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Markets break the winning streak
Markets witnessed selling pressure last week after rising for three consecutive
weeks, with the Sensex and Nifty declining 4.0% and 3.7%, respectively.
Weakness was especially seen towards the latter half of the week. Food
inflation during the week came in higher than expectations increasing to
18.3% compared to 14.4% in the previous week. This sparked concerns
that the RBI may have to hike the interest rates at a much higher pace than
originally anticipated. Hence, a sell-off was seen in the markets led primarily
by the rate-sensitive sectors. The BSE mid-cap index underperformed the
large-cap index, falling by 4.3%. The BSE small-cap index was however,
relatively better losing 3.2% of its value. On the sectoral front, the BSE Auto
index lost the most ground, declining 7.3% followed by the BSE Realty index,
which ended 6.7% lower. The BSE Oil and Gas index outperformed the
other indices, losing only 0.8% of its value during the week.
BSE Auto Index underperforms the Sensex
The BSE Auto Index was a major loser for the week declining 7.3% and
widely underperforming the Sensex, which was down 4.0%. The rapid rise
in inflation numbers weighed heavily on the auto sector as the sector is
sensitive to interest rates, which are expected to rise. The deep cut in the
stock prices was seen despite the auto majors (except Bajaj Auto) reporting
strong monthly sales numbers for December 2010. Bajaj Auto, Amtek Auto,
Tata Motors, Hero Honda and Maruti Suzuki were the major losers in the
sector falling by 14.6%, 9.3%, 8.9%, 5.7% and 5.4%, respectively.
Nonetheless, we remain positive on the long-term prospects of the Indian
auto sector and prefer stocks where strong and improving business
fundamentals could continue to deliver positive earnings surprises.
Inside This Weekly
3QFY2011 Sensex earnings outlook: We believe that for the 8-8.5%
real GDP growth that India still looks set to achieve, talking in terms of
benchmark Sensex valuations, a target P/E multiple of 17x on FY2012E EPS
seems fair. In this context, post the correction, the Sensex is now looking
more reasonably valued, available at 16.3x 1-year forward EPS, close to its
average P/E since April 2004. Our 17x target multiple translates into a
Sensex target of 21,844 by March 2011; however, once the markets start
looking at FY2013E numbers within the next few months, there would be a
corresponding upside in the Sensex targets as well.
Auto Sector Update - December 2010: Automakers reported strong sales
performance in Dec’10 despite it traditionally being a sluggish month. After
witnessing slightly lower growth in Nov’10, volumes regained momentum
due to attractive year-end discounts and advanced purchases in anticipation
of price hikes in Jan’11. While M&M and Hero Honda reported better-thanexpected
sales volume during the month, Bajaj Auto (BAL) reported marginally
below expectations performance. Overall, sales maintained the strong
momentum during the month albeit at a slower pace, largely aided by healthy
economic growth, positive consumer sentiment and easy financing.
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