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UBS Investment Research
India Market Strategy
Positive earnings momentum
Positive Sensex/Nifty earnings momentum may support the market
FY12 consensus (IBES) earnings estimates for Nifty and Sensex have improved by
1.8% and 1.9% respectively, in the last three months. However the Nifty and
Sensex have been down by 4.8% & 4.4% in the last three months on concerns
around inflation, higher crude oil prices, concerns on FY12 fiscal deficit, and
slowing down of reforms in the wake of impending state elections.
We factor in inflation concerns – Toning down Sensex target to 22,500
We are lowering our target P/E multiple to 15x for Sensex (from 16.7x) as we
factor in higher inflation for our growth and terminal periods. Our March 2012
Sensex target has been revised lower to 22,500 (from 24,600 earlier). Since Nifty is
a more broad-based index and has a better following among investors, we
introduce a March 2012 Nifty target of 6,800 implying an upside of ~19%
2011 – Year of opportunities & stock picking
With the Sensex and Nifty at levels of 19,000 & 5,700 respectively, we believe that
2011 is a year of bottom-up stock picking. We strongly recommend investors
should use the volatility in the Indian stocks to pick up attractively priced growth
stocks as we are very positive on India’s economic growth and corporate earnings
growth prospects in the next decade. India’s economic growth will continue to
attract flows and we believe the weightage of India in emerging market indices is
likely to go up meaningfully in the coming years. Our O/W sectors (vs. Nifty) are
Infrastructure, IT Services, Power, Telecom, and Real Estate. Our high conviction
stock ideas are Hero Honda, ICICI Bank, Asian Paints, Mphasis, Idea Cellular,
Coal India, Lanco Infratech, Power Grid, Tube Investments, and Jai Balaji.
Nifty has fallen 4.8% in the past three month on concerns about higher inflation,
rising crude oil prices, and fiscal discipline going forward. Though we believe
most of these concerns are warranted if oil prices sustain above US$100 in
FY12, the market at current seems to be pricing in all the concerns. We expect
markets to remain volatile in the next few months till the concerns on inflation
and oil price subside.
Over the 12 month period, our India Economist, Philip Wyatt, expects
inflation to follow a downward trend. WPI inflation is likely to slow down to
7.0% by FY11 end and remains at that level FY12 end.
However, high oil prices presents risk to our thesis. The impact on FY12
WPI could range from 5.5% to 11% for oil averaging $90-$110. Our base
case of 7% WPI by Mar-12 uses average global oil price inflation of c.12%
(WTI to average c. $97 bbl).
On fiscal deficit, we believe that government’s FY11 fiscal target of 5.5% of
GDP seems attainable given windfall revenues from 3G and WMAX
proceeds. However, the impact of high crude oil prices on FY12 fiscal deficit
could be up to 1.2% of GDP if the oil prices average between $100-$110 and
assuming there is no hike in diesel, kerosene and LPG prices
Please see our note, 2011- A year of opportunities, published on 11 January
2011, for more details.
Meanwhile, Nifty consensus earnings estimates were revised up by 0.9% and
1.8% for FY11E and FY12E, respectively, in the past 3 months (17 Oct’10 – 17
Jan’11). The upward earnings revisions are mostly led by sectors such as Autos,
financials, and IT services, while Telecom and petrochemicals sectors continue
to drag the earnings downwards.
Our analysis shows that there has not been a consistent theme across sectors that
have led to earnings revisions during the last three months. The upward
revisions have been based on stock specific factors. For example, in Autos the
majority of the upward revision is led by Tata Motors, while IT services it has
been Tata Consultancy Services (TCS).
The consensus FY11E and FY12E Nifty EPS currently stand at 323 and 392.
Over the last 12-18 months, the consensus Nifty earnings have been trending
upwards
Sectors Comments
Key consensus upgrades
Autos
► There were significant upgrades in Tata Motors (26.1% in FY12E) during the last three months due to the better visibility on the JLR
margins.
► The earnings of Mahindra and Mahindra (4.9% in FY12E) have also been revised upwards on the back of better than expected volume
growth in the tractor business.
