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India Equity Research Reports, IPO and Stock News
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Cyclical growth problems: India has been through a tumultuous time over the past three years – slow pace of reforms has created doubts about the structural story, corruption scandals have dampened business sentiment, global turmoil has further hurt investment confidence, and high inflation (arguably due to high commodity prices, fiscal stimulus, and lack of storage strategies for perishable foods) has prompted rate hikes and cuts in growth forecasts.
Structural story intact: Investors have not abandoned the market and, to us, this is the right response to the mini-crisis India is going through. The long-term growth story may appear chaotic to the casual observer. However, India has transitioned. Robust growth (earnings CAGR of c15% over the coming decade) driven by productivity upside, trailing wealth creation, and a more considered investment cycle is underway (=> positive ROE surprise).
Long-term story not priced in: This also is a recipe for strong equity returns because we think that the growth story is not in the price, i.e., equity valuations look attractive. Stock selection should still occupy focus. Volatility in the coming three to six months and even a sharp decline in absolute terms if the global markets tumble is still likely.
Key triggers: Our proprietary market timing and sentiment indicators are perched in buy zone.
Corporate activity is strong.
Policy expectations are low.
Good monsoons may moderate food inflation.
Valuations look compelling on an absolute basis.
Interest rates could be peaking.
Tail risks not in the price.
DM world problems could keep pegging back equities.
Weak domestic policy response further hindered by alleged corruption scandals is a continuing worry.
Growth: Inflation and high rates are impediments.
Sensex target: 11% to Dec-11 and 34% to Dec-12.
During the 2008 crisis, Indian earnings outperformed, but equities fell due to a large outflow of capital. A recession with no seizing up of capital markets is India’s best case in the context. Massive global stimulus or a breakdown in capital markets will hurt India on a relative basis a la 2008.
Still a stock picker’s market
We prefer domestic over global cyclicals with emphasis on discretionary names. Top picks: DRRD, INFO and MM.
Summary of Our Views
Key Investor Debates
Equity valuations are not cheap enough – our view is equity valuations are looking as good as they have in several years, especially for the broad market.
Growth is slowing due to high inflation and global headwinds plus tepid domestic capex and negative earnings revisions will cap equity upside. Reflexivity is at work – lower share prices are affecting growth and vice versa. Earnings have support from decade-low gross margins and strong balance sheets. We think broad market earnings growth may have troughed. ROE is off lows and bears upside risk given balance sheet discipline.
Equity returns are over-dependent on foreign flows – the current account deficit is a problem. Global winds are critical to outcomes for Indian equities. India’s high rates has levered it to a DXY rally.
Politics might play spoilsport. We think expectations are low, and so a positive surprise is possible.
What’s in the Price?
Slowing growth seems to be in the price. The market appears to be looking for a sharp drop in nominal growth.
Our residual income model for the Sensex implies an ERP of 6.3, meaning below fair level valuations (relative to our view). At a 10-year bond yield of 8.3%, this denotes a long-term return of c15%. Future growth has been assigned 46% of the MSCI Index value, which is below the five-year trailing average. Several stocks are implying very low long-term growth rates.
The market’s P/B is implying a long-term return of 15%, which we think is a good return in the context of India’s equity risk premium. That said, tail risks are not in the price if the VaR indicator is a guide.
Trades and Themes
Sectors: OW: Consumer Discretionary., Energy, Technology Utilities
UW: Consumer Staples, Healthcare, Financials, Materials
Neutral: Industrials, Telecoms
Stocks: Favorites include DRRD, INFO and MM (see page 5 for Focus List and page 6 for stocks to avoid picked by our analysts).
Themes
Focus on stock picking – macro influence on stock prices has already peaked.
Small- and mid-cap look very attractive.
Technology and discretionary consumption stocks look the most interesting macro stories.
Industrials under threat from slowing capex but share prices look badly hit.
Market Outlook: The probability-weighted outcome for the BSE Sensex is 18,850 for December 2011, 11% above the current level. The probability-weighted outcome for the BSE Sensex is 22,750 for December 2012, 34% above the current level.
Base Case (60% probability) BSE Sensex: 21,022
Our base case calls for fiscal prudence, policy initiatives in FDI, infrastructure, taxation and deregulation, no global financial crisis with range bound crude oil prices and reasonable capital flows, a pause by the RBI in early 2012 as inflation peaks and moderate equity supply (less than US$25bn). A slower global growth is a big benefit for corporate margins in India as well as inflation.
