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UBS Investment Research
India Market Strategy
L ots of negatives in the price
Earnings momentum continues to be negative
Nifty FY12E and FY13E consensus earnings estimates have been revised
downward by 5.7% and 7.7% respectively ytd. The revision during the last quarter
(till Oct 7) itself was -3.6% for FY12E earnings and -5.0% for FY13E earnings.
Almost all sectors have witnessed downward revisions in estimates, with the
metals & mining sector contributing significantly. Consumers (led by ITC) and
pharmaceuticals (led by Ranbaxy), however, were positive contributors. Our
bottom-up analysis of Nifty constituents suggests 11.7%/15.7% growth in earnings
in FY12/13, below consensus estimates of 14.3%/16.2% in FY12/13.
Model portfolio- Moving underweight auto, neutral on cement
We have turned u/w the auto sector, from o/w, as we remove Maruti from our
portfolio. Autos have outperformed the market as well as other sectors in the past 3
months and we reduce our allocation to the sector. We have turned neutral on the
cement sector, from u/w, as the monsoon period is now over and we are entering a
seasonally strong quarter. We reduce our weight in mid-caps from 8% to 5%. Our
key portfolio additions are Cipla, Coal India, Grasim and Manappuram Finance.
FII outflows present further downside risk
We believe that Indian stocks price in most of the bad news such as slowing
economic growth, negative earnings momentum, high inflation, depreciation of the
rupee and high interest rates. However, Indian stocks could correct another 15-20%
if we see significant FII outflows due to global events. In such an environment,
stock picking is key: our high conviction buy ideas are Bharti Airtel, Coal India,
Federal Bank, Idea Cellular and Mahindra & Mahindra.
Nifty consensus earnings estimates for FY12E and FY13E were revised
downwards by 3.6% and 5.0% respectively, in 2QFY12 (till October 7). The
downward revision started post mid-August, that is at the end of the earnings
season. Disappointing Q1 earnings were partly the reason for the downward
revision. Stocks such as Tata Motors, Tata Steel, RIL, ICICI, SBI and Sesa Goa
have contributed to the downward revision. On a sector level, earnings revision
across the metals & mining sector was a driver of negative momentum, while
consumers and pharmaceuticals were positive contributors.
Key consensus upgrades / downgrades- FY12E
Sectors Comments
Key consensus upgrades
Pharmaceuticals
►Pharma earnings were revised up by 1.2% largely due to upgrades in Ranbaxy earnings. Ranbaxy FY12E earnings were revised upwards by
27% in the last quarter as estimates are probably now factoring in resolution of U.S. issues and Lipitor exclusivity.
►Cipla (-5%) and Dr. Reddy’s (-5.2%) saw a downward revision.
Consumers
►The positive earnings revision in the consumer sector was led by ITC, whose earnings estimates were revised upwards by 1.9%, likely due to
price increases taken by the company, following VAT increases in a few states.
►HUL’s consensus earnings were revised down by 2.3%, possibly due to downward revision of volume growth expectations.
Key consensus downgrades
Telecom
►Telecom sector earnings were revised down due to downward revision in both Reliance Communications (-17.3%) and Bharti Airtel (-11.1%).
►Bharti’s earnings were revised down due to adjustments related to higher tax charges, while RCom saw earnings downgrade due to
disappointing Q1 results.
Real Estate ►DLF earnings were revised down by 10.4%, likely due to higher interest charges being taken into account and also due to low visibility on
future earnings.
Metals & Mining
►There was downward revision in metals& mining across the board as earnings of all stocks were revised down by 5-25%. This is because
underlying commodity prices have gone down due to expectations of a global slowdown and the demand for companies’ products is expected
to be low as well. Also, the MMDR bill proposes to increase tax and royalty which is an overhang on the sector.
► The significant revisions include SAIL (-26.7%), Sesa Goa (-14.3%) (Karnataka iron ore mining ban) and Jindal Steel & Power (-10.8%).
