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Global headwinds blowing, India relatively well placed
Global equities have corrected sharply over the past one month on concerns of
slower global growth. The US economy continues to face risks of a double-dip
recession on tepid economic growth and high unemployment. Eurozone countries
also remain on a weaker footing due to concerns regarding sovereign debt crisis.
In the backdrop of these headwinds, we believe India is better placed to weather
the current scenario due to lower dependence on exports for driving economic
growth and benefits arising from lower commodity and energy prices due to slower
global growth.
Inflation expected to moderate on lower global commodity and energy prices :
The Reserve Bank of India (RBI) has continued its rate hike spree on account of
persistence of higher inflation. The RBI has raised the key policy rate - the repo
rate - on 11 occasions since March 2010, leading to a sharp 475bp rise in the
operative policy rate. The sticky nature of inflation at higher levels has been partly
on account of a sharp rise in global commodity and energy prices, as economic
recovery in developed economies picked pace. However, with the prospects of
slower-than-anticipated growth in these economies and moderating growth trends
in emerging economies, commodity and energy prices have come off considerably
from their recent peaks. With declining stimulus measures and slower global growth,
we expect prices to remain in check in the near term. Reduced prices are expected
to be materially positive for the Indian economy, as it will aid in a) reducing fiscal
deficit, b) cooling inflationary pressures and c) putting an end to the prolonged
monetary tightening cycle.
Slower domestic growth may also prompt an end to monetary tightening: Apart
from reduced inflationary pressures, the slowdown in domestic growth and
heightened risks in the global macro environment are expected to lead to an end to
the monetary policy tightening stance. Domestic growth has slowed considerably,
as evident from the slowing GDP growth rates, tepid IIP growth, moderating growth
in quarterly gross fixed capital formation and declining vehicle sales and cement
dispatches growth rates. Credit sanctions have also slackened substantially in the
recent months. India's manufacturing PMI has slipped to a 29-month low of
52.6 during August 2011. Although recent indications from the RBI suggest
another 25bp hike in the repo rate in the upcoming monetary policy review,
there is an increasing likelihood, due to the above-mentioned reasons, that the
RBI may pause after that hike.
Valuations attractive: Indian markets have fallen by ~20% in CY2011YTD and
have underperformed emerging market peers by ~8% and global peers by ~11%
due to concerns of higher inflation and interest rates. The earnings growth trajectory
for Indian corporates remains moderate despite higher raw-material costs and
interest rates hurting margins over the past few quarters. While FY2012 earnings
growth is likely to be modest, cooling inflation and interest rates should underpin
healthier growth in FY2013. Based on one-year forward earnings, the Sensex is
trading at attractive valuations of 13.5x vis-à-vis its last five-year average of 15.7x.
We value the Sensex at a conservative 14x target P/E multiple to arrive at a Sensex
target of 19,100. We maintain our positive stance on Indian equities considering
their relative better positioning globally, reasonable earnings growth trajectory and
attractive valuations vis-à-vis India’s structurally positive outlook.
India: Relatively better placed amid global downturn
Economic recovery in the US continues to be weak: The recent
US GDP growth data, though better than the dismal 0.4%
registered in 4QFY2011, was still considerably lower at 1.0%
(3.8% recorded in 1QFY2011). US Fed in its recent meeting
decided to keep interest rates at exceptionally low levels till at
least mid-2013, which is likely to be favourable for flows into
emerging markets. Economies of Eurozone countries also
continue to face headwinds due to issues regarding sovereign
debt crisis. In our view, there are structural issues facing the
Eurozone due to the inherent conflict between common monetary
policy and independent fiscal policies of member countries.
