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India Equities
2011 – Sector views and stock picks
2011 performance to be driven by stock
rather than sector calls
For many sectors, earnings outlook is
robust but valuations are already high
Top picks include Yes Bank, L&T,
Infosys, PTC, DLF, Tata Steel…
Financials: Robust earnings, but high valuations; renegotiation
of pension liabilities could hurt public sector banks. Prefer Yes
Bank on rising mkt share, shift to retail and re-rating prospects.
FMCG: Revenue likely to be robust, but cost inflation and
pricing pressures are squeezing margins. Dabur has a strong
niche, earnings growth and reasonable valuation.
Industrials & Infrastructure: Government spend to remain
strong and private sector to accelerate. Larsen & Toubro has a
diversified presence, high visibility and strong balance sheet.
IT Services: Revenue prospects look strong thanks to increased
off-shoring and discretionary spending revival. Infosys most
exposed to global trends and minimal tax change exposure.
Metals: Bullish on Steel & Aluminium, bearish on Iron Ore &
Zinc. INR and regulation are the risks. Tata Steel is most likely
to benefit from steel price rises and upside from new projects.
Oil & Gas: Expect muted performance due to flat gas output
and higher under-recovery burden. Cairn India to benefit from
80% output growth and high oil prices.
Property: Bullish on commercial property, bearish on
residential where rate hikes hurt more. DLF has the best scale
and high exposure to commercial property.
Retail: Expect a challenging year thanks to tough comps on
same store sales growth and margins. Gitanjali has a robust
growth outlook and reasonable valuation.
Telecom: Volume and uptake of 3G are positive, but to turn
bullish, still need sector consolidation/shakeout. Bharti’s
network scale should see it benefit most from 3G.
Utilities: Accelerating power capacity addition and more capex
will drive positive performance. PTC has expanding margins
and potential to unlock value of subsidiaries.
Sector / View Outlook
Financials
Mixed
Expected to deliver robust earnings growth in FY12 (20-25% public sector / 25-35% private sector), driven largely by 20%+ credit growth,
partly offset by flat-to-down margins and diminishing asset quality concerns. Risks to earnings are skewed to the downside by a potential
hit from recently renegotiated pension liabilities for public banks which could amount to as much as one year’s earnings. Given valuation
premium to market (~25%), overall risk/benefit trade-off is neutral. We prefer private versus public sector banks.
Yes Bank (YES IN, OW, INR534) is our top pick based on quality management, strong execution track record, structural business shift
towards retail and strong prospects for a stock re-rating.
FMCG
Negative
While India’s favourable demographic and economic trends continue to bode well for strong sales growth, we expect stock performance of listed
FMCG companies to be muted because a) we see downside risk to margins from input cost inflation and competitive pricing pressures which are
expected to persist, and b) all-time high valuations (~24x forward PE). We believe overall risk-benefit trade-off is not favourable.
Dabur (DABUR IN, OW, INR114) is our top pick because of its niche positioning, strong earnings outlook, and reasonable valuations.
Industrials &
Infrastructure
Positive
In 2011, we expect private sector capex spend to accelerate (15-18%), and government spend on infrastructure to remain strong (it’s the
last year of the current 5-year plan). Companies with operational scale and access to capital will likely surprise on the upside.
Capex/infrastructure spend will be mainly directed towards Power (40GW of new capacity orders worth USD36bn), Roads (7000-9000kms
of highway projects worth USD15-20bn), Metals and Cement (USD12-15bn).
Larsen & Toubro (LT IN, OW-V, INR2,341) is our top pick given its strong top-line growth visibility, diversified presence, and strong
balance sheet. In the power sector, we view the transmission companies as more attractive than equipment manufacturers and
distribution companies.
IT Services
Positive
In 2011, revenue growth is expected to be robust (23-25% in USD terms), fuelled by a) increased off-shoring, and b) revival of
discretionary IT spending) across several industry sectors. Furthermore, Indian IT companies will benefit from an ongoing trend towards
grant of smaller contracts (versus mega-deals) which will expand the addressable market. While EBIDTA margins are expected to remain
largely stable for the big players, an increase in the tax-rate (STPI tax exemption sunset) will adversely impact net margins; still, earnings
are expected to grow a healthy ~20%, and be the key driver of stock performance in 2011.