Bull Case (30% probability) BSE Sensex: 28,782
Our bull case assumes global calm and a measured recovery in global growth, strong domestic policy action, range-bound crude oil prices, rate cuts in response to a fall in inflation and very slow increase in equity supply. Sensex earnings growth rises to 22% for both F2012 and F2013.
Bear Case (10% probability) BSE Sensex: 14,981
Our bear case assumes weak policy action, a fragile global situation culminating into some sort of crisis and supply shock in crude oil prices causing tighter monetary policy. Sensex earnings growth falls to 12% and 8% for F2012 and F2013, respectively
Catalysts
Global risk appetite: DM growth, European issues, China hard landing, ME situation. Watch: DXY, Oil.
Domestic growth (policy announcements – RBI, government projects, reforms).
Inflation (oil prices and food prices).
Corporate performance.
Cautious positioning in the market.
Summary of Key Market Indicators
SUMMARY
Key IndicatorsViewMACROIndustrial GrowthIndustrial growth continues to slow, risk is that it falls further due to inflation/global growth issuesCurrent account deficitAppears to be reigned in but crude oil is risk. Funding risk also exists due to the fragile global situationInflation Remains sticky though the headline number could decline - risk is oil and other global commodities pricesFiscal DeficitBudgeted to decline but assumptions may turn out to be optimistic. Yet deficit is off its recent high pointCredit Deposit RatioDeclining at the marginMonetary policyAction data dependent as well as a function of how global commodity prices fare in the coming weeksGovernment actionNot strong enough but improving at the margin: Retail FDI, Urea price decontrol, Environmental clearances, SEB tariff hikesPoliticsAlleged corruption scandals have slowed down policy actionsMonsoonsMonsoons better than expected - Summer crop output heading for trend line growthGlobal risk appetiteFragile - MENA risk, DM growth, Soverign risksVALUATIONSAbsolute valuationsAttractive - ERP over 6% - consistent with strong returnsRelative valuationsApproaching long term averagesValuations relative to bondsEquities hold the edge on growth optionalityComposite ValuationsBroad market valuations look attractiveCORPORATE FUNDAMENTALSEarnings growth Pricing power low, our proprietary leading indicator suggests trough in broad market earnings growthEarnings revisionsRevisions have been negative, consensus estimates appear reasonableCapexRemains tepid due to rate hikes, growth risks and policy hiatusROEOff the low point - key debate is whether ROE is on a structural declineMARKET DYNAMICSLiquidityRemains tight but may have troughedBreadthWeakMomentumWeak - again good for future returnsHedgingPut-call ratio at highs, markets appear hedged for downside risksFlowsMixed bag - Corporates, retail buying, FIIs may not have capitulatedOwnershipHigh for FIIs relative to history, though off the peakPerformanceIndia has been neutral since the Libyan crisisStock PledgingOff highsStyleMarket focused on low beta, high quality (low capex, high FCF and ROE)
•
The stock “renting” culture of the previous decade seems behind us: Contrary to popular belief, investing (vs. speculating) has not been abandoned. Indeed, the holding period of all market participants on the aggregate has doubled in the two years. “Investors” are now holding stocks for an average of nearly three years. The shift of speculative trading from the cash market to the derivatives’ market has helped.
•
FIIs appear more committed: In the previous bull market, FIIs bought stocks but reduced holding periods as the bull market matured. In the past three years, FII ownership has deepened and lengthened.
•
Market still seeking safety of large caps: Share of Sensex trading is still rising, and this concentration of trading may mean that the broad market has not troughed if one uses just trading data as a guide.
•
Winners trade less, not more: The higher the trading velocity the poorer has been the performance of the stock over the past 12 months.
Sensex to rise and then fall
•
We use the historical relationship between our modified earnings yield gap and forward MSCI Index returns to model the path of the MSCI India historically and prospectively. As is visible from the adjoining chart, the paths are not perfectly aligned and, for sure, there is deviation during the 2007-08 bubble-crisis period. That said, the proximity in the relationship is quite visible.
