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India Equity Research Reports, IPO and Stock News
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• Valuations turning supportive. Subsequent to the 12% correction since
the beginning of the year, Indian equities now trade at a reasonable
15x FY12E and 13x FY13E (vs. the medium term average of 16x). In
addition, the street has started toning down expectations meaningfully
and currently estimates earnings growth of 19% for FY12E (vs. 24%
earlier; J.P. Morgan estimates 16%).
• Policy environment improving after a phase of drift. Projects
aggregating US$30 bn have been cleared over the recent past.
Parliament is back in session and a substantial policy agenda has been
placed for consideration. This pertains to reviving the investment cycle,
financial sector reforms and fiscal consolidation – themes with
enormous significance for long-term growth and the equity markets. The
leg room available to the Government to implement reforms and take
tough measures should improve after elections in five states are
completed in mid-May. We see the window for pushing through
important policy measures extending well into CY2012.
• Easing liquidity pressures. The banking system’s borrowing from the
RBI under the daily LAF has been moderating over the recent past. We
expect liquidity tightness in the system to peak over the next two weeks
and ease into April, in-line with seasonal trends.
• Key risk. The surge in global crude oil prices, if sustained, represents the
key headwind to market performance. India stands out among the peer
group in terms of dependence on imported crude oil.
• Portfolio stance. Over the last quarter, our portfolio stance has been
biased towards global sectors – IT services, Energy and regulated
utilities. We are now turning incrementally positive on Financials and the
Investment Cycle. We favour private sector banks and capital goods in
the early part of the cycle. Valuations for these sectors have been beaten
down substantially and macro headwinds are receding.
India Equity Market Review
MSCI India (US$) lost 1% over the last month and marginally underperformed the
peer group. Volatility remained high, though. Data points – both global and local –
were mixed. We believe the underperformance of Indian equities could largely be
attributed to the sharp spike in global crude oil prices, following the political
upheaval in some Middle East countries, particularly Libya. The unfortunate events
in Japan have also added to uncertainty.
The Government’s Union Budget for FY12E, tabled late last month, had a limited
impact on the market. No major changes in taxation were announced. Some
scepticism was voiced on the aggressive fiscal deficit targeted. But this is unlikely to
come to the fore over the next six months. The bond markets rallied briefly in
response to the lower than expected borrowing program announced.
Despite the recent headwinds, investor sentiment appears to be reversing a bit. After
selling down Indian equities over Jan-Feb (US$ 2 bn), FIIs have bought US$320 mn
of equities over March so far. DIIs remained buyers too, with insurance companies
and mutual funds buying US$ 300 mn and US$ 120 mn respectively
Consumer, Energy and Telecom (from beaten down levels) outperformed over the
month, while IT, Industrials and Materials underperformed.
India Equities – Nearing the end of the
tunnel?
We are beginning to turn more constructive on Indian equities. After the recent
correction, value appears to be emerging. The market currently trades at
15x FY12E and 13x FY13E on our estimates. Key issues of concern to investors
over the last two quarters – policy drift and tight liquidity – appear to be
turning around for the better. And we believe there is potential for further
improvement into the next quarter. Rising global oil prices remain a dampener
though. A meaningful correction herein will we believe set the tone for sustained
returns.
Value beginning to emerge
The broad market has corrected 12% since the beginning of the year and
underperformed the peer group significantly. Subsequent to the correction, valuations
are turning more reasonable. Valuations for the large cap MSCI India universe are
notably lower than the medium term mean levels, both on PE and PB basis. For more
details on market and sectoral valuations
Also, the street has started toning down expectations meaningfully, though there
could be some more to go on this front through the 4Q reporting season, scheduled
for next month. Currently consensus estimates earnings growth of 19% for FY12E
vs. J.P. Morgan estimates of 16%.
Policy Agenda – Back to the fore
Business sentiment was impacted adversely over the last two quarters following:
• Delays in clearances of projects, particularly in the mining sector, due to the
Growth vs. Environment debate
• A series of corruption exposes. Differences over the modalities of
investigating the 2G telecom issue in particular, between the Government
and the Opposition, resulted in the winter session of Parliament being
stalled.
But over the last month, the policy environment appears to have turned around for
the better.
• Investments aggregating more than US$30 bn have been cleared, mainly in
the mining sector.
