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UBS Investment Research
India Market Strategy
Analyzing Earnings momentum/Laggards
Earnings momentum turns negative, likely priced in
Consensus FY12 earnings estimate for Nifty has been revised down by 1.1% in the
4QFY11 vs. upward revision of 1.9% in 3QFY11. The downward revision has
been more prominent post the 3QFY11 results which were disappointing. We
believe that the market seems to have priced in the negative earnings momentum as
the Nifty has rallied 8.7% since bottoming out on 21 Mar’11, at a level of 5,365.
Auto, IT services +ve; Financials, Telecom, Infra, Materials -ve
Tata Motors led the earnings upgrade in Autos whereas TCS saw the largest
earnings revision in IT services. Downward revisions were seen across the board in
financials as analysts factor in tighter liquidity. RCOM led the earnings revisions
in Telcos. Materials sector downward revision was driven by Sesa Goa & SAIL.
Slow order inflows led to downward earnings revisions in JP Associates and L&T
Identifying opportunities through earnings momentum / BSE 100 laggards
We recommend the following stocks which have (1) positive earnings momentum
(2) have been laggards and also (3) UBS analysts have good level of conviction in
their Buy ratings- Ranbaxy, BHEL and IBREL. We remain positive on Indian
stocks in the medium term with a March 2012 Sensex & Nifty targets of 22,500 &
6,800 respectively. We believe attractive demographics coupled with a stable
government that is open to reforms provides India with an excellent opportunity to
grow the economy and corporate earnings in the next 10-20 years. Key catalyst to
watch out for: 1) progress on reforms post the state elections 2) 4QFY11 earnings
reports 3) crude oil prices 4) 2011 monsoon season.
Nifty consensus earnings estimates for FY11E and FY12E were revised down
by 0.4% and 1.1% respectively in 4QFY11 (since 1 Jan 2011). Downward
revision has been more prominent post the earnings season (after 14 Feb’11). It
seems that consensus estimates have been revised down on the back of
disappointing 3QFY11 earnings. Please see our note, 3QFY11 earnings
disappoint, dated 25 Feb’10, for more details.
The upward earnings revision was mostly led by autos and IT services sectors
while sectors such as materials, petrochemicals, infrastructure, telecom, and
financials were a drag on the earnings (see the table below for details).
Table 2: Sector contribution to Nifty’s FY12E consensus earnings momentum
Sector Sector contribution
Autos 0.5%
IT Services 0.2%
Consumers 0.0%
Pharmaceuticals 0.0%
Power 0.0%
Oil & Gas 0.0%
Cement -0.1%
Real Estate -0.1%
Financials -0.2%
Telecom -0.2%
Infra & Capital Goods -0.3%
Petrochem -0.4%
Materials -0.5%
Nifty -1.1%
Source: IBES (DataStream); UBS
Key consensus upgrades / downgrades
Sectors Comments
Key consensus upgrades
Autos
► Autos earnings were revised up by 5.0% mainly due to upgrades in Tata Motor earnings. Tata Motors FY12E earnings were revised
upwards by 12.3% in the last 90 days on account of improvement in JLR financials.
►Hero Honda (-9.1%) and Maruti (-1.0%) continue to see downward revision in their earnings mainly due to cost pressures
IT Services
► The earnings revision in the IT sector was led by TCS (6.9% in FY12E) as the company continues to outperform its peers (Infosys, Wipro,
HCL) both in revenue growth and EBITDA margins.
► HCL and Infosys also saw their consensus earnings being revised up in the last 90 days
► In the sector, Wipro was the only company to have witnessed earnings downgrades.
Key consensus downgrades
Materials
► The downward revision in the material sector was mainly led by SAIL (-15.8%) and Sesa (-9.5%)
►For SAIL, we believe that further downgrades to consensus numbers are likely as consensus is not yet factoring in lower volume and
realisation assumptions and higher cost estimates.
