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India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Most Preferred Stock Ideas for 2012
Least Preferred Stock Ideas for 2012
Headwinds provide buying opportunity
�� Summary
India is in the midst of a cyclical slowdown that is further complicated by stubborn
inflation and a rapidly depreciating currency. Corporate earnings growth is likely
to slow to about 10% YoY as earnings momentum continues to be negative. In the
event of large-scale foreign institutional investment (FII) outflows, we estimate
20% further downside to Indian equity markets. However, we would view this as
an attractive buying opportunity as India’s structural story is strong and
underpinned by demographic advantages.
�� Inflation, policy and rates in 2012
We expect inflation to slow to 7% by March 2012 and remain in the 6-7% range
thereafter. In 2012, we expect cuts of 100bp in the official repo rate starting in the
March quarter. We expect the USD-INR rate to weaken to 55 by end-2011 and
appreciate in stages to 51 by end-2012 as it prices in ‘inflation-stabilisation’ then
‘growth recovery’.
�� Key Catalysts
We think falling inflation followed by a loosening monetary policy that revives
economic growth is likely to be the key catalyst to watch out for. Other potential
catalysts include the government making progress on reforms and fiscal discipline
in the February 2012 budget. Potential negative catalysts include stubborn
inflation, higher crude oil prices, further rupee depreciation and continuing policy
paralysis.
�� Most & Least Preferred Stock Ideas for 2012
Most preferred: Bharti Airtel, Coal India, Federal Bank, Idea Cellular and
Mahindra & Mahindra. Least preferred: Bank of India, HCL Technologies, LIC
Housing Finance and Tata Motors.
Outlook 2012 – Summary
What is the outlook for India and our central
thesis for 2012?
�� Nifty Outlook: The Nifty is trading at about 12.5x forward PE, below the
10-year average. In the event of large scale FII outflows, we estimate 20%
further downside to Indian equity markets.
We expect earnings growth of about 10% in FY13 and about 12% in FY14.
Our March 2013 target for the Nifty is 6,500, based on a 12-month forward
PE of 15x and a base case FY14E EPS of Rs430.
�� Economic Outlook: We expect real economic growth to recover to 7.3% in
2012-13 and to 7.8% in 2013-14. We expect only a moderate recovery from
the slump to 6.9% growth in 2011-12 for two reasons: 1) only limited policy
stimulation; and 2) the challenging global conditions.
India is in a fairly standard-issue economic downswing, but we expect the
turn to come in the March 2012 quarter (where we forecast a sub-7% growth
rate). We think policy should respond in the March 2012 quarter and believe
the response will matter. A heavy QE-type reply implies another cycle of
vigorous economic recovery plus reaccelerating inflation. This in turn gives
profits a challenging time as policymakers must later wind back the stimulus.
However, we do not expect this—rather, we expect ‘stimulus-lite’. This
implies a modest growth rebound and minor inflation consequences.
The implications of the above for equity investors are: 1) the recovery is
going to depend on profits benefitting from lower cost inflation rather than a
straight interest rate cyclical story; and 2) capex should remain relatively
weak and then recover. In the interim, we believe the consumption story will
play a bigger role than the infrastructure side. Fresh reform moves are also
likely, in our view. They could boost the retail sector and the investment in
the logistics, transportation and storage sectors that India badly needs.
From the global angle, India’s growth is increasingly synchronised to the G7
economies via trade and foreign capital. The gap in the growth rate between
India and the G7 has narrowed 1% after the global financial crisis to
approximately 6%. Balance of payments data also tell us that even at today’s
yawning interest rate differentials India’s ability to draw in foreign capital is
much reduced. India must reduce inflation, companies must improve
efficiency, and the government must improve regulatory clarity and stability
if India is to continue to attract sufficient foreign funds.
�� Earnings Outlook: Our bottom-up earnings analysis of Nifty constituents
suggests earnings growth of over 14% in FY13 (see the table below for more
details). We believe there could be further downward revisions to earnings
forecasts as the economic outlook for FY13 becomes clearer over the course
of the year. We forecast earnings growth of 10% in FY13.
Macro events on the global front can have an impact on the outlook for India.
Our global equity strategy team’s view on the global macro economy is that
growth is weak and appears unlikely to rebound sharply given ongoing deleveraging,
austerity plans, and heightened uncertainty. ‘Sovereign stress’
also threatens periodic shocks to markets given the role of politics and
challenging growth.