• The Budget session of Parliament appears to be progressing well and more
importantly a substantial policy agenda has been placed for consideration.
This pertains to reviving the investment cycle, financial sector and fiscal
discipline and consolidation – themes that have enormous significance for
the longer term growth trajectory and the equity markets.
Policy Agenda
Policy initiatives / Bill Implications
Land Acquisition
(Amendment) Bills
Expected to address the 3 most problematic aspects of land acquisition: excessive misuse of
compulsory acquisition laws by states to serve private interests; inadequacy of compensation
provided to the owners; and violent protests against compulsory acquisitions.
Mines & Mineral
(Development &
Regulation) Act
Provide clarity on laws governing mining and compensation payable for acquiring land,
including profit sharing with locals and the mining tax.
Banking Bill Liberalize banking rules in the country by giving shareholders voting rights in line with their
equity holding and allowing banks to raise money through additional instruments such as
preference shares so as to expand business.
Pension Bill Pension Fund Regulatory and Development Authority Bill that seeks to set up a statutory
pension regulator and also allow up to 26% foreign direct investment in pension fund
management companies.
Insurance Bill The amendment would allow insurance companies to raise capital on the lines of the banking
sector in the form of subordinated debt or through preference shares or through perpetual
bonds
GST Bill The bill intends to amend the constitution for introduction of nationwide Goods & Services
Tax
Direct Cash transfer Provide direct cash subsidies to targeted households to replace the system of subsidized pricing
of essential goods
New Companies Bill To replace the old Act and provide the framework for corporate structure and governance
Source: J. P. Morgan
We believe the policy leg room available to the Government should improve
after elections in 5 states are completed in mid May. The window of opportunity
should extend into FY13, given the current schedule of state elections.
Easing liquidity pressures
The substantial liquidity pressures witnessed over 2HCY2010 also seem to be easing
on the margin, as suggested by the sharp correction in daily borrowing by the
banking system from the RBI, under the daily Liquidity Adjustment Facility (LAF)
mechanism. This could be attributed to a) a pickup in Government spending, b)
RBI’s open market operations in late December-early January, and c) a cut in SLR.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
• Valuations turning supportive. Subsequent to the 12% correction since
the beginning of the year, Indian equities now trade at a reasonable
15x FY12E and 13x FY13E (vs. the medium term average of 16x). In
addition, the street has started toning down expectations meaningfully
and currently estimates earnings growth of 19% for FY12E (vs. 24%
earlier; J.P. Morgan estimates 16%).
• Policy environment improving after a phase of drift. Projects
aggregating US$30 bn have been cleared over the recent past.
Parliament is back in session and a substantial policy agenda has been
placed for consideration. This pertains to reviving the investment cycle,
financial sector reforms and fiscal consolidation – themes with
enormous significance for long-term growth and the equity markets. The
leg room available to the Government to implement reforms and take
tough measures should improve after elections in five states are
completed in mid-May. We see the window for pushing through
important policy measures extending well into CY2012.
• Easing liquidity pressures. The banking system’s borrowing from the
RBI under the daily LAF has been moderating over the recent past. We
expect liquidity tightness in the system to peak over the next two weeks
and ease into April, in-line with seasonal trends.
• Key risk. The surge in global crude oil prices, if sustained, represents the
key headwind to market performance. India stands out among the peer
group in terms of dependence on imported crude oil.
• Portfolio stance. Over the last quarter, our portfolio stance has been
biased towards global sectors – IT services, Energy and regulated
utilities. We are now turning incrementally positive on Financials and the
Investment Cycle. We favour private sector banks and capital goods in
the early part of the cycle. Valuations for these sectors have been beaten
down substantially and macro headwinds are receding.
India Equity Market Review
MSCI India (US$) lost 1% over the last month and marginally underperformed the
peer group. Volatility remained high, though. Data points – both global and local –
were mixed. We believe the underperformance of Indian equities could largely be
attributed to the sharp spike in global crude oil prices, following the political
upheaval in some Middle East countries, particularly Libya. The unfortunate events
in Japan have also added to uncertainty.
