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India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Foreword
The year CY11 commenced on an uncertain note as dark clouds on our economy re-emerged from international quarters, and domestic factors like inflation, political and policy making
slowly turned adverse. Even then, the consensus was that FY11 growth would be maintained and FY12 growth, while a bit muted would still be encouraging. Broader market indices were
expected to maintain their sluggish/sideways trend and end the year on an encouraging note.
Come December, Murphy’s law seems to be reigning supreme in India. On the macro front, inflation is yet to be tamed (though early signs of respite emerging now) despite our central
bank using most of the tools in its arsenal. The unenviable tightrope walk of RBI has resulted in the high interest rates (inflicting pain on India Inc.) with an imminent danger of demand
slowdown. In conjunction, elevated crude prices and weakening rupee could emerge as a major derailing factor for all budgetary/financial parameters. The waters have been further
muddled by the paralysis on the policy making front resulting in big ticket capex being derailed. Consequently all growth/economic monitoring parameters are exuding negativity.
In this back drop, our markets have undergone a consistent derating along with multiple earnings downgrades. Retardation of earnings growth has been visible and uncertainty is
widespread with most observers taking it as given, that the ongoing global slowdown will have an adverse rub off on us. That brings some pertinent questions to the fore: Are we entering
a secular bear market, or is it just a corrective phase?; Is the deterioration of performance of India Inc. divergent (less/more) from what is being perceived?; The frames of reference have
moved fundamentally, but is it being adequately captured by the markets?
Indications are that our GDP growth will be lower than estimates at the beginning of the year, and mid year review conveys the same. However, the broad consensus is veering towards
7.1-7.2% level and that seems to be achievable. This despite the blip in manufacturing as services and agriculture seem to be on a stable growth path. While demand growth is slowing
down, the fears of demand destruction seem to be farfetched at the current juncture. However, sentiments convey that the same is being considered a distinct possibility.
On the corporate front, data flows indicate that large players sensed the rough road ahead and tightened operations on all fronts i.e raw material/manufacturing costing, leverage,
financial costs etc. While inflation may have become structural along with high interest rates, India Inc. seems to have aligned its operational metrics to these changed frames of reference
much faster that the capital market observers and participants. Hence, most of the numbers flow is usually met with disbelief and skeptics abound on the sustainability of the same.
We at Antique believe that while factors for being a pessimist abound, the stock markets seem to have factored the same to a large extent, much earlier. The consistent downgrade in
consensus earnings estimates for FY12e and FY13e was preempted by the flight of smart money (as usual). While the markets have exhibited a slide on a P/E basis, we believe that a
large part of the same was on account of P/B derating as India inc. was perceived to have softening RoE and risk free returns (G-Sec, Interest rates) were on a rising trend. As both these
anticipated trends fructified and are close to their turning points, a slow reversal of these two key measurable is expected. Thus, we anticipate the markets to exit the calendar year with
better P/B ratio and the rub off on P/E could come later, may be nurtured by slow and grudging earning upgrades by the street in 2HFY13e. However, a long term overhang factor could
be the derailed/deferred capex which could pose a risk to the FY13e and FY14e earnings growth and can prove to be the proverbial spoilsport.
Thus, we are of the opinion that the markets would find its sweet spot at around the P/E level of 14.5-15 and P/B level of 2.6-2.8 for our FY13e earnings
and hence our Sensex target for End CY12e is 18600-19200. However, the route to those levels would be quite tortuous. While there exists a good chance
that the valuation and earnings metrics could get revised upwards, indication of the same would be received post 2QFY13e numbers.
Key differences between 2008 and 2011
The pessimist’s outlook
Exports were 13.5% of GDP in FY08 and economy was inward dependent. Domestic consumer growth was around 8% and that ensured
sustenance of GDP growth. Circa 2011, exports are now 14.5% of GDP, post a surprising (and skeptical?) rise, and domestic demand growth
is exhibiting signs of ebbing. This has all the connotations of turning out to be a spoilsport.
The stimulus package in FY09 ensured soft interest rates, ample capital availability and excise duties were slashed. Global factors like easing
crude prices and cool off in commodities enabled alleviation of input costing pressures, thereby providing the much needed succor to India Inc.
As demand was intact, pricing power was maintained and India inc. could maintain its EBIDTA. Currently, demand is slackening, pricing power
is on the wane and raw material (commodity and crude) prices are elevated. Thus EBIDTA compression seems inevitable for FY13e.
