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India Strategy
Scandal, subsidies, slowdown = shock
Event
ƒ Budget to give direction: The market has corrected, hit by scandals, rising
subsidy burden, slowing investment growth, surging food inflation and selling
by FIIs. Valuations now look much more reasonable, even considering some
more downgrades, and are around the long-term average. While the worstcase scenario (oil price shock, political instability, etc.) could still play out, the
probability seems to be declining a bit. The market will seek clarity on the
budget as to how the government intends to meet the fiscal deficit target in
FY12, in the absence of a 3G windfall.
Impact
ƒ Budget – can it meet both ends: It appears that the government is well on
track to meet and even exceed the FY11 fiscal deficit target of 5.5% with the
bounty from 3G auction. For FY12, the 4.8% fiscal deficit target looks a bit
daunting, even though tax revenues should remain buoyant. On one hand, the
government is faced with high inflation, increased subsidy and rising demand
for social spend given food inflation, but on the other hand is constrained from
raising taxes, as it might affect growth.
ƒ Oil prices – critical for India: Rising crude prices pose a big risk not only to
the current account deficit but also the fiscal deficit via higher subsidy burden.
Our oil analyst Jal Irani estimates the government’s share of the subsidy
burden in FY11 to be close to US$10bn at an average crude price of
US$82/bbl. We estimate that this burden could expand to around US$15bn in
FY12 at an average crude price of US$100/bbl, thereby implying roughly
US$400m incremental burden for every US$1/bbl increase in crude.
ƒ Aggressive disinvestment or borrowings could crowd out private sector:
The government target for disinvestment for FY11 stood at US$9bn and it is
all set to borrow US$71bn. In our view, it will need to borrow almost US$90bn
in FY12 as well as set much higher divestment targets to meet its current
account and fiscal deficit targets. This could crowd out the private sector,
which may get constrained on raising funds from the market and bear the
burden of higher costs from rising interest rates.
Outlook
ƒ Expectations low and valuations reasonable: While India is still not out of
the woods and a lot depends on oil price movement, expectations – especially
for the budget – are very low. Valuations also look more reasonable at 14.5x
PER on FY12E. We think markets could consolidate at these levels before
making an upward move in the second half of the year, aided by better clarity
on the investment cycle, visible steps by the government on controlling
inflation and outcomes of upcoming state elections.
ƒ Focus on top 10 stocks: We recommend selected exposure to our top 10
stocks, which are leaders in their space and have much better earnings
growth visibility. They have outperformed MSCI India by 400bp and Sensex
by 170bp since inception in August 2010
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India Strategy
Scandal, subsidies, slowdown = shock
Event
ƒ Budget to give direction: The market has corrected, hit by scandals, rising
subsidy burden, slowing investment growth, surging food inflation and selling
by FIIs. Valuations now look much more reasonable, even considering some
more downgrades, and are around the long-term average. While the worstcase scenario (oil price shock, political instability, etc.) could still play out, the
probability seems to be declining a bit. The market will seek clarity on the
budget as to how the government intends to meet the fiscal deficit target in
FY12, in the absence of a 3G windfall.
Impact
ƒ Budget – can it meet both ends: It appears that the government is well on
track to meet and even exceed the FY11 fiscal deficit target of 5.5% with the
bounty from 3G auction. For FY12, the 4.8% fiscal deficit target looks a bit
daunting, even though tax revenues should remain buoyant. On one hand, the
government is faced with high inflation, increased subsidy and rising demand
for social spend given food inflation, but on the other hand is constrained from
raising taxes, as it might affect growth.
ƒ Oil prices – critical for India: Rising crude prices pose a big risk not only to
the current account deficit but also the fiscal deficit via higher subsidy burden.
Our oil analyst Jal Irani estimates the government’s share of the subsidy
burden in FY11 to be close to US$10bn at an average crude price of
US$82/bbl. We estimate that this burden could expand to around US$15bn in
FY12 at an average crude price of US$100/bbl, thereby implying roughly
US$400m incremental burden for every US$1/bbl increase in crude.
ƒ Aggressive disinvestment or borrowings could crowd out private sector:
The government target for disinvestment for FY11 stood at US$9bn and it is
all set to borrow US$71bn. In our view, it will need to borrow almost US$90bn
in FY12 as well as set much higher divestment targets to meet its current
account and fiscal deficit targets. This could crowd out the private sector,
which may get constrained on raising funds from the market and bear the
burden of higher costs from rising interest rates.
Outlook
ƒ Expectations low and valuations reasonable: While India is still not out of
the woods and a lot depends on oil price movement, expectations – especially
for the budget – are very low. Valuations also look more reasonable at 14.5x
PER on FY12E. We think markets could consolidate at these levels before
making an upward move in the second half of the year, aided by better clarity
on the investment cycle, visible steps by the government on controlling
inflation and outcomes of upcoming state elections.
ƒ Focus on top 10 stocks: We recommend selected exposure to our top 10
stocks, which are leaders in their space and have much better earnings
growth visibility. They have outperformed MSCI India by 400bp and Sensex
by 170bp since inception in August 2010
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