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India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Strategy
India
Desperate times, desperate measures. We change our Model Portfolio to reflect the
Government’s deteriorating fiscal position and rebound in stock prices over the past
few weeks. We focus on capital preservation. The Government may increase the limit
on FII investment in G-Secs to prevent a yield shock from higher-than-expected fiscal
deficit and borrowings. However, the situation demands a vigorous response in the
form of tough reforms and correction of fiscal imbalances rather than expediency
Very high fiscal pressure in 2HFY12E; BOP vulnerable given questionable exports
The Government may need to resort to desperate tactics to shore up revenues in 2HFY12E and
prevent a yield shock. Taxation revenues have grown 10.3% in 1HFY12 against the Government’s
targeted 17.3% for FY2012BE. Likely slowdown in 2HFY12E may impact indirect taxes, which
have held up quite well in 1HFY12. The Government has raised only `12 bn out of its proposed
`400 bn divestment target and even other non-tax revenues will fall short of expectations. On the
other hand, subsidies will surprise negatively without swift action. We have revised FY2012E
GFD/GDP to 5.7% from 5.4% previously, which was anyway well above the Government’s 4.6%
estimate.
Higher FII limits, taxation, fuel price various alternatives to manage a worsening situation
Increase in FII limit in G-Secs (currently at US$10 bn) may be one way to prevent a sharp increase
in yields. The Government may also raise taxes on certain products and raise prices of fuels to
mitigate impact on subsidies, fiscal deficit and Government borrowing. The Government may not
have the luxury of waiting until the next Union Budget due on February 28, 2012. We estimate
FY2012E oil under-recoveries at `1.21 tn without further fuel price hikes and the Government’s
share at `628 bn even assuming share of upstream companies at 45% of total under-recoveries.
Changing Model Portfolio to reflect concerns about further deterioration in the fiscal position
We have reduced weight on M&M, one of our perennial favorites, fearing fuel price increases and
additional taxation on diesel vehicles and noting unfavorable reward-risk balance (8% upside to
FY2013E fair valuation). We have replaced it with HUL (another rural proxy) in our Top-10 list. We
have also reduced weight on ICICI Bank, BOB & PNB and STLT and replaced them in our Top-10
list with IndusInd Bank & Yes Bank, NHPC and RIL. The top 10 stocks (by weight) account for 70%
of our Model Portfolio highlighting the dearth of quality investible ideas currently; this bias
towards a few large-cap. blue chips has been the case for the past several months.
Rupee is another big worry; prefer stocks with natural hedge against Rupee depreciation
We continue to avoid stocks with high foreign-currency borrowings as we have had concerns
about India’s CAD/BOP given (1) quality and sustainability of India’s exports and (2) large
redemptions of overseas borrowings of several Indian companies. Our Model Portfolio has a bias
towards stocks with overseas revenues, revenues linked to global prices and positive contribution
margin (revenues less RM > FC loans) if prices of both products and raw materials are in US Dollars.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Strategy
India
Desperate times, desperate measures. We change our Model Portfolio to reflect the
Government’s deteriorating fiscal position and rebound in stock prices over the past
few weeks. We focus on capital preservation. The Government may increase the limit
on FII investment in G-Secs to prevent a yield shock from higher-than-expected fiscal
deficit and borrowings. However, the situation demands a vigorous response in the
form of tough reforms and correction of fiscal imbalances rather than expediency
Very high fiscal pressure in 2HFY12E; BOP vulnerable given questionable exports
The Government may need to resort to desperate tactics to shore up revenues in 2HFY12E and
prevent a yield shock. Taxation revenues have grown 10.3% in 1HFY12 against the Government’s
targeted 17.3% for FY2012BE. Likely slowdown in 2HFY12E may impact indirect taxes, which
have held up quite well in 1HFY12. The Government has raised only `12 bn out of its proposed
`400 bn divestment target and even other non-tax revenues will fall short of expectations. On the
other hand, subsidies will surprise negatively without swift action. We have revised FY2012E
GFD/GDP to 5.7% from 5.4% previously, which was anyway well above the Government’s 4.6%
estimate.
Higher FII limits, taxation, fuel price various alternatives to manage a worsening situation
Increase in FII limit in G-Secs (currently at US$10 bn) may be one way to prevent a sharp increase
in yields. The Government may also raise taxes on certain products and raise prices of fuels to
mitigate impact on subsidies, fiscal deficit and Government borrowing. The Government may not
have the luxury of waiting until the next Union Budget due on February 28, 2012. We estimate
FY2012E oil under-recoveries at `1.21 tn without further fuel price hikes and the Government’s
share at `628 bn even assuming share of upstream companies at 45% of total under-recoveries.
Changing Model Portfolio to reflect concerns about further deterioration in the fiscal position
We have reduced weight on M&M, one of our perennial favorites, fearing fuel price increases and
additional taxation on diesel vehicles and noting unfavorable reward-risk balance (8% upside to
FY2013E fair valuation). We have replaced it with HUL (another rural proxy) in our Top-10 list. We
have also reduced weight on ICICI Bank, BOB & PNB and STLT and replaced them in our Top-10
list with IndusInd Bank & Yes Bank, NHPC and RIL. The top 10 stocks (by weight) account for 70%
of our Model Portfolio highlighting the dearth of quality investible ideas currently; this bias
towards a few large-cap. blue chips has been the case for the past several months.
Rupee is another big worry; prefer stocks with natural hedge against Rupee depreciation
We continue to avoid stocks with high foreign-currency borrowings as we have had concerns
about India’s CAD/BOP given (1) quality and sustainability of India’s exports and (2) large
redemptions of overseas borrowings of several Indian companies. Our Model Portfolio has a bias
towards stocks with overseas revenues, revenues linked to global prices and positive contribution
margin (revenues less RM > FC loans) if prices of both products and raw materials are in US Dollars.
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