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West doesn't meet East
Across Asia and Europe we met 49 long only and 8 hedge fund clients
Asian investors by and large bearish, Europeans turning positive
Investors positive on banks, IT, auto; turning positive on energy, property
Oil prices, margin pressure, capex slowdown - biggest areas for concern
Significant divergence between Asian and European investors
We met Asian investors just before the Indian Budget - in the last week of February, and we
met European investors a week or so after the budget was passed. While the bearishness of
Asian investors was at its peak (barring a few large long only funds), European investors,
particularly those focused on GEM, don't seem particularly negative on India. Most LO
investors are underweight India, though GEM investors are getting incrementally positive.
What are the main concerns and questions of investors?
The biggest concern is the combination of persistent high inflation, potentially high fiscal
deficit and their effect on interest rates and the possibility of it crowding out private
borrowing. The second most often asked question was about downside risk to earnings
estimates and which sectors could contribute to such downgrades. We believe metals,
cement, consumer staples and construction - contributing to 25-30% of market's earnings –
could face downgrades.
What are the causes of investors' confusion?
Simply put - 2 questions: (i) Why is the Indian market so resilient in the wake of sharply
increasing oil prices and political scandals? And (ii) Why is the Indian Rupee so strong in a
scenario of increasing oil prices and declining capital flows? Expectation of potential
moderation in global growth - which could lead to moderation in commodity prices could
explain the first issue. A recent decline in trade deficit and foreign institutional investors
(FIIs) buying Indian debt (neutralising equity outflows) possibly explains the second issue.
Strongest agreements and disagreements
Our underweight on second tier PSU banks, absence and BHEL and Hero Honda from our
portfolio and our underweight on pharmaceuticals were the strongest areas of disagreement.
Overweight on IT and automobiles and overweight on some frontline engineering companies
(e.g. L&T) met with most acceptance among investors.
Significant divergence between Asian and European investors
We met Asian investors just before the Indian Budget - in the last week of February,
and we met European investors a week or so after the budget. Hardly any time
difference - one would think. But while the bearishness of Asian investors was at its
peak (barring a few large long only funds), European investors, particularly those
focused on GEM, don't seem particularly negative on India. And this - despite the fact
that during that 2-week period, middle eastern tensions accelerated and oil prices
increased further – which is unequivocally bad news for India.
Across these two continents we met 57 investors - 49 long only (LO) and 8 hedge funds
(HF). While the LO investors' outlook on India were mixed - relatively more positive in
Europe – hedge funds remain uniformly bearish.
How are investors positioned?
Most LO investors are underweight India - and that is in line with the data available from
public sources like EPFR.
GEM investors are getting incrementally positive - on a few fundamentally sound stocks
that have underperformed the market significantly. These long term investors believe
that investing in some of these stocks now would lead to good returns over the long
term, notwithstanding where the market heads in the near term. It' seems unlikely that
these investors would rush in to buy right now, as their concerns about the market are
still significant - but they are more positive than when we met them late last year.
Hedge funds, however, are still looking for short ideas in India - they are searching
among select commodity plays (steel, cement) and rate sensitive sectors.
What are the main concerns and questions of investors?
Undoubtedly the biggest concern is the combination of persistent high inflation,
potentially high fiscal deficit (which could be aggravated by high oil and other
commodity prices) and their impact on interest rates and crowding out of private
investment. Sensitivity of fiscal and current account deficits to oil prices were discussed
repeatedly. While predicting oil prices is a thankless job, this indicates, that any sign of
resolution in MENA geopolitical tensions, and consequently, moderation in oil prices,
could lead to significant rerating of the market.
The second most often asked question was on downside risk to earnings estimates and
which sectors could contribute to such downgrades. Our answer was - metals, cement,
consumer staples and construction - contributing to 25-30% of market's earnings. That
implies 2.5-3% downside to earnings estimates. Thus - FY12 EPS could settle at
Rs1220-1225 - and applying a 13x PE multiple, it could mean a "worst case" Sensex
level of 15500-16000.
What are the main causes for investors' confusion?
Simply put - 2 questions:
i Why is the Indian market so resilient in the wake of sharply increasing oil prices
and political scandals? It has outperformed Emerging markets since mid-February,
and
ii Why is the Indian Rupee so strong in a scenario of increasing oil prices and
declining capital flows?
On the first question - the only answer seems to be the expectation of potential
moderation in global growth - which could lead to moderation in commodity prices.
Indeed, some commodity prices - particularly ferrous metals in Asia - have declined of
late, and that's good news for India.
The second question is easier to answer - trade deficit declined recently, and even
though FIIs sold Indian equity, they bought Indian debt - leading to significant net
portfolio inflows into India.