India likely to remain resilient amid the global slowdown: In
our view, India is relatively better placed to withstand the weaker
global macroeconomic scenario due to its lower dependence
on exports (exports to GDP of ~20% vs. ~40% for peers) and
benefit of lower commodity and energy prices. A recent report
by global rating agency Fitch titled 'What if the US falls back into
recession?' also finds that India is going to be amongst the least
impacted countries if the US falls back into recession as the impact
of the exposure to US will be offset by the benefits of lower oil prices
India has a lower dependence on exports
Source: World Bank, Angel Research; Note: Data for 2009
Country Exports as a % of GDP
Brazil 11.1
India 19.6
Indonesia 24.1
China 26.7
South Africa 27.3
Russian Federation 27.7
Mexico 27.8
Korea, Rep. 49.9
Thailand 68.4
Malaysia 96.4
Inflation expected to moderate, leading to end of
the monetary tightening cycle
Slowdown in global growth likely to keep commodity and energy
prices under pressure - Materially positive for the Indian
economy: Fears of a double-dip recession in the US, sovereign
debt crisis concerns in Eurozone countries and the overall
expected slower global growth had cooled off commodity and
energy prices. During August 2011, the Reuters CRB index had
come off 2011 YTD peaks by ~15% and WTI crude oil prices
had declined substantially by ~30% from CY2011 peak.
However, with the Federal Reserve keeping the door open for
further quantitative easing (QE) in its September meet, prices
have clawed back a bit over the last week. However, with rising
deficit and the failure of the first two rounds of QE in stimulating
economic growth, we do not expect further QE measures from
the Fed, and even if it goes for these measures, the quantum is
likely to be relatively smaller.
Rising global growth concerns and declining fiscal stimulus
measures in developed economies (on concerns of expanding
fiscal deficits and unsustainable public debt to GDP) are likely to
keep commodity and energy prices in check at least in the short
term. Even in the latest meet of the US Federal Reserve at the
Jackson Hole, the Chairman abstained from adopting further
quantitative easing measures despite signs of further weakness
in the economy. Lower prices are expected to be materially positive
for the Indian economy, as they will aid in a) reducing fiscal
deficit, b) cooling inflationary pressures and c) putting an end to
the prolonged monetary tightening stance of the RBI.
Slower domestic growth may also prompt an end to monetary
tightening: Apart from reduced inflationary pressures, the
slowdown in domestic growth and heightened risks in the global
macro environment are expected to lead to an end to the
monetary policy tightening stance. Domestic growth has slowed
considerably, as evident from slowing GDP growth rates, tepid
IIP growth, moderating growth in quarterly gross fixed capital
formation and declining vehicle sales and cement dispatches
growth rates. Also, liquidity conditions in the system have eased
off considerably, with deposit mobilisation gaining strong traction
and muted credit offtake. Credit sanctions have also slackened
substantially in the recent months. India's manufacturing PMI
has slipped to a 29-month low of 52.6 during August 2011.
Although recent indications from the RBI suggest another 25bp
hike in the repo rate in the upcoming monetary policy review,
there is an increasing likelihood, due to the above-mentioned
reasons, that the RBI may pause after that hike.
Hence, we believe that we are very close to the peak of the current
interest rate cycle due to a) expected moderation in domestic
inflation on the back of good monsoons and easing off of global
commodity and energy prices due to slowing global growth,
sovereign debt crisis concerns in the Eurozone and possibility of
a double-dip recession in the US and b) slowing domestic growth
as evident from considerable moderation in GDP and IIP growth
data, slowing vehicle and cement sales, sharp moderation in
credit offtake and moderating pace of gross fixed capital
formation. The latest 1QFY2012 GDP growth showed
continuance of the moderating trend in growth. Also, the lagged
effects of prolonged monetary tightening are yet to flow through
fully, in our view.
Interest rates have risen sharply over the past one year
(250-300bp hike in base rate). Higher interest rates have slowed
down the pace of capital formation and have impacted earnings
growth of corporates. In fact, the RBI's effort to moderate inflation
by cutting demand side pressures seems to have started taking
effect, as evident from the decline in yoy growth in private
consumption expenditure to its lowest since 4QFY2009 at 6.3%
in 1QFY2012. Accordingly, we believe that we are very close to
the peak of the current interest rate cycle, which should bode
well for the overall market and especially for interest rate sensitive sectors.
