Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India Strategy
Back from the road
Investor meetings across Asia, the US and Europe suggest consensus
bearishness on India. Significant underperformance has driven valuations to fair
value, but we would still wait for more clarity on inflation and the political
situation before reversing our cautious stance.
Investor meetings suggest consensus bearishness on India
We spent the second half of January and early February meeting investors across Asia, the
US and Europe. We had more than 60 meetings – interestingly, only one investor said that
they were overweight India (in an Asian or Emerging Markets context), and another said they
were neutral. Everybody else suggested an underweight position – a significant reversal from
last October. However, clients said they were looking to add to their exposure if the Indian
market continued to underperform. Value investors suggested that they are finding more
“value” ideas in India. Investors (as well as us) are perplexed by the relatively muted amount
of foreign selling year to date given the 15% ytd decline in MSCI India – net sales of only
US$1.5bn versus inflows of US$29bn in 2010.
Our road map – valuations, inflation and the political situation
We are monitoring the above-mentioned variables before making any decision to change our
cautious stance, and suggested investors focus on these too. Valuations are almost there as
we are now in fair value territory (forward P/E of 14.3x on our estimates versus ten-year
average of 14.2x) – further declines would add to valuation comfort. The recent downtick in
primary food inflation is comforting but we would watch inflation data through March to get
more comfortable (an upside surprise to expectations of a 7-8% WPI reading in March could
pressure markets). A smooth passage of the budget session of parliament, which starts on
21 February (we are not expecting many reforms – it is a low-expectation budget!), would
give us greater comfort that the government will focus on execution going forward.
No change in model portfolio and key weightings for now
We our maintaining our current defensive sector positioning with materials, telcos and utilities
as key overweight sectors and banks/financials as a key underweight (see our report
Treading Water, dated 6 January 2011 for details). We expect to reverse our banks/financials
underweight when we get more constructive on the market. We are also watching the
industrials space closely – especially Larsen & Toubro (LT IN).
Short term bounce could be in the offing
With the NIFTY index down 15% ytd and with a 14 day RSI of less than 25, a short-term
bounce cannot be ruled out. However, we would be sellers of such a bounce, and would look
to the 4800-5000 level on the NIFTY as a better longer-term entry point (versus the current
level of ~ 5200).
Back from the road
Consensus bearishness and the 15% ytd decline would suggest reversing our cautious
stance; however, we would still wait and watch inflation and the political situation before
turning bullish.
As mentioned earlier, over more than 60 investor meetings across Asia, the US and Europe, we
found only one investor who said that they were overweight India (in an Asian or Emerging
Markets context). Everybody else suggested an underweight position – a significant reversal from
last October when most clients were overweight (even if they were cautious).
Reliance Industries (RIL IN) was the most discussed stock in our meetings – investors seem
intrigued by its underperformance versus global refining and petchem peers. Our holdings
analysis suggests RIL was a consensus underweight across both foreign and domestic
institutional investor portfolios at the end of last year. Avadhoot Sabnis, RBS’s oil and gas analyst,
upgraded RIL to a Hold from a Sell on 24 January 2011 (see his report, A mixed bag, for details).
Investors (as well as us) are perplexed by the relatively muted amount of foreign selling year to
date given the 15% ytd decline in MSCI India – according to data from SEBI, foreign institutional
investors have only sold down US$1.5bn of Indian equities versus inflows of US$29bn in 2010
(refer chart 1). As Chart 2 shows, previous episodes of such amounts of foreign selling were
relatively better absorbed by the markets – for example, the BSE 500 Index was down only 3.7%
in May 2010 although FIIs sold US$2bn worth of Indian shares (more than the year to date
selling). As such, we are concerned that a further sell-down by foreign investors could lead to
more downside.
With the significant underperformance versus Asia ex Japan on an ytd basis (MSCI India down
15.4% versus 4.8% for Asia ex Japan through 10 February), valuations for MSCI India are now
looking more attractive on both an absolute and a relative basis. Specifically, MSCI India is now
trading at 14.3x our 12-month forward EPS estimate versus a ten-year average of 14.2x (down
from 17.4x at the end of 2010). MSCI India’s P/E premium to Asia ex Japan has shrunk to 20%
(historical average of 18%) from 36% at the end of 2010.
However, the Future Growth Ratio, which is a better predictor for forward 12M price returns than
the forward P/E ratio, suggests downside of around 12% to its historical average of 40%. The
FGR is a single metric which blends earnings multiples and the prevailing interest rates.
Specifically, the FGR is the proportion of the current stock or index price explained by its future
growth. For further details on the FGR, please refer to Tactically bearish, structurally bullish dated
23 August 2010
MSCI India valuations look a bit better on bottom-up Bloomberg consensus numbers as our EPS
estimates for 2012F/2013F are 3/6% below consensus. Bottom-up Bloomberg consensus
earnings estimates have drifted down since the beginning of the year (down ~1-2% following
disappointing December quarter results for a number of companies) but we think we have still
some more downward revisions in store.