Which sectors and stocks were discussed most often?
Understandably, the most often discussed sectors were the large sectors - banks, auto,
IT Services, engineering / capital goods. The dark horse sector that came up for
discussion repeatedly was property. Some investors are also turning bullish on telecom
and energy selectively (primarily Reliance Industries and ONGC).
Most frequently discussed stocks were:
i L&T: We upgraded to Buy on 14th March. New order inflows and reasonable
valuations are key catalysts.
ii BHEL: After recent derating trading at 15.6xFY12, but product price pressures
continue.
iii ICICI Bank and Axis Bank: Strong deposit franchise, decent credit growth
iv REC and PFC: Good proxies on infrastructure, but wholesale funded
v IRB Infrastructure: Play on road orders restarting
vi Oberoi Properties, Sobha Developers: Good management quality and corporate
governance in the property space.
vii HDIL: One of the best execution in real estate space
viii Hero Honda: Despite split between JV partners, looking attractive on valuations
ix Tata Motors: Strong volume growth and cost reduction, concerns on China
slowing down and potential diesel price increase in India.
x Jaiprakash Associates: Cheap valuation; New cement capacity and soon-to-becommissioned
power plants could start generating cash.
Strongest agreements and disagreements from our portfolio
1 We have overweight on banks with particular emphasis on privare banks. However,
from investors’ perspective, some concerns on NPLs of ICICI Bank and Axis Bank
are still significant.
2 Even though we have overweight on only the large frontline PSU banks, on second
tier PSU banks EU investors seemed less bearish than we are.
3 Many UK and EU investors seem less bearish on BHEL and Hero Honda than we
are, primarily because at current valuations most of the negatives appear
discounted.
4 Many investors were more positive on the pharmaceutical sector than we are,
despite huge outperformance of the sector in 2010 and consequent expensive
valuation.
5 There are some lingering concerns about managements of IRB and BGR Energy –
both of which figure in our model portfolio.
The strongest agreements were on frontline IT stocks, L&T, and the auto stocks -
particularly on Bajaj Auto and M&M. There are some concerns on competitive
pressures for Maruti. Many investors are also looking to add to Bharti and Reliance and
ONGC. A common misperception among investors was that IT is an over-owned sector
since the sector has recently been a “consensus overweight” for most brokers. Most
investors were surprised to see our analysis that both FIIs and DIIs are heavily
underweight IT.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
West doesn't meet East
Across Asia and Europe we met 49 long only and 8 hedge fund clients
Asian investors by and large bearish, Europeans turning positive
Investors positive on banks, IT, auto; turning positive on energy, property
Oil prices, margin pressure, capex slowdown - biggest areas for concern
Significant divergence between Asian and European investors
We met Asian investors just before the Indian Budget - in the last week of February, and we
met European investors a week or so after the budget was passed. While the bearishness of
Asian investors was at its peak (barring a few large long only funds), European investors,
particularly those focused on GEM, don't seem particularly negative on India. Most LO
investors are underweight India, though GEM investors are getting incrementally positive.
What are the main concerns and questions of investors?
The biggest concern is the combination of persistent high inflation, potentially high fiscal
deficit and their effect on interest rates and the possibility of it crowding out private
borrowing. The second most often asked question was about downside risk to earnings
estimates and which sectors could contribute to such downgrades. We believe metals,
cement, consumer staples and construction - contributing to 25-30% of market's earnings –
could face downgrades.
What are the causes of investors' confusion?
Simply put - 2 questions: (i) Why is the Indian market so resilient in the wake of sharply
increasing oil prices and political scandals? And (ii) Why is the Indian Rupee so strong in a
scenario of increasing oil prices and declining capital flows? Expectation of potential
moderation in global growth - which could lead to moderation in commodity prices could
explain the first issue. A recent decline in trade deficit and foreign institutional investors
(FIIs) buying Indian debt (neutralising equity outflows) possibly explains the second issue.
Strongest agreements and disagreements
Our underweight on second tier PSU banks, absence and BHEL and Hero Honda from our
portfolio and our underweight on pharmaceuticals were the strongest areas of disagreement.
Overweight on IT and automobiles and overweight on some frontline engineering companies
(e.g. L&T) met with most acceptance among investors.
Significant divergence between Asian and European investors
We met Asian investors just before the Indian Budget - in the last week of February,
and we met European investors a week or so after the budget. Hardly any time
difference - one would think. But while the bearishness of Asian investors was at its
peak (barring a few large long only funds), European investors, particularly those
focused on GEM, don't seem particularly negative on India. And this - despite the fact
that during that 2-week period, middle eastern tensions accelerated and oil prices
increased further – which is unequivocally bad news for India.