Inflation, policy and rates
Inflation has been the number one issue in India’s economy. The wholesale
price index (WPI) rate remains at 9-10%. This dates back to Indian policy overstimulation
in 2009 and the rebound in global commodity prices. But the impact
of higher global oil pricing has almost run its full course, in our view.
Meanwhile, the Reserve Bank of India (RBI) has raised policy rates to 8.5% and
the economy is slowing. We therefore expect headline inflation to slow to 7% by
March 2012 and remain in a 6-7% range thereafter.
This inflation reprieve should allow the government to somewhat ease policies.
In 2012, we expect cuts of 100bp in the official repo rate starting in the March
quarter. We expect the fiscal deficit to rise by approximately 1% of GDP to
5.5% in 2011-12, and to remain at 5% in 2012-13. The wider fiscal deficit
mainly reflects cyclical revenue slippage and subsidy boost. Beyond this, high
inflation and bond market stresses provide little room for significant policy
stimulation.
Towards end-2011, the exchange rate is vulnerable to: 1) the wider trade deficit;
2) weaker growth; and 3) larger foreign currency debt repayments. In 2012,
however, we expect the exchange rate to stabilise and strengthen as inflation
stabilises. We do not expect further gains until the economy recovers and
official rate cuts end. We expect the USD-INR rate to weaken to 55 by end-2011
then appreciate in stages to 51 by end-2012 as it prices in ‘inflation-stabilisation’
and then ‘growth recovery’.
What are the likely key themes for 2012?
�� State assembly elections 2012: State assembly elections are scheduled in
seven states in 2012: Goa, Gujarat, Himachal Pradesh, Manipur, Punjab,
Uttarakhand and Uttar Pradesh (UP).
The UP election is a key event to watch, as it might have an impact on the
Lok Sabha elections in 2014, since UP elects approximately 15% of Lok
Sabha members. The Mayawati-led BSP has had a strong hold on the UP
electorate but has recently faced significant criticism about corruption. The
Congress Party has chosen Rahul Gandhi as its representative to take
advantage of the declining support for the BSP.
The other key states are Gujarat and Punjab, where the BJP-led National
Democratic Alliance (a major opposition party at the national level) is in
power. The performance of the Congress Party in these state elections will
provide an insight into how the electorate views the Congress-led UPA
government’s term in power at the national level so far.
The recent election results in Bihar, Tamil Nadu, West Bengal and Kerala
indicate that voters have begun to reward good governance and penalise bad
governance. We therefore believe the run-up to state elections is likely to
witness increased government policy/reform/incentive/subsidy
announcements at the state and national levels, to create positive sentiment
among voters.
�� Reforms: Given the recent clamour about policy paralysis, we expect
reforms by the government to be a key driver for markets in 2012. Over the
past several months, there have been positive steps including cabinet
approval of mandatory digitisation, a promising draft National Telecom
Policy (NTP) 2011 and petrol price deregulation etc. Reforms that we think
could occur in 2012 include:
— GST: The Goods and Services Tax (GST) is a value-added tax, which is
generally expected to be implemented by October 2012. It will replace all
indirect taxes on goods and services by Central and State governments. It
is likely to help in the progress towards a more comprehensive tax
structure and is expected to lower the tax rate and broaden the tax base. It
should be a positive move towards reducing tax evasion and promoting
economic growth.
— DTC: The Direct Tax Code is likely to come into effect in 2012 and will
replace the existing Income Tax Act. A number of amendments to the
current regulations are proposed, such as raising the tax exemption limit
for men, women and seniors, removal of surcharge/cess from corporate
tax and raising the amount allowed to be allocated to tax-free investments,
and the impact should be largely positive on sentiment if implemented.
— Insurance: A hike in the FDI limit from 26% to 49%, which has been
under discussion for some time, would be positive for the banking sector
as companies would be able to access more capital. Stocks such as HDFC
and Aditya Birla Nuvo (ABNL) are likely to benefit from this, in our
view.
— New banking licences: The RBI is likely to issue new banking licences
to non-banking finance companies (NBFCs) and industrial houses. This
could be positive for small, private sector banks, which would be M&A
candidates.