The Reserve Bank of India raised its headline WPI inflation projection for March 2011 to 7% from
5.5% in its monetary policy review on 25 January. We had highlighted the upside risk to the RBI’s
inflation target back in December (refer November Inflation Release dated 14 December 2010).
We believe the RBI’s new projection is more realistic. Sanjay Mathur, our Asia economist, expects
the WPI to trend down to 7.7% by March 2011 from 8.4% in December 2010 and average 5.7%
for fiscal 2012.
The recent downtick in weekly primary food inflation is comforting and should help inflation
readings for February and March (if prices don’t increase from current levels). Primary food
articles inflation declined to 13.1% for the week ended 29 January from 17% in the prior week, as
primary food prices declined 2.8% week on week as vegetable prices declined 17%. The increase
in food inflation for the month of December (to 8.6% from 6.1% in November) was driven by an
unseasonal 23% m/m uptick in vegetable prices.
However, we would watch inflation numbers through March before giving an all-clear signal on the
inflation front. Most investors (and sell side analysts) were negatively surprised by the uptick in
headline inflation in December; as such, any more negative surprises would probably lead to a
negative equity market reaction.
A key concern for investors has been the policy inaction resulting from the recent corruption
scandals that has hampered infrastructure execution. A relatively smooth passage of the budget
session of Parliament would give investors some comfort regarding this issue. To review, hardly
any business got conducted in the winter session of Parliament due to the political stalemate
around corruption. Recent media reports suggest that the government may agree to the
opposition’s demand for a Joint Parliamentary Committee (JPC) to investigate the 2G spectrum
allocation, which could lead to a smooth passage of the budget. The budget session commences
on 21 February, and the budget will be introduced to Parliament on 28 February. The budget
session concludes on 21 April with a break from 16 March to 3 April.
We would also point out that investors are not expecting any significant progress on reforms from
this budget session – as such, any movement on reforms in the budget would be a positive
surprise to the market.
Separately, we would also highlight the recent flexibility from the Ministry of Environment
regarding environmental clearances to mining projects in response to concerns that the ministry’s
earlier rigid stance was hampering growth. POSCO was granted conditional approval from the
environment ministry to go ahead with its US$12bn integrated steel plant and port project in
Orissa on 31 January – the initial memorandum of understanding was signed by POSCO with the
state of Orissa in June 2005. The environment ministry also approved SAIL’s second phase of
mining of the Chiria deposits on 10 February.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India Strategy
Back from the road
Investor meetings across Asia, the US and Europe suggest consensus
bearishness on India. Significant underperformance has driven valuations to fair
value, but we would still wait for more clarity on inflation and the political
situation before reversing our cautious stance.
Investor meetings suggest consensus bearishness on India
We spent the second half of January and early February meeting investors across Asia, the
US and Europe. We had more than 60 meetings – interestingly, only one investor said that
they were overweight India (in an Asian or Emerging Markets context), and another said they
were neutral. Everybody else suggested an underweight position – a significant reversal from
last October. However, clients said they were looking to add to their exposure if the Indian
market continued to underperform. Value investors suggested that they are finding more
“value” ideas in India. Investors (as well as us) are perplexed by the relatively muted amount
of foreign selling year to date given the 15% ytd decline in MSCI India – net sales of only
US$1.5bn versus inflows of US$29bn in 2010.
Our road map – valuations, inflation and the political situation
We are monitoring the above-mentioned variables before making any decision to change our
cautious stance, and suggested investors focus on these too. Valuations are almost there as
we are now in fair value territory (forward P/E of 14.3x on our estimates versus ten-year
average of 14.2x) – further declines would add to valuation comfort. The recent downtick in
primary food inflation is comforting but we would watch inflation data through March to get
more comfortable (an upside surprise to expectations of a 7-8% WPI reading in March could
pressure markets). A smooth passage of the budget session of parliament, which starts on
21 February (we are not expecting many reforms – it is a low-expectation budget!), would
give us greater comfort that the government will focus on execution going forward.
No change in model portfolio and key weightings for now
We our maintaining our current defensive sector positioning with materials, telcos and utilities
as key overweight sectors and banks/financials as a key underweight (see our report
Treading Water, dated 6 January 2011 for details). We expect to reverse our banks/financials
underweight when we get more constructive on the market. We are also watching the
industrials space closely – especially Larsen & Toubro (LT IN).
Short term bounce could be in the offing
With the NIFTY index down 15% ytd and with a 14 day RSI of less than 25, a short-term
bounce cannot be ruled out. However, we would be sellers of such a bounce, and would look
to the 4800-5000 level on the NIFTY as a better longer-term entry point (versus the current
level of ~ 5200).
Back from the road
Consensus bearishness and the 15% ytd decline would suggest reversing our cautious
stance; however, we would still wait and watch inflation and the political situation before
turning bullish.
