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India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Think beyond the obvious
India has underperformed due to inflation and rate worries, and politics
Peaking inflation, lower demand in 2H; RBI may pause after another 75bp hike
BUY opportunity in L&T, Bajaj Auto, TCS, IIB, Axis Bank, Reliance
TTMT, Ashok Leyland, DLF, Ambuja Cement could underperform more
Market down 10% in 2011 YTD, 7% in last three weeks
In 2011, the Indian equity market has underperformed other Asian markets due to concerns
about inflation, monetary policy tightening, earnings downgrades and political uncertainty. In
the most recent monetary policy, RBI’s 50bp hike in rates, efforts at faster monetary
transmission, and hawkish language spooked the market.
RBI could likely tighten 2-3 times more, taking repo to 8%
Judging by the RBI’s stated intent of controlling inflation even at the cost of short-term growth, we
believe it could choose to front-load policy tightening. This implies further rate hikes of 75bp over
the rest of 2011 taking the repo rate to 8%, significantly higher than the average rate of 6.5% in
2010. Historically, policy tightening cycles in India have lasted 15-18 months. By that token, since
the present cycle began in March 2010, we think RBI could pause around September 2011.
Valuations in “no man’s land”, but expensive relative to region
The Sensex is trading at a PE of 14.8x one-year forward (assuming a 3% cut to our FY12
and FY13 earnings estimates), only slightly below its long-term average one-year forward
P/E multiple of 15.2x. Moreover, despite the recent underperformance, India continues to
trade at a 35-40% premium to China and a 20-25% premium to Asia ex Japan equities.
Near-term market direction down – but possibly not much
Given the intensifying macro headwinds, the unresolved political uncertainties and downside
risks to earnings estimates (from margin pressure and potential demand compression), we
believe there might be further downside to the Sensex. The question is - how much? If we
assume (i) 4% downside to our EPS estimates in FY12 and FY13, and (ii) Sensex trading
down to a 10% discount to its long-term average (ie, to 13.5x), it would imply a near-term
“floor” Sensex level of 17,000.
Asymmetric correction has created buying opportunities
Although the market has corrected 7% over the past 2-3 weeks, several stocks and sectors
have corrected much more. Some fundamentally good stocks, we believe, have declined to
attractive levels of valuation. We highlight L&T, Axis Bank, IndusInd Bank, Bajaj Auto,
TCS and Reliance Industries.
But some stocks could still underperform
We highlight Tata Motors, Ashok Leyland, DLF and Ambuja Cement as potential
underperformers. These companies either suffer from policy tightening and fuel price
increases, or from potential inability to pass on input cost pressures to their customers.
Asymmetric correction has created buying opportunities
The market has corrected 7% over the past 2-3 weeks, but several stocks and sectors
have corrected much more. Some fundamentally good stocks, we believe, have
declined to attractive levels of valuation.
1 L&T, with a footprint in all areas of capex, remains a great play on Indian
infrastructure, urbanisation and corporate capex. In our view, the stock presents a
good opportunity for investors willing to overlook near-term margin and order inflow
pressures.
2 Bajaj Auto, one of the best plays on consumption, in our view, is trading at 13x
2012E P/E after the recent correction. With huge cash generation every year,
strong and stable market share and 30-40% ROCE, it remains among our two
picks in the Indian auto universe.
3 Axis Bank and IndusInd Bank: Axis Bank is likely to see negligible earnings
impact due to the recent rate hikes and change in provisioning norms; IIB may
actually see its earnings estimates increase. At 2-2.5x 2011E P/BV, valuations
appear attractive.
4 TCS: Some of the best hedges in times of domestic growth slowdown are the
exporters. With TCS’s established record of strong growth and positive earnings
surprises, it is our preferred pick in the Indian IT services space.
5 Some stocks have traded down with the market. Reliance Industries, at INR950,
is back at levels before the recent BP (BP LN, not rated) deal (which puts a floor
valuation on the gas fields). We believe RIL provides a good trading BUY
opportunity at current levels.
But some stocks could see more underperformance
1 We highlight Tata Motors and Ashok Leyland in the CV space as potential
underperformers. The domestic CV cycle – critically dependent on interest rates
and diesel prices – is clearly slowing. Even though 65-70% of Tata Motors’ sales
come from overseas (JLR), even there, we believe, operational efficiency
improvements and margin gains are behind us.
2 We believe DLF – with large dependence on residential real estate in the NCR
(where evidence of a slowdown in transaction volumes is clear) and significant
leverage on balance sheet – could be an underperformer in the medium term.
