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India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Inflation – Not reached the inflexion point as yet
> GS Global ECS Research expects inflation to peak in 2Q2011 led by higher primary article inflation.
> History suggests high inflationary periods are detrimental to GDP growth and corporate profitability.
> We suggest greater exposure to IT, healthcare, and consumers, and highlight top six safe haven stocks.
Inflation in India – Not yet at peak levels; expected to peak in 2Q2011
• GS Global ECS Research expects FY12 inflation to be at 6.7% due to (1) recent upside surprises in agricultural prices, (2) rising input
and output price expectations, and (3) higher global commodity prices
Impact of high inflationary periods – History suggests risks to corporate profits and valuations
• Periods of high inflation (>7%) have led to monetary tightening and deceleration in GDP growth (%) (by an average 150 bp)
• Corporate margins compressed during periods of high inflation (by an average 200 bp)
• Periods of high inflation have coincided with downward earnings revision cycle
• MSCI India P/E compresses during periods of high inflation (by an average of 15%)
• Consensus is still building in margin expansion in FY11E/12E. We expect margins and EPS to be revised downwards going forward
Sectors in focus during high inflation periods
• Potential outperformers are IT, Healthcare, and Consumer staples
• Sectors to avoid include Real Estate, Infra, Cap Goods, and Utilities
• Based on exposure to DMs, unlevered balance sheets and high cash to market cap, we screen six stocks as our top picks
Sustained high inflation: A key macro concern
> Our macro team raised FY12 inflation forecast to 6.7% from 6.0% due to recent upside surprises in agricultural
prices, rising input and output price expectations, and higher global commodity prices
> While inflation should peak in the April-June quarter of CY11, it may remain above 6% for FY12
> Inflation has not been as broad-based as 2008 and so far has been led by primary article inflation
Inflation: A key risk to corporate earnings
> Historically, periods of high inflation (>7%) have led to monetary tightening and deceleration in GDP growth (%)
> Rise in global commodity prices and monetary policy tightening are expected to hurt India Inc. profitability
> Net margins compress during periods of high inflation, consensus is still building in margin expansion in
FY11E/12E, posing downside risks to estimates
Corporate earnings revision follows periods of high inflation
> India’s 2011 consensus MSCI EPS has been revised down by 11% since June 10, the most in the region
> As inflation peaked out in 3Q2010, it marked the beginning of downward revision in MSCI India 2011 EPS
Valuations compress during periods of high inflation
> MSCI India 12-m fwd P/E is negatively correlated to inflation, as multiples compress in an inflationary environment
> Historical study (1950-2007) on US markets suggest that inflation and P/E multiples have a high negative
correlation
India – 3rd most expensive Asian market despite correction
> MSCI India trading at -1 SD below 5-year historical mean despite recent underperformance
> However, most of the compression is price related and any earnings revisions may pose further downside
> Most sectors trading close to 5-year historical means, Industrials now trading 1 SD below historical mean
Preferable sector exposures in an inflationary environment
> Potential outperformers are IT, Healthcare, Consumer Staples
> Sectors to avoid include Real Estate, Infra, Cap Goods, Utilities
Export-oriented stocks insulated from domestic concerns
> We screen for companies that can potentially outperform the broader markets as they have low exposure to the
domestic macro-economic concerns like inflation, high interest rates, and currency depreciation
Red Flags: Stretched balance sheets, low interest coverage
> We screen for companies that can potentially underperform the broader markets due to high sensitivity to rising
interest rates on the back of stretched balance sheet and low interest coverage
Cash rich companies can sustain near term lending squeeze
> We screen for companies that can potentially outperform the broader markets as they have high cash balances,
which can provide the cushion as corporate lending rates shoot up
GS vs. consensus – We are 5% below consensus on FY12E
> Our below I/B/E/S consensus estimates indicate we are moderately factoring in the impact of inflation
> We are above consensus on Energy, IT Services, and construction for FY12E, reflecting our positive view on the
sectors
GS India top stock ideas (click on company name for report/ details)
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
GS India top stock ideas (click on company name for report/ details)
- AUTOMOBILES: Bosch India (Buy, on Conviction List)
- BANKS: IndusInd Bank (Buy, on Conviction List)
- CEMENT: ACC (Sell, on Conviction List)
- CONSUMER STAPLES: Marico (Buy)
- HEALTHCARE: Aurobindo Pharma (Buy)
- INDUSTRIALS: Sintex Industries (Buy)
- IT: HCL Technologies (Buy)
- INFRASTRUCTURE: IRB Infrastructure (Buy)
- MEDIA: Sun TV (Sell)
- METALS & MINING: Tata Steel (Buy, on Conviction List)
- OIL & GAS: Reliance Industries (Buy, on Conviction List)
- TELECOM: Bharti Airtel (Buy, on Conviction List)
- UTILITIES: Adani Power (Buy, on Conviction List)
Inflation – Not reached the inflexion point as yet
> GS Global ECS Research expects inflation to peak in 2Q2011 led by higher primary article inflation.
> History suggests high inflationary periods are detrimental to GDP growth and corporate profitability.
> We suggest greater exposure to IT, healthcare, and consumers, and highlight top six safe haven stocks.
