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India Equity Research Reports, IPO and Stock News
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hEDGE
The alternative insights monthly
January view: New Year, New Hope
Leverage at low levels
Uptick in valuation dispersion indicator
What to expect in 2012 from India?
IT: Moderating growth
Auto: Weakness spreads
Flashback CY11
CY11 started with Nifty at 6130 and optimism at its peak. Industry’s Nifty targets
for the year were 7K+ and USD/INR was at 44. We all know by now how CY11
actually panned out. An ailing global economy along with a cluster of domestic
concerns (inflation, high rates, reforms backlog, slowdown and falling currency)
ensured that the year was one of the worst (if not the worst). Indian equity market
capitalization is down ~24% in CY11. Flight to safety and a weakening balance of
trade have bludgeoned the currency to all time low versus the greenback—INR has
depreciated ~16.75% to the USD in CY11. GDP growth fell to a 2-year low of ~6.9%
YoY in Q2FY12 (against 7.7% in Q1FY12). Moreover, most observers, taking into
consideration the ongoing global slowdown and domestic concerns, have resorted
to earnings downgrades across companies. The pessimism in the year was at the
extreme with 9 out of 12 months closing in the red, which is the highest negative
monthly closing in Nifty’s history. Such pessimism was seen before in CY95 and
CY01 with 8 months closing in the red. CY12 is beginning with Nifty at 4625 and
optimism at ebb.
Gilt funds had a good run last year. Barring the blip towards the end, gold for the
most part was one of the most sought after asset classes. The performance of
equities is better summed up in our earlier lines. We start CY12 with the world
economy at the crossroads. Emerging markets (EMs) will look to put growth back
on the track. Days of monetary easing in EMs are likely to be back.
India : What to expect in 2012?
Monetary easing on the cards along with currency at all time low of 52 is a silver lining for fresh investments in the new year.
With state elections around the corner and general elections later, industry has least expectations from the government on the
reforms front.
Is the currency a pro or con?
In CY11, the Nifty corrected ~24% and ~38% in USD terms. This is the second worst CY for Indian markets. Currency at 52 levels
will be bait when fresh foreign funds allocations are made in January.
Monetary easing on the horizon
With the inflation trajectory now decelerating, industry now definitely expects RBI to lighten its noose around rates. Slowdown in
economic growth also provides a strong case for easing in the days ahead. Moreover, Brazil and China have already started
cutting cash reserve requirements for banks. Easing monetary policy in India should come as a big boost to the strong
consumption story in India.
Revival in foreign fund flows
FII outflow in CY11 was USD0.5bn. FII invested USD5.1bn via the primary market while they were net sellers of USD5.6bn in
secondary markets. Revival in the currency coupled with a reversal in the rate cycle will be instrumental in attracting flows back
into the country.
Reforms backlog to stay
Logjam on the policy front has been one of the key deterrents for growth. The government has probably limited time to push for
reforms. 2012 will witness the most crucial elections in key states. Assembly elections in Uttar Pradesh will be followed by
elections in Punjab. Incumbent governments usually resort to populist measures before elections to serve their political interests.
In CY09 also, the government had taken crucial decisions such as wage hikes for central government employees, pre-election
spending, farm loan waivers and expansion of social security schemes like rural employment. DTC, GST, food security bill, land
acquisition bill, and SEB reforms will be some of the key agendas which the government has on its plate. We do not expect the
reform impasse to end this year as well.
Sectoral front
FMCG has been the outright leader. The list of laggards is long and led by capital goods and metals. However, fortunes should
change in CY12, which is widely anticipated to be an environment of falling prices and rates. Benign inflation should benefit
consumption themes like FMCG and pharma. But, the going will be tough for the auto pack. Four wheelers will continue to feel
the heat of slowdown. However, prospects for two wheelers appear better. Nevertheless, a softening rate cycle augurs well for
the industry. INR depreciation in the last quarters of CY11 has proved to be a boon for IT. Slow down in decision making is a
concern for tier-1 companies. Moderation in pricing scenario will force Street to factor in lower growth assumptions.
For telecom players, a weak INR has wiped out nearly 60% of cash-flow benefit from recent tariff hikes. The only factor in favour
of the sector seems to be a return of pricing power in 2G voice. A slowdown in capital expenditure led by a moderation in cycle
has affected industrials. Tepid growth in order books will hamper revenue visibility next year as well.