•
We also use the historical relationship between the MSCI India index and the BSE Sensex to mimic the path for the BSE Sensex. The Sensex is looking at a phenomenal run up in the coming 18 months. Where the model works the best, which is the three-year forward term, the outlook appears to be getting better than a few months ago with compounded annual returns forecast at around 12%.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Cyclical growth problems: India has been through a tumultuous time over the past three years – slow pace of reforms has created doubts about the structural story, corruption scandals have dampened business sentiment, global turmoil has further hurt investment confidence, and high inflation (arguably due to high commodity prices, fiscal stimulus, and lack of storage strategies for perishable foods) has prompted rate hikes and cuts in growth forecasts.
Structural story intact: Investors have not abandoned the market and, to us, this is the right response to the mini-crisis India is going through. The long-term growth story may appear chaotic to the casual observer. However, India has transitioned. Robust growth (earnings CAGR of c15% over the coming decade) driven by productivity upside, trailing wealth creation, and a more considered investment cycle is underway (=> positive ROE surprise).
Long-term story not priced in: This also is a recipe for strong equity returns because we think that the growth story is not in the price, i.e., equity valuations look attractive. Stock selection should still occupy focus. Volatility in the coming three to six months and even a sharp decline in absolute terms if the global markets tumble is still likely.
Key triggers: Our proprietary market timing and sentiment indicators are perched in buy zone.
Corporate activity is strong.
Policy expectations are low.
Good monsoons may moderate food inflation.
Valuations look compelling on an absolute basis.
Interest rates could be peaking.
Tail risks not in the price.
DM world problems could keep pegging back equities.
Weak domestic policy response further hindered by alleged corruption scandals is a continuing worry.
Growth: Inflation and high rates are impediments.
Sensex target: 11% to Dec-11 and 34% to Dec-12.
During the 2008 crisis, Indian earnings outperformed, but equities fell due to a large outflow of capital. A recession with no seizing up of capital markets is India’s best case in the context. Massive global stimulus or a breakdown in capital markets will hurt India on a relative basis a la 2008.
Still a stock picker’s market
We prefer domestic over global cyclicals with emphasis on discretionary names. Top picks: DRRD, INFO and MM.
Summary of Our Views
Key Investor Debates
Equity valuations are not cheap enough – our view is equity valuations are looking as good as they have in several years, especially for the broad market.
Growth is slowing due to high inflation and global headwinds plus tepid domestic capex and negative earnings revisions will cap equity upside. Reflexivity is at work – lower share prices are affecting growth and vice versa. Earnings have support from decade-low gross margins and strong balance sheets. We think broad market earnings growth may have troughed. ROE is off lows and bears upside risk given balance sheet discipline.
Equity returns are over-dependent on foreign flows – the current account deficit is a problem. Global winds are critical to outcomes for Indian equities. India’s high rates has levered it to a DXY rally.
Politics might play spoilsport. We think expectations are low, and so a positive surprise is possible.
What’s in the Price?
Slowing growth seems to be in the price. The market appears to be looking for a sharp drop in nominal growth.
Our residual income model for the Sensex implies an ERP of 6.3, meaning below fair level valuations (relative to our view). At a 10-year bond yield of 8.3%, this denotes a long-term return of c15%. Future growth has been assigned 46% of the MSCI Index value, which is below the five-year trailing average. Several stocks are implying very low long-term growth rates.
The market’s P/B is implying a long-term return of 15%, which we think is a good return in the context of India’s equity risk premium. That said, tail risks are not in the price if the VaR indicator is a guide.
Trades and Themes
Sectors: OW: Consumer Discretionary., Energy, Technology Utilities
UW: Consumer Staples, Healthcare, Financials, Materials
Neutral: Industrials, Telecoms
Stocks: Favorites include DRRD, INFO and MM (see page 5 for Focus List and page 6 for stocks to avoid picked by our analysts).
Themes
Focus on stock picking – macro influence on stock prices has already peaked.
Small- and mid-cap look very attractive.
Technology and discretionary consumption stocks look the most interesting macro stories.
Industrials under threat from slowing capex but share prices look badly hit.
Market Outlook: The probability-weighted outcome for the BSE Sensex is 18,850 for December 2011, 11% above the current level. The probability-weighted outcome for the BSE Sensex is 22,750 for December 2012, 34% above the current level.
Base Case (60% probability) BSE Sensex: 21,022
Our base case calls for fiscal prudence, policy initiatives in FDI, infrastructure, taxation and deregulation, no global financial crisis with range bound crude oil prices and reasonable capital flows, a pause by the RBI in early 2012 as inflation peaks and moderate equity supply (less than US$25bn). A slower global growth is a big benefit for corporate margins in India as well as inflation.