Inflation in India – Not yet at peak levels; expected to peak in 2Q2011
• GS Global ECS Research expects FY12 inflation to be at 6.7% due to (1) recent upside surprises in agricultural prices, (2) rising input
and output price expectations, and (3) higher global commodity prices
Impact of high inflationary periods – History suggests risks to corporate profits and valuations
• Periods of high inflation (>7%) have led to monetary tightening and deceleration in GDP growth (%) (by an average 150 bp)
• Corporate margins compressed during periods of high inflation (by an average 200 bp)
• Periods of high inflation have coincided with downward earnings revision cycle
• MSCI India P/E compresses during periods of high inflation (by an average of 15%)
• Consensus is still building in margin expansion in FY11E/12E. We expect margins and EPS to be revised downwards going forward
Sectors in focus during high inflation periods
• Potential outperformers are IT, Healthcare, and Consumer staples
• Sectors to avoid include Real Estate, Infra, Cap Goods, and Utilities
• Based on exposure to DMs, unlevered balance sheets and high cash to market cap, we screen six stocks as our top picks
- Aurobindo Pharma
- Marico
- Tata Steel
- Infosys Technologies
- Bosch India
- HCL Technologies Ltd.
Sustained high inflation: A key macro concern
> Our macro team raised FY12 inflation forecast to 6.7% from 6.0% due to recent upside surprises in agricultural
prices, rising input and output price expectations, and higher global commodity prices
> While inflation should peak in the April-June quarter of CY11, it may remain above 6% for FY12
> Inflation has not been as broad-based as 2008 and so far has been led by primary article inflation
Inflation: A key risk to corporate earnings
> Historically, periods of high inflation (>7%) have led to monetary tightening and deceleration in GDP growth (%)
> Rise in global commodity prices and monetary policy tightening are expected to hurt India Inc. profitability
> Net margins compress during periods of high inflation, consensus is still building in margin expansion in
FY11E/12E, posing downside risks to estimates
Corporate earnings revision follows periods of high inflation
> India’s 2011 consensus MSCI EPS has been revised down by 11% since June 10, the most in the region
> As inflation peaked out in 3Q2010, it marked the beginning of downward revision in MSCI India 2011 EPS
Valuations compress during periods of high inflation
> MSCI India 12-m fwd P/E is negatively correlated to inflation, as multiples compress in an inflationary environment
> Historical study (1950-2007) on US markets suggest that inflation and P/E multiples have a high negative
correlation
India – 3rd most expensive Asian market despite correction
> MSCI India trading at -1 SD below 5-year historical mean despite recent underperformance
> However, most of the compression is price related and any earnings revisions may pose further downside
> Most sectors trading close to 5-year historical means, Industrials now trading 1 SD below historical mean
Preferable sector exposures in an inflationary environment
> Potential outperformers are IT, Healthcare, Consumer Staples
> Sectors to avoid include Real Estate, Infra, Cap Goods, Utilities
Export-oriented stocks insulated from domestic concerns
> We screen for companies that can potentially outperform the broader markets as they have low exposure to the
domestic macro-economic concerns like inflation, high interest rates, and currency depreciation
Red Flags: Stretched balance sheets, low interest coverage
> We screen for companies that can potentially underperform the broader markets due to high sensitivity to rising
interest rates on the back of stretched balance sheet and low interest coverage
Cash rich companies can sustain near term lending squeeze
> We screen for companies that can potentially outperform the broader markets as they have high cash balances,
which can provide the cushion as corporate lending rates shoot up
GS vs. consensus – We are 5% below consensus on FY12E
> Our below I/B/E/S consensus estimates indicate we are moderately factoring in the impact of inflation
> We are above consensus on Energy, IT Services, and construction for FY12E, reflecting our positive view on the
sectors
GS India top stock ideas (click on company name for report/ details)
- AUTOMOBILES: Bosch India (Buy, on Conviction List)
- BANKS: IndusInd Bank (Buy, on Conviction List)
- CEMENT: ACC (Sell, on Conviction List)
- CONSUMER STAPLES: Marico (Buy)
- HEALTHCARE: Aurobindo Pharma (Buy)
- INDUSTRIALS: Sintex Industries (Buy)
- IT: HCL Technologies (Buy)
- INFRASTRUCTURE: IRB Infrastructure (Buy)
- MEDIA: Sun TV (Sell)
- METALS & MINING: Tata Steel (Buy, on Conviction List)
- OIL & GAS: Reliance Industries (Buy, on Conviction List)
- TELECOM: Bharti Airtel (Buy, on Conviction List)
- UTILITIES: Adani Power (Buy, on Conviction List)
(click on company name above for report/ details)
Goldman Sachs India top picks
> Our top Buys have an avg. 42% potential upside to 12-m target prices with 3-year fwd EBITDA CAGR of 42%
> Our top Sells have an avg. 12% potential downside to p g p 12-m target prices, trading at an avg. 30% premium to peers
IP profiling for our top picks
> 82% of our highlighted “Buys” are in the top 2 quintiles vs. their peer group
Our top picks
> Structural change or operational turnaround leads to an improving return profile
> Our Sell ideas offer opportunities from structural derating and mean reversion
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