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India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India Conference 2011
India – Growth now with value
Current macro headwinds provide a great entry point
India, with its 1.2bn population, rising income levels and growing aspirations,
presents an unparalleled opportunity. The current macro headwinds in the form
of rising inflation, slowing investment and political chaos provide a perfect
opportunity to pick and choose the jewels of India to adorn your portfolio at great
value. We present 50 companies, five panel sessions and four exciting trips to
whet your appetite.
Themes to play
�� Investment – need of the hour: India is a severely constrained economy and
the government needs to give a big push to both industrial capex and
infrastructure build. After a hectic 2006-2009, there seems to be a pause as
the government tries to establish its views on environmental issues and
corporates absorb the global shock and repair their balance sheets. We
expect things to pick up in next 6-8 months.
�� Consumption – the driving force: Increased social spending,
implementation of the “right to work” with introduction of NREGA, a real estate
boom and agri-commodity inflation have increased the purchasing power of
rural India. Improving demographics and rising income levels are changing
the profile of the food basket and discretionary spending patterns.
�� Reforms – badly needed to fast track growth: Economic reforms have
been the most significant facilitator of growth since the early 1990s and are
credited with bringing about positive structural changes in India’s economy.
However, the government needs to maintain the pace of implementing
reforms which often get sidelined around political issues such as scams,
corruption charges and standoffs with the opposition parties.
Short-term weakness – defined by four I’s
Although the long-term growth prospects for India look good, we believe
concerns around Inflation, Interest rates, Investment growth and Inflow of funds
will keep the markets vulnerable over the next couple of quarters. Therefore we
remain cautious on India in the short term. That said, the market has corrected
nearly 14% YTD and valuations now look much more reasonable than they did a
few months back. We recommend investors to start building long positions in
selective stocks on any instance of market weakness. Our Sensex target
currently stands at 22000 by March-end 2012; upside of 22%.
Sector Preference and Top 10 stocks
Our Top 10 stocks, while not spared in this weak market, have outperformed the
Sensex by 210bps and Nifty by 270bps since August last year (details in tables 8
and 9). On sector preference, we recommend playing global cyclicality while
retaining a defensive exposure – overweight on metals, energy, IT and
healthcare; underweight on consumer staples, consumer discretionary and
financials; neutral on capital goods.
Macro Overhang in the Short Term; Long-
Term Growth Positive
Good Opportunity to Enter, Albeit Cautiously and Selectively
Since we put out our outlook for FY12 last month, the market has corrected by nearly 10%
(14% YTD). While macro headwinds will continue to weigh on the market for the next few
months, we believe there are pockets of opportunity opening up where investors can start
building long positions. For one, valuations are now at reasonable levels, which does address
concerns around the huge premium that India was trading at relative to peers. However, the
market will likely wait and watch the trend in earnings revisions and clarity around macro
issues before making an up move, in our view. We think this may only happen in the second
half of the year, when clarity starts emerging around these macro uncertainties. We are
retaining our Sensex target of 22000 by March-end 2012, implying a 22% upside from current
levels.
Long-term Themes Remain Intact
�� Investment: The growth trajectory has shifted upwards of 8% and for this momentum to
continue, investment activity needs to maintain its pace. India is a severely constrained
economy and needs to give a big push to both industrial capex and infrastructure build.
After a hectic 2006-2009, there seems to be a pause as the government tries to establish
its view on environmental issues and corporates absorb the global shock and repair their
balance sheets. We expect things to pick up in next 6-8 months; however, execution will be
the key differentiator.
�� Domestic Consumption: Rural demand has shown tremendous growth in the past two
years which has helped sustain robust economic growth. Increased social spending,
implementation of the “right to work” with introduction of NREGA, a real estate boom and
agri-commodity inflation have increased the purchasing power of rural India. Urban
demand has also recovered post the global credit crisis, owing to improving job markets
and higher incomes; however, food inflation remains a major dampener. We expect
consumption to drive overall economic growth as improving demographics and rising
income levels are changing the profile of the food basket and discretionary spending
patterns.