Autos
►Autos downward revision was led by Tata Motors (-13.2%) and Maruti (-10.2%). Tata Motors earnings revision was because of weak JLR
volume growth due to slowdown in developed markets, as well as sluggish MHCV volume growth and low PV sales, domestically. Maruti’s
earnings were revised likely due to the negative impact of Yen appreciation and low volumes due to the recent strike.
►M&M (14.7%) and Bajaj Auto (1.7%), however, saw upward revisions.
Petrochemicals ►RIL earnings were revised down by 2.7%. RIL has sold 30% stake in its gas fields to BP, which has replaced earnings from operations with
interest earnings from the sale proceeds, causing a net negative impact.
IT Services
►IT services earnings downgrade was driven by Wipro (-4.7%) and Infosys (-3.3%). HCL Tech also witnessed a downward revision (-3.3%).
The de-rating in the sector is due to the weakening macro environment combined with ongoing weakness in deal flows which adversely impacts
demand for the sector.
Note: Period between 1 July 2011 and 7 October 2011; Source: Datastream; UBS
Nifty/Sensex FY12E and FY13E earnings estimates
Our bottom up analysis of the Nifty/Sensex constituents suggests 11.7%/13.9%
growth in earnings in FY12 and 15.7%/15.7% growth in FY13. This is lower
than consensus estimates for Nifty/Sensex earnings growth of 14.3%/15.6% and
16.2%/15.8% in FY12 and FY13, respectively. We believe there may be further
downside to these numbers as earnings downgrades continue.
Sector changes
Autos (from overweight to underweight)
We have turned underweight the auto sector, from overweight earlier, as we
remove Maruti from our portfolio due to near term headwinds in the form of
sharp appreciation of the Yen, impacting margins. Autos have outperformed the
market as well as other sectors in the past 3 months and we reduce our allocation
to the sector.
Cement (from underweight to neutral)
We have turned neutral on the cement sector, from underweight, as the monsoon
period is now over and we are entering a seasonally strong quarter. We have
added Grasim to our model portfolio with a 2% weight.
Stock additions
Manappuram Finance (Buy, PT Rs77.50)
We add Manappuram Finance to our model portfolio with a 2% weight. We like
MGFL for its high growth and low asset quality risks and believe it will be a
beneficiary of declining wholesale interest rates expected in the second half.
Grasim (Buy, PT Rs2,600.00)
We have added Grasim Industries to our model portfolio with a 2% weight.
Grasim is our preferred pick and the only Buy rated stock in the cement sector.
We believe valuations are attractive at current levels and provide a good
opportunity to buy.
Coal India (Buy, PT Rs400.00)
We have added Coal India to our portfolio with a 3% weight. The stock has
corrected more than 10% in the past month due to negative news flow around
the proposed mining tax, concerns about wage negotiations and a production
miss in H1. We believe that the correction outweighs the negative news flow
and hence provides an attractive opportunity to buy, given that the structural
story of Coal India remains intact.
Cairn India (Buy, PT Rs385.00)
We add Cairn India to our portfolio with a 2% weight. We believe that the deal
overhang surrounding the stock has now been cleared. We like the stock, given
that it remains the most leveraged play on increased oil production and benefits
from the depreciating rupee. The stock has corrected recently; we see limited
downside at current valuations and expect the stock to move up.
Cipla (Buy, PT Rs340.00)
We add Cipla to our portfolio with a 2% weight. We believe valuations are now
reasonable and expect the company to benefit from sharp depreciation in the
currency.
Bajaj Electricals (Buy, PT Rs285.00)
We add Bajaj Electricals to our portfolio with a 1% weight. Bajaj Elec. is the
leader in consumer electrical appliances in India and we believe it is well poised
to continue to gain market share in a highly fragmented consumer electrical
appliances market. The stock is currently trading at the lower end of its
valuation band (11x/8x FY12E/FY13E EPS), which is attractive given the ~30%
FY12-14 EPS CAGR.
Stock deletions
Maruti Suzuki (Buy, PT Rs1420.00)
We remove Maruti Suzuki from our model portfolio. We see near term
headwinds in the form of sharp appreciation of the Yen, impacting margins. We
are significantly below consensus in terms of FY12E earnings. The stock has
underperformed the Nifty by 0.5% since inclusion.
