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India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Strategy
Reform or stagnate. The recent run-up in the market exposes it to (1) continued delay
in critical reforms and (2) risks from a bad macro environment. Valuations at 15X
FY2012E ‘EPS’ and 12.9X FY2013E ‘EPS’ are reasonable but not cheap. The market will
likely disappoint without (1) critical reforms post five state elections (May 2011) and
(2) steep correction in crude oil prices. We have made a few changes to our Model
Portfolio to reduce risks and put in some cash proxies.
Bottom-up story has played out largely but macro concerns remain
We had previously highlighted the dichotomy between (1) a reasonable micro situation with
reasonable visibility on GDP growth (8.1% for FY2012E) and earnings growth (18.4% for FY2012E
for the BSE-30 Index) and (2) a bad macro environment arising from very high crude oil prices
(weak fiscal and BOP positions) and limited reforms to arrest the ongoing deterioration in certain
areas (rising energy deficit, power sector losses). It seems the market has taken cognizance of the
former but is ignoring the latter.
Reforms are key for next leg of sustainable growth; settle for a sluggish market otherwise
The market appears to be factoring in reforms post five state elections (May 2011). We believe the
government would need to deliver meaningful reforms for the market to perform hereon. The
deregulation of energy prices and reforms in the power sector (distribution) are two critical areas,
in our view. They have a large bearing on the government’s finances, interest rates and inflation
too. There are several other chronic problems, which are well documented and don’t need further
elucidation. Sustainable economic growth (not accompanied by high inflation) may be difficult
without addressing structural impediments in the economy.
Modest upside, larger downside without reforms and/or divine intervention
We see a modest 5% upside to our FY2012E fair valuation of 20,500 for the BSE-30 Index but see
larger downside if crude oil prices persist at current levels and the government fails to change its
somewhat somnolent approach to economic matters. We don’t think India has the luxury to bide
its time forever and/or hope for external events to somehow turn favorable.
Valuations are reasonable but not cheap
The Indian market (BSE-30 Index) is currently trading at 15X FY2012E ‘EPS’ and 12.9X FY2013E
‘EPS’. We see modest risks to earnings but derive comfort from the composition of the market’s
earnings; a large chunk (50%) of earnings comes from sectors whose earnings depend on global
factors. We model FY2012E and FY2013E ‘EPS’ to grow 18.4% and 16.3%.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Strategy
Reform or stagnate. The recent run-up in the market exposes it to (1) continued delay
in critical reforms and (2) risks from a bad macro environment. Valuations at 15X
FY2012E ‘EPS’ and 12.9X FY2013E ‘EPS’ are reasonable but not cheap. The market will
likely disappoint without (1) critical reforms post five state elections (May 2011) and
(2) steep correction in crude oil prices. We have made a few changes to our Model
Portfolio to reduce risks and put in some cash proxies.
Bottom-up story has played out largely but macro concerns remain
We had previously highlighted the dichotomy between (1) a reasonable micro situation with
reasonable visibility on GDP growth (8.1% for FY2012E) and earnings growth (18.4% for FY2012E
for the BSE-30 Index) and (2) a bad macro environment arising from very high crude oil prices
(weak fiscal and BOP positions) and limited reforms to arrest the ongoing deterioration in certain
areas (rising energy deficit, power sector losses). It seems the market has taken cognizance of the
former but is ignoring the latter.
Reforms are key for next leg of sustainable growth; settle for a sluggish market otherwise
The market appears to be factoring in reforms post five state elections (May 2011). We believe the
government would need to deliver meaningful reforms for the market to perform hereon. The
deregulation of energy prices and reforms in the power sector (distribution) are two critical areas,
in our view. They have a large bearing on the government’s finances, interest rates and inflation
too. There are several other chronic problems, which are well documented and don’t need further
elucidation. Sustainable economic growth (not accompanied by high inflation) may be difficult
without addressing structural impediments in the economy.
Modest upside, larger downside without reforms and/or divine intervention
We see a modest 5% upside to our FY2012E fair valuation of 20,500 for the BSE-30 Index but see
larger downside if crude oil prices persist at current levels and the government fails to change its
somewhat somnolent approach to economic matters. We don’t think India has the luxury to bide
its time forever and/or hope for external events to somehow turn favorable.
Valuations are reasonable but not cheap
The Indian market (BSE-30 Index) is currently trading at 15X FY2012E ‘EPS’ and 12.9X FY2013E
‘EPS’. We see modest risks to earnings but derive comfort from the composition of the market’s
earnings; a large chunk (50%) of earnings comes from sectors whose earnings depend on global
factors. We model FY2012E and FY2013E ‘EPS’ to grow 18.4% and 16.3%.
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