Despite all-around problems, IIP growth had exhibited very slow slide in FY08, conveying that sentiments rather than demand was impacting
capex cycle. FY10 and FY11 performance reaped the benefits of capex undertaken during FY05-FY07. In FY12, IIP growth has exhibited a
pattern akin to falling off a cliff, portending some sort of capex derailment due to deferrals, shelving etc. Wide ranging reasons i.e unclear
policies, red tapism, elusive financial closure etc. are casting a long shadow on the viability of these projects.
On the brighter side
While growth in urban India has been slowing down because of global interlinking, rural India continues to grow on back of trickle down effect
of massive social sector spending, appreciation (and liquidation) of latent assets (land, gold etc). This coupled with buoyant agriculture
production is likely to keep the rural consumption strong. Thus, demand would be maintained, albeit with an alteration in composition pyramid
i.e small ticket items posting higher growth than large ticket items.
Easing growth rates across the world, along with absence of additional QE measures, augurs well for a cool off in commodity prices and should
provide relief on imported inflation. However, elevated crude oil could sour the situation. The vicious cycle of cost inflation could now be turning
a full circle. While runaway rupee depreciation is a worrisome factor, it is largely linked to global pain rather than India specific factors and thus
would normalize in the coming months. Thus margin concern, which is all pervasive, could be fading away in coming quarters.
Elevated Inflation for an extended period of time led to aggressive monetary policy and took toll on growth rates. However, inflation is now
exhibiting signs of reversal. While this could be a contentious call, we are of the opinion that factors like consumer pushback, increased supply
have the potential to facilitate the same. Right signals from the central bank along with improving liquidity will have a positive effect on India Inc.
especially on capex implementation front and also mitigate worries on NPA formation for the banking system. RBI’s December meet has
indicated a reversal of the hawkish stance a shift of focus to growth. However, there is no visible solution on the policy making/statutory
clearances front and this is also a potential spoiler for financial closure and capex implementation.
OUR CALL
As we enter CY12, there is a huge overhang of international factors like EU financial imbroglio, global realignment of investment risk, sluggish global growth etc. and domestic
factors like sliding GDP growth, sluggish demand, high inflation and interest rates, logjam on policy making front, derailed capex, sliding currency etc. Aditionally, sluggish capex
of the past two years has the making of curtailing our growth in the coming two years. Thus, it is justified for any capital market investor to be pessimistic and bearish.
An old adage conveys that ‘market always turn at heights of euphoria or depths of despair’, and by all means we are almost at the latter stage. In such a situation what would be
the safe havens for investors?.
Taking a call, we at Antique are of the opinion that while markets could be grappling with many factors and be exhibiting sideways movement in the first quarter of the CY12, the
stability of earnings and slow traction in growth will play out. In such an environment of skepticism, it would be prudent to invest in companies who have a good degree of advantage
on operational and financial costing fronts as sluggish demand and impaired pricing power are a systemic malaise now. At the same time one should also not shy away from loading
up on some risk as we feel that post March’12, that would play out significantly.
In such a scenario, sectors like BFSI, Auto, FMCG and IT appear have the traits of both growth and operational ruggedness. Stocks like State Bank of India(CMP INR1,623), Axis
Bank(CMP INR854), Rural Electrification Corp(CMP INR160), Mahindra & Mahindra(CMP INR690), Hero MotoCorp(CMP INR1,849), Hindustan Unilever(CMP INR401), Titan Ind.
(CMP INR169), Infosys(CMP INR2,744) and TCS(CMP INR1,160) make the case. An unorthodox story like Petronet LNG(CMP INR160) would also make the grade. While some
players in the Pharma sector may be sweetly poised as far as the currency movement and growth factors are concerned, things are too nebulous to take a call in the same, hence we
are refraining from the sector despite a positive bias.
Sectors which are out of flavor like Cap goods, Cement, Utilities and Oil and gas, have high intrinsic risk perceptions and are hence shirked by a majority. Our call is that some of the
stocks like L&T(CMP INR1,001), Shree Cements(CMP INR1,977), NTPC(CMP INR160) could have factored in most of the negatives at the current prices and could prove to be
outperformer in H2FY12, as and when the pall of gloom lifts.
Politics: The spanner in the works?
