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India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India Market Strategy ------------------------------------------------------------------------------------------
Hold those shorts for a while
● We believe Indian equities may see a near-term bounce: 1) ~90%
of ~150 investors we met recently were negative; 2) as commodity
prices unwind due to concerns on global growth, and interest
rates remain low, India may continue to see inflows; and 3) even if
slower, relative growth in India would look good.
● The sectors that may do well in this short-lived rally could be very
different from our long-term picks – investors may show a
preference for beneficiaries of (expected) lower rates, domestic
growth, and domestic asset inflation: real-estate, banks, etc.
● In our view, this positive trend should not last too long: 1) India is
slowing for reasons more than inflation, and in a while those
concerns will re-emerge; 2) Only a small part of inflation is
imported, and India's inflation was high even before global
commodities started spiking; and 3) core is already entrenched.
● Growth slowdown in our view is driven by: 1) structural inflation;
2 stuttering reforms; and 3) poor governance in some states.
● For the medium term, a number of stocks in India could see 15-
20% CAGR returns over three years – see note for list.
A tactical covering of shorts?
We believe Indian equities may see a near-term bounce:
● Most of the ~150 investors we have met over the past 1.5 months
were negative on the Indian market – while even these investors
mostly assumed that the growth slowdown was near-term (we
think it will last for longer), this is tactically positive. The ~10% of
the investors who were bullish felt that on a relative basis among
emerging markets, India still had strong fundamentals.
● Of the medium-term risks to growth (and we think there are
many – as discussed later in this note), inflation is only one part, in
our view, and a relatively small part of the inflation is imported. But
perception seems to be that global commodity prices are the
biggest issue. Plus, the RBI has already flagged that 1H inflation
will be high, and growth low – this is now likely priced in as well.
● So far, all commentary on the sell-off in commodities talks of rising
global growth concerns (and a stronger dollar). The old arguments
of a goldilocks environment for the Indian stock market will likely
come back in vogue – low inflation/deflation globally and low
interest rates (the ECB held rates yesterday and signalled no rate
rise in the next meeting too). The commodity sell-off may have
been overdone given some technical stops were breached in the
last trading session, but the global growth concerns are clear.
● In such cases, more money is likely to flow into India (even 7%
GDP growth is good relatively, especially if economies globally are
slowing), and falling global prices would create the perception that
India is in a great position.
● The sectors that may do well in this short-lived rally could be very
different from our long-term picks – in this bounce, investors may
prefer beneficiaries of lower rates, domestic growth, and domestic
asset inflation: real-estate, banks, autos, PSU oil refiners, etc.
Our growth concerns, however, continue
In our view, this positive trend should not last too long: 1) India is
slowing for reasons more than inflation, so in a while those concerns
should re-emerge. Plus, as a smaller part of inflation is imported,and 2)
India's inflation was high even before global commodities started
spiking, the core is already entrenched.
While most in the market think India's growth slowdown is a three- to
six-month affair, we believe it can last much longer: four to eight
quarters if not longer if the government does not re-start reforms. We
see three major issues:
● Inflation is a structural problem and global commodities have
a smaller role – growth in India over the past 20 years was
concentrated in a few states. But per-capita growth in three
states with one-third of India’s population (about 376 mn) – Uttar
Pradesh (UP, ex. the two districts near Delhi), Bihar and Madhya
Pradesh (MP), was close to zero. These states provided much of
the low-end labour as migrants spread out. Now, with growth
finally reaching these states (see Fresh Horses for the Economy,
dated 17 February 2011), they are adding to inflation
significantly – with labour migration slowing and wage costs rising
sharply; and one-third of India's population wants more protein,
more textiles, more shoes, more tobacco, more electricity, etc.
● Stuttering reforms now hitting growth – steel demand growth in
India has been close to zero for the last four to five months. We
think this is because there is a plateauing of growth in various
infrastructure segments. Power generation capacity additions for
example went from 3-4GW/year to 20 GW/year (expected in
FY12). But now we are seeing that in the absence of distribution
reforms, SEBs have remained bankrupt, and without mining
reform there is not enough coal. So, unlike China, which steadily
accelerated to 100GW over a decade, India is stagnating. If 20GW
does not become 30GW, there is no growth. Similarly, there is a
problem with airports: the larger ones that were privatised have
already been modernised (Mumbai, Delhi, Bangalore, Hyderabad).
Road orders have re-started, but construction activity is not seeing
the kind of delta needed to offset the rest of the segments.
● State-wise governance issues – we believe these are very
important. The central government just sets policy but it is the
state governments that drives the execution of it. There is a
problem of policy-making as seen above, but there is a problem of
execution as well in (at least) three of the larger states of the
Indian federation: Maharashtra, Karnataka and Andhra Pradesh
together comprise about 31% of India's GDP, and are all going
through political turmoil.
