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India Equity Research Reports, IPO and Stock News
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India Strategy
Rate hike – not the last one
Event
Rate hike on expected lines: The RBI continued to be in tightening mode in
its policy review meeting on March 17. The central bank raised the repo and
reverse repo rates by 25bp each, in line with expectations. We believe
inflation will continue to remain elevated forcing RBI to continue with
tightening.
Market – looking for catalysts: The market correction since Jan’11 appears
to have largely factored in the idiosyncratic factors for India - persistent high
inflation, further rate hikes, slowdown in growth and the near-term overhang
from state elections. Nervousness remains due to a possible oil shock, and a
positive catalyst is awaited. We believe materials (oil, steel and cement) and
IT should deliver strong results in April-May and look ripe for picking. Our top
picks here are JSP, RIL, Infosys and India Cement.
Impact
Inflation – is a structural issue and has no easy fix: The February reading
of the WPI came in higher than street expectations. We expect recent
increases in the coal price by Coal India to show up in inflation over the next
two months. Already cement and steel prices have moved up. And since the
captive power cost of most industries goes up, it will show up in manufactured
goods gradually. Also, we expect the government to increase diesel prices
post May elections and Coal India is threatening a further coal price hike,
hence inflation may not reduce for next few months.
Margins over sales volume: Most sectors have adopted the strategy of
retaining margins while sacrificing volume. Banks have aggressively raised
lending rates to compensate for rising deposit rates. Cement companies are
maintaining supply discipline to push prices up. High steel prices seem to
have reduced demand, with clients citing higher working capital requirements.
Investment – some signs of life, execution lagging: While we have seen
some initiatives by the government to grant environmental clearances, actual
work will likely take at least 6 months to start. In many cases the final approval
letters have not been issued even after 3-4months of in-principle approval. In
addition, rising interest rates have increased the hurdle rate for new projects.
Earnings revisions continue the downward trend: The trend across
sectors is negative at the moment, with the exception of IT. The consensus
FY12E Sensex EPS has fallen 3% since reaching its peak in Nov’10,
reflecting a 19% growth over FY11, 200bp lower than what was estimated
back in April’10.
Outlook
Position your portfolio for Q4 results - prefer global cyclicals: Q4 results
remain the key catalyst in the near term. Our overweight sectors - IT,
Materials, Healthcare and Energy - look well poised to deliver strong results.
Our Top-10 Focus Stocks continue to outperform MSCI India by 400bp since
inception in August 2010. Stocks that have outperformed within this basket
are Tata Steel (+17%), ITC (+8.4%) and Infosys (+3.4%).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India Strategy
Rate hike – not the last one
Event
Rate hike on expected lines: The RBI continued to be in tightening mode in
its policy review meeting on March 17. The central bank raised the repo and
reverse repo rates by 25bp each, in line with expectations. We believe
inflation will continue to remain elevated forcing RBI to continue with
tightening.
Market – looking for catalysts: The market correction since Jan’11 appears
to have largely factored in the idiosyncratic factors for India - persistent high
inflation, further rate hikes, slowdown in growth and the near-term overhang
from state elections. Nervousness remains due to a possible oil shock, and a
positive catalyst is awaited. We believe materials (oil, steel and cement) and
IT should deliver strong results in April-May and look ripe for picking. Our top
picks here are JSP, RIL, Infosys and India Cement.
Impact
Inflation – is a structural issue and has no easy fix: The February reading
of the WPI came in higher than street expectations. We expect recent
increases in the coal price by Coal India to show up in inflation over the next
two months. Already cement and steel prices have moved up. And since the
captive power cost of most industries goes up, it will show up in manufactured
goods gradually. Also, we expect the government to increase diesel prices
post May elections and Coal India is threatening a further coal price hike,
hence inflation may not reduce for next few months.
Margins over sales volume: Most sectors have adopted the strategy of
retaining margins while sacrificing volume. Banks have aggressively raised
lending rates to compensate for rising deposit rates. Cement companies are
maintaining supply discipline to push prices up. High steel prices seem to
have reduced demand, with clients citing higher working capital requirements.
Investment – some signs of life, execution lagging: While we have seen
some initiatives by the government to grant environmental clearances, actual
work will likely take at least 6 months to start. In many cases the final approval
letters have not been issued even after 3-4months of in-principle approval. In
addition, rising interest rates have increased the hurdle rate for new projects.
Earnings revisions continue the downward trend: The trend across
sectors is negative at the moment, with the exception of IT. The consensus
FY12E Sensex EPS has fallen 3% since reaching its peak in Nov’10,
reflecting a 19% growth over FY11, 200bp lower than what was estimated
back in April’10.
Outlook
Position your portfolio for Q4 results - prefer global cyclicals: Q4 results
remain the key catalyst in the near term. Our overweight sectors - IT,
Materials, Healthcare and Energy - look well poised to deliver strong results.
Our Top-10 Focus Stocks continue to outperform MSCI India by 400bp since
inception in August 2010. Stocks that have outperformed within this basket
are Tata Steel (+17%), ITC (+8.4%) and Infosys (+3.4%).
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