The New Year will be crucial for the power sector as the market will look for cues on critical issues like coal allocation and SEB
reforms. Volatility will be the order of the day for materials. Any form of monetary easing in China and India should definitely aid
demand globally and locally, respectively. However, slowdown in Europe will keep a check on such advances.
Oil & Gas: Light products lead GRM revival (Our oil & gas analyst Niraj Mansingka)
During December, volatility in crude oil prices reduced substantially with crude averaging USD108.9/bbl. Sequentially, crude
prices declined from USD112.5/bbl in Q2FY12 to USD109.3/bbl in Q3FY12 due to concerns on growth in the European region.
Incrementally, OPEC’s production quota increase to 30.0mbpd will keep prices under check, excluding geopolitical factors like
tension in Nigeria, sanctions on Iran etc. Recovery in MoM gasoline-crude cracks aided GRMs, but simultaneous decline in dieselcrude
and jet kerosene-crude cracks hindered expansion in GRMs. MoM, Indian Simple GRMs were down USD0.3/bbl to
USD1.68/bbl. Indian Complex GRMs, however, recovered by USD0.7/bbl to USD10.6/bbl led by revival in gasoline and naphtha
spreads. In marketing, diesel/kerosene under recoveries spiked 17% and 10% MoM, respectively, due to INR depreciation while
gasoline registered marginal over recovery of INR0.04/lt. Our top picks are ONGC which has valuation support even though we
factored in net realization of USD42/bbl, the lowest in the past six years. We also prefer BPCL in view of our hypothesis of
correction in crude prices. We prefer BPCL despite HPCL’s high leverage to correction in crude prices due to the latter’s ongoing
low-return capex (Euro IV) which is yet to be completed.
IT: Moderating growth (Our IT analyst Ganesh Duvvuri)
INR depreciation in the last quarter of CY11 has proved to be a boon for IT and consequently the CNX IT Index has outperformed
the Nifty by ~18% in the last three months of CY11. Our interaction with tier-1 companies leads us to believe that decision making
has slowed down and ramp-ups are running behind schedule. The pricing scenario has moderated with even inflation linked
increases being denied. We believe these concerns will force street to factor lower growth assumptions and build in marginal
price decline. We expect revenue growth to moderate in Q3FY12 to about 2-3% QoQ for Tier-1 companies against earlier
expectations of 5% at the beginning of the quarter. Volume growth expectation for TCS has moderated to about 3.5% QoQ for
Q3FY12 and Q4FY12, from the earlier 5%. We believe it will be difficult for Tier-1 companies to replicate FY12 growth in FY13
largely on clients’ decision-making inertia and not structural impairment of demand. We continue to prefer TCS due to its strong
deal wins in the recent past and HCLT for its valuation support and a strong order book. Wipro is trading at a 5% discount to
Infosys and needs to deliver on the expectation of an improvement in revenue growth trajectory. Infosys, we believe, will face
near term pressure due to dependence on short-term projects and higher exposure to discretionary spending.
Auto: Weakness spreads (Our auto analyst Sachin Gupta)
December 2011 auto volumes indicate a slowdown in demand for passenger vehicles and car makers continued to reel under
adverse macro outlook and poor demand. Two wheelers also seem to be losing steam with Bajaj Auto (BAL) and TVS Motors
reporting weak motorcycle sales. BAL management has lowered its FY12 sales guidance to 4.4 mn units from 4.6 mn units,
suggesting weakness. Concerns are also emerging on rural demand front, since sales of mopeds (primarily a rural product) dipped
to 2% versus YTD growth of 12%. Hero Motocorp has defied the trend with rising channel inventories, raising questions over
quality of growth. In line with expectations, LCVs continued to grow upward of 25% as the hub-and-spoke model is being
implemented in smaller towns. However, demand for HCVs has started to taper off as the base benefit is fading. After a weak
November, tractor demand recovered marginally in December. Mahindra & Mahindra expects demand to rebound from Q4FY12
since Q4 is usually its strongest quarter.
