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India Equity Research Reports, IPO and Stock News
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India strategy
Turning cautious
The market has run 11% from its Feb-11 low even as macro risks relating
to high crude prices and inflation have risen. While the pattern of flows in
1Q suggests that foreign investors are principally in for the longer-term
growth story, from a portfolio standpoint, some reduction in risk is
warranted. In our model portfolio, we have deleted some stocks that look
vulnerable to hardening rates and higher input commodity prices and
added defensive names from the consumer, utilities sectors. Banks,
Materials move to U-WT, while consumer discretionary is now O-WT.
Stubborn oil prices/slowdown risk not discounted by the market
q As highlighted in our previous note dated 7th April ‘Oil factor’, the sustained
strength in crude oil prices remains a risk to the domestic demand outlook. Every
US$10/bbl rise also impacts the GDP growth by c.0.5%
q YTD, we have downgraded earnings of the domestic plays by 2-25%. We see risk of
further downgrades following the 4QFY11 results, as the full impact of higher costs
becomes visible.
Inflation / tightening risks remain high
q WPI Inflation is running at over 9%. Fuel price hikes expected in May post the
state-elections will keep inflation high.
q Our economist Rajeev Malik sees a 50-75bps rate hike over the next 3-4 months,
which would take the repo rate to 7.25% - 7.5%. Risk is on the upside.
q While the recent softening in 1-year rates is a positive, we believe that corporate
borrowing costs may not ease materially and higher interest costs would be visible
from FY12.
Stocks without near-term triggers / liquidity beneficiaries
removed/cut
q While we remain positive on the medium-term outlook for loan growth and see
strong 4Q results for banks, we are reducing risk in our banking stock portfolio.
q With Yes Bank having rebounded strongly on easing liquidity, we have taken it off.
q Hindalco and Voltas lack near-term triggers. Hindalco is facing cost pressures on
coal and will see triggers from commissioning of new capacities only in late 2HFY12.
q The risk to Infosys’ margins is still not well factored by the market and we see the
stock languishing over the next couple of quarters. Cut weight by 7ppt.
Adding consumer/ utilities to lower beta
q Strong hiring trends, wage hikes, rising consumer credit and longer-term structural
factors support buoyancy in consumption.
q Reduce the U-WT on consumer staples by adding Jubilant foods. While the stock
has been an outperformer recently, we like the structural story.
q Raise weight on HDFC Bank, where high CASA and strong consumer lending will
help sustain growth even in a rising rate environment. We also introduce SBI with a
neutral 1.5% as asset quality risks are abating. Reduce 1 ppt from ICICI Bank as
hardening rates could delay margin expansion.
q Notwithstanding the poor guidance by Infosys, we remain sanguine on TCS’s
earnings growth and potential for relative re-rating and raise its weight by 4 ppts.
However, overall, we lower IT services to a neutral.
q Adding Coal India as it is shielded from potential energy price rise and Tata Power
as it’s a utility which is net long on coal. These two additions should reduce
portfolio beta as it replaces Hindalco.
q JPA and Dish TV are the new introductions with 2 ppts each. JPA is high beta but
valuations are compelling. Dish TV has reached a critical mass of 10m subs and
should be a classical beneficiary of the J-Curve theory
Yes Bank (-3): Yes bank has been an outperformer YTD and largely builds in
the benefits of improved liquidity. Remove the stock to lower the portfolio
beta.
ICICI Bank (-1): Sharp rise in rates may delay margin expansion, likely
treasury losses may also lead to some disappointment in reported earnings.
Reducing weight to lower the portfolio beta
HDFC Bank (+1.5): High interest rates will lead to margin pressures for
most banks but for HDFC bank due to its strong deposit franchise. Asset
quality risks also lower given very low exposure to infrastructure lending.
SBI (+1.5): Uncertainty on pension liabilities persists but risks of further
asset quality pressures are diminishing . Introducing with a neutral weight of
1.5%.
Hindalco (-4): Hindalco lacks any near-tern triggers and would appear
interesting closer to the capacity commissioning time which would be in
2HFY12. Potential more coal price hikes by Coal India remains an additional
concern.
Coal India (+2): The stock has been outperformer YTD but we believe that
the stock is still a safer bet and offers a hedge against any further rise in
energy costs and helps lower the portfolio beta.
Tata Power (+2): We further strengthen our utilities exposure by adding
Tata Power. The stock is among the cheapest in the space and its net long
position on coal offers added security.
Voltas (-2): Political disturbances in the middle-east implies that the new
project award will be weaker. Removing from the portfolio as it lacks any
near-term visible triggers.
Dish TV (+2): Dish TV has reached a critical mass of 10m subs and should
be a classical beneficiary of the J-Curve theory. The company will turn free
cash flow positive from FY13 onwards and is funded for growth.
Jubilant (+2): Whilst the stock has performed well recently, Jubilant is a
play on strong growth in discretionary consumer food services spend and
evolving urban lifestyles, backed by an efficient Domino's format that drives
40%+ return ratios and generates free cash despite PBT tripling over FY11-14
JPA (+2): Stock has been a large underperformer over the last 12 months.
Assuming a 20% conglo discount, fair value works out to Rs130/share.
Completion of cement projects, commissioning of the hydro power unit &
continued strong cashflows of Jaypee Infratech would be the triggers.
Infosys (-7): Street still continues to be optimistic on Infosys FY12 margins
despite a -300bps margin guidance by the management. We believe that the
risk to earnings would be on the downside with more potential for derating.