As mentioned earlier, over more than 60 investor meetings across Asia, the US and Europe, we
found only one investor who said that they were overweight India (in an Asian or Emerging
Markets context). Everybody else suggested an underweight position – a significant reversal from
last October when most clients were overweight (even if they were cautious).
Reliance Industries (RIL IN) was the most discussed stock in our meetings – investors seem
intrigued by its underperformance versus global refining and petchem peers. Our holdings
analysis suggests RIL was a consensus underweight across both foreign and domestic
institutional investor portfolios at the end of last year. Avadhoot Sabnis, RBS’s oil and gas analyst,
upgraded RIL to a Hold from a Sell on 24 January 2011 (see his report, A mixed bag, for details).
Investors (as well as us) are perplexed by the relatively muted amount of foreign selling year to
date given the 15% ytd decline in MSCI India – according to data from SEBI, foreign institutional
investors have only sold down US$1.5bn of Indian equities versus inflows of US$29bn in 2010
(refer chart 1). As Chart 2 shows, previous episodes of such amounts of foreign selling were
relatively better absorbed by the markets – for example, the BSE 500 Index was down only 3.7%
in May 2010 although FIIs sold US$2bn worth of Indian shares (more than the year to date
selling). As such, we are concerned that a further sell-down by foreign investors could lead to
more downside.
With the significant underperformance versus Asia ex Japan on an ytd basis (MSCI India down
15.4% versus 4.8% for Asia ex Japan through 10 February), valuations for MSCI India are now
looking more attractive on both an absolute and a relative basis. Specifically, MSCI India is now
trading at 14.3x our 12-month forward EPS estimate versus a ten-year average of 14.2x (down
from 17.4x at the end of 2010). MSCI India’s P/E premium to Asia ex Japan has shrunk to 20%
(historical average of 18%) from 36% at the end of 2010.
However, the Future Growth Ratio, which is a better predictor for forward 12M price returns than
the forward P/E ratio, suggests downside of around 12% to its historical average of 40%. The
FGR is a single metric which blends earnings multiples and the prevailing interest rates.
Specifically, the FGR is the proportion of the current stock or index price explained by its future
growth. For further details on the FGR, please refer to Tactically bearish, structurally bullish dated
23 August 2010
MSCI India valuations look a bit better on bottom-up Bloomberg consensus numbers as our EPS
estimates for 2012F/2013F are 3/6% below consensus. Bottom-up Bloomberg consensus
earnings estimates have drifted down since the beginning of the year (down ~1-2% following
disappointing December quarter results for a number of companies) but we think we have still
some more downward revisions in store.
The Reserve Bank of India raised its headline WPI inflation projection for March 2011 to 7% from
5.5% in its monetary policy review on 25 January. We had highlighted the upside risk to the RBI’s
inflation target back in December (refer November Inflation Release dated 14 December 2010).
We believe the RBI’s new projection is more realistic. Sanjay Mathur, our Asia economist, expects
the WPI to trend down to 7.7% by March 2011 from 8.4% in December 2010 and average 5.7%
for fiscal 2012.
The recent downtick in weekly primary food inflation is comforting and should help inflation
readings for February and March (if prices don’t increase from current levels). Primary food
articles inflation declined to 13.1% for the week ended 29 January from 17% in the prior week, as
primary food prices declined 2.8% week on week as vegetable prices declined 17%. The increase
in food inflation for the month of December (to 8.6% from 6.1% in November) was driven by an
unseasonal 23% m/m uptick in vegetable prices.
However, we would watch inflation numbers through March before giving an all-clear signal on the
inflation front. Most investors (and sell side analysts) were negatively surprised by the uptick in
headline inflation in December; as such, any more negative surprises would probably lead to a
negative equity market reaction.
A key concern for investors has been the policy inaction resulting from the recent corruption
scandals that has hampered infrastructure execution. A relatively smooth passage of the budget
session of Parliament would give investors some comfort regarding this issue. To review, hardly
any business got conducted in the winter session of Parliament due to the political stalemate
around corruption. Recent media reports suggest that the government may agree to the
opposition’s demand for a Joint Parliamentary Committee (JPC) to investigate the 2G spectrum
allocation, which could lead to a smooth passage of the budget. The budget session commences
on 21 February, and the budget will be introduced to Parliament on 28 February. The budget
session concludes on 21 April with a break from 16 March to 3 April.
We would also point out that investors are not expecting any significant progress on reforms from
this budget session – as such, any movement on reforms in the budget would be a positive
surprise to the market.
Separately, we would also highlight the recent flexibility from the Ministry of Environment
regarding environmental clearances to mining projects in response to concerns that the ministry’s
earlier rigid stance was hampering growth. POSCO was granted conditional approval from the
environment ministry to go ahead with its US$12bn integrated steel plant and port project in
Orissa on 31 January – the initial memorandum of understanding was signed by POSCO with the
state of Orissa in June 2005. The environment ministry also approved SAIL’s second phase of
mining of the Chiria deposits on 10 February.
No comments:
Post a Comment