Tata Steel (Neutral, PT Rs460.00)
We remove Tata Steel from our model portfolio as we have recently
downgraded the stock to a Neutral from a Buy, as we lower earnings estimates
led by lower EBITDA/t from Corus, lower sales volume in India and increased
capex in FY12/13. The stock has underperformed the market by 14% since its
inclusion in the portfolio.
Ranbaxy (Buy, PT Rs630.00)
We replace Ranbaxy with Cipla in our model portfolio as we see Cipla as a
more defensive play. Ranbaxy has outperformed the market by 9% since its
inclusion in the portfolio and we do not expect too much upside in the near term.
Apollo Tyres (Buy, PT Rs84.00)
We remove Apollo Tyres from our model portfolio as we shift weight to stocks
that represent better alpha opportunity and reduce the overall weight allocated to
mid-caps. The stock has underperformed the market by 12.5% since its inclusion
in the portfolio.
DB Corp (Buy, PT Rs300.00)
We remove DB Corp from our model portfolio as we shift weight to stocks that
represent better alpha opportunity and reduce the overall weight allocated to
mid-caps. The stock has underperformed the Nifty by 6% since its inclusion in
the portfolio.
UBS India model portfolio performance
As at 10 October, 2011, our portfolio had generated a return of 84.8% since
launch. This compares with the Sensex’s 71.3%, Nifty’s 66.9%; and the MSCI
India’s 68.6% (as on 7 October 2011). Key sectors that have outperformed
compared with the Nifty are Autos (95.7% outperformance), Banks and FIs
(76.5%) and Materials (44.2%), while Real Estate (-101.9% underperformance),
Petrochemicals (-62.6%), Oil and Gas (-60.2%) and Telecom (-56.2%) have
underperformed.
Statement of Risk
We believe the risks to our long-term estimates (for example, for corporate
earnings) and macroeconomic variables (such as GDP growth rates and
inflation) arise from any economic slowdown, weakening currency, global
economic events, and government policy changes.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
India Market Strategy
L ots of negatives in the price
Earnings momentum continues to be negative
Nifty FY12E and FY13E consensus earnings estimates have been revised
downward by 5.7% and 7.7% respectively ytd. The revision during the last quarter
(till Oct 7) itself was -3.6% for FY12E earnings and -5.0% for FY13E earnings.
Almost all sectors have witnessed downward revisions in estimates, with the
metals & mining sector contributing significantly. Consumers (led by ITC) and
pharmaceuticals (led by Ranbaxy), however, were positive contributors. Our
bottom-up analysis of Nifty constituents suggests 11.7%/15.7% growth in earnings
in FY12/13, below consensus estimates of 14.3%/16.2% in FY12/13.
Model portfolio- Moving underweight auto, neutral on cement
We have turned u/w the auto sector, from o/w, as we remove Maruti from our
portfolio. Autos have outperformed the market as well as other sectors in the past 3
months and we reduce our allocation to the sector. We have turned neutral on the
cement sector, from u/w, as the monsoon period is now over and we are entering a
seasonally strong quarter. We reduce our weight in mid-caps from 8% to 5%. Our
key portfolio additions are Cipla, Coal India, Grasim and Manappuram Finance.
FII outflows present further downside risk
We believe that Indian stocks price in most of the bad news such as slowing
economic growth, negative earnings momentum, high inflation, depreciation of the
rupee and high interest rates. However, Indian stocks could correct another 15-20%
if we see significant FII outflows due to global events. In such an environment,
stock picking is key: our high conviction buy ideas are Bharti Airtel, Coal India,
Federal Bank, Idea Cellular and Mahindra & Mahindra.
Nifty consensus earnings estimates for FY12E and FY13E were revised
downwards by 3.6% and 5.0% respectively, in 2QFY12 (till October 7). The
downward revision started post mid-August, that is at the end of the earnings
season. Disappointing Q1 earnings were partly the reason for the downward
revision. Stocks such as Tata Motors, Tata Steel, RIL, ICICI, SBI and Sesa Goa
have contributed to the downward revision. On a sector level, earnings revision
across the metals & mining sector was a driver of negative momentum, while
consumers and pharmaceuticals were positive contributors.