Technical view: Year-end positivity (Our technical analyst Tejas J Shah)
Bears gave a fitting end to the ‘annuus horriblis’ 2011 by pulling the benchmark index down 6.5%. The early strength in December
soon reversed from 5100 (61.8% retracement of the down move from 5400 to 4639) taking the index below its previous low of
4639 towards a new low for the year at 4531 which coincided with an earlier major swing low. The market did exhibit a ‘Santa
Claus’ rally back towards 4800, but that too failed in the last week as some of the gains were given up. For the second time in four
years, the Nifty has ended the year with substantial losses as well as four straight quarters of losses (previously seen in 2008). This
clearly reinforces that the bear market that began in November 2010 is likely to extend in 2012.
Coming into the New Year, the sentiment is fairly pessimistic as the consensus calls for lower prices. This can backfire with a
smart rally on the index as many heavyweight sectors are trading in oversold territory and awaiting a technical rebound. For the
index per se, one needs to watch for a break above 4745 (21 DEMA) to confirm an extension of the upmove from the recent low
of 4531 towards 4920. Short-term momentum oscillators that had rolled bearish in December have whipsawed back into buy
signals that will aid the index advance. We believe the first half of the month is likely to be bullish with weakness pouting in the
second half that should resume the bear trend and eventually break into new lows for a target of 4400 and 4350.
Global events
A flurry of positive economic data from US last month bolstered global dependence on Uncle Sam. US household
personal savings have dipped with consumer spending inching higher and improving employment data. Vehicle sales
have jumped to ~13.6 mn in November, sixth straight monthly gain in a row over previous month. Unemployment rate
also fell to 8.6% in November, lowest since March 2009, as private employers continued to add jobs at a healthy pace.
During the EU summit last month, leaders made meaningful progress on fiscal integration. Although too much stress on
fiscal austerity without growth-boosting measures could worsen the debt dynamics. UK decided not to be a part of the
“fiscal compact” agreed in the EU Summit. UK’s veto is a significant political event as it leads to creation of a two-tier
EU with 23 members moving towards further integration while others (primarily UK) choosing to maintain status quo.
Emerging markets’ performance was mixed, KLCI being the biggest gainer (up ~4.0%) among emerging markets.
Continuing the downtrend, Indian benchmark indices gave negative returns in December.
Shanghai (down 5.7%) underperformed every emerging market with talks of slowdown intensifying.
Among developed markets, Hang Seng (up ~2.5%) was the biggest gainer. Laggards were led by Kospi (down ~1.2%) and
NASDAQ (down ~0.6%).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
hEDGE
The alternative insights monthly
January view: New Year, New Hope
Leverage at low levels
Uptick in valuation dispersion indicator
What to expect in 2012 from India?
IT: Moderating growth
Auto: Weakness spreads
Flashback CY11
CY11 started with Nifty at 6130 and optimism at its peak. Industry’s Nifty targets
for the year were 7K+ and USD/INR was at 44. We all know by now how CY11
actually panned out. An ailing global economy along with a cluster of domestic
concerns (inflation, high rates, reforms backlog, slowdown and falling currency)
ensured that the year was one of the worst (if not the worst). Indian equity market
capitalization is down ~24% in CY11. Flight to safety and a weakening balance of
trade have bludgeoned the currency to all time low versus the greenback—INR has
depreciated ~16.75% to the USD in CY11. GDP growth fell to a 2-year low of ~6.9%
YoY in Q2FY12 (against 7.7% in Q1FY12). Moreover, most observers, taking into
consideration the ongoing global slowdown and domestic concerns, have resorted
to earnings downgrades across companies. The pessimism in the year was at the
extreme with 9 out of 12 months closing in the red, which is the highest negative
monthly closing in Nifty’s history. Such pessimism was seen before in CY95 and
CY01 with 8 months closing in the red. CY12 is beginning with Nifty at 4625 and
optimism at ebb.
Gilt funds had a good run last year. Barring the blip towards the end, gold for the
most part was one of the most sought after asset classes. The performance of
equities is better summed up in our earlier lines. We start CY12 with the world
economy at the crossroads. Emerging markets (EMs) will look to put growth back
on the track. Days of monetary easing in EMs are likely to be back.
India : What to expect in 2012?
Monetary easing on the cards along with currency at all time low of 52 is a silver lining for fresh investments in the new year.
With state elections around the corner and general elections later, industry has least expectations from the government on the
reforms front.
Is the currency a pro or con?
In CY11, the Nifty corrected ~24% and ~38% in USD terms. This is the second worst CY for Indian markets. Currency at 52 levels
will be bait when fresh foreign funds allocations are made in January.