CY12, could be the beginning of election carnival
The popularity of UPA government is now at its nadir as it seems to be lurching from one mess to another. Allegation of large scale corruptions have lead to a political deadlock and policy
making log-jam seems to have dealt a severe body blow to India Inc.’s capex cycle. Political instability along with extrinsic factors like global economic shakeout, surging crude prices
currency gyrations etc have taken a toll on our economy and issues like ballooning fiscal deficit, elevated inflation, currency depreciation, large trade deficit and external debt have all
the makings of a spoilsport and could derail India’s growth story.
These issues have emerged as a common cause for the opposition parties as UPA allies to exert a high degree of pressure on the government and the scope of maneuverability is getting
increasingly reduced.
For the government, the current budget session is probably the last chance to set the ball rolling for pushing reforms as the next year could be crucial in terms of political fortunes. 2012
will witness the most crucial elections i.e. Uttar Pradesh, which has all the makings of a ‘Gamechanger’ in the Indian political arena, this will be followed by Gujarat and Punjab elections.
Governments usually resort to populist measures before elections to serve their political interests, and in 2009, the government initiated wage hikes for central government employees, preelection
spending, farm loan waivers and expansion of social security schemes like rural employment.
Most recent decisions such as the mining bill, land acquisition bill and food security bill can also be said to be playing to the gallery. However, some of the key bills critical for accelerating
India‘s growth cycle is reforms like GST, direct tax code, Companies Act, FDI in multi-brand retailing, electricity distribution reforms, etc which would take their own course to get
implemented. Though the government has recently exhibited its ability to take hard decisions such as on FDI in multi-brand retail, the road ahead is not going to be easy as a dysfunctional
parliament has ensured that almost 30 bills are pending.
We managed to tide over the blip of 2008 as our growth was maintained on account of economy being largely in an auto pilot mode with strong domestic demand. Also, the rapidity
of the recovery didn’t subject the economy to any shocks. However, with a severe policy log-jam hampering investment climate as reflected in IP and GDP nos and a complete standstill
on the reforms, we seem to be running out of steam and visible signs of fatigue are building up. We believe that this is the high time for government to take some bold steps in order to
put the economy back on track and expect the same to build up traction in months to come.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Foreword
The year CY11 commenced on an uncertain note as dark clouds on our economy re-emerged from international quarters, and domestic factors like inflation, political and policy making
slowly turned adverse. Even then, the consensus was that FY11 growth would be maintained and FY12 growth, while a bit muted would still be encouraging. Broader market indices were
expected to maintain their sluggish/sideways trend and end the year on an encouraging note.
Come December, Murphy’s law seems to be reigning supreme in India. On the macro front, inflation is yet to be tamed (though early signs of respite emerging now) despite our central
bank using most of the tools in its arsenal. The unenviable tightrope walk of RBI has resulted in the high interest rates (inflicting pain on India Inc.) with an imminent danger of demand
slowdown. In conjunction, elevated crude prices and weakening rupee could emerge as a major derailing factor for all budgetary/financial parameters. The waters have been further
muddled by the paralysis on the policy making front resulting in big ticket capex being derailed. Consequently all growth/economic monitoring parameters are exuding negativity.
In this back drop, our markets have undergone a consistent derating along with multiple earnings downgrades. Retardation of earnings growth has been visible and uncertainty is
widespread with most observers taking it as given, that the ongoing global slowdown will have an adverse rub off on us. That brings some pertinent questions to the fore: Are we entering
a secular bear market, or is it just a corrective phase?; Is the deterioration of performance of India Inc. divergent (less/more) from what is being perceived?; The frames of reference have
moved fundamentally, but is it being adequately captured by the markets?
Indications are that our GDP growth will be lower than estimates at the beginning of the year, and mid year review conveys the same. However, the broad consensus is veering towards
7.1-7.2% level and that seems to be achievable. This despite the blip in manufacturing as services and agriculture seem to be on a stable growth path. While demand growth is slowing
down, the fears of demand destruction seem to be farfetched at the current juncture. However, sentiments convey that the same is being considered a distinct possibility.
On the corporate front, data flows indicate that large players sensed the rough road ahead and tightened operations on all fronts i.e raw material/manufacturing costing, leverage,
financial costs etc. While inflation may have become structural along with high interest rates, India Inc. seems to have aligned its operational metrics to these changed frames of reference
much faster that the capital market observers and participants. Hence, most of the numbers flow is usually met with disbelief and skeptics abound on the sustainability of the same.