TCS (+4): Will likely deliver a 6-7 ppts higher growth than Infosys and with
possibility of earnings upgrade. Also, among the IT majors – TCS has more
stable management team.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India strategy
Turning cautious
The market has run 11% from its Feb-11 low even as macro risks relating
to high crude prices and inflation have risen. While the pattern of flows in
1Q suggests that foreign investors are principally in for the longer-term
growth story, from a portfolio standpoint, some reduction in risk is
warranted. In our model portfolio, we have deleted some stocks that look
vulnerable to hardening rates and higher input commodity prices and
added defensive names from the consumer, utilities sectors. Banks,
Materials move to U-WT, while consumer discretionary is now O-WT.
Stubborn oil prices/slowdown risk not discounted by the market
q As highlighted in our previous note dated 7th April ‘Oil factor’, the sustained
strength in crude oil prices remains a risk to the domestic demand outlook. Every
US$10/bbl rise also impacts the GDP growth by c.0.5%
q YTD, we have downgraded earnings of the domestic plays by 2-25%. We see risk of
further downgrades following the 4QFY11 results, as the full impact of higher costs
becomes visible.
Inflation / tightening risks remain high
q WPI Inflation is running at over 9%. Fuel price hikes expected in May post the
state-elections will keep inflation high.
q Our economist Rajeev Malik sees a 50-75bps rate hike over the next 3-4 months,
which would take the repo rate to 7.25% - 7.5%. Risk is on the upside.
q While the recent softening in 1-year rates is a positive, we believe that corporate
borrowing costs may not ease materially and higher interest costs would be visible
from FY12.
Stocks without near-term triggers / liquidity beneficiaries
removed/cut
q While we remain positive on the medium-term outlook for loan growth and see
strong 4Q results for banks, we are reducing risk in our banking stock portfolio.
q With Yes Bank having rebounded strongly on easing liquidity, we have taken it off.
q Hindalco and Voltas lack near-term triggers. Hindalco is facing cost pressures on
coal and will see triggers from commissioning of new capacities only in late 2HFY12.
q The risk to Infosys’ margins is still not well factored by the market and we see the
stock languishing over the next couple of quarters. Cut weight by 7ppt.
Adding consumer/ utilities to lower beta
q Strong hiring trends, wage hikes, rising consumer credit and longer-term structural
factors support buoyancy in consumption.
q Reduce the U-WT on consumer staples by adding Jubilant foods. While the stock
has been an outperformer recently, we like the structural story.
q Raise weight on HDFC Bank, where high CASA and strong consumer lending will
help sustain growth even in a rising rate environment. We also introduce SBI with a
neutral 1.5% as asset quality risks are abating. Reduce 1 ppt from ICICI Bank as
hardening rates could delay margin expansion.
q Notwithstanding the poor guidance by Infosys, we remain sanguine on TCS’s
earnings growth and potential for relative re-rating and raise its weight by 4 ppts.
However, overall, we lower IT services to a neutral.
q Adding Coal India as it is shielded from potential energy price rise and Tata Power
as it’s a utility which is net long on coal. These two additions should reduce
portfolio beta as it replaces Hindalco.
q JPA and Dish TV are the new introductions with 2 ppts each. JPA is high beta but
valuations are compelling. Dish TV has reached a critical mass of 10m subs and
should be a classical beneficiary of the J-Curve theory
Yes Bank (-3): Yes bank has been an outperformer YTD and largely builds in
the benefits of improved liquidity. Remove the stock to lower the portfolio
beta.
ICICI Bank (-1): Sharp rise in rates may delay margin expansion, likely
treasury losses may also lead to some disappointment in reported earnings.
Reducing weight to lower the portfolio beta
HDFC Bank (+1.5): High interest rates will lead to margin pressures for
most banks but for HDFC bank due to its strong deposit franchise. Asset
quality risks also lower given very low exposure to infrastructure lending.
SBI (+1.5): Uncertainty on pension liabilities persists but risks of further
asset quality pressures are diminishing . Introducing with a neutral weight of
1.5%.
Hindalco (-4): Hindalco lacks any near-tern triggers and would appear
interesting closer to the capacity commissioning time which would be in
2HFY12. Potential more coal price hikes by Coal India remains an additional
concern.
Coal India (+2): The stock has been outperformer YTD but we believe that
the stock is still a safer bet and offers a hedge against any further rise in
energy costs and helps lower the portfolio beta.
Tata Power (+2): We further strengthen our utilities exposure by adding
Tata Power. The stock is among the cheapest in the space and its net long
position on coal offers added security.
Voltas (-2): Political disturbances in the middle-east implies that the new
project award will be weaker. Removing from the portfolio as it lacks any
near-term visible triggers.
Dish TV (+2): Dish TV has reached a critical mass of 10m subs and should
be a classical beneficiary of the J-Curve theory. The company will turn free
cash flow positive from FY13 onwards and is funded for growth.
Jubilant (+2): Whilst the stock has performed well recently, Jubilant is a
play on strong growth in discretionary consumer food services spend and
evolving urban lifestyles, backed by an efficient Domino's format that drives
40%+ return ratios and generates free cash despite PBT tripling over FY11-14
JPA (+2): Stock has been a large underperformer over the last 12 months.
Assuming a 20% conglo discount, fair value works out to Rs130/share.
Completion of cement projects, commissioning of the hydro power unit &
continued strong cashflows of Jaypee Infratech would be the triggers.
Infosys (-7): Street still continues to be optimistic on Infosys FY12 margins
despite a -300bps margin guidance by the management. We believe that the
risk to earnings would be on the downside with more potential for derating.
TCS (+4): Will likely deliver a 6-7 ppts higher growth than Infosys and with
possibility of earnings upgrade. Also, among the IT majors – TCS has more
stable management team.
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