Across these two continents we met 57 investors - 49 long only (LO) and 8 hedge funds
(HF). While the LO investors' outlook on India were mixed - relatively more positive in
Europe – hedge funds remain uniformly bearish.
How are investors positioned?
Most LO investors are underweight India - and that is in line with the data available from
public sources like EPFR.
GEM investors are getting incrementally positive - on a few fundamentally sound stocks
that have underperformed the market significantly. These long term investors believe
that investing in some of these stocks now would lead to good returns over the long
term, notwithstanding where the market heads in the near term. It' seems unlikely that
these investors would rush in to buy right now, as their concerns about the market are
still significant - but they are more positive than when we met them late last year.
Hedge funds, however, are still looking for short ideas in India - they are searching
among select commodity plays (steel, cement) and rate sensitive sectors.
What are the main concerns and questions of investors?
Undoubtedly the biggest concern is the combination of persistent high inflation,
potentially high fiscal deficit (which could be aggravated by high oil and other
commodity prices) and their impact on interest rates and crowding out of private
investment. Sensitivity of fiscal and current account deficits to oil prices were discussed
repeatedly. While predicting oil prices is a thankless job, this indicates, that any sign of
resolution in MENA geopolitical tensions, and consequently, moderation in oil prices,
could lead to significant rerating of the market.
The second most often asked question was on downside risk to earnings estimates and
which sectors could contribute to such downgrades. Our answer was - metals, cement,
consumer staples and construction - contributing to 25-30% of market's earnings. That
implies 2.5-3% downside to earnings estimates. Thus - FY12 EPS could settle at
Rs1220-1225 - and applying a 13x PE multiple, it could mean a "worst case" Sensex
level of 15500-16000.
What are the main causes for investors' confusion?
Simply put - 2 questions:
i Why is the Indian market so resilient in the wake of sharply increasing oil prices
and political scandals? It has outperformed Emerging markets since mid-February,
and
ii Why is the Indian Rupee so strong in a scenario of increasing oil prices and
declining capital flows?
On the first question - the only answer seems to be the expectation of potential
moderation in global growth - which could lead to moderation in commodity prices.
Indeed, some commodity prices - particularly ferrous metals in Asia - have declined of
late, and that's good news for India.
The second question is easier to answer - trade deficit declined recently, and even
though FIIs sold Indian equity, they bought Indian debt - leading to significant net
portfolio inflows into India.
Which sectors and stocks were discussed most often?
Understandably, the most often discussed sectors were the large sectors - banks, auto,
IT Services, engineering / capital goods. The dark horse sector that came up for
discussion repeatedly was property. Some investors are also turning bullish on telecom
and energy selectively (primarily Reliance Industries and ONGC).
Most frequently discussed stocks were:
i L&T: We upgraded to Buy on 14th March. New order inflows and reasonable
valuations are key catalysts.
ii BHEL: After recent derating trading at 15.6xFY12, but product price pressures
continue.
iii ICICI Bank and Axis Bank: Strong deposit franchise, decent credit growth
iv REC and PFC: Good proxies on infrastructure, but wholesale funded
v IRB Infrastructure: Play on road orders restarting
vi Oberoi Properties, Sobha Developers: Good management quality and corporate
governance in the property space.
vii HDIL: One of the best execution in real estate space
viii Hero Honda: Despite split between JV partners, looking attractive on valuations
ix Tata Motors: Strong volume growth and cost reduction, concerns on China
slowing down and potential diesel price increase in India.
x Jaiprakash Associates: Cheap valuation; New cement capacity and soon-to-becommissioned
power plants could start generating cash.
Strongest agreements and disagreements from our portfolio
1 We have overweight on banks with particular emphasis on privare banks. However,
from investors’ perspective, some concerns on NPLs of ICICI Bank and Axis Bank
are still significant.
2 Even though we have overweight on only the large frontline PSU banks, on second
tier PSU banks EU investors seemed less bearish than we are.
3 Many UK and EU investors seem less bearish on BHEL and Hero Honda than we
are, primarily because at current valuations most of the negatives appear
discounted.
4 Many investors were more positive on the pharmaceutical sector than we are,
despite huge outperformance of the sector in 2010 and consequent expensive
valuation.
5 There are some lingering concerns about managements of IRB and BGR Energy –
both of which figure in our model portfolio.
The strongest agreements were on frontline IT stocks, L&T, and the auto stocks -
particularly on Bajaj Auto and M&M. There are some concerns on competitive
pressures for Maruti. Many investors are also looking to add to Bharti and Reliance and
ONGC. A common misperception among investors was that IT is an over-owned sector
since the sector has recently been a “consensus overweight” for most brokers. Most
investors were surprised to see our analysis that both FIIs and DIIs are heavily
underweight IT.
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