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India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Resetting for risk
While domestic macro challenges have been the primary driver for India’s
underperformance, the rising risk from global headwinds (see ‘The great
reset’ - by Russell Napier’) will also weigh on equity valuations; we build
in 50bps higher cost of equity, implying a cut in target multiple to 14x and
an end-FY12 Sensex target of 19,500. We note, however, that investor
positioning is already far more defensive than in 2008 and our model
portfolio changes focus on valuation opportunities/ gainers from
potential softening in commodity prices.
‘The great reset’ suggests that risk premia will rise
q Russell Napier, in his recent report, makes a case for an unwinding in the US
treasury market, leading to a ‘reset’ across asset classes, lower commodity
prices.
q Russell sees the events impacting emerging market (EM) equities as well,
though buying opportunities will emerge quicker.
q While the Sensex’s fall has been led by domestic macro challenges – inflation,
monetary tightening and policy inaction – valuations will reflect global risks as
well.
q We raise the cost of equity by 50bps, which translates to a lower target PE
multiple to 14x. On our Mar-13CL Sensex EPS estimate of 1389 (down 6.3%
YTD), the Mar-12 Sensex target moves to 19,500 or 11% higher than current
levels.
q Our earlier Sensex target multiple of 15x built in a cost of equity of 14%.
India – investor positioning already defensive
q The Indian market (Sensex down 14% ytd) is the worst performing market in
the region; investors remain concerned about inflation and a slowing
investment cycle.
q Investment/infrastructure plays are down 16-20% YTD. The shift to defensive
sectors is visible in 1.4% rise for FMCG, only 8% fall for pharma.
q Divergence in stock performance is also reflected in 23 stocks (largely
consumer and pharma) under our coverage trading within 10% of their 52
week high, when the market is just 1% above its 52 week low.
Portfolio – adding gainers from lower commodity prices
q With stock valuations, by and large, reflecting concerns and award a high
premium for defensiveness, we do not see merit in blindly chasing defensives.
q For IT services, we believe risks to developed market driven topline growth are
not yet factored into valuations. We cut TCS by 3ppt, taking the sector to UWT.
q We add stocks like ONGC, Hero Honda and United Spirits where valuations are
now attractive and softening in input commodity prices will be a key trigger.
q We remove Titan, where valuations, at 33x P/E, look stretched. Likewise Cairn,
which is negatively geared to softening in commodity prices.
q We are now O-WT consumer staples, vis-à-vis our Neutral stance earlier.
q Energy remains O-WT.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Resetting for risk
While domestic macro challenges have been the primary driver for India’s
underperformance, the rising risk from global headwinds (see ‘The great
reset’ - by Russell Napier’) will also weigh on equity valuations; we build
in 50bps higher cost of equity, implying a cut in target multiple to 14x and
an end-FY12 Sensex target of 19,500. We note, however, that investor
positioning is already far more defensive than in 2008 and our model
portfolio changes focus on valuation opportunities/ gainers from
potential softening in commodity prices.
‘The great reset’ suggests that risk premia will rise
q Russell Napier, in his recent report, makes a case for an unwinding in the US
treasury market, leading to a ‘reset’ across asset classes, lower commodity
prices.
q Russell sees the events impacting emerging market (EM) equities as well,
though buying opportunities will emerge quicker.
q While the Sensex’s fall has been led by domestic macro challenges – inflation,
monetary tightening and policy inaction – valuations will reflect global risks as
well.
q We raise the cost of equity by 50bps, which translates to a lower target PE
multiple to 14x. On our Mar-13CL Sensex EPS estimate of 1389 (down 6.3%
YTD), the Mar-12 Sensex target moves to 19,500 or 11% higher than current
levels.
q Our earlier Sensex target multiple of 15x built in a cost of equity of 14%.
India – investor positioning already defensive
q The Indian market (Sensex down 14% ytd) is the worst performing market in
the region; investors remain concerned about inflation and a slowing
investment cycle.
q Investment/infrastructure plays are down 16-20% YTD. The shift to defensive
sectors is visible in 1.4% rise for FMCG, only 8% fall for pharma.
q Divergence in stock performance is also reflected in 23 stocks (largely
consumer and pharma) under our coverage trading within 10% of their 52
week high, when the market is just 1% above its 52 week low.
Portfolio – adding gainers from lower commodity prices
q With stock valuations, by and large, reflecting concerns and award a high
premium for defensiveness, we do not see merit in blindly chasing defensives.
q For IT services, we believe risks to developed market driven topline growth are
not yet factored into valuations. We cut TCS by 3ppt, taking the sector to UWT.
q We add stocks like ONGC, Hero Honda and United Spirits where valuations are
now attractive and softening in input commodity prices will be a key trigger.
q We remove Titan, where valuations, at 33x P/E, look stretched. Likewise Cairn,
which is negatively geared to softening in commodity prices.
q We are now O-WT consumer staples, vis-à-vis our Neutral stance earlier.
q Energy remains O-WT.
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