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Amidst the pervasive gloom, a few signs are pointing to better times
returning sooner rather than later. The rapid fall of the Nifty PEG has
brought it to within 10% of the band where it stabilized in 2009, before
the next rally began. A ‘time‐correction’ could pull down the PEG to
0.7x in 1Q2012. The yield‐gap is down to near its three‐year mean. In
the real economy, two lead indicators – Electricity generation and LCVs
– are pointing to a rebound in Manufacturing. The missing element –
lower interest rates – may be back soon, as seen in the recent fall in
bond yields. Shifts in earnings momentum suggest that sectors with
strong links to the recovery are more likely to outperform in 2012. We
advise cuts in allocations to Two‐wheelers and Consumer, and
increases in Commercial vehicles, Passenger vehicles, Cement,
Pharmaceuticals, Telecom, Metals and IT Services.
Steep fall in valuation; Nifty within 10%, three months of stable level
After falling from 2.0x to 0.8x in nine months, the Nifty PEG is within 10% of the
range where the Nifty stabilized in 2009, before the next rally began. If prices
and FY13 earnings forecasts stay at end‐Dec11 levels, the ‘time‐correction’
could push down the PEG to that range within three months. The yield‐gap to
the 1‐year government bond too has fallen close to its three‐year mean, partly
due to the fall in the Nifty, but more due to the large fall in the bond yield itself.
Latent signs suggest manufacturing recovery may be impending
Previous cycles saw the Electricity segment of the IIP rebound about six months
before Manufacturing. A strong rebound in Electricity has now been under way
for 14 months. Another similar lead indicator has been growth in sales of LCVs.
Despite the leading indicators being flashed, the rebound in Manufacturing has
not commenced. We believe the missing element in this cycle, that was active
in the previous economic cycle, is a low interest rate regime. The fall in food
inflation in Dec11 is significant as the food segment contributed over half the
rise in wholesale inflation during 2011. The fall in the one‐year government
bond yield has been a strong indicator of the fall in the Repo.
Tilt away from defensives may have begun
Late 2011 saw sectoral performances begin to shift from previous trends. There
is a tilt away from ‘defensive’ sectors and towards stocks with stronger linkages
to the next rebound. These changes are linked to the shifts in earnings
momentum and have signaled the revival of ‘normal’ sectors such as Cement
and Commercial vehicles. For 2012, we advise cuts in allocations to Twowheelers
and Consumer and increases in Commercial vehicles, Passenger
vehicles, Cement, Pharmaceuticals, Telecom, Metals and IT Services. Our top 10
stocks for 2012 are Bharti Airtel (BHARTI IN, Buy), Hindalco Industries (HNDL IN,
Buy), HCL Technologies (HCLT IN, Buy), ICICI Bank (ICICIBC IN, Buy), Larsen and
Toubro (LT IN, Hold), LIC Housing Finance (LICHF IN, NR), Maruti Suzuki (MSIL
IN, NR), State Bank of India (SBIN IN, Buy), Sun Pharmaceuticals (SUNP IN, Add)
and UltraTech Cement (UTCEM IN, Add).
Investment summary
The steep fall in the Nifty PEG during 2011 makes it cheaper than at end of 2008, despite a smaller fall in the index. At
0.83x, it is within 10% of the range where the Nifty stabilized in 2009, before the next rally began. The PEG could reach
that range within three months even if prices stay constant, and if FY13 earnings forecasts hold stable. The large fall in
bond yields in recent weeks has pushed down the yield gap near its three‐year mean. Two promising signs from the real
economy are the rebound in growth of LCVs and of Electricity production. Both have led the recovery of Manufacturing
by about six months in previous cycles. The missing element in this cycle ‐ low interest rates ‐ is likely to be ushered in
by the fall in inflation. Though the concerns over equity valuation and economic growth persist, late 2011 saw a tilt
away from defensives and towards stocks with stronger linkages to the next rebound. Revisions to earnings forecasts
have signaled the revival of ‘normal’ sectors such as Cement and Commercial vehicles. For 2012, we advise cuts in
allocations to Two‐wheelers and Consumer and increases in Commercial vehicles, Passenger vehicles, Cement,
Pharmaceuticals, Telecom, Metals and IT Services.
Steep fall in PEG, yield‐gap bring Nifty to within 10% of stable level
The c18% fall in the Nifty during Aug11‐Dec11 may appear mild in comparison with the 36% fall during
Aug08‐Dec08. However, the P/E at end Dec11 was only a bit above that in Dec08. The PEG has dropped
steeply in the past nine months to an estimated 0.83x at end Dec11, lower than the PEG at end Dec08.
Assuming the forecasts for FY13 growth of the Nifty stabilize near the current level of 15.5%, the
potential downside to the Nifty would be 10%. Should the Nifty stay unchanged at its end‐Dec11 level,
the P/E and PEG would drift down to 11.0x and 0.7x by end Mar12. This means that by the end of the
first quarter of 2012, the Nifty PEG could reach the middle of the range where it had stabilized after
the sharp correction in 2008‐2009. The yield‐gap too points to a rapid fall in the valuation of the Nifty.