► Sesa has been impacted due to the negative sentiment surrounding the ban of iron ore export imposed by Karnataka government.
Infra/Cap Goods
►Consensus earnings in the infrastructure space were revised down by 5.0% as order inflow continues to remain a hang over on the sector
►The main stocks whose FY12 earnings were downgraded are Jaiprakash Associates (-18.2%), and L&T (-4.7%).
Financials
►There were downward earnings revisions across the sector as consensus factor in tight monetary environment and thus lower net income
margins (NIM)
►The downgrades in the sector was led by Reliance Capital (-8.6%), IDFC (-5.1%), HDFC (-4.5%), Kotak Mahindra Bank (-4.2%), PNB (-
3.3%).
Petrochemicals ► Reliance’s upstream business has been showing declining gas production over the last 6-9 months. The downward revision is primarily the
result of street getting negative on the outlook of gas production. RIL FY12 earnings were revised down by 4.1% in last 3 months.
Telecom
► The downward revision in the sector was led by RCom with 30.6% revision in company’s FY12E earnings estimates.
► The street remains wary of the stock and is looking for operational turnaround before turning bullish.
► On the sector, the street remains cautious given high competitive intensity and regulatory uncertainty.
Real Estate
► In the last three months, DLF consensus FY12E earnings witnessed a decline of 21.3%.
► Though UBS estimates were lower than consensus assuming more conservative pre-sales, we see the street is now lowering its pre-sales
expectations as the company’s launch pipe-lines has been weak over the last 3-6mths
Source: IBES (DataStream); UBS
Nifty – Earnings growth
Our bottom-up analysis of Nifty constituents suggests that earnings are likely to
grow by 18.4% in FY11E, 18.9% in FY12E and 18.6% in FY13E compared
with 18.3% growth in FY10. We expect earnings growth to be led by sectors
such as autos, financials, infrastructure, materials, and pharmaceuticals. The
consensus for FY11E, FY12E and FY13E earnings growth is 18.4%, 19.9% and
18.1% respectively.
Stock Screens - Laggards and positive earnings
momentum
We look at some of the laggards from BSE-100 index for some interesting
investment ideas. We highlight laggard stocks where UBS has a Buy rating and
where the earnings momentum has been positive in the last 3 months.
Key stock ideas
BHEL (Buy, PT – Rs2,950.00)
BHEL's earnings growth is robust and secure, in our view. With more than three
years' revenue coverage from the current order book (almost $35bn) and
expanded manufacturing capacity, 21% EPS CAGR over next 3 years looks very
safe.
We believe that investors should not be too concerned about FY11 order inflow
guidance miss. BHEL has always maintained that it would achieve new orders
worth Rs550-600bn if NTPC bulk tendering order comes through in FY11.
Excluding this exceptional event (of NTPC order not coming through), we
believe that the order inflow would be in-line with expectations.
The stock is trading at 14.0x FY12E EPS which we think is attractive
considering strong corporate governance. The current stock price makes BHEL
compelling in our view.
Ranbaxy (Buy, PT – Rs630.00)
Ranbaxy is currently trading close to our bear case valuation of Rs430/share.
Our bear case implies Ranbaxy will forgo its exclusivity for Lipitor, Caduet and
Actos, and depressed long-term profitability.
We believe this is unjustified given the company has successfully launched three
first-to-file (FTF) products despite US FDA issues, since the acquisition by
Daiichi in 2008. The current price implies 37% upside potential to our base case
and 63% to our bull case.