�� Reforms - Necessary to sustain the pace of growth: Many reforms that had made
significant progress till last year – such as the Direct Tax Code, GST and Fuel Price
Deregulation – have been postponed either due to implementation issues or due to political
pressure. We believe slow pace of implementation of reforms is one of the major reasons
that have kept India from achieving double-digit growth. The government’s reform process
needs to be underscored by its focus on addressing other major policy issues such as:
a) A fiscal policy that is focused on creating productive assets and bringing down the
ballooning fiscal deficit
b) Better supply-side management of essential items such as food-grains to avoid wastage
c) An effective approach to managing movements in the rupee due to volatile capital inflows
while at the same time making the export sector more competitive
Focus on Four ‘I’s - Inflation, Interest,
Investment & Inflow
Investment Growth – can it revive as the environment weakens?
The overarching theme in 2011, in our view, will be investment growth in the economy.
Economic growth over the past two years has been resilient owing to support from strong
consumption growth, which continues to hold its own. On the other hand, investment demand
has shown strength in patches and the growth pattern has been sketchy. For the economy to
grow at 8-9% from here on, investment needs to show sustained growth over the next few
quarters. Public spending has been constrained and spend on infrastructure is running well
below target.
While the private sector has shown its intention to intensify capital spend, the execution on
the ground has been severely constrained by strict environmental norms and lack of reforms
on land acquisition. We think conditions have become less favourable over the past few
months, and further risks are emanating from rising interest rates, sustained high food
inflation and the rise in global commodity prices. Political developments over the next 2-3
months will be key to ensure a pick-up in the investment cycle.
Inflation – has it peaked or can surprise again?
Normal monsoon weather and a low base of the Wholesale Price Index (WPI) had raised the
expectation of lower inflation, which has recently been dashed by unseasonal rains pushing
food inflation. Investors are also reconciling the view that developed economies might avoid a
double dip, as reflected in Macquarie’s house view of US GDP forecast at 3.5%, and may
stoke inflation. Energy prices have already moved up sharply, given the severe winter, and
are now threatening to go even higher, with supply disruptions in Australia. While we believe
that the current correction in the market is partly to discount this increased risk, further derating
can happen if oil prices were to move beyond the psychological mark of US$100/barrel.
Interest rates increases, which until now were seen as normalisation of the policy, might now
be required to contain inflation.
Inflows – 2010 was liquidity driven; what about 2011?
The liquidity-driven market of 2010 had its underpinnings in loose monetary conditions in
developed markets, money chasing risky assets and the relative attractiveness of Indian
equities, resulting in a huge equity premium of India over its Asian and emerging peers. India
registered close to US$30bn of FII fund inflows in CY2010, around 30% more than the
amount received at the peak of the euphoria in CY2007. As a result, India outperformed
emerging markets and the rest of Asia for the first three quarters of CY10 while
underperforming in the last quarter. We believe CY2011 may not be as robust, since we
expect the majority of the incremental flows will go value-hunting in other emerging markets
and the gradually recovering developed western markets. That said, while this readjustment
of flows may lead to a short-term correction in the market, the downside will likely be limited
and money will eventually find its way back into the Indian growth story. However, we expect
returns to be moderate, at around 13-15%.
Economic reforms – can this coalition government muster numbers
The Indian government has been mired in issues of rising food inflation and corruption.
Opposition political parties have brought the parliament to a standstill, and no sign of any
resolution is in sight. In this context, this coalition government has limited ability to push
through any difficult economic reforms. The situation could get worse from here, as two of its
key allies (TMC and DMK) go to elections in their respective states (West Bengal and Tamil
Nadu) in May '11. Now, if these allies are able to get a majority on their own or lose the
elections, their bargaining power will increase significantly. The probability of TMC winning in
West Bengal seems very high if the results of recent municipal elections in Kolkata are
anything to go by.
This coalition government is on a weak footing and is holding up only because of a lack of
united opposition. The issues of food inflation and corruption have given a common cause for
the opposition parties. Out of the total parliament seats of 545, the coalition government holds
only 262 seats, which is less than 50%, and also includes both TMC and DMK. Also, it is
dependent on the outside support of SP and BSP for a simple majority. Both these political
parties (SP and BSP) have a strong hold in the state of Uttar Pradesh, which goes into
election in 2012. It will be really interesting to see what stand these parties take this year and
more so as they inch towards elections.