It is down by c1%, closer to its three‐year mean partly due to the large fall in the one‐year government
bond yield – a lead indicator of a change in the Repo.
IIP poised to rise; Electricity, interest rates may catalyze rebound
Two indicators from the real economy suggest a recovery in industrial production may be round the
corner. The growth of Electricity production and sales of light commercial vehicles (LCV) begin their
rebound about six months before the turning point in Manufacturing. For some time now, both have
signaled that a recovery is due. Electricity growth is likely to stay in high single digits till FY13f. The
missing element, that was active in the previous economic cycle, is a low interest rate regime. The
recent fall in food inflation is significant as over half the rise in prices in 2011 was driven by food items.
Revisions to earnings forecasts point to need to churn allocations
Even as consensus forecasts for growth in FY12 and FY13 earnings continue to fall, there are sectors
such as Cement where the forecasts have been holding firm, or are being raised. The trend of a decline
has reversed in a few sectors during the last two quarters of 2011. We measure these shifts in earnings
momentum and find they correlate with and are often the lead indicators of the performance of
sectors within the Nifty. Within Automobiles, the outlook for Commercial vehicles and Passenger
vehicles has brightened even as that for Two‐wheelers appears to have plateaued. The best sector of
2011, Consumer, appears less promising given the forecast decline in its earnings momentum.
Tilt away from defensives beginning to be visible in late 2011
Our study of three spells of large fall and two spells of large rise from Jul11 to Dec11 reveals that
outperformers during both phases were concentrated in large value, relatively high P/E stocks.
Dividend yield did not have a significant link with performance during the rising spells. Neither did the
proportion of cash/market value have a significant link. During the rising spell, relative outperformance
was seen in a group of large value stocks with high net gearing, i.e. low cash. Large value stocks in
Consumer, Cement, Pharmaceuticals and Telecom outperformed in the falling periods, but
underperformed in the rising spells. Large value Financials were the prominent outperformers in the
rising spells (See Annexure 1).
2012 outperformers may be dispersed across sectors
Relative to the sector weights within the Nifty, we advise higher allocations mainly in Automobiles
(excluding Two‐wheelers), Cement, Pharmaceuticals, Telecom, Metals and IT Services. We advise
pruning of allocations to Two‐wheelers and Consumer. We stay cautious on Construction and
Financials, despite forecasts pointing to a revival or extension of earnings momentum.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Amidst the pervasive gloom, a few signs are pointing to better times
returning sooner rather than later. The rapid fall of the Nifty PEG has
brought it to within 10% of the band where it stabilized in 2009, before
the next rally began. A ‘time‐correction’ could pull down the PEG to
0.7x in 1Q2012. The yield‐gap is down to near its three‐year mean. In
the real economy, two lead indicators – Electricity generation and LCVs
– are pointing to a rebound in Manufacturing. The missing element –
lower interest rates – may be back soon, as seen in the recent fall in
bond yields. Shifts in earnings momentum suggest that sectors with
strong links to the recovery are more likely to outperform in 2012. We
advise cuts in allocations to Two‐wheelers and Consumer, and
increases in Commercial vehicles, Passenger vehicles, Cement,
Pharmaceuticals, Telecom, Metals and IT Services.
Steep fall in valuation; Nifty within 10%, three months of stable level
After falling from 2.0x to 0.8x in nine months, the Nifty PEG is within 10% of the
range where the Nifty stabilized in 2009, before the next rally began. If prices
and FY13 earnings forecasts stay at end‐Dec11 levels, the ‘time‐correction’
could push down the PEG to that range within three months. The yield‐gap to
the 1‐year government bond too has fallen close to its three‐year mean, partly
due to the fall in the Nifty, but more due to the large fall in the bond yield itself.
Latent signs suggest manufacturing recovery may be impending
Previous cycles saw the Electricity segment of the IIP rebound about six months
before Manufacturing. A strong rebound in Electricity has now been under way
for 14 months. Another similar lead indicator has been growth in sales of LCVs.
Despite the leading indicators being flashed, the rebound in Manufacturing has
not commenced. We believe the missing element in this cycle, that was active
in the previous economic cycle, is a low interest rate regime. The fall in food
inflation in Dec11 is significant as the food segment contributed over half the
rise in wholesale inflation during 2011. The fall in the one‐year government
bond yield has been a strong indicator of the fall in the Repo.
