India Strategy : In Twilight zone; India macro-market outlook :Emkay

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India Strategy

India Strategy In Twilight zone; India macro-market outlook Summary: India macro-market outlook ·      New Normal is flatter growth: The sustenance of high inflation of over 9% even while GDP growth slowed to 7.7% in Q1FY12 (7.2% adjusted) indicates that the non-inflationary (sub 5% inflation) GDP growth in the current context is below 7%. The new normal seems to be around 7-7.5%. ·      Near term risks are elevated: Adverse global macro-financial and domestic disequilibrium viz. political scenario, policy inertia, over-hawkish RBI and elevated costs of production & consumption, imply downside risk to growth in FY12-FY13. Re-emergence of Twin Deficit problem is a fundamental risk; Expect FY12E at 7% with downside bias; 6-7% growth over next 2-3 quarters. FY13E unlikely to be better than 7.5%, exposed to global risks §         Sensitivity to global slowdown: India GDP growth (ex agriculture) show high elasticity with US and Euro zone real GDP growth of 1.2 and 1.4 respectively §         Inflation: Structural upside dominating cyclical downside; Central tendency-8% (+/- 0.6%) by Mar 2012, 8.3% by Dec 2011 and 6% by Apr 2012 §         INR/USD: Slide in INR not surprising; High probability of further 4% weakening §         Monetary policy: On hold could migrate into easing stance; high possibility beyond 6 months ·      Earning downgrade: Consensus Sensex EPS estimate for FY13E has contracted 10% since Apr 2011, higher than 9.3% for FY12E; Lagged impact from economic slowdown and global macro-financial instability will imply further downgrades; “New Normal” implies new LT trend earnings growth of 10-12% vs the usual 15-20% ·      Sensex target-High probability of correction: Average Sensex EPS for FY12E & FY13E (currently at 1257) on further 5% cut will be 1194; With 1SD below long term mean of 14x  a reasonable range for Sensex is 14500-16700; At 1194 Sensex earning yield is 6.9%, nearly 160bp lower than 2-year Gsec yield. Convergence would require 19% correction or substantial Gsec bull run at the front end ·      Strategy-Stay defensive longer: We remain underweight on Banking & financials, Engineering & Capital Goods, Infra, Power and Real Estate. Overweight Agri-input, FMCG & selectively on IT and neutral on Reliance, Pharma, Autos, Telecom and Cement. Greater portfolio risk taking should happen when (1) there is macro visibility or (2) earnings downgrades are over or (3) when valuations become attractive, None of these are evident now.