Bull Case (30% probability) BSE Sensex: 28,782
Our bull case assumes global calm and a measured recovery in global growth, strong domestic policy action, range-bound crude oil prices, rate cuts in response to a fall in inflation and very slow increase in equity supply. Sensex earnings growth rises to 22% for both F2012 and F2013.
Bear Case (10% probability) BSE Sensex: 14,981
Our bear case assumes weak policy action, a fragile global situation culminating into some sort of crisis and supply shock in crude oil prices causing tighter monetary policy. Sensex earnings growth falls to 12% and 8% for F2012 and F2013, respectively
Catalysts
Global risk appetite: DM growth, European issues, China hard landing, ME situation. Watch: DXY, Oil.
Domestic growth (policy announcements – RBI, government projects, reforms).
Inflation (oil prices and food prices).
Corporate performance.
Cautious positioning in the market.
Summary of Key Market Indicators
SUMMARY
Key IndicatorsViewMACROIndustrial GrowthIndustrial growth continues to slow, risk is that it falls further due to inflation/global growth issuesCurrent account deficitAppears to be reigned in but crude oil is risk. Funding risk also exists due to the fragile global situationInflation Remains sticky though the headline number could decline - risk is oil and other global commodities pricesFiscal DeficitBudgeted to decline but assumptions may turn out to be optimistic. Yet deficit is off its recent high pointCredit Deposit RatioDeclining at the marginMonetary policyAction data dependent as well as a function of how global commodity prices fare in the coming weeksGovernment actionNot strong enough but improving at the margin: Retail FDI, Urea price decontrol, Environmental clearances, SEB tariff hikesPoliticsAlleged corruption scandals have slowed down policy actionsMonsoonsMonsoons better than expected - Summer crop output heading for trend line growthGlobal risk appetiteFragile - MENA risk, DM growth, Soverign risksVALUATIONSAbsolute valuationsAttractive - ERP over 6% - consistent with strong returnsRelative valuationsApproaching long term averagesValuations relative to bondsEquities hold the edge on growth optionalityComposite ValuationsBroad market valuations look attractiveCORPORATE FUNDAMENTALSEarnings growth Pricing power low, our proprietary leading indicator suggests trough in broad market earnings growthEarnings revisionsRevisions have been negative, consensus estimates appear reasonableCapexRemains tepid due to rate hikes, growth risks and policy hiatusROEOff the low point - key debate is whether ROE is on a structural declineMARKET DYNAMICSLiquidityRemains tight but may have troughedBreadthWeakMomentumWeak - again good for future returnsHedgingPut-call ratio at highs, markets appear hedged for downside risksFlowsMixed bag - Corporates, retail buying, FIIs may not have capitulatedOwnershipHigh for FIIs relative to history, though off the peakPerformanceIndia has been neutral since the Libyan crisisStock PledgingOff highsStyleMarket focused on low beta, high quality (low capex, high FCF and ROE)
•
The stock “renting” culture of the previous decade seems behind us: Contrary to popular belief, investing (vs. speculating) has not been abandoned. Indeed, the holding period of all market participants on the aggregate has doubled in the two years. “Investors” are now holding stocks for an average of nearly three years. The shift of speculative trading from the cash market to the derivatives’ market has helped.
•
FIIs appear more committed: In the previous bull market, FIIs bought stocks but reduced holding periods as the bull market matured. In the past three years, FII ownership has deepened and lengthened.
•
Market still seeking safety of large caps: Share of Sensex trading is still rising, and this concentration of trading may mean that the broad market has not troughed if one uses just trading data as a guide.
•
Winners trade less, not more: The higher the trading velocity the poorer has been the performance of the stock over the past 12 months.
Sensex to rise and then fall
•
We use the historical relationship between our modified earnings yield gap and forward MSCI Index returns to model the path of the MSCI India historically and prospectively. As is visible from the adjoining chart, the paths are not perfectly aligned and, for sure, there is deviation during the 2007-08 bubble-crisis period. That said, the proximity in the relationship is quite visible.
•
We also use the historical relationship between the MSCI India index and the BSE Sensex to mimic the path for the BSE Sensex. The Sensex is looking at a phenomenal run up in the coming 18 months. Where the model works the best, which is the three-year forward term, the outlook appears to be getting better than a few months ago with compounded annual returns forecast at around 12%.
