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India Equity Research Reports, IPO and Stock News
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India Equity Strategy
‘Headwinds’, Not a ‘Head-On’ Crash
We would Buy Indian stocks now — We believe the current market conditions
present a good opportunity to buy some decent Indian stocks. We know the
headwinds: macro, misgovernance, money (large foreign inflows yet to flow out),
and mood (it’s bad). But don’t forget the last decade’s (and likely tomorrow’s)
tailwinds – 8%+ GDP growth (after downgrades), 25%+ government revenue
growth, relatively safe 15%+ earnings growth (we argue why in this note), more
reasonable valuations (now below long-term averages) and under-performance (-
19% vs. MSCI-World, - 12% vs. MSCI EM YTD – 35 days actually). We probably
appear a little brave maintaining our 22,000 Dec 11 Sensex target (+25% from
here), but believe the rewards outweigh the risks decisively from here.
Mood suggests major earnings downgrades — India’s earnings revision index
is falling, perceived risks to earnings (inflation – margins, rates – interest costs,
investment slowdown – growth) are rising, and the confidence in/of corporates is
dipping. An unholy mix no doubt, suggesting an earnings slump ahead. The signs
though are a little mixed; 3QFY12 earnings have been in line with expectations,
the IBES earnings revisions index has dropped sharply, though the narrower
Sensex earnings are still relatively stable at 18-19% FY12 growth.
Why earnings might not fall that much — We see some earnings downgrade
risks, but believe the market is overly pessimistic: a) Sensex composition – 50%+
representation of energy, IT and financials – carries limited risk; b) earnings
concentration: top 3 stocks account for 22% of growth, and risks to these earnings
look low; c) relative breadth of sectors – 10+ sector account offers diversification.
Risks however do reside in a) industrials (wt: 8% / 5% of growth), rate shocks
and/or commodity price drops – but we believe FY12 earnings growth should keep
its head above the 15% levels.
Would buy financials, and other beaten-down large caps — Our preferred
stocks are Axis, Bharti, BHEL, DLF, GAIL, JSW Steel, ICICI, M&M, JPA, SBI.
Click on Image for LARGER View
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India Equity Strategy
‘Headwinds’, Not a ‘Head-On’ Crash
Would buy financials, and other beaten-down large caps — Our preferred
stocks are Axis, Bharti, BHEL, DLF, GAIL, JSW Steel, ICICI, M&M, JPA, SBI.
We would Buy Indian stocks now — We believe the current market conditions
present a good opportunity to buy some decent Indian stocks. We know the
headwinds: macro, misgovernance, money (large foreign inflows yet to flow out),
and mood (it’s bad). But don’t forget the last decade’s (and likely tomorrow’s)
tailwinds – 8%+ GDP growth (after downgrades), 25%+ government revenue
growth, relatively safe 15%+ earnings growth (we argue why in this note), more
reasonable valuations (now below long-term averages) and under-performance (-
19% vs. MSCI-World, - 12% vs. MSCI EM YTD – 35 days actually). We probably
appear a little brave maintaining our 22,000 Dec 11 Sensex target (+25% from
here), but believe the rewards outweigh the risks decisively from here.
Mood suggests major earnings downgrades — India’s earnings revision index
is falling, perceived risks to earnings (inflation – margins, rates – interest costs,
investment slowdown – growth) are rising, and the confidence in/of corporates is
dipping. An unholy mix no doubt, suggesting an earnings slump ahead. The signs
though are a little mixed; 3QFY12 earnings have been in line with expectations,
the IBES earnings revisions index has dropped sharply, though the narrower
Sensex earnings are still relatively stable at 18-19% FY12 growth.
Why earnings might not fall that much — We see some earnings downgrade
risks, but believe the market is overly pessimistic: a) Sensex composition – 50%+
representation of energy, IT and financials – carries limited risk; b) earnings
concentration: top 3 stocks account for 22% of growth, and risks to these earnings
look low; c) relative breadth of sectors – 10+ sector account offers diversification.
Risks however do reside in a) industrials (wt: 8% / 5% of growth), rate shocks
and/or commodity price drops – but we believe FY12 earnings growth should keep
its head above the 15% levels.
Would buy financials, and other beaten-down large caps — Our preferred
stocks are Axis, Bharti, BHEL, DLF, GAIL, JSW Steel, ICICI, M&M, JPA, SBI.
Click on Image for LARGER View
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