Playing global cyclicality while retaining defensive exposure
Our house view on global macro sees economic recovery in the developed markets of US
and Europe and high commodity prices in 2011. Keeping in mind the above factors, we
recommend playing global cyclicality while retaining our defensive exposure.
�� Sectors like metals and energy will benefit from the rising global commodity cycle, while IT
will continue to gain from recovering developed markets.
�� Our defensive overweight exposure primarily includes Healthcare.
�� We are now underweight financials, owing to rising rates denting net interest margins and
an overhang from pension costs.
�� We have reduced our exposure to capital goods to marketweight due to worries around
execution and inflow of new projects.
�� We have also downgraded both consumer staples and discretionary to underweight; the
former on the back of input price pressures impacting margins and the latter based on our
concerns around slowing discretionary spending amongst consumers.
Stock hunting continues to be the order of the day
The surge in fund inflows into Indian equities saw all sectors gaining in measur,e with some
significantly outperforming others. This had the impact of pushing up stock valuations way
above their 2009 levels. However, with the recent correction, most sectors and stocks look a
lot more reasonable now. The differentiator amongst stocks will be ones that have clear
visibility in earnings and are investing for growth, thereby contributing to job and income
growth in this high inflation environment. We believe there are pockets of opportunity
available across sectors that we recommend buying.
Macquarie Top-10 Focus List
Our Top-10 Focus List is a concentrated list of stocks for those looking for high absolute
returns from fundamentally sound stocks. The recommended list consists of stocks that we
believe are ahead of their peers in terms of earnings visibility and growth potential. Our focus
list has outperformed the Sensex by 210bps and Nifty by 270bps since August 24, 2010. We
have been making interim changes to the focus list based on our sector preference and
analyst conviction call on specific stocks, which have helped drive the outperformance.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India Conference 2011
India – Growth now with value
Current macro headwinds provide a great entry point
India, with its 1.2bn population, rising income levels and growing aspirations,
presents an unparalleled opportunity. The current macro headwinds in the form
of rising inflation, slowing investment and political chaos provide a perfect
opportunity to pick and choose the jewels of India to adorn your portfolio at great
value. We present 50 companies, five panel sessions and four exciting trips to
whet your appetite.
Themes to play
�� Investment – need of the hour: India is a severely constrained economy and
the government needs to give a big push to both industrial capex and
infrastructure build. After a hectic 2006-2009, there seems to be a pause as
the government tries to establish its views on environmental issues and
corporates absorb the global shock and repair their balance sheets. We
expect things to pick up in next 6-8 months.
�� Consumption – the driving force: Increased social spending,
implementation of the “right to work” with introduction of NREGA, a real estate
boom and agri-commodity inflation have increased the purchasing power of
rural India. Improving demographics and rising income levels are changing
the profile of the food basket and discretionary spending patterns.
�� Reforms – badly needed to fast track growth: Economic reforms have
been the most significant facilitator of growth since the early 1990s and are
credited with bringing about positive structural changes in India’s economy.
However, the government needs to maintain the pace of implementing
reforms which often get sidelined around political issues such as scams,
corruption charges and standoffs with the opposition parties.
Short-term weakness – defined by four I’s
Although the long-term growth prospects for India look good, we believe
concerns around Inflation, Interest rates, Investment growth and Inflow of funds
will keep the markets vulnerable over the next couple of quarters. Therefore we
remain cautious on India in the short term. That said, the market has corrected
nearly 14% YTD and valuations now look much more reasonable than they did a
few months back. We recommend investors to start building long positions in
selective stocks on any instance of market weakness. Our Sensex target
currently stands at 22000 by March-end 2012; upside of 22%.