Infosys (INFO IN, OW, INR3,830) is our top pick given its competitive prospects to benefit from global trends (skews earnings risks
upwards) and it has minimal incremental exposure to changes in tax rates.
Metals
Positive
Our 2011 outlook is bullish on Aluminum (increased switch to aluminum from copper), and Steel (higher margins from restrained
production in China and demand growth globally). We also are bearish on Iron Ore and Zinc (price pressure from increased supply).
Overall, we expect India’s Metals & Mining sector to deliver 14% top-line growth and 17% EBITDA growth in 2011. Although a potentially
stronger INR and regulatory risk (MMDR bill prescribing mining royalties) are headwinds, we believe that overall benefits outweigh the
risks at current valuations (6.5x EBITDA).
Tata Steel (TATA IN, OW-V, INR730) is our top pick – it is best positioned to benefit from rising steel prices and potential upside from
commissioning of backward integration projects.
Oil & Gas
Negative
We expect muted performance, thanks to flat gas output, and a continued burden of oil under-recoveries for India’s public sector Oil
Marketing companies (Oil, HPCL, BPCL). Overall earnings growth (10-13% average) will be largely driven by higher volumes.
Cairn India (CAIR IN, OW, INR360) is our top pick – it stands to benefit from ~80% growth in oil production from its new fields in FY12 and
is best leveraged to higher Oil prices (our forecasts assume oil at USD76/bbl in 2011).
Property
Mixed
Our outlook is mixed – we are bullish on commercial property and bearish on residential property. While overall project execution appears largely
on track in 2011, we expect higher revenue realizations from commercial property (20-30% volume growth + 5-10% price appreciation), and lower
realizations from residential property (flat prices and 10-15% lower volumes). We also expect larger commercial property developers to benefit
disproportionately. Rising interest rates and potential lending squeeze will hurt residential projects more than commercial.
DLF (DLFU IN, OW-V, INR386) is our top pick given its scale and higher exposure to commercial property.
Retail
Negative
2011 is expected to be a more challenging year, mainly due to tough comps: the sector saw the benefit of a) pent up demand, and b) an
uptick in consumer sentiment, which resulted in 15-20% same-store-sales (SSS) growth and margin expansion in 2010. SSS growth
should decelerate in 2011, and we expect margin expansion to be modest at best. Stock performance is therefore likely to be muted.
Gitanjali (GITG IN, OW-V, INR341) is our top pick because of its robust growth outlook and reasonable valuation; we also like Titan over
the long term.
Telecom
Mixed
Outlook to remain clouded during 2011. On the positive side, continued growth in volume, stabilization of tariffs, potentially rapid uptake of 3G
services (expected only in late 2011), and muted valuations (14x forward PE) warrant a constructive approach to the sector; however, the imminent
rollout of MNP could threaten tariff stability. Furthermore, sector consolidation/shakeout, which we view as necessary for a sustainable sector rerating,
still seem distant, and until then we expect the sector to be range-bound. We recommend the incumbents over new entrants.
Bharti (BHARTI IN, N-V, INR370) is best positioned given its quality spectrum bank, potential to see the fastest 3G adoption, and an
improving outlook in Africa.
Utilities
Positive
Outlook is positive for 2011, driven largely by 25%+ earnings growth on the back of acceleration in power capacity addition (18GW in
FY12), and high sector capex during FY12 which implies strong earnings in subsequent years. Although investor concerns regarding new
project implementation, fuel availability and the financial health of state-owned distribution companies will persist (understandably), we
believe these factors do not represent any meaningful short-mid term earnings risk and, more importantly, are adequately discounted in
valuations (sector PB multiples have contracted from 2.5x to 2x during 2010 on these concerns).