Valuations attractive
Indian markets have fallen by ~20% in CY2011YTD and have
underperformed emerging market peers by ~8% and global
peers by ~11% due to concerns of higher inflation and interest
rates. The earnings growth trajectory for Indian corporates
remains moderate despite higher raw-material costs and interest
rates hurting margins over the past few quarters. While FY2012
earnings growth is likely to be modest, cooling inflation and
interest rates should underpin healthier growth in FY2013. We
expect Sensex companies to deliver EPS growth of 13.0% in
FY2012 and improve further to 19.1% in FY2013, translating
into a reasonable 17.0% CAGR over FY2011-13E. Earnings
growth is expected to be broad-based, with higher contribution
from banking stocks. Oil and gas, metals and IT stocks are
expected to be the other major contributors to growth.
Based on one-year forward earnings, the Sensex is trading at
attractive valuations of 13.5x (12.3x based on FY2013E earnings)
vis-à-vis its last five-year average of 15.7x. In fact, the valuations
are just ~20% higher than the valuations prevailing post-Lehman
crash, when the entire global economy was in turmoil and
constrained by severe credit crisis; and let us not forget that from
those levels markets rallied more than 100%. However, the
scenario is not that gloomy in the current environment, which
makes the current valuations attractive. We value the Sensex at
a conservative 14x target P/E multiple to arrive at a Sensex target
of 19,100. We maintain our positive stance on Indian equities
considering their relative better positioning globally, reasonable
earnings growth trajectory and attractive valuations vis-à-vis their
structurally positive outlook.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Top Picks
(click on company name below for details)
Axis Bank
ICICI BankInfosys
L&T
Lupin
Mphasis
RIL
Mahindra Satyam
Tata Steel
United Phosphorous
Finolex Cables
Greenply Industries
Jagran Prakashan
Relaxo Footwears
Tata Sponge Iron
(click on company name above for details)
Global headwinds blowing, India relatively well placed
Global equities have corrected sharply over the past one month on concerns of
slower global growth. The US economy continues to face risks of a double-dip
recession on tepid economic growth and high unemployment. Eurozone countries
also remain on a weaker footing due to concerns regarding sovereign debt crisis.
In the backdrop of these headwinds, we believe India is better placed to weather
the current scenario due to lower dependence on exports for driving economic
growth and benefits arising from lower commodity and energy prices due to slower
global growth.
Inflation expected to moderate on lower global commodity and energy prices :
The Reserve Bank of India (RBI) has continued its rate hike spree on account of
persistence of higher inflation. The RBI has raised the key policy rate - the repo
rate - on 11 occasions since March 2010, leading to a sharp 475bp rise in the
operative policy rate. The sticky nature of inflation at higher levels has been partly
on account of a sharp rise in global commodity and energy prices, as economic
recovery in developed economies picked pace. However, with the prospects of
slower-than-anticipated growth in these economies and moderating growth trends
in emerging economies, commodity and energy prices have come off considerably
from their recent peaks. With declining stimulus measures and slower global growth,
we expect prices to remain in check in the near term. Reduced prices are expected
to be materially positive for the Indian economy, as it will aid in a) reducing fiscal
deficit, b) cooling inflationary pressures and c) putting an end to the prolonged
monetary tightening cycle.
Slower domestic growth may also prompt an end to monetary tightening: Apart
from reduced inflationary pressures, the slowdown in domestic growth and
heightened risks in the global macro environment are expected to lead to an end to
the monetary policy tightening stance. Domestic growth has slowed considerably,
as evident from the slowing GDP growth rates, tepid IIP growth, moderating growth
in quarterly gross fixed capital formation and declining vehicle sales and cement
dispatches growth rates. Credit sanctions have also slackened substantially in the
recent months. India's manufacturing PMI has slipped to a 29-month low of
52.6 during August 2011. Although recent indications from the RBI suggest
another 25bp hike in the repo rate in the upcoming monetary policy review,
there is an increasing likelihood, due to the above-mentioned reasons, that the
RBI may pause after that hike.