IndiaBulls Real Estate (Buy, PT – Rs205.00)
IBREL is our top pick among the Mumbai developers given:
key location assets in Mumbai
steady leasing momentum for Mumbai assets (~70% leased of 2msf ready;
and 1msf in early stages of finishing)
key beneficiary of higher parking FSI
encouraging progress on construction to drive earnings performance; and
compelling valuations of 60% disc to base NAV, 33% disc to bear-case
NAV; and 0.5x P/BV.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
India Market Strategy
Analyzing Earnings momentum/Laggards
Earnings momentum turns negative, likely priced in
Consensus FY12 earnings estimate for Nifty has been revised down by 1.1% in the
4QFY11 vs. upward revision of 1.9% in 3QFY11. The downward revision has
been more prominent post the 3QFY11 results which were disappointing. We
believe that the market seems to have priced in the negative earnings momentum as
the Nifty has rallied 8.7% since bottoming out on 21 Mar’11, at a level of 5,365.
Auto, IT services +ve; Financials, Telecom, Infra, Materials -ve
Tata Motors led the earnings upgrade in Autos whereas TCS saw the largest
earnings revision in IT services. Downward revisions were seen across the board in
financials as analysts factor in tighter liquidity. RCOM led the earnings revisions
in Telcos. Materials sector downward revision was driven by Sesa Goa & SAIL.
Slow order inflows led to downward earnings revisions in JP Associates and L&T
Identifying opportunities through earnings momentum / BSE 100 laggards
We recommend the following stocks which have (1) positive earnings momentum
(2) have been laggards and also (3) UBS analysts have good level of conviction in
their Buy ratings- Ranbaxy, BHEL and IBREL. We remain positive on Indian
stocks in the medium term with a March 2012 Sensex & Nifty targets of 22,500 &
6,800 respectively. We believe attractive demographics coupled with a stable
government that is open to reforms provides India with an excellent opportunity to
grow the economy and corporate earnings in the next 10-20 years. Key catalyst to
watch out for: 1) progress on reforms post the state elections 2) 4QFY11 earnings
reports 3) crude oil prices 4) 2011 monsoon season.
Nifty consensus earnings estimates for FY11E and FY12E were revised down
by 0.4% and 1.1% respectively in 4QFY11 (since 1 Jan 2011). Downward
revision has been more prominent post the earnings season (after 14 Feb’11). It
seems that consensus estimates have been revised down on the back of
disappointing 3QFY11 earnings. Please see our note, 3QFY11 earnings
disappoint, dated 25 Feb’10, for more details.
The upward earnings revision was mostly led by autos and IT services sectors
while sectors such as materials, petrochemicals, infrastructure, telecom, and
financials were a drag on the earnings (see the table below for details).
Table 2: Sector contribution to Nifty’s FY12E consensus earnings momentum
Sector Sector contribution
Autos 0.5%
IT Services 0.2%
Consumers 0.0%
Pharmaceuticals 0.0%
Power 0.0%
Oil & Gas 0.0%
Cement -0.1%
Real Estate -0.1%
Financials -0.2%
Telecom -0.2%
Infra & Capital Goods -0.3%
Petrochem -0.4%
Materials -0.5%
Nifty -1.1%
Source: IBES (DataStream); UBS
Key consensus upgrades / downgrades
Sectors Comments
Key consensus upgrades
Autos
► Autos earnings were revised up by 5.0% mainly due to upgrades in Tata Motor earnings. Tata Motors FY12E earnings were revised
upwards by 12.3% in the last 90 days on account of improvement in JLR financials.
►Hero Honda (-9.1%) and Maruti (-1.0%) continue to see downward revision in their earnings mainly due to cost pressures
IT Services
► The earnings revision in the IT sector was led by TCS (6.9% in FY12E) as the company continues to outperform its peers (Infosys, Wipro,
HCL) both in revenue growth and EBITDA margins.
► HCL and Infosys also saw their consensus earnings being revised up in the last 90 days
► In the sector, Wipro was the only company to have witnessed earnings downgrades.
Key consensus downgrades
Materials
► The downward revision in the material sector was mainly led by SAIL (-15.8%) and Sesa (-9.5%)
►For SAIL, we believe that further downgrades to consensus numbers are likely as consensus is not yet factoring in lower volume and
realisation assumptions and higher cost estimates.