For the medium term, our top picks remain Hero Honda, ITC and
HDFC Bank, while there are a large number of stocks that we think
could drive 15-20% annualised returns over the next three
years: ICICI Bank, Bharti, GAIL, Reliance (if gas volumes pick-up),
HZL, JSPL, Coal India, Sun Pharma, Adani Enterprises.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India Market Strategy ------------------------------------------------------------------------------------------
Hold those shorts for a while
● We believe Indian equities may see a near-term bounce: 1) ~90%
of ~150 investors we met recently were negative; 2) as commodity
prices unwind due to concerns on global growth, and interest
rates remain low, India may continue to see inflows; and 3) even if
slower, relative growth in India would look good.
● The sectors that may do well in this short-lived rally could be very
different from our long-term picks – investors may show a
preference for beneficiaries of (expected) lower rates, domestic
growth, and domestic asset inflation: real-estate, banks, etc.
● In our view, this positive trend should not last too long: 1) India is
slowing for reasons more than inflation, and in a while those
concerns will re-emerge; 2) Only a small part of inflation is
imported, and India's inflation was high even before global
commodities started spiking; and 3) core is already entrenched.
● Growth slowdown in our view is driven by: 1) structural inflation;
2 stuttering reforms; and 3) poor governance in some states.
● For the medium term, a number of stocks in India could see 15-
20% CAGR returns over three years – see note for list.
A tactical covering of shorts?
We believe Indian equities may see a near-term bounce:
● Most of the ~150 investors we have met over the past 1.5 months
were negative on the Indian market – while even these investors
mostly assumed that the growth slowdown was near-term (we
think it will last for longer), this is tactically positive. The ~10% of
the investors who were bullish felt that on a relative basis among
emerging markets, India still had strong fundamentals.
● Of the medium-term risks to growth (and we think there are
many – as discussed later in this note), inflation is only one part, in
our view, and a relatively small part of the inflation is imported. But
perception seems to be that global commodity prices are the
biggest issue. Plus, the RBI has already flagged that 1H inflation
will be high, and growth low – this is now likely priced in as well.
● So far, all commentary on the sell-off in commodities talks of rising
global growth concerns (and a stronger dollar). The old arguments
of a goldilocks environment for the Indian stock market will likely
come back in vogue – low inflation/deflation globally and low
interest rates (the ECB held rates yesterday and signalled no rate
rise in the next meeting too). The commodity sell-off may have
been overdone given some technical stops were breached in the
last trading session, but the global growth concerns are clear.
● In such cases, more money is likely to flow into India (even 7%
GDP growth is good relatively, especially if economies globally are
slowing), and falling global prices would create the perception that
India is in a great position.
● The sectors that may do well in this short-lived rally could be very
different from our long-term picks – in this bounce, investors may
prefer beneficiaries of lower rates, domestic growth, and domestic
asset inflation: real-estate, banks, autos, PSU oil refiners, etc.
Our growth concerns, however, continue
In our view, this positive trend should not last too long: 1) India is
slowing for reasons more than inflation, so in a while those concerns
should re-emerge. Plus, as a smaller part of inflation is imported,and 2)
India's inflation was high even before global commodities started
spiking, the core is already entrenched.
While most in the market think India's growth slowdown is a three- to
six-month affair, we believe it can last much longer: four to eight
quarters if not longer if the government does not re-start reforms. We
see three major issues:
● Inflation is a structural problem and global commodities have
a smaller role – growth in India over the past 20 years was
concentrated in a few states. But per-capita growth in three
states with one-third of India’s population (about 376 mn) – Uttar
Pradesh (UP, ex. the two districts near Delhi), Bihar and Madhya
Pradesh (MP), was close to zero. These states provided much of
the low-end labour as migrants spread out. Now, with growth
finally reaching these states (see Fresh Horses for the Economy,
dated 17 February 2011), they are adding to inflation
significantly – with labour migration slowing and wage costs rising
sharply; and one-third of India's population wants more protein,
more textiles, more shoes, more tobacco, more electricity, etc.
● Stuttering reforms now hitting growth – steel demand growth in
India has been close to zero for the last four to five months. We
think this is because there is a plateauing of growth in various
infrastructure segments. Power generation capacity additions for
example went from 3-4GW/year to 20 GW/year (expected in
FY12). But now we are seeing that in the absence of distribution
reforms, SEBs have remained bankrupt, and without mining
reform there is not enough coal. So, unlike China, which steadily
accelerated to 100GW over a decade, India is stagnating. If 20GW
does not become 30GW, there is no growth. Similarly, there is a
problem with airports: the larger ones that were privatised have
already been modernised (Mumbai, Delhi, Bangalore, Hyderabad).
Road orders have re-started, but construction activity is not seeing
the kind of delta needed to offset the rest of the segments.
● State-wise governance issues – we believe these are very
important. The central government just sets policy but it is the
state governments that drives the execution of it. There is a
problem of policy-making as seen above, but there is a problem of
execution as well in (at least) three of the larger states of the
Indian federation: Maharashtra, Karnataka and Andhra Pradesh
together comprise about 31% of India's GDP, and are all going
through political turmoil.
For the medium term, our top picks remain Hero Honda, ITC and
HDFC Bank, while there are a large number of stocks that we think
could drive 15-20% annualised returns over the next three
years: ICICI Bank, Bharti, GAIL, Reliance (if gas volumes pick-up),
HZL, JSPL, Coal India, Sun Pharma, Adani Enterprises.
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