3 We believe frontline cement stocks, particularly Ambuja Cements, could
underperform significantly because of likely continuation of over-supply in the
sector and expensive valuation (USD175 EV/T) of the stock. Recent
outperformance of Ambuja, on the back of market’s hopes about Holcim (HOLM
VX) merging Ambuja with ACC (ACC IN), is likely to unwind – we see no adequate
justification for Holcim to take such action now.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Think beyond the obvious
India has underperformed due to inflation and rate worries, and politics
Peaking inflation, lower demand in 2H; RBI may pause after another 75bp hike
BUY opportunity in L&T, Bajaj Auto, TCS, IIB, Axis Bank, Reliance
TTMT, Ashok Leyland, DLF, Ambuja Cement could underperform more
Market down 10% in 2011 YTD, 7% in last three weeks
In 2011, the Indian equity market has underperformed other Asian markets due to concerns
about inflation, monetary policy tightening, earnings downgrades and political uncertainty. In
the most recent monetary policy, RBI’s 50bp hike in rates, efforts at faster monetary
transmission, and hawkish language spooked the market.
RBI could likely tighten 2-3 times more, taking repo to 8%
Judging by the RBI’s stated intent of controlling inflation even at the cost of short-term growth, we
believe it could choose to front-load policy tightening. This implies further rate hikes of 75bp over
the rest of 2011 taking the repo rate to 8%, significantly higher than the average rate of 6.5% in
2010. Historically, policy tightening cycles in India have lasted 15-18 months. By that token, since
the present cycle began in March 2010, we think RBI could pause around September 2011.
Valuations in “no man’s land”, but expensive relative to region
The Sensex is trading at a PE of 14.8x one-year forward (assuming a 3% cut to our FY12
and FY13 earnings estimates), only slightly below its long-term average one-year forward
P/E multiple of 15.2x. Moreover, despite the recent underperformance, India continues to
trade at a 35-40% premium to China and a 20-25% premium to Asia ex Japan equities.
Near-term market direction down – but possibly not much
Given the intensifying macro headwinds, the unresolved political uncertainties and downside
risks to earnings estimates (from margin pressure and potential demand compression), we
believe there might be further downside to the Sensex. The question is - how much? If we
assume (i) 4% downside to our EPS estimates in FY12 and FY13, and (ii) Sensex trading
down to a 10% discount to its long-term average (ie, to 13.5x), it would imply a near-term
“floor” Sensex level of 17,000.
Asymmetric correction has created buying opportunities
Although the market has corrected 7% over the past 2-3 weeks, several stocks and sectors
have corrected much more. Some fundamentally good stocks, we believe, have declined to
attractive levels of valuation. We highlight L&T, Axis Bank, IndusInd Bank, Bajaj Auto,
TCS and Reliance Industries.
But some stocks could still underperform
We highlight Tata Motors, Ashok Leyland, DLF and Ambuja Cement as potential
underperformers. These companies either suffer from policy tightening and fuel price
increases, or from potential inability to pass on input cost pressures to their customers.
Asymmetric correction has created buying opportunities
The market has corrected 7% over the past 2-3 weeks, but several stocks and sectors
have corrected much more. Some fundamentally good stocks, we believe, have
declined to attractive levels of valuation.
1 L&T, with a footprint in all areas of capex, remains a great play on Indian
infrastructure, urbanisation and corporate capex. In our view, the stock presents a
good opportunity for investors willing to overlook near-term margin and order inflow
pressures.
2 Bajaj Auto, one of the best plays on consumption, in our view, is trading at 13x
2012E P/E after the recent correction. With huge cash generation every year,
strong and stable market share and 30-40% ROCE, it remains among our two
picks in the Indian auto universe.
3 Axis Bank and IndusInd Bank: Axis Bank is likely to see negligible earnings
impact due to the recent rate hikes and change in provisioning norms; IIB may
actually see its earnings estimates increase. At 2-2.5x 2011E P/BV, valuations
appear attractive.
4 TCS: Some of the best hedges in times of domestic growth slowdown are the
exporters. With TCS’s established record of strong growth and positive earnings
surprises, it is our preferred pick in the Indian IT services space.
5 Some stocks have traded down with the market. Reliance Industries, at INR950,
is back at levels before the recent BP (BP LN, not rated) deal (which puts a floor
valuation on the gas fields). We believe RIL provides a good trading BUY
opportunity at current levels.
But some stocks could see more underperformance
1 We highlight Tata Motors and Ashok Leyland in the CV space as potential
underperformers. The domestic CV cycle – critically dependent on interest rates
and diesel prices – is clearly slowing. Even though 65-70% of Tata Motors’ sales
come from overseas (JLR), even there, we believe, operational efficiency
improvements and margin gains are behind us.
2 We believe DLF – with large dependence on residential real estate in the NCR
(where evidence of a slowdown in transaction volumes is clear) and significant
leverage on balance sheet – could be an underperformer in the medium term.
3 We believe frontline cement stocks, particularly Ambuja Cements, could
underperform significantly because of likely continuation of over-supply in the
sector and expensive valuation (USD175 EV/T) of the stock. Recent
outperformance of Ambuja, on the back of market’s hopes about Holcim (HOLM
VX) merging Ambuja with ACC (ACC IN), is likely to unwind – we see no adequate
justification for Holcim to take such action now.
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