►Maruti and Hero Honda have seen downward revision in their earnings mainly due to cost pressures
Financials
► The financials sector FY12E earnings were revised upwards by 3.0%, led by SBI (6.5% in FY12E), PNB (5.9% in FY12E) and Kotak
Mahindra Bank (3.7% in FY12E) on the back of robust financial performance in 1HFY11 due to stronger net interest income margins and credit
growth
IT Services
► The earnings revision in the IT sector was led by TCS (8.3% in FY12E) as the company continues to outperform its peers (Infosys, Wipro,
HCL) both in revenue growth and EBITDA margins.
► Overall, the street is bullish on the sector given the improving outlook in the US economy.
► In the sector, Wipro was the only company to have witnessed earnings downgrades in FY12E.
Pharmaceuticals
► Pharmaceuticals witnessed earnings upgrade of 3.4% in FY12E largely due to product approval and new product launches in the US
market.
► The upward revision was led by Dr Reddy’s (10.3% in FY12E), Ranbaxy (13.2% in FY12E), and Sun Pharma (10.7% in FY12E).
Key consensus downgrades
Cement ► The cement sector FY12E consensus earnings were revised down by 7.7% as the street has negative outlook on the sector given
overcapacity issues and muted demand outlook
Petrochemicals ► Reliance’s upstream business has been showing declining gas production over the last 6-9 months. The downward revision is primarily the
result of Street getting negative on the outlook of gas production
Telecom
► The downward revision in the sector was led by RCom with 15% revision in company’s FY12E earnings estimates.
► The street remains wary of the stock and is looking for operational turnaround before turning bullish.
► On the sector, the street remains cautious ahead of MNP launch in Jan 2011.
Real Estate
► In the last three months, DLF consensus FY12E earnings witnessed a decline of 7.9%.
► Though UBS estimates were lower than consensus assuming more conservative pre-sales, we see the street is now lowering its pre-sales
expectations as the company’s launch pipe-lines has been weak over the last 3-6mths
Sensex FY11E and FY12E Earnings momentum
This section shows the earnings momentum for the Sensex companies. The trend
in Sensex earnings is inline with Nifty earnings.
Nifty Target Derivation
Given that significant proportions of investors benchmark their portfolio with
Nifty, we introduce FY12 Nifty target in this note. Our Nifty target, like Sensex
target, is based on our bottom up outlook on FY13 Nifty earnings and target P/E
multiple for Nifty.
We derive our PE multiple for the Nifty from a two-stage forward PE target
multiple model, assuming intrinsic value drivers such as ROE and earnings
growth
Nifty – Earnings growth
Our bottom-up analysis of Nifty constituents suggests that earnings are likely to
grow by 20.2% in FY11E and FY12E and by 18.8% in FY13E compared with
18.3% growth in FY10. We expect earnings growth to be led by sectors such as
autos, financials, materials, infrastructure, and IT services. The consensus for
FY11E, FY12E, and FY13E earnings growth is 18.3%, 21.5%, and 19.0%,
respectively.
Nifty – Target PE multiple and target
We use a two-stage forward PE target multiple model to derive our Nifty target.
The first stage is the growth phase where we expect earnings to grow by 12.4%,
ROE of 17.0%, and COE of 12.6%. 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 10.0%.
The contribution of the growth phase to our total target PE multiple is 4.7x. Our
two-stage forward PE target multiple for the Nifty is 15x (compared with our
estimated long-term average forward PE multiple of 13.5x). Using the UBS
forecast EPS of 453 for FY13E; we arrive at our FY12E Nifty target of 6,800.
Sensex Target Derivation
We revise down our FY12E BSE Sensex target to 22,500 from 24,600 earlier as
we reduce our target PE multiple to 15.0x from 16.7x earlier. The target multiple
reduces as we increase our inflation outlook for the growth period (5.0% vs.
4.5% earlier) and terminal period (2.5% vs. 2.0% earlier) factoring in the rising
inflation scenario currently.