Valuations attractive: Indian markets have fallen by ~20% in CY2011YTD and
have underperformed emerging market peers by ~8% and global peers by ~11%
due to concerns of higher inflation and interest rates. The earnings growth trajectory
for Indian corporates remains moderate despite higher raw-material costs and
interest rates hurting margins over the past few quarters. While FY2012 earnings
growth is likely to be modest, cooling inflation and interest rates should underpin
healthier growth in FY2013. Based on one-year forward earnings, the Sensex is
trading at attractive valuations of 13.5x vis-à-vis its last five-year average of 15.7x.
We value the Sensex at a conservative 14x target P/E multiple to arrive at a Sensex
target of 19,100. We maintain our positive stance on Indian equities considering
their relative better positioning globally, reasonable earnings growth trajectory and
attractive valuations vis-à-vis India’s structurally positive outlook.
India: Relatively better placed amid global downturn
Economic recovery in the US continues to be weak: The recent
US GDP growth data, though better than the dismal 0.4%
registered in 4QFY2011, was still considerably lower at 1.0%
(3.8% recorded in 1QFY2011). US Fed in its recent meeting
decided to keep interest rates at exceptionally low levels till at
least mid-2013, which is likely to be favourable for flows into
emerging markets. Economies of Eurozone countries also
continue to face headwinds due to issues regarding sovereign
debt crisis. In our view, there are structural issues facing the
Eurozone due to the inherent conflict between common monetary
policy and independent fiscal policies of member countries.
India likely to remain resilient amid the global slowdown: In
our view, India is relatively better placed to withstand the weaker
global macroeconomic scenario due to its lower dependence
on exports (exports to GDP of ~20% vs. ~40% for peers) and
benefit of lower commodity and energy prices. A recent report
by global rating agency Fitch titled 'What if the US falls back into
recession?' also finds that India is going to be amongst the least
impacted countries if the US falls back into recession as the impact
of the exposure to US will be offset by the benefits of lower oil prices
India has a lower dependence on exports
Source: World Bank, Angel Research; Note: Data for 2009
Country Exports as a % of GDP
Brazil 11.1
India 19.6
Indonesia 24.1
China 26.7
South Africa 27.3
Russian Federation 27.7
Mexico 27.8
Korea, Rep. 49.9
Thailand 68.4
Malaysia 96.4
Inflation expected to moderate, leading to end of
the monetary tightening cycle
Slowdown in global growth likely to keep commodity and energy
prices under pressure - Materially positive for the Indian
economy: Fears of a double-dip recession in the US, sovereign
debt crisis concerns in Eurozone countries and the overall
expected slower global growth had cooled off commodity and
energy prices. During August 2011, the Reuters CRB index had
come off 2011 YTD peaks by ~15% and WTI crude oil prices
had declined substantially by ~30% from CY2011 peak.
However, with the Federal Reserve keeping the door open for
further quantitative easing (QE) in its September meet, prices
have clawed back a bit over the last week. However, with rising
deficit and the failure of the first two rounds of QE in stimulating
economic growth, we do not expect further QE measures from
the Fed, and even if it goes for these measures, the quantum is
likely to be relatively smaller.
Rising global growth concerns and declining fiscal stimulus
measures in developed economies (on concerns of expanding
fiscal deficits and unsustainable public debt to GDP) are likely to
keep commodity and energy prices in check at least in the short
term. Even in the latest meet of the US Federal Reserve at the
Jackson Hole, the Chairman abstained from adopting further
quantitative easing measures despite signs of further weakness
in the economy. Lower prices are expected to be materially positive
for the Indian economy, as they will aid in a) reducing fiscal
deficit, b) cooling inflationary pressures and c) putting an end to
the prolonged monetary tightening stance of the RBI.