Sector Preference and Top 10 stocks
Our Top 10 stocks, while not spared in this weak market, have outperformed the
Sensex by 210bps and Nifty by 270bps since August last year (details in tables 8
and 9). On sector preference, we recommend playing global cyclicality while
retaining a defensive exposure – overweight on metals, energy, IT and
healthcare; underweight on consumer staples, consumer discretionary and
financials; neutral on capital goods.
Macro Overhang in the Short Term; Long-
Term Growth Positive
Good Opportunity to Enter, Albeit Cautiously and Selectively
Since we put out our outlook for FY12 last month, the market has corrected by nearly 10%
(14% YTD). While macro headwinds will continue to weigh on the market for the next few
months, we believe there are pockets of opportunity opening up where investors can start
building long positions. For one, valuations are now at reasonable levels, which does address
concerns around the huge premium that India was trading at relative to peers. However, the
market will likely wait and watch the trend in earnings revisions and clarity around macro
issues before making an up move, in our view. We think this may only happen in the second
half of the year, when clarity starts emerging around these macro uncertainties. We are
retaining our Sensex target of 22000 by March-end 2012, implying a 22% upside from current
levels.
Long-term Themes Remain Intact
�� Investment: The growth trajectory has shifted upwards of 8% and for this momentum to
continue, investment activity needs to maintain its pace. India is a severely constrained
economy and needs to give a big push to both industrial capex and infrastructure build.
After a hectic 2006-2009, there seems to be a pause as the government tries to establish
its view on environmental issues and corporates absorb the global shock and repair their
balance sheets. We expect things to pick up in next 6-8 months; however, execution will be
the key differentiator.
�� Domestic Consumption: Rural demand has shown tremendous growth in the past two
years which has helped sustain robust economic growth. Increased social spending,
implementation of the “right to work” with introduction of NREGA, a real estate boom and
agri-commodity inflation have increased the purchasing power of rural India. Urban
demand has also recovered post the global credit crisis, owing to improving job markets
and higher incomes; however, food inflation remains a major dampener. We expect
consumption to drive overall economic growth as improving demographics and rising
income levels are changing the profile of the food basket and discretionary spending
patterns.
�� Reforms - Necessary to sustain the pace of growth: Many reforms that had made
significant progress till last year – such as the Direct Tax Code, GST and Fuel Price
Deregulation – have been postponed either due to implementation issues or due to political
pressure. We believe slow pace of implementation of reforms is one of the major reasons
that have kept India from achieving double-digit growth. The government’s reform process
needs to be underscored by its focus on addressing other major policy issues such as:
a) A fiscal policy that is focused on creating productive assets and bringing down the
ballooning fiscal deficit
b) Better supply-side management of essential items such as food-grains to avoid wastage
c) An effective approach to managing movements in the rupee due to volatile capital inflows
while at the same time making the export sector more competitive
Focus on Four ‘I’s - Inflation, Interest,
Investment & Inflow
Investment Growth – can it revive as the environment weakens?
The overarching theme in 2011, in our view, will be investment growth in the economy.
Economic growth over the past two years has been resilient owing to support from strong
consumption growth, which continues to hold its own. On the other hand, investment demand
has shown strength in patches and the growth pattern has been sketchy. For the economy to
grow at 8-9% from here on, investment needs to show sustained growth over the next few
quarters. Public spending has been constrained and spend on infrastructure is running well
below target.
While the private sector has shown its intention to intensify capital spend, the execution on
the ground has been severely constrained by strict environmental norms and lack of reforms
on land acquisition. We think conditions have become less favourable over the past few
months, and further risks are emanating from rising interest rates, sustained high food
inflation and the rise in global commodity prices. Political developments over the next 2-3
months will be key to ensure a pick-up in the investment cycle.
Inflation – has it peaked or can surprise again?
Normal monsoon weather and a low base of the Wholesale Price Index (WPI) had raised the
expectation of lower inflation, which has recently been dashed by unseasonal rains pushing
food inflation. Investors are also reconciling the view that developed economies might avoid a
double dip, as reflected in Macquarie’s house view of US GDP forecast at 3.5%, and may
stoke inflation. Energy prices have already moved up sharply, given the severe winter, and
are now threatening to go even higher, with supply disruptions in Australia. While we believe
that the current correction in the market is partly to discount this increased risk, further derating
can happen if oil prices were to move beyond the psychological mark of US$100/barrel.