Sensex – Earnings growth
Our bottom-up analysis of Sensex constituents suggests that earnings are likely
to grow by 17.8% and 18.7% in FY11E and FY12E, respectively. We expect
earnings growth to be led by sectors such as autos, financials, materials,
infrastructure, and IT services. The consensus for FY11E, FY12E, and FY13E
earnings growth is 15.2%, 20.8%, and 19.4%, respectively.
Sensex – Target PE multiple and target
We use a two-stage forward PE target multiple model to derive our Sensex
target. The first stage is the growth phase where we expect earnings to grow by
12.4%, ROE of 17.0%, and COE of 12.6%. 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 10.0%.
The contribution of the growth phase to our total target PE multiple is 4.7x. Our
two-stage forward PE target multiple for the Sensex is 15x (compared with our
estimated long-term average forward PE multiple of 15x). Using the UBS
forecast EPS of 1,486 for FY13E; we arrive at our FY12E Nifty target of 22,500.
UBS India Model Portfolio
Given that most investors follow Nifty, we are now benchmarking our portfolio
to Nifty. The below tables summarises our model portfolio positions with
respect to Nifty
Model portfolio performance
As at 20 January 2011, our portfolio had generated a return of 118.4%. This
compares with the Sensex’s 96.6%; Nifty’s 90.9%; and MSCI India’s 100.7%.
The key sectors that have outperformed the Sensex are banks (101.2% excess
return), IT services (97.2%), auto (59.6%), power (58.1%), and metals (49.9%),
while telecom (-114.5%), real estate (-107.4%), oil & gas (-86.8%),
petrochemicals (-82.4%), and pharmaceuticals (-58.6%) have underperformed
The indicated performance returns of our model portfolio are based on capital
appreciation, excluding dividends and transaction costs such as commissions,
fees, margin interest, and other charges. Actual transactions adjusted for such
transaction costs will result in reduced total returns. Prices of stocks in the
performance calculations reflect closing prices. Since its inception on 26 March
2009, the UBS India model portfolio has contained 98 stocks, 70 of which have
advanced while on the list while 28 have declined. A complete record of all the
recommendations upon which this report is based is available from UBS
Securities India Private Ltd. upon written request. Past performance is not an
indication of future results
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
India Market Strategy
Positive earnings momentum
Positive Sensex/Nifty earnings momentum may support the market
FY12 consensus (IBES) earnings estimates for Nifty and Sensex have improved by
1.8% and 1.9% respectively, in the last three months. However the Nifty and
Sensex have been down by 4.8% & 4.4% in the last three months on concerns
around inflation, higher crude oil prices, concerns on FY12 fiscal deficit, and
slowing down of reforms in the wake of impending state elections.
We factor in inflation concerns – Toning down Sensex target to 22,500
We are lowering our target P/E multiple to 15x for Sensex (from 16.7x) as we
factor in higher inflation for our growth and terminal periods. Our March 2012
Sensex target has been revised lower to 22,500 (from 24,600 earlier). Since Nifty is
a more broad-based index and has a better following among investors, we
introduce a March 2012 Nifty target of 6,800 implying an upside of ~19%
2011 – Year of opportunities & stock picking
With the Sensex and Nifty at levels of 19,000 & 5,700 respectively, we believe that
2011 is a year of bottom-up stock picking. We strongly recommend investors
should use the volatility in the Indian stocks to pick up attractively priced growth
stocks as we are very positive on India’s economic growth and corporate earnings
growth prospects in the next decade. India’s economic growth will continue to
attract flows and we believe the weightage of India in emerging market indices is
likely to go up meaningfully in the coming years. Our O/W sectors (vs. Nifty) are
Infrastructure, IT Services, Power, Telecom, and Real Estate. Our high conviction
stock ideas are Hero Honda, ICICI Bank, Asian Paints, Mphasis, Idea Cellular,
Coal India, Lanco Infratech, Power Grid, Tube Investments, and Jai Balaji.
Nifty has fallen 4.8% in the past three month on concerns about higher inflation,
rising crude oil prices, and fiscal discipline going forward. Though we believe
most of these concerns are warranted if oil prices sustain above US$100 in
FY12, the market at current seems to be pricing in all the concerns. We expect
markets to remain volatile in the next few months till the concerns on inflation
and oil price subside.