— SEB reforms: State Electricity Boards (SEBs), which are presently
recording operating losses, could be given a lease of life by reforming
SEB structures (unbundling, privatising, consistent tariff revisions etc).
This would be beneficial for growth and profitability of the Power
Finance Corporation (PFC), Rural Electrification Corporation (REC), and
public sector banks.
— DoT’s views on TRAI recommendations: Over the past 12-18 months,
the Telecom Regulatory Authority of India (TRAI) has come out with
several recommendations on spectrum management, pricing, licensing
and M&A guidelines. We expect the Department of Telecommunications
(DoT) to take a view on these recommendations in H112 in the course of
drafting the new telecom policy. Among the recommendations, the
TRAI’s latest recommendations on M&A and spectrum sharing are path
breaking as the new M&A guidelines should enable meaningful
consolidation in the sector. On the issue of 2G spectrum charges (excess
spectrum and renewal of licenses), though we believe existing operators
will have to pay market prices, the DoT view remains to be seen.
— Faster clearance and smooth development of coal blocks: We expect
new initiatives from the Prime Minister’s Office (PMO) to result in better
coordination among the power ministry, the coal ministry and other
related government departments. This could improve domestic coal
availability for power projects.
— Support in power project execution: Power projects currently
experience numerous delays in matters such as land acquisition and
environmental and forest approvals. The government appears to be
prioritising faster execution of power projects and we expect processing
and approvals/clearances to become faster and more efficient.
— Duty on imported Chinese equipment: There has been very strong
newsflow on the likelihood of a 14% duty on imported Chinese
equipment. This is likely to be beneficial for Bharat Heavy Electricals
(BHEL), L&T, Thermax and other domestic equipment suppliers. We
have also spoken with management of some power companies, who think
that though power generation companies would fight the measure hard, it
looks very likely (perhaps as soon as January/February). However,
pricing is not the only issue here, as power generation companies are also
concerned with delivery schedule and financing.
— FDI in multi-brand retail: The Cabinet has recently permitted 51%
foreign direct investment (FDI) in multi-brand retail. Once implemented,
we expect FDI in multi-brand retail to benefit: 1) major consumer staples
companies, especially those that have dominant market shares, as retailers
will require their support to expand; 2) backend logistics, as 50% of the
investment has to be earmarked for the back end; 3) consumer durables,
as funds required for expansion will be easily available in an industry
with significant scope for growth; and 4) retailers, which could be
acquired or become JV partners for MNCs.
�� Consumer growth to remain strong: Despite high food inflation the
underlying trends in the consumer sector seem to suggest strong growth in
volumes and uptrading to better quality products. This should provide
momentum in consumer spending. Private consumption contributed 58% of
FY11 GDP.
�� Emergence of pricing power in telecom: We believe India’s mobile sector
is going through a paradigm shift, with the leading companies (Bharti Airtel,
Idea Cellular, Vodafone and Reliance Communications) increasing tariffs as
the current pricing is not sustainable. We believe that price increases mark a
turning point in the sector’s competitive dynamics. The emergence of pricing
power over the next year is likely to lead to better financial performance and
further re-rating of the sector, in our view.
�� Mining pick up: We expect timely environmental approvals/forest
clearances for various coal blocks/other mines that are pending at various
stages, as the government realises these are needed to promote coal output
that is required for India’s economy. We believe any such speedy action by
the government could be a positive for companies such as Coal India,
Hindalco Industries and Sterlite Industries.
Additionally, resolution of the mining ban in Karnataka, which is widely
expected by early 2012 (at least to meet the requirements of domestic steel
producers, though exports might still not be allowed) would be a positive for
mining companies like Sesa Goa and steel companies like JSW Steel, in
addition to the general benefits of the positive impact on employment in the
region, contribution to state and central government taxes and Index of
Industrial Production (IIP) and GDP.
However, ongoing mining investigations (related to illegal
mining/environmental damages) remain a key event risk for metals and
mining companies in India.
What may surprise on the upside or downside?
�� On the upside, if the government is able to successfully carry out reforms
planned for 2012, it should be positive for the market.
�� Encouraging data on inflation, industrial production, GDP and quarterly
earnings growth could also be positive for sentiment.
�� On the downside, global events such as commodity price increases or
worsening conditions in the Euro-zone could have a negative effect.