We at Antique believe that while factors for being a pessimist abound, the stock markets seem to have factored the same to a large extent, much earlier. The consistent downgrade in
consensus earnings estimates for FY12e and FY13e was preempted by the flight of smart money (as usual). While the markets have exhibited a slide on a P/E basis, we believe that a
large part of the same was on account of P/B derating as India inc. was perceived to have softening RoE and risk free returns (G-Sec, Interest rates) were on a rising trend. As both these
anticipated trends fructified and are close to their turning points, a slow reversal of these two key measurable is expected. Thus, we anticipate the markets to exit the calendar year with
better P/B ratio and the rub off on P/E could come later, may be nurtured by slow and grudging earning upgrades by the street in 2HFY13e. However, a long term overhang factor could
be the derailed/deferred capex which could pose a risk to the FY13e and FY14e earnings growth and can prove to be the proverbial spoilsport.
Thus, we are of the opinion that the markets would find its sweet spot at around the P/E level of 14.5-15 and P/B level of 2.6-2.8 for our FY13e earnings
and hence our Sensex target for End CY12e is 18600-19200. However, the route to those levels would be quite tortuous. While there exists a good chance
that the valuation and earnings metrics could get revised upwards, indication of the same would be received post 2QFY13e numbers.
Key differences between 2008 and 2011
The pessimist’s outlook
Exports were 13.5% of GDP in FY08 and economy was inward dependent. Domestic consumer growth was around 8% and that ensured
sustenance of GDP growth. Circa 2011, exports are now 14.5% of GDP, post a surprising (and skeptical?) rise, and domestic demand growth
is exhibiting signs of ebbing. This has all the connotations of turning out to be a spoilsport.
The stimulus package in FY09 ensured soft interest rates, ample capital availability and excise duties were slashed. Global factors like easing
crude prices and cool off in commodities enabled alleviation of input costing pressures, thereby providing the much needed succor to India Inc.
As demand was intact, pricing power was maintained and India inc. could maintain its EBIDTA. Currently, demand is slackening, pricing power
is on the wane and raw material (commodity and crude) prices are elevated. Thus EBIDTA compression seems inevitable for FY13e.
Despite all-around problems, IIP growth had exhibited very slow slide in FY08, conveying that sentiments rather than demand was impacting
capex cycle. FY10 and FY11 performance reaped the benefits of capex undertaken during FY05-FY07. In FY12, IIP growth has exhibited a
pattern akin to falling off a cliff, portending some sort of capex derailment due to deferrals, shelving etc. Wide ranging reasons i.e unclear
policies, red tapism, elusive financial closure etc. are casting a long shadow on the viability of these projects.
On the brighter side
While growth in urban India has been slowing down because of global interlinking, rural India continues to grow on back of trickle down effect
of massive social sector spending, appreciation (and liquidation) of latent assets (land, gold etc). This coupled with buoyant agriculture
production is likely to keep the rural consumption strong. Thus, demand would be maintained, albeit with an alteration in composition pyramid
i.e small ticket items posting higher growth than large ticket items.
Easing growth rates across the world, along with absence of additional QE measures, augurs well for a cool off in commodity prices and should
provide relief on imported inflation. However, elevated crude oil could sour the situation. The vicious cycle of cost inflation could now be turning
a full circle. While runaway rupee depreciation is a worrisome factor, it is largely linked to global pain rather than India specific factors and thus
would normalize in the coming months. Thus margin concern, which is all pervasive, could be fading away in coming quarters.
Elevated Inflation for an extended period of time led to aggressive monetary policy and took toll on growth rates. However, inflation is now
exhibiting signs of reversal. While this could be a contentious call, we are of the opinion that factors like consumer pushback, increased supply
have the potential to facilitate the same. Right signals from the central bank along with improving liquidity will have a positive effect on India Inc.
especially on capex implementation front and also mitigate worries on NPA formation for the banking system. RBI’s December meet has
indicated a reversal of the hawkish stance a shift of focus to growth. However, there is no visible solution on the policy making/statutory
clearances front and this is also a potential spoiler for financial closure and capex implementation.