Over the 12 month period, our India Economist, Philip Wyatt, expects
inflation to follow a downward trend. WPI inflation is likely to slow down to
7.0% by FY11 end and remains at that level FY12 end.
However, high oil prices presents risk to our thesis. The impact on FY12
WPI could range from 5.5% to 11% for oil averaging $90-$110. Our base
case of 7% WPI by Mar-12 uses average global oil price inflation of c.12%
(WTI to average c. $97 bbl).
On fiscal deficit, we believe that government’s FY11 fiscal target of 5.5% of
GDP seems attainable given windfall revenues from 3G and WMAX
proceeds. However, the impact of high crude oil prices on FY12 fiscal deficit
could be up to 1.2% of GDP if the oil prices average between $100-$110 and
assuming there is no hike in diesel, kerosene and LPG prices
Please see our note, 2011- A year of opportunities, published on 11 January
2011, for more details.
Meanwhile, Nifty consensus earnings estimates were revised up by 0.9% and
1.8% for FY11E and FY12E, respectively, in the past 3 months (17 Oct’10 – 17
Jan’11). The upward earnings revisions are mostly led by sectors such as Autos,
financials, and IT services, while Telecom and petrochemicals sectors continue
to drag the earnings downwards.
Our analysis shows that there has not been a consistent theme across sectors that
have led to earnings revisions during the last three months. The upward
revisions have been based on stock specific factors. For example, in Autos the
majority of the upward revision is led by Tata Motors, while IT services it has
been Tata Consultancy Services (TCS).
The consensus FY11E and FY12E Nifty EPS currently stand at 323 and 392.
Over the last 12-18 months, the consensus Nifty earnings have been trending
upwards
Sectors Comments
Key consensus upgrades
Autos
► There were significant upgrades in Tata Motors (26.1% in FY12E) during the last three months due to the better visibility on the JLR
margins.
► The earnings of Mahindra and Mahindra (4.9% in FY12E) have also been revised upwards on the back of better than expected volume
growth in the tractor business.
►Maruti and Hero Honda have seen downward revision in their earnings mainly due to cost pressures
Financials
► The financials sector FY12E earnings were revised upwards by 3.0%, led by SBI (6.5% in FY12E), PNB (5.9% in FY12E) and Kotak
Mahindra Bank (3.7% in FY12E) on the back of robust financial performance in 1HFY11 due to stronger net interest income margins and credit
growth
IT Services
► The earnings revision in the IT sector was led by TCS (8.3% in FY12E) as the company continues to outperform its peers (Infosys, Wipro,
HCL) both in revenue growth and EBITDA margins.
► Overall, the street is bullish on the sector given the improving outlook in the US economy.
► In the sector, Wipro was the only company to have witnessed earnings downgrades in FY12E.
Pharmaceuticals
► Pharmaceuticals witnessed earnings upgrade of 3.4% in FY12E largely due to product approval and new product launches in the US
market.
► The upward revision was led by Dr Reddy’s (10.3% in FY12E), Ranbaxy (13.2% in FY12E), and Sun Pharma (10.7% in FY12E).
Key consensus downgrades
Cement ► The cement sector FY12E consensus earnings were revised down by 7.7% as the street has negative outlook on the sector given
overcapacity issues and muted demand outlook
Petrochemicals ► Reliance’s upstream business has been showing declining gas production over the last 6-9 months. The downward revision is primarily the
result of Street getting negative on the outlook of gas production
Telecom
► The downward revision in the sector was led by RCom with 15% revision in company’s FY12E earnings estimates.
► The street remains wary of the stock and is looking for operational turnaround before turning bullish.
► On the sector, the street remains cautious ahead of MNP launch in Jan 2011.
Real Estate
► In the last three months, DLF consensus FY12E earnings witnessed a decline of 7.9%.
► Though UBS estimates were lower than consensus assuming more conservative pre-sales, we see the street is now lowering its pre-sales
expectations as the company’s launch pipe-lines has been weak over the last 3-6mths
Sensex FY11E and FY12E Earnings momentum
This section shows the earnings momentum for the Sensex companies. The trend
in Sensex earnings is inline with Nifty earnings.