Monetary easing on the horizon
With the inflation trajectory now decelerating, industry now definitely expects RBI to lighten its noose around rates. Slowdown in
economic growth also provides a strong case for easing in the days ahead. Moreover, Brazil and China have already started
cutting cash reserve requirements for banks. Easing monetary policy in India should come as a big boost to the strong
consumption story in India.
Revival in foreign fund flows
FII outflow in CY11 was USD0.5bn. FII invested USD5.1bn via the primary market while they were net sellers of USD5.6bn in
secondary markets. Revival in the currency coupled with a reversal in the rate cycle will be instrumental in attracting flows back
into the country.
Reforms backlog to stay
Logjam on the policy front has been one of the key deterrents for growth. The government has probably limited time to push for
reforms. 2012 will witness the most crucial elections in key states. Assembly elections in Uttar Pradesh will be followed by
elections in Punjab. Incumbent governments usually resort to populist measures before elections to serve their political interests.
In CY09 also, the government had taken crucial decisions such as wage hikes for central government employees, pre-election
spending, farm loan waivers and expansion of social security schemes like rural employment. DTC, GST, food security bill, land
acquisition bill, and SEB reforms will be some of the key agendas which the government has on its plate. We do not expect the
reform impasse to end this year as well.
Sectoral front
FMCG has been the outright leader. The list of laggards is long and led by capital goods and metals. However, fortunes should
change in CY12, which is widely anticipated to be an environment of falling prices and rates. Benign inflation should benefit
consumption themes like FMCG and pharma. But, the going will be tough for the auto pack. Four wheelers will continue to feel
the heat of slowdown. However, prospects for two wheelers appear better. Nevertheless, a softening rate cycle augurs well for
the industry. INR depreciation in the last quarters of CY11 has proved to be a boon for IT. Slow down in decision making is a
concern for tier-1 companies. Moderation in pricing scenario will force Street to factor in lower growth assumptions.
For telecom players, a weak INR has wiped out nearly 60% of cash-flow benefit from recent tariff hikes. The only factor in favour
of the sector seems to be a return of pricing power in 2G voice. A slowdown in capital expenditure led by a moderation in cycle
has affected industrials. Tepid growth in order books will hamper revenue visibility next year as well.
The New Year will be crucial for the power sector as the market will look for cues on critical issues like coal allocation and SEB
reforms. Volatility will be the order of the day for materials. Any form of monetary easing in China and India should definitely aid
demand globally and locally, respectively. However, slowdown in Europe will keep a check on such advances.
Oil & Gas: Light products lead GRM revival (Our oil & gas analyst Niraj Mansingka)
During December, volatility in crude oil prices reduced substantially with crude averaging USD108.9/bbl. Sequentially, crude
prices declined from USD112.5/bbl in Q2FY12 to USD109.3/bbl in Q3FY12 due to concerns on growth in the European region.
Incrementally, OPEC’s production quota increase to 30.0mbpd will keep prices under check, excluding geopolitical factors like
tension in Nigeria, sanctions on Iran etc. Recovery in MoM gasoline-crude cracks aided GRMs, but simultaneous decline in dieselcrude
and jet kerosene-crude cracks hindered expansion in GRMs. MoM, Indian Simple GRMs were down USD0.3/bbl to
USD1.68/bbl. Indian Complex GRMs, however, recovered by USD0.7/bbl to USD10.6/bbl led by revival in gasoline and naphtha
spreads. In marketing, diesel/kerosene under recoveries spiked 17% and 10% MoM, respectively, due to INR depreciation while
gasoline registered marginal over recovery of INR0.04/lt. Our top picks are ONGC which has valuation support even though we
factored in net realization of USD42/bbl, the lowest in the past six years. We also prefer BPCL in view of our hypothesis of
correction in crude prices. We prefer BPCL despite HPCL’s high leverage to correction in crude prices due to the latter’s ongoing
low-return capex (Euro IV) which is yet to be completed.