OUR CALL
As we enter CY12, there is a huge overhang of international factors like EU financial imbroglio, global realignment of investment risk, sluggish global growth etc. and domestic
factors like sliding GDP growth, sluggish demand, high inflation and interest rates, logjam on policy making front, derailed capex, sliding currency etc. Aditionally, sluggish capex
of the past two years has the making of curtailing our growth in the coming two years. Thus, it is justified for any capital market investor to be pessimistic and bearish.
An old adage conveys that ‘market always turn at heights of euphoria or depths of despair’, and by all means we are almost at the latter stage. In such a situation what would be
the safe havens for investors?.
Taking a call, we at Antique are of the opinion that while markets could be grappling with many factors and be exhibiting sideways movement in the first quarter of the CY12, the
stability of earnings and slow traction in growth will play out. In such an environment of skepticism, it would be prudent to invest in companies who have a good degree of advantage
on operational and financial costing fronts as sluggish demand and impaired pricing power are a systemic malaise now. At the same time one should also not shy away from loading
up on some risk as we feel that post March’12, that would play out significantly.
In such a scenario, sectors like BFSI, Auto, FMCG and IT appear have the traits of both growth and operational ruggedness. Stocks like State Bank of India(CMP INR1,623), Axis
Bank(CMP INR854), Rural Electrification Corp(CMP INR160), Mahindra & Mahindra(CMP INR690), Hero MotoCorp(CMP INR1,849), Hindustan Unilever(CMP INR401), Titan Ind.
(CMP INR169), Infosys(CMP INR2,744) and TCS(CMP INR1,160) make the case. An unorthodox story like Petronet LNG(CMP INR160) would also make the grade. While some
players in the Pharma sector may be sweetly poised as far as the currency movement and growth factors are concerned, things are too nebulous to take a call in the same, hence we
are refraining from the sector despite a positive bias.
Sectors which are out of flavor like Cap goods, Cement, Utilities and Oil and gas, have high intrinsic risk perceptions and are hence shirked by a majority. Our call is that some of the
stocks like L&T(CMP INR1,001), Shree Cements(CMP INR1,977), NTPC(CMP INR160) could have factored in most of the negatives at the current prices and could prove to be
outperformer in H2FY12, as and when the pall of gloom lifts.
Politics: The spanner in the works?
CY12, could be the beginning of election carnival
The popularity of UPA government is now at its nadir as it seems to be lurching from one mess to another. Allegation of large scale corruptions have lead to a political deadlock and policy
making log-jam seems to have dealt a severe body blow to India Inc.’s capex cycle. Political instability along with extrinsic factors like global economic shakeout, surging crude prices
currency gyrations etc have taken a toll on our economy and issues like ballooning fiscal deficit, elevated inflation, currency depreciation, large trade deficit and external debt have all
the makings of a spoilsport and could derail India’s growth story.
These issues have emerged as a common cause for the opposition parties as UPA allies to exert a high degree of pressure on the government and the scope of maneuverability is getting
increasingly reduced.
For the government, the current budget session is probably the last chance to set the ball rolling for pushing reforms as the next year could be crucial in terms of political fortunes. 2012
will witness the most crucial elections i.e. Uttar Pradesh, which has all the makings of a ‘Gamechanger’ in the Indian political arena, this will be followed by Gujarat and Punjab elections.
Governments usually resort to populist measures before elections to serve their political interests, and in 2009, the government initiated wage hikes for central government employees, preelection
spending, farm loan waivers and expansion of social security schemes like rural employment.
Most recent decisions such as the mining bill, land acquisition bill and food security bill can also be said to be playing to the gallery. However, some of the key bills critical for accelerating
India‘s growth cycle is reforms like GST, direct tax code, Companies Act, FDI in multi-brand retailing, electricity distribution reforms, etc which would take their own course to get
implemented. Though the government has recently exhibited its ability to take hard decisions such as on FDI in multi-brand retail, the road ahead is not going to be easy as a dysfunctional
parliament has ensured that almost 30 bills are pending.
We managed to tide over the blip of 2008 as our growth was maintained on account of economy being largely in an auto pilot mode with strong domestic demand. Also, the rapidity
of the recovery didn’t subject the economy to any shocks. However, with a severe policy log-jam hampering investment climate as reflected in IP and GDP nos and a complete standstill
on the reforms, we seem to be running out of steam and visible signs of fatigue are building up. We believe that this is the high time for government to take some bold steps in order to
put the economy back on track and expect the same to build up traction in months to come.
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