Slower domestic growth may also prompt an end to monetary
tightening: Apart from reduced inflationary pressures, the
slowdown in domestic growth and heightened risks in the global
macro environment are expected to lead to an end to the
monetary policy tightening stance. Domestic growth has slowed
considerably, as evident from slowing GDP growth rates, tepid
IIP growth, moderating growth in quarterly gross fixed capital
formation and declining vehicle sales and cement dispatches
growth rates. Also, liquidity conditions in the system have eased
off considerably, with deposit mobilisation gaining strong traction
and muted credit offtake. Credit sanctions have also slackened
substantially in the recent months. India's manufacturing PMI
has slipped to a 29-month low of 52.6 during August 2011.
Although recent indications from the RBI suggest another 25bp
hike in the repo rate in the upcoming monetary policy review,
there is an increasing likelihood, due to the above-mentioned
reasons, that the RBI may pause after that hike.
Hence, we believe that we are very close to the peak of the current
interest rate cycle due to a) expected moderation in domestic
inflation on the back of good monsoons and easing off of global
commodity and energy prices due to slowing global growth,
sovereign debt crisis concerns in the Eurozone and possibility of
a double-dip recession in the US and b) slowing domestic growth
as evident from considerable moderation in GDP and IIP growth
data, slowing vehicle and cement sales, sharp moderation in
credit offtake and moderating pace of gross fixed capital
formation. The latest 1QFY2012 GDP growth showed
continuance of the moderating trend in growth. Also, the lagged
effects of prolonged monetary tightening are yet to flow through
fully, in our view.
Interest rates have risen sharply over the past one year
(250-300bp hike in base rate). Higher interest rates have slowed
down the pace of capital formation and have impacted earnings
growth of corporates. In fact, the RBI's effort to moderate inflation
by cutting demand side pressures seems to have started taking
effect, as evident from the decline in yoy growth in private
consumption expenditure to its lowest since 4QFY2009 at 6.3%
in 1QFY2012. Accordingly, we believe that we are very close to
the peak of the current interest rate cycle, which should bode
well for the overall market and especially for interest rate sensitive sectors.
Valuations attractive
Indian markets have fallen by ~20% in CY2011YTD and have
underperformed emerging market peers by ~8% and global
peers by ~11% due to concerns of higher inflation and interest
rates. The earnings growth trajectory for Indian corporates
remains moderate despite higher raw-material costs and interest
rates hurting margins over the past few quarters. While FY2012
earnings growth is likely to be modest, cooling inflation and
interest rates should underpin healthier growth in FY2013. We
expect Sensex companies to deliver EPS growth of 13.0% in
FY2012 and improve further to 19.1% in FY2013, translating
into a reasonable 17.0% CAGR over FY2011-13E. Earnings
growth is expected to be broad-based, with higher contribution
from banking stocks. Oil and gas, metals and IT stocks are
expected to be the other major contributors to growth.
Based on one-year forward earnings, the Sensex is trading at
attractive valuations of 13.5x (12.3x based on FY2013E earnings)
vis-à-vis its last five-year average of 15.7x. In fact, the valuations
are just ~20% higher than the valuations prevailing post-Lehman
crash, when the entire global economy was in turmoil and
constrained by severe credit crisis; and let us not forget that from
those levels markets rallied more than 100%. However, the
scenario is not that gloomy in the current environment, which
makes the current valuations attractive. We value the Sensex at
a conservative 14x target P/E multiple to arrive at a Sensex target
of 19,100. We maintain our positive stance on Indian equities
considering their relative better positioning globally, reasonable
earnings growth trajectory and attractive valuations vis-à-vis their
structurally positive outlook.
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