► Sesa has been impacted due to the negative sentiment surrounding the ban of iron ore export imposed by Karnataka government.
Infra/Cap Goods
►Consensus earnings in the infrastructure space were revised down by 5.0% as order inflow continues to remain a hang over on the sector
►The main stocks whose FY12 earnings were downgraded are Jaiprakash Associates (-18.2%), and L&T (-4.7%).
Financials
►There were downward earnings revisions across the sector as consensus factor in tight monetary environment and thus lower net income
margins (NIM)
►The downgrades in the sector was led by Reliance Capital (-8.6%), IDFC (-5.1%), HDFC (-4.5%), Kotak Mahindra Bank (-4.2%), PNB (-
3.3%).
Petrochemicals ► Reliance’s upstream business has been showing declining gas production over the last 6-9 months. The downward revision is primarily the
result of street getting negative on the outlook of gas production. RIL FY12 earnings were revised down by 4.1% in last 3 months.
Telecom
► The downward revision in the sector was led by RCom with 30.6% revision in company’s FY12E earnings estimates.
► The street remains wary of the stock and is looking for operational turnaround before turning bullish.
► On the sector, the street remains cautious given high competitive intensity and regulatory uncertainty.
Real Estate
► In the last three months, DLF consensus FY12E earnings witnessed a decline of 21.3%.
► Though UBS estimates were lower than consensus assuming more conservative pre-sales, we see the street is now lowering its pre-sales
expectations as the company’s launch pipe-lines has been weak over the last 3-6mths
Source: IBES (DataStream); UBS
Nifty – Earnings growth
Our bottom-up analysis of Nifty constituents suggests that earnings are likely to
grow by 18.4% in FY11E, 18.9% in FY12E and 18.6% in FY13E compared
with 18.3% growth in FY10. We expect earnings growth to be led by sectors
such as autos, financials, infrastructure, materials, and pharmaceuticals. The
consensus for FY11E, FY12E and FY13E earnings growth is 18.4%, 19.9% and
18.1% respectively.
Stock Screens - Laggards and positive earnings
momentum
We look at some of the laggards from BSE-100 index for some interesting
investment ideas. We highlight laggard stocks where UBS has a Buy rating and
where the earnings momentum has been positive in the last 3 months.
Key stock ideas
BHEL (Buy, PT – Rs2,950.00)
BHEL's earnings growth is robust and secure, in our view. With more than three
years' revenue coverage from the current order book (almost $35bn) and
expanded manufacturing capacity, 21% EPS CAGR over next 3 years looks very
safe.
We believe that investors should not be too concerned about FY11 order inflow
guidance miss. BHEL has always maintained that it would achieve new orders
worth Rs550-600bn if NTPC bulk tendering order comes through in FY11.
Excluding this exceptional event (of NTPC order not coming through), we
believe that the order inflow would be in-line with expectations.
The stock is trading at 14.0x FY12E EPS which we think is attractive
considering strong corporate governance. The current stock price makes BHEL
compelling in our view.
Ranbaxy (Buy, PT – Rs630.00)
Ranbaxy is currently trading close to our bear case valuation of Rs430/share.
Our bear case implies Ranbaxy will forgo its exclusivity for Lipitor, Caduet and
Actos, and depressed long-term profitability.
We believe this is unjustified given the company has successfully launched three
first-to-file (FTF) products despite US FDA issues, since the acquisition by
Daiichi in 2008. The current price implies 37% upside potential to our base case
and 63% to our bull case.
IndiaBulls Real Estate (Buy, PT – Rs205.00)
IBREL is our top pick among the Mumbai developers given:
key location assets in Mumbai
steady leasing momentum for Mumbai assets (~70% leased of 2msf ready;
and 1msf in early stages of finishing)
key beneficiary of higher parking FSI
encouraging progress on construction to drive earnings performance; and
compelling valuations of 60% disc to base NAV, 33% disc to bear-case
NAV; and 0.5x P/BV.
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