Power Trading Corporation (PTC IN, OW-V, INR161) is our top pick given its expected growth from more power availability, and potential
to unlock value in its subsidiaries.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
India Equities
2011 – Sector views and stock picks
2011 performance to be driven by stock
rather than sector calls
For many sectors, earnings outlook is
robust but valuations are already high
Top picks include Yes Bank, L&T,
Infosys, PTC, DLF, Tata Steel…
Financials: Robust earnings, but high valuations; renegotiation
of pension liabilities could hurt public sector banks. Prefer Yes
Bank on rising mkt share, shift to retail and re-rating prospects.
FMCG: Revenue likely to be robust, but cost inflation and
pricing pressures are squeezing margins. Dabur has a strong
niche, earnings growth and reasonable valuation.
Industrials & Infrastructure: Government spend to remain
strong and private sector to accelerate. Larsen & Toubro has a
diversified presence, high visibility and strong balance sheet.
IT Services: Revenue prospects look strong thanks to increased
off-shoring and discretionary spending revival. Infosys most
exposed to global trends and minimal tax change exposure.
Metals: Bullish on Steel & Aluminium, bearish on Iron Ore &
Zinc. INR and regulation are the risks. Tata Steel is most likely
to benefit from steel price rises and upside from new projects.
Oil & Gas: Expect muted performance due to flat gas output
and higher under-recovery burden. Cairn India to benefit from
80% output growth and high oil prices.
Property: Bullish on commercial property, bearish on
residential where rate hikes hurt more. DLF has the best scale
and high exposure to commercial property.
Retail: Expect a challenging year thanks to tough comps on
same store sales growth and margins. Gitanjali has a robust
growth outlook and reasonable valuation.
Telecom: Volume and uptake of 3G are positive, but to turn
bullish, still need sector consolidation/shakeout. Bharti’s
network scale should see it benefit most from 3G.
Utilities: Accelerating power capacity addition and more capex
will drive positive performance. PTC has expanding margins
and potential to unlock value of subsidiaries.
Sector / View Outlook
Financials
Mixed
Expected to deliver robust earnings growth in FY12 (20-25% public sector / 25-35% private sector), driven largely by 20%+ credit growth,
partly offset by flat-to-down margins and diminishing asset quality concerns. Risks to earnings are skewed to the downside by a potential
hit from recently renegotiated pension liabilities for public banks which could amount to as much as one year’s earnings. Given valuation
premium to market (~25%), overall risk/benefit trade-off is neutral. We prefer private versus public sector banks.
Yes Bank (YES IN, OW, INR534) is our top pick based on quality management, strong execution track record, structural business shift
towards retail and strong prospects for a stock re-rating.
FMCG
Negative
While India’s favourable demographic and economic trends continue to bode well for strong sales growth, we expect stock performance of listed
FMCG companies to be muted because a) we see downside risk to margins from input cost inflation and competitive pricing pressures which are
expected to persist, and b) all-time high valuations (~24x forward PE). We believe overall risk-benefit trade-off is not favourable.
Dabur (DABUR IN, OW, INR114) is our top pick because of its niche positioning, strong earnings outlook, and reasonable valuations.
Industrials &
Infrastructure
Positive
In 2011, we expect private sector capex spend to accelerate (15-18%), and government spend on infrastructure to remain strong (it’s the
last year of the current 5-year plan). Companies with operational scale and access to capital will likely surprise on the upside.
Capex/infrastructure spend will be mainly directed towards Power (40GW of new capacity orders worth USD36bn), Roads (7000-9000kms
of highway projects worth USD15-20bn), Metals and Cement (USD12-15bn).
Larsen & Toubro (LT IN, OW-V, INR2,341) is our top pick given its strong top-line growth visibility, diversified presence, and strong
balance sheet. In the power sector, we view the transmission companies as more attractive than equipment manufacturers and
distribution companies.
IT Services
Positive
In 2011, revenue growth is expected to be robust (23-25% in USD terms), fuelled by a) increased off-shoring, and b) revival of
discretionary IT spending) across several industry sectors. Furthermore, Indian IT companies will benefit from an ongoing trend towards
grant of smaller contracts (versus mega-deals) which will expand the addressable market. While EBIDTA margins are expected to remain
largely stable for the big players, an increase in the tax-rate (STPI tax exemption sunset) will adversely impact net margins; still, earnings
are expected to grow a healthy ~20%, and be the key driver of stock performance in 2011.