Interest rates increases, which until now were seen as normalisation of the policy, might now
be required to contain inflation.
Inflows – 2010 was liquidity driven; what about 2011?
The liquidity-driven market of 2010 had its underpinnings in loose monetary conditions in
developed markets, money chasing risky assets and the relative attractiveness of Indian
equities, resulting in a huge equity premium of India over its Asian and emerging peers. India
registered close to US$30bn of FII fund inflows in CY2010, around 30% more than the
amount received at the peak of the euphoria in CY2007. As a result, India outperformed
emerging markets and the rest of Asia for the first three quarters of CY10 while
underperforming in the last quarter. We believe CY2011 may not be as robust, since we
expect the majority of the incremental flows will go value-hunting in other emerging markets
and the gradually recovering developed western markets. That said, while this readjustment
of flows may lead to a short-term correction in the market, the downside will likely be limited
and money will eventually find its way back into the Indian growth story. However, we expect
returns to be moderate, at around 13-15%.
Economic reforms – can this coalition government muster numbers
The Indian government has been mired in issues of rising food inflation and corruption.
Opposition political parties have brought the parliament to a standstill, and no sign of any
resolution is in sight. In this context, this coalition government has limited ability to push
through any difficult economic reforms. The situation could get worse from here, as two of its
key allies (TMC and DMK) go to elections in their respective states (West Bengal and Tamil
Nadu) in May '11. Now, if these allies are able to get a majority on their own or lose the
elections, their bargaining power will increase significantly. The probability of TMC winning in
West Bengal seems very high if the results of recent municipal elections in Kolkata are
anything to go by.
This coalition government is on a weak footing and is holding up only because of a lack of
united opposition. The issues of food inflation and corruption have given a common cause for
the opposition parties. Out of the total parliament seats of 545, the coalition government holds
only 262 seats, which is less than 50%, and also includes both TMC and DMK. Also, it is
dependent on the outside support of SP and BSP for a simple majority. Both these political
parties (SP and BSP) have a strong hold in the state of Uttar Pradesh, which goes into
election in 2012. It will be really interesting to see what stand these parties take this year and
more so as they inch towards elections.
Playing global cyclicality while retaining defensive exposure
Our house view on global macro sees economic recovery in the developed markets of US
and Europe and high commodity prices in 2011. Keeping in mind the above factors, we
recommend playing global cyclicality while retaining our defensive exposure.
�� Sectors like metals and energy will benefit from the rising global commodity cycle, while IT
will continue to gain from recovering developed markets.
�� Our defensive overweight exposure primarily includes Healthcare.
�� We are now underweight financials, owing to rising rates denting net interest margins and
an overhang from pension costs.
�� We have reduced our exposure to capital goods to marketweight due to worries around
execution and inflow of new projects.
�� We have also downgraded both consumer staples and discretionary to underweight; the
former on the back of input price pressures impacting margins and the latter based on our
concerns around slowing discretionary spending amongst consumers.
Stock hunting continues to be the order of the day
The surge in fund inflows into Indian equities saw all sectors gaining in measur,e with some
significantly outperforming others. This had the impact of pushing up stock valuations way
above their 2009 levels. However, with the recent correction, most sectors and stocks look a
lot more reasonable now. The differentiator amongst stocks will be ones that have clear
visibility in earnings and are investing for growth, thereby contributing to job and income
growth in this high inflation environment. We believe there are pockets of opportunity
available across sectors that we recommend buying.
Macquarie Top-10 Focus List
Our Top-10 Focus List is a concentrated list of stocks for those looking for high absolute
returns from fundamentally sound stocks. The recommended list consists of stocks that we
believe are ahead of their peers in terms of earnings visibility and growth potential. Our focus
list has outperformed the Sensex by 210bps and Nifty by 270bps since August 24, 2010. We
have been making interim changes to the focus list based on our sector preference and
analyst conviction call on specific stocks, which have helped drive the outperformance.
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