Nifty Target Derivation
Given that significant proportions of investors benchmark their portfolio with
Nifty, we introduce FY12 Nifty target in this note. Our Nifty target, like Sensex
target, is based on our bottom up outlook on FY13 Nifty earnings and target P/E
multiple for Nifty.
We derive our PE multiple for the Nifty from a two-stage forward PE target
multiple model, assuming intrinsic value drivers such as ROE and earnings
growth
Nifty – Earnings growth
Our bottom-up analysis of Nifty constituents suggests that earnings are likely to
grow by 20.2% in FY11E and FY12E and by 18.8% in FY13E compared with
18.3% growth in FY10. We expect earnings growth to be led by sectors such as
autos, financials, materials, infrastructure, and IT services. The consensus for
FY11E, FY12E, and FY13E earnings growth is 18.3%, 21.5%, and 19.0%,
respectively.
Nifty – Target PE multiple and target
We use a two-stage forward PE target multiple model to derive our Nifty target.
The first stage is the growth phase where we expect earnings to grow by 12.4%,
ROE of 17.0%, and COE of 12.6%. 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 10.0%.
The contribution of the growth phase to our total target PE multiple is 4.7x. Our
two-stage forward PE target multiple for the Nifty is 15x (compared with our
estimated long-term average forward PE multiple of 13.5x). Using the UBS
forecast EPS of 453 for FY13E; we arrive at our FY12E Nifty target of 6,800.
Sensex Target Derivation
We revise down our FY12E BSE Sensex target to 22,500 from 24,600 earlier as
we reduce our target PE multiple to 15.0x from 16.7x earlier. The target multiple
reduces as we increase our inflation outlook for the growth period (5.0% vs.
4.5% earlier) and terminal period (2.5% vs. 2.0% earlier) factoring in the rising
inflation scenario currently.
Sensex – Earnings growth
Our bottom-up analysis of Sensex constituents suggests that earnings are likely
to grow by 17.8% and 18.7% in FY11E and FY12E, respectively. We expect
earnings growth to be led by sectors such as autos, financials, materials,
infrastructure, and IT services. The consensus for FY11E, FY12E, and FY13E
earnings growth is 15.2%, 20.8%, and 19.4%, respectively.
Sensex – Target PE multiple and target
We use a two-stage forward PE target multiple model to derive our Sensex
target. The first stage is the growth phase where we expect earnings to grow by
12.4%, ROE of 17.0%, and COE of 12.6%. 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 10.0%.
The contribution of the growth phase to our total target PE multiple is 4.7x. Our
two-stage forward PE target multiple for the Sensex is 15x (compared with our
estimated long-term average forward PE multiple of 15x). Using the UBS
forecast EPS of 1,486 for FY13E; we arrive at our FY12E Nifty target of 22,500.
UBS India Model Portfolio
Given that most investors follow Nifty, we are now benchmarking our portfolio
to Nifty. The below tables summarises our model portfolio positions with
respect to Nifty
Model portfolio performance
As at 20 January 2011, our portfolio had generated a return of 118.4%. This
compares with the Sensex’s 96.6%; Nifty’s 90.9%; and MSCI India’s 100.7%.
The key sectors that have outperformed the Sensex are banks (101.2% excess
return), IT services (97.2%), auto (59.6%), power (58.1%), and metals (49.9%),
while telecom (-114.5%), real estate (-107.4%), oil & gas (-86.8%),
petrochemicals (-82.4%), and pharmaceuticals (-58.6%) have underperformed
The indicated performance returns of our model portfolio are based on capital
appreciation, excluding dividends and transaction costs such as commissions,
fees, margin interest, and other charges. Actual transactions adjusted for such
transaction costs will result in reduced total returns. Prices of stocks in the
performance calculations reflect closing prices. Since its inception on 26 March
2009, the UBS India model portfolio has contained 98 stocks, 70 of which have
advanced while on the list while 28 have declined. A complete record of all the
recommendations upon which this report is based is available from UBS
Securities India Private Ltd. upon written request. Past performance is not an
indication of future results
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