Infosys (INFO IN, OW, INR3,830) is our top pick given its competitive prospects to benefit from global trends (skews earnings risks
upwards) and it has minimal incremental exposure to changes in tax rates.
Metals
Positive
Our 2011 outlook is bullish on Aluminum (increased switch to aluminum from copper), and Steel (higher margins from restrained
production in China and demand growth globally). We also are bearish on Iron Ore and Zinc (price pressure from increased supply).
Overall, we expect India’s Metals & Mining sector to deliver 14% top-line growth and 17% EBITDA growth in 2011. Although a potentially
stronger INR and regulatory risk (MMDR bill prescribing mining royalties) are headwinds, we believe that overall benefits outweigh the
risks at current valuations (6.5x EBITDA).
Tata Steel (TATA IN, OW-V, INR730) is our top pick – it is best positioned to benefit from rising steel prices and potential upside from
commissioning of backward integration projects.
Oil & Gas
Negative
We expect muted performance, thanks to flat gas output, and a continued burden of oil under-recoveries for India’s public sector Oil
Marketing companies (Oil, HPCL, BPCL). Overall earnings growth (10-13% average) will be largely driven by higher volumes.
Cairn India (CAIR IN, OW, INR360) is our top pick – it stands to benefit from ~80% growth in oil production from its new fields in FY12 and
is best leveraged to higher Oil prices (our forecasts assume oil at USD76/bbl in 2011).
Property
Mixed
Our outlook is mixed – we are bullish on commercial property and bearish on residential property. While overall project execution appears largely
on track in 2011, we expect higher revenue realizations from commercial property (20-30% volume growth + 5-10% price appreciation), and lower
realizations from residential property (flat prices and 10-15% lower volumes). We also expect larger commercial property developers to benefit
disproportionately. Rising interest rates and potential lending squeeze will hurt residential projects more than commercial.
DLF (DLFU IN, OW-V, INR386) is our top pick given its scale and higher exposure to commercial property.
Retail
Negative
2011 is expected to be a more challenging year, mainly due to tough comps: the sector saw the benefit of a) pent up demand, and b) an
uptick in consumer sentiment, which resulted in 15-20% same-store-sales (SSS) growth and margin expansion in 2010. SSS growth
should decelerate in 2011, and we expect margin expansion to be modest at best. Stock performance is therefore likely to be muted.
Gitanjali (GITG IN, OW-V, INR341) is our top pick because of its robust growth outlook and reasonable valuation; we also like Titan over
the long term.
Telecom
Mixed
Outlook to remain clouded during 2011. On the positive side, continued growth in volume, stabilization of tariffs, potentially rapid uptake of 3G
services (expected only in late 2011), and muted valuations (14x forward PE) warrant a constructive approach to the sector; however, the imminent
rollout of MNP could threaten tariff stability. Furthermore, sector consolidation/shakeout, which we view as necessary for a sustainable sector rerating,
still seem distant, and until then we expect the sector to be range-bound. We recommend the incumbents over new entrants.
Bharti (BHARTI IN, N-V, INR370) is best positioned given its quality spectrum bank, potential to see the fastest 3G adoption, and an
improving outlook in Africa.
Utilities
Positive
Outlook is positive for 2011, driven largely by 25%+ earnings growth on the back of acceleration in power capacity addition (18GW in
FY12), and high sector capex during FY12 which implies strong earnings in subsequent years. Although investor concerns regarding new
project implementation, fuel availability and the financial health of state-owned distribution companies will persist (understandably), we
believe these factors do not represent any meaningful short-mid term earnings risk and, more importantly, are adequately discounted in
valuations (sector PB multiples have contracted from 2.5x to 2x during 2010 on these concerns).
Power Trading Corporation (PTC IN, OW-V, INR161) is our top pick given its expected growth from more power availability, and potential
to unlock value in its subsidiaries.
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