IT: Moderating growth (Our IT analyst Ganesh Duvvuri)
INR depreciation in the last quarter of CY11 has proved to be a boon for IT and consequently the CNX IT Index has outperformed
the Nifty by ~18% in the last three months of CY11. Our interaction with tier-1 companies leads us to believe that decision making
has slowed down and ramp-ups are running behind schedule. The pricing scenario has moderated with even inflation linked
increases being denied. We believe these concerns will force street to factor lower growth assumptions and build in marginal
price decline. We expect revenue growth to moderate in Q3FY12 to about 2-3% QoQ for Tier-1 companies against earlier
expectations of 5% at the beginning of the quarter. Volume growth expectation for TCS has moderated to about 3.5% QoQ for
Q3FY12 and Q4FY12, from the earlier 5%. We believe it will be difficult for Tier-1 companies to replicate FY12 growth in FY13
largely on clients’ decision-making inertia and not structural impairment of demand. We continue to prefer TCS due to its strong
deal wins in the recent past and HCLT for its valuation support and a strong order book. Wipro is trading at a 5% discount to
Infosys and needs to deliver on the expectation of an improvement in revenue growth trajectory. Infosys, we believe, will face
near term pressure due to dependence on short-term projects and higher exposure to discretionary spending.
Auto: Weakness spreads (Our auto analyst Sachin Gupta)
December 2011 auto volumes indicate a slowdown in demand for passenger vehicles and car makers continued to reel under
adverse macro outlook and poor demand. Two wheelers also seem to be losing steam with Bajaj Auto (BAL) and TVS Motors
reporting weak motorcycle sales. BAL management has lowered its FY12 sales guidance to 4.4 mn units from 4.6 mn units,
suggesting weakness. Concerns are also emerging on rural demand front, since sales of mopeds (primarily a rural product) dipped
to 2% versus YTD growth of 12%. Hero Motocorp has defied the trend with rising channel inventories, raising questions over
quality of growth. In line with expectations, LCVs continued to grow upward of 25% as the hub-and-spoke model is being
implemented in smaller towns. However, demand for HCVs has started to taper off as the base benefit is fading. After a weak
November, tractor demand recovered marginally in December. Mahindra & Mahindra expects demand to rebound from Q4FY12
since Q4 is usually its strongest quarter.
Technical view: Year-end positivity (Our technical analyst Tejas J Shah)
Bears gave a fitting end to the ‘annuus horriblis’ 2011 by pulling the benchmark index down 6.5%. The early strength in December
soon reversed from 5100 (61.8% retracement of the down move from 5400 to 4639) taking the index below its previous low of
4639 towards a new low for the year at 4531 which coincided with an earlier major swing low. The market did exhibit a ‘Santa
Claus’ rally back towards 4800, but that too failed in the last week as some of the gains were given up. For the second time in four
years, the Nifty has ended the year with substantial losses as well as four straight quarters of losses (previously seen in 2008). This
clearly reinforces that the bear market that began in November 2010 is likely to extend in 2012.
Coming into the New Year, the sentiment is fairly pessimistic as the consensus calls for lower prices. This can backfire with a
smart rally on the index as many heavyweight sectors are trading in oversold territory and awaiting a technical rebound. For the
index per se, one needs to watch for a break above 4745 (21 DEMA) to confirm an extension of the upmove from the recent low
of 4531 towards 4920. Short-term momentum oscillators that had rolled bearish in December have whipsawed back into buy
signals that will aid the index advance. We believe the first half of the month is likely to be bullish with weakness pouting in the
second half that should resume the bear trend and eventually break into new lows for a target of 4400 and 4350.
Global events
A flurry of positive economic data from US last month bolstered global dependence on Uncle Sam. US household
personal savings have dipped with consumer spending inching higher and improving employment data. Vehicle sales
have jumped to ~13.6 mn in November, sixth straight monthly gain in a row over previous month. Unemployment rate
also fell to 8.6% in November, lowest since March 2009, as private employers continued to add jobs at a healthy pace.
During the EU summit last month, leaders made meaningful progress on fiscal integration. Although too much stress on
fiscal austerity without growth-boosting measures could worsen the debt dynamics. UK decided not to be a part of the
“fiscal compact” agreed in the EU Summit. UK’s veto is a significant political event as it leads to creation of a two-tier
EU with 23 members moving towards further integration while others (primarily UK) choosing to maintain status quo.
Emerging markets’ performance was mixed, KLCI being the biggest gainer (up ~4.0%) among emerging markets.
Continuing the downtrend, Indian benchmark indices gave negative returns in December.
Shanghai (down 5.7%) underperformed every emerging market with talks of slowdown intensifying.
Among developed markets, Hang Seng (up ~2.5%) was the biggest gainer. Laggards were led by Kospi (down ~1.2%) and
NASDAQ (down ~0.6%).
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