Tilt away from defensives may have begun
Late 2011 saw sectoral performances begin to shift from previous trends. There
is a tilt away from ‘defensive’ sectors and towards stocks with stronger linkages
to the next rebound. These changes are linked to the shifts in earnings
momentum and have signaled the revival of ‘normal’ sectors such as Cement
and Commercial vehicles. For 2012, we advise cuts in allocations to Twowheelers
and Consumer and increases in Commercial vehicles, Passenger
vehicles, Cement, Pharmaceuticals, Telecom, Metals and IT Services. Our top 10
stocks for 2012 are Bharti Airtel (BHARTI IN, Buy), Hindalco Industries (HNDL IN,
Buy), HCL Technologies (HCLT IN, Buy), ICICI Bank (ICICIBC IN, Buy), Larsen and
Toubro (LT IN, Hold), LIC Housing Finance (LICHF IN, NR), Maruti Suzuki (MSIL
IN, NR), State Bank of India (SBIN IN, Buy), Sun Pharmaceuticals (SUNP IN, Add)
and UltraTech Cement (UTCEM IN, Add).
Investment summary
The steep fall in the Nifty PEG during 2011 makes it cheaper than at end of 2008, despite a smaller fall in the index. At
0.83x, it is within 10% of the range where the Nifty stabilized in 2009, before the next rally began. The PEG could reach
that range within three months even if prices stay constant, and if FY13 earnings forecasts hold stable. The large fall in
bond yields in recent weeks has pushed down the yield gap near its three‐year mean. Two promising signs from the real
economy are the rebound in growth of LCVs and of Electricity production. Both have led the recovery of Manufacturing
by about six months in previous cycles. The missing element in this cycle ‐ low interest rates ‐ is likely to be ushered in
by the fall in inflation. Though the concerns over equity valuation and economic growth persist, late 2011 saw a tilt
away from defensives and towards stocks with stronger linkages to the next rebound. Revisions to earnings forecasts
have signaled the revival of ‘normal’ sectors such as Cement and Commercial vehicles. For 2012, we advise cuts in
allocations to Two‐wheelers and Consumer and increases in Commercial vehicles, Passenger vehicles, Cement,
Pharmaceuticals, Telecom, Metals and IT Services.
Steep fall in PEG, yield‐gap bring Nifty to within 10% of stable level
The c18% fall in the Nifty during Aug11‐Dec11 may appear mild in comparison with the 36% fall during
Aug08‐Dec08. However, the P/E at end Dec11 was only a bit above that in Dec08. The PEG has dropped
steeply in the past nine months to an estimated 0.83x at end Dec11, lower than the PEG at end Dec08.
Assuming the forecasts for FY13 growth of the Nifty stabilize near the current level of 15.5%, the
potential downside to the Nifty would be 10%. Should the Nifty stay unchanged at its end‐Dec11 level,
the P/E and PEG would drift down to 11.0x and 0.7x by end Mar12. This means that by the end of the
first quarter of 2012, the Nifty PEG could reach the middle of the range where it had stabilized after
the sharp correction in 2008‐2009. The yield‐gap too points to a rapid fall in the valuation of the Nifty.
It is down by c1%, closer to its three‐year mean partly due to the large fall in the one‐year government
bond yield – a lead indicator of a change in the Repo.
IIP poised to rise; Electricity, interest rates may catalyze rebound
Two indicators from the real economy suggest a recovery in industrial production may be round the
corner. The growth of Electricity production and sales of light commercial vehicles (LCV) begin their
rebound about six months before the turning point in Manufacturing. For some time now, both have
signaled that a recovery is due. Electricity growth is likely to stay in high single digits till FY13f. The
missing element, that was active in the previous economic cycle, is a low interest rate regime. The
recent fall in food inflation is significant as over half the rise in prices in 2011 was driven by food items.
Revisions to earnings forecasts point to need to churn allocations
Even as consensus forecasts for growth in FY12 and FY13 earnings continue to fall, there are sectors
such as Cement where the forecasts have been holding firm, or are being raised. The trend of a decline
has reversed in a few sectors during the last two quarters of 2011. We measure these shifts in earnings
momentum and find they correlate with and are often the lead indicators of the performance of
sectors within the Nifty. Within Automobiles, the outlook for Commercial vehicles and Passenger
vehicles has brightened even as that for Two‐wheelers appears to have plateaued. The best sector of
2011, Consumer, appears less promising given the forecast decline in its earnings momentum.
Tilt away from defensives beginning to be visible in late 2011
Our study of three spells of large fall and two spells of large rise from Jul11 to Dec11 reveals that
outperformers during both phases were concentrated in large value, relatively high P/E stocks.
Dividend yield did not have a significant link with performance during the rising spells. Neither did the
proportion of cash/market value have a significant link. During the rising spell, relative outperformance
was seen in a group of large value stocks with high net gearing, i.e. low cash. Large value stocks in
Consumer, Cement, Pharmaceuticals and Telecom outperformed in the falling periods, but
underperformed in the rising spells. Large value Financials were the prominent outperformers in the
rising spells (See Annexure 1).
2012 outperformers may be dispersed across sectors
Relative to the sector weights within the Nifty, we advise higher allocations mainly in Automobiles
(excluding Two‐wheelers), Cement, Pharmaceuticals, Telecom, Metals and IT Services. We advise
pruning of allocations to Two‐wheelers and Consumer. We stay cautious on Construction and
Financials, despite forecasts pointing to a revival or extension of earnings momentum.
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