Key consensus upgrades / downgrades- FY12E
Sectors Comments
Key consensus upgrades
Pharmaceuticals
►Pharma earnings were revised up by 1.2% largely due to upgrades in Ranbaxy earnings. Ranbaxy FY12E earnings were revised upwards by
27% in the last quarter as estimates are probably now factoring in resolution of U.S. issues and Lipitor exclusivity.
►Cipla (-5%) and Dr. Reddy’s (-5.2%) saw a downward revision.
Consumers
►The positive earnings revision in the consumer sector was led by ITC, whose earnings estimates were revised upwards by 1.9%, likely due to
price increases taken by the company, following VAT increases in a few states.
►HUL’s consensus earnings were revised down by 2.3%, possibly due to downward revision of volume growth expectations.
Key consensus downgrades
Telecom
►Telecom sector earnings were revised down due to downward revision in both Reliance Communications (-17.3%) and Bharti Airtel (-11.1%).
►Bharti’s earnings were revised down due to adjustments related to higher tax charges, while RCom saw earnings downgrade due to
disappointing Q1 results.
Real Estate ►DLF earnings were revised down by 10.4%, likely due to higher interest charges being taken into account and also due to low visibility on
future earnings.
Metals & Mining
►There was downward revision in metals& mining across the board as earnings of all stocks were revised down by 5-25%. This is because
underlying commodity prices have gone down due to expectations of a global slowdown and the demand for companies’ products is expected
to be low as well. Also, the MMDR bill proposes to increase tax and royalty which is an overhang on the sector.
► The significant revisions include SAIL (-26.7%), Sesa Goa (-14.3%) (Karnataka iron ore mining ban) and Jindal Steel & Power (-10.8%).
Autos
►Autos downward revision was led by Tata Motors (-13.2%) and Maruti (-10.2%). Tata Motors earnings revision was because of weak JLR
volume growth due to slowdown in developed markets, as well as sluggish MHCV volume growth and low PV sales, domestically. Maruti’s
earnings were revised likely due to the negative impact of Yen appreciation and low volumes due to the recent strike.
►M&M (14.7%) and Bajaj Auto (1.7%), however, saw upward revisions.
Petrochemicals ►RIL earnings were revised down by 2.7%. RIL has sold 30% stake in its gas fields to BP, which has replaced earnings from operations with
interest earnings from the sale proceeds, causing a net negative impact.
IT Services
►IT services earnings downgrade was driven by Wipro (-4.7%) and Infosys (-3.3%). HCL Tech also witnessed a downward revision (-3.3%).
The de-rating in the sector is due to the weakening macro environment combined with ongoing weakness in deal flows which adversely impacts
demand for the sector.
Note: Period between 1 July 2011 and 7 October 2011; Source: Datastream; UBS
Nifty/Sensex FY12E and FY13E earnings estimates
Our bottom up analysis of the Nifty/Sensex constituents suggests 11.7%/13.9%
growth in earnings in FY12 and 15.7%/15.7% growth in FY13. This is lower
than consensus estimates for Nifty/Sensex earnings growth of 14.3%/15.6% and
16.2%/15.8% in FY12 and FY13, respectively. We believe there may be further
downside to these numbers as earnings downgrades continue.
Sector changes
Autos (from overweight to underweight)
We have turned underweight the auto sector, from overweight earlier, as we
remove Maruti from our portfolio due to near term headwinds in the form of
sharp appreciation of the Yen, impacting margins. Autos have outperformed the
market as well as other sectors in the past 3 months and we reduce our allocation
to the sector.
Cement (from underweight to neutral)
We have turned neutral on the cement sector, from underweight, as the monsoon
period is now over and we are entering a seasonally strong quarter. We have
added Grasim to our model portfolio with a 2% weight.
Stock additions
Manappuram Finance (Buy, PT Rs77.50)
We add Manappuram Finance to our model portfolio with a 2% weight. We like
MGFL for its high growth and low asset quality risks and believe it will be a
beneficiary of declining wholesale interest rates expected in the second half.