The Government’s Union Budget for FY12E, tabled late last month, had a limited
impact on the market. No major changes in taxation were announced. Some
scepticism was voiced on the aggressive fiscal deficit targeted. But this is unlikely to
come to the fore over the next six months. The bond markets rallied briefly in
response to the lower than expected borrowing program announced.
Despite the recent headwinds, investor sentiment appears to be reversing a bit. After
selling down Indian equities over Jan-Feb (US$ 2 bn), FIIs have bought US$320 mn
of equities over March so far. DIIs remained buyers too, with insurance companies
and mutual funds buying US$ 300 mn and US$ 120 mn respectively
Consumer, Energy and Telecom (from beaten down levels) outperformed over the
month, while IT, Industrials and Materials underperformed.
India Equities – Nearing the end of the
tunnel?
We are beginning to turn more constructive on Indian equities. After the recent
correction, value appears to be emerging. The market currently trades at
15x FY12E and 13x FY13E on our estimates. Key issues of concern to investors
over the last two quarters – policy drift and tight liquidity – appear to be
turning around for the better. And we believe there is potential for further
improvement into the next quarter. Rising global oil prices remain a dampener
though. A meaningful correction herein will we believe set the tone for sustained
returns.
Value beginning to emerge
The broad market has corrected 12% since the beginning of the year and
underperformed the peer group significantly. Subsequent to the correction, valuations
are turning more reasonable. Valuations for the large cap MSCI India universe are
notably lower than the medium term mean levels, both on PE and PB basis. For more
details on market and sectoral valuations
Also, the street has started toning down expectations meaningfully, though there
could be some more to go on this front through the 4Q reporting season, scheduled
for next month. Currently consensus estimates earnings growth of 19% for FY12E
vs. J.P. Morgan estimates of 16%.
Policy Agenda – Back to the fore
Business sentiment was impacted adversely over the last two quarters following:
• Delays in clearances of projects, particularly in the mining sector, due to the
Growth vs. Environment debate
• A series of corruption exposes. Differences over the modalities of
investigating the 2G telecom issue in particular, between the Government
and the Opposition, resulted in the winter session of Parliament being
stalled.
But over the last month, the policy environment appears to have turned around for
the better.
• Investments aggregating more than US$30 bn have been cleared, mainly in
the mining sector.
• The Budget session of Parliament appears to be progressing well and more
importantly a substantial policy agenda has been placed for consideration.
This pertains to reviving the investment cycle, financial sector and fiscal
discipline and consolidation – themes that have enormous significance for
the longer term growth trajectory and the equity markets.
Policy Agenda
Policy initiatives / Bill Implications
Land Acquisition
(Amendment) Bills
Expected to address the 3 most problematic aspects of land acquisition: excessive misuse of
compulsory acquisition laws by states to serve private interests; inadequacy of compensation
provided to the owners; and violent protests against compulsory acquisitions.
Mines & Mineral
(Development &
Regulation) Act
Provide clarity on laws governing mining and compensation payable for acquiring land,
including profit sharing with locals and the mining tax.
Banking Bill Liberalize banking rules in the country by giving shareholders voting rights in line with their
equity holding and allowing banks to raise money through additional instruments such as
preference shares so as to expand business.
Pension Bill Pension Fund Regulatory and Development Authority Bill that seeks to set up a statutory
pension regulator and also allow up to 26% foreign direct investment in pension fund
management companies.
Insurance Bill The amendment would allow insurance companies to raise capital on the lines of the banking
sector in the form of subordinated debt or through preference shares or through perpetual
bonds
GST Bill The bill intends to amend the constitution for introduction of nationwide Goods & Services
Tax
Direct Cash transfer Provide direct cash subsidies to targeted households to replace the system of subsidized pricing
of essential goods
New Companies Bill To replace the old Act and provide the framework for corporate structure and governance
Source: J. P. Morgan
We believe the policy leg room available to the Government should improve
after elections in 5 states are completed in mid May. The window of opportunity
should extend into FY13, given the current schedule of state elections.
Easing liquidity pressures
The substantial liquidity pressures witnessed over 2HCY2010 also seem to be easing
on the margin, as suggested by the sharp correction in daily borrowing by the
banking system from the RBI, under the daily Liquidity Adjustment Facility (LAF)
mechanism. This could be attributed to a) a pickup in Government spending, b)
RBI’s open market operations in late December-early January, and c) a cut in SLR.
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