stocks revenue grew 20.8%, Net Income 13.9% YoY
Earnings growth of UBS India stock universe (ex oil & gas) in 2QFY11
decelerated to 10.1% YoY when compared to 17.5% growth in 1QFY11. Sales
growth and EBITDA margins also declined in 2QFY11 to 20.4% and 20.3%
respect. from 26.3% and 21.8% in 1QFY11. Among the sectors strong earnings
growth was shown by sectors such as autos, banks, engineering, media and metals
while sectors such as cement, infrastructure, real estate and telecom were a drag on
earnings. BSE Sensex stocks reported revenue, EBITDA and net income YoY
growth of 22.6%, 18.5%, and 9.9% respectively in 2QFY11. Our earnings growth
forecasts for the BSE Sensex are 16.0% for FY11E and 20.6% for FY12E
„ Positive surprises: autos, pharma, oil & gas and real estate
40% of the companies under our coverage beat expectations in 2QFY10 compared
to 32% in 1QFY10. Positive surprises came from sectors such as autos, pharma, oil
& gas and real estate while negative surprises came from sectors such as IT
services, infrastructure, power, and telecom.
„ Staying positive on India; March 2012 Sensex target of 24,600
We maintain our positive view on Indian stocks in 2011 with a March 2012 Sensex
target of 24,600 as: 1) we believe the Indian economy will continue to deliver an
8% GDP growth rate; 2) corporate India is likely to deliver mid-high teens
earnings growth in FY12; we expect Sensex EPS to grow 20% in FY12; and 3) the
stable government will likely continue to make progress on the various reforms.
Our key stock picks are Bharti Airtel, GVK, Jai Balaji, Lanco, RCom, and Shriram
transport finance.
UBS India coverage universe -
2QFY11 performance
Q Earnings growth rate of UBS India coverage universe accelerated to 33.0%
yoy in 2QFY11 from -12.3% yoy in 1QFY11 as oil & gas companies
benefitted from reimbursement of oil subsidies from government during the
quarter.
Q Excluding the oil & gas sector UBS coverage universe earnings (ex oil &
gas) decelerated to 10.1% yoy in 2QFY11 vs. 17.5% yoy in 1QFY11.
Q UBS universe (composite) sales growth continues to remain strong coming
in at 23.0% in 2QFY11 vs. 25.0% in 1QFY11.
Q Strong earnings growth was shown by such as autos, banks, engineering,
media and metals while sectors such as cement, infrastructure, real estate and
telecom were a drag on earnings.
Beats and misses
Q In 2QFY11, the number of companies that beat UBS earnings estimates
increased as compared to 1QFY11.
Q Of the 81 companies that we have analysed for 2QFY11 results performance,
number of companies which beat estimates was equal to companies which
missed estimates as compared to negative 7.6% net beat (% beat minus %
miss) in 1QFY11.
Q Based on market capitalization, 31.1% of companies beat our earnings
estimates compared to 26.9% in 1QFY11 suggesting that on a relative basis
large cap companies have faired better this quarter when compared to last
quarter.
Q The percentage of companies which met expectation decreased to 21.0% in
2QFY11 from 28.8% in 1QFY11.
Sensex - 2QFY11 performance
Q Sensex’s earnings growth came in at 9.9% yoy in 2QFY11 in line with our
estimate. However, excluding oil & gas sector the earnings growth (10.2%
yoy) in 2QFY11 was ahead of our estimate of 7.8% yoy but was lower than
last quarter growth.
Q Further, the earnings growth of Sensex excluding global commodities came
in below our estimates at 4.7% vs. UBS-e of 8.7% largely due to decline in
earnings of diversified (Jai Prakash Associate), cements and Telecom sector.
Q Sensex sales growth in 2QFY11 (22.6% yoy) came in above our estimates of
10.8% yoy; however the sales growth decelerated in the quarter when
compared to last quarter growth of 30.0% yoy. Excluding global
commodities Sensex sales growth was at 23.7% yoy in 2QFY11 vs. 17.8%
yoy in 1QFY11.
UBS view on Sensex
Sensex earnings
Based on our bottom up analysis of Sensex constituents, we expect Sensex
earnings growth of 20.6% in FY12 followed by 18.3% in FY13. This compares
to IBES consensus earnings growth of 20.4% and 18.8% in FY12 and FY13
respectively. We expect earnings growth in FY12 to be led by the financial,
metals, infrastructure and IT services sectors.
BSE Sensex target derivation
We use a two-stage forward PE target multiple model to derive our BSE Sensex
target. The first stage is the growth phase where we expect earnings to grow
11.8%, ROE of 17.0% and COE of 12.1%. The growth phase is 20 years. The
second stage is the terminal stage where we assume a long-term earnings growth
rate of 5.0%, ROE of 11.0% and COE of 9.5%.
The contribution of the growth phase to our total target PE multiple is 5.4x. Our
two-stage forward PE target multiple for the BSE Sensex is 16.7x. Using our
EPS forecast of Rs1,469 for FY13, we arrive at our FY12 BSE Sensex target of
24,600 (rounded).
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