Grasim (Buy, PT Rs2,600.00)
We have added Grasim Industries to our model portfolio with a 2% weight.
Grasim is our preferred pick and the only Buy rated stock in the cement sector.
We believe valuations are attractive at current levels and provide a good
opportunity to buy.
Coal India (Buy, PT Rs400.00)
We have added Coal India to our portfolio with a 3% weight. The stock has
corrected more than 10% in the past month due to negative news flow around
the proposed mining tax, concerns about wage negotiations and a production
miss in H1. We believe that the correction outweighs the negative news flow
and hence provides an attractive opportunity to buy, given that the structural
story of Coal India remains intact.
Cairn India (Buy, PT Rs385.00)
We add Cairn India to our portfolio with a 2% weight. We believe that the deal
overhang surrounding the stock has now been cleared. We like the stock, given
that it remains the most leveraged play on increased oil production and benefits
from the depreciating rupee. The stock has corrected recently; we see limited
downside at current valuations and expect the stock to move up.
Cipla (Buy, PT Rs340.00)
We add Cipla to our portfolio with a 2% weight. We believe valuations are now
reasonable and expect the company to benefit from sharp depreciation in the
currency.
Bajaj Electricals (Buy, PT Rs285.00)
We add Bajaj Electricals to our portfolio with a 1% weight. Bajaj Elec. is the
leader in consumer electrical appliances in India and we believe it is well poised
to continue to gain market share in a highly fragmented consumer electrical
appliances market. The stock is currently trading at the lower end of its
valuation band (11x/8x FY12E/FY13E EPS), which is attractive given the ~30%
FY12-14 EPS CAGR.
Stock deletions
Maruti Suzuki (Buy, PT Rs1420.00)
We remove Maruti Suzuki from our model portfolio. We see near term
headwinds in the form of sharp appreciation of the Yen, impacting margins. We
are significantly below consensus in terms of FY12E earnings. The stock has
underperformed the Nifty by 0.5% since inclusion.
Tata Steel (Neutral, PT Rs460.00)
We remove Tata Steel from our model portfolio as we have recently
downgraded the stock to a Neutral from a Buy, as we lower earnings estimates
led by lower EBITDA/t from Corus, lower sales volume in India and increased
capex in FY12/13. The stock has underperformed the market by 14% since its
inclusion in the portfolio.
Ranbaxy (Buy, PT Rs630.00)
We replace Ranbaxy with Cipla in our model portfolio as we see Cipla as a
more defensive play. Ranbaxy has outperformed the market by 9% since its
inclusion in the portfolio and we do not expect too much upside in the near term.
Apollo Tyres (Buy, PT Rs84.00)
We remove Apollo Tyres from our model portfolio as we shift weight to stocks
that represent better alpha opportunity and reduce the overall weight allocated to
mid-caps. The stock has underperformed the market by 12.5% since its inclusion
in the portfolio.
DB Corp (Buy, PT Rs300.00)
We remove DB Corp from our model portfolio as we shift weight to stocks that
represent better alpha opportunity and reduce the overall weight allocated to
mid-caps. The stock has underperformed the Nifty by 6% since its inclusion in
the portfolio.
UBS India model portfolio performance
As at 10 October, 2011, our portfolio had generated a return of 84.8% since
launch. This compares with the Sensex’s 71.3%, Nifty’s 66.9%; and the MSCI
India’s 68.6% (as on 7 October 2011). Key sectors that have outperformed
compared with the Nifty are Autos (95.7% outperformance), Banks and FIs
(76.5%) and Materials (44.2%), while Real Estate (-101.9% underperformance),
Petrochemicals (-62.6%), Oil and Gas (-60.2%) and Telecom (-56.2%) have
underperformed.
Statement of Risk
We believe the risks to our long-term estimates (for example, for corporate
earnings) and macroeconomic variables (such as GDP growth rates and
inflation) arise from any economic slowdown, weakening currency, global
economic events, and government policy changes.
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