What are the likely key catalysts in 2012?
�� Falling inflation followed by a loosening monetary policy that revives
economic growth is likely to be the key catalyst to watch out for.
�� Successful progress on reforms by the government in 2012 could be a
catalyst for the market.
�� The demonstration of fiscal discipline in the Union Budget announcement in
February 2012 could also be a key driver.
�� Negative catalysts include stubborn inflation, higher crude prices, further
rupee depreciation and continued policy paralysis.
What are our most non-consensus country
calls?
Negative on IT services: We are negative on the sector and expect vendors to
become more cautious on their outlook by early 2012. Our key concerns
include: 1) slower demand growth over the medium term in large sectors such as
banking and financial services and telecom; 2) aggressive competition from
lower margin vendors; 3) rising supply costs; and 4) near-term cyclical demand
weakness. We expect the near-term cyclical weakness to result in weaker-thanexpected
IT services budgets in 2012, which should impact newsflow and share
prices by late December 2011, or early January 2012.
We expect Infosys Technologies (Infosys) and Tata Consultancy Services (TCS)
to be relatively defensive in a prolonged sector downturn due to their high
quality management, strong balance sheets and potential earnings benefits from
currency depreciation.
Most Preferred Stock Ideas for 2012
Least Preferred Stock Ideas for 2012
Most & Least Preferred Stock Ideas for 2012
Most preferred: Bharti Airtel, Coal India, Federal Bank, Idea Cellular and
Mahindra & Mahindra. Least preferred: Bank of India, HCL Technologies, LIC
Housing Finance and Tata Motors.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Most Preferred Stock Ideas for 2012
Bharti Airtel
Least Preferred Stock Ideas for 2012
Bank of India
Headwinds provide buying opportunity
�� Summary
India is in the midst of a cyclical slowdown that is further complicated by stubborn
inflation and a rapidly depreciating currency. Corporate earnings growth is likely
to slow to about 10% YoY as earnings momentum continues to be negative. In the
event of large-scale foreign institutional investment (FII) outflows, we estimate
20% further downside to Indian equity markets. However, we would view this as
an attractive buying opportunity as India’s structural story is strong and
underpinned by demographic advantages.
�� Inflation, policy and rates in 2012
We expect inflation to slow to 7% by March 2012 and remain in the 6-7% range
thereafter. In 2012, we expect cuts of 100bp in the official repo rate starting in the
March quarter. We expect the USD-INR rate to weaken to 55 by end-2011 and
appreciate in stages to 51 by end-2012 as it prices in ‘inflation-stabilisation’ then
‘growth recovery’.
�� Key Catalysts
We think falling inflation followed by a loosening monetary policy that revives
economic growth is likely to be the key catalyst to watch out for. Other potential
catalysts include the government making progress on reforms and fiscal discipline
in the February 2012 budget. Potential negative catalysts include stubborn
inflation, higher crude oil prices, further rupee depreciation and continuing policy
paralysis.
�� Most & Least Preferred Stock Ideas for 2012
Most preferred: Bharti Airtel, Coal India, Federal Bank, Idea Cellular and
Mahindra & Mahindra. Least preferred: Bank of India, HCL Technologies, LIC
Housing Finance and Tata Motors.
Outlook 2012 – Summary
What is the outlook for India and our central
thesis for 2012?
�� Nifty Outlook: The Nifty is trading at about 12.5x forward PE, below the
10-year average. In the event of large scale FII outflows, we estimate 20%
further downside to Indian equity markets.
We expect earnings growth of about 10% in FY13 and about 12% in FY14.
Our March 2013 target for the Nifty is 6,500, based on a 12-month forward
PE of 15x and a base case FY14E EPS of Rs430.
�� Economic Outlook: We expect real economic growth to recover to 7.3% in
2012-13 and to 7.8% in 2013-14. We expect only a moderate recovery from
the slump to 6.9% growth in 2011-12 for two reasons: 1) only limited policy
stimulation; and 2) the challenging global conditions.
India is in a fairly standard-issue economic downswing, but we expect the
turn to come in the March 2012 quarter (where we forecast a sub-7% growth
rate). We think policy should respond in the March 2012 quarter and believe
the response will matter. A heavy QE-type reply implies another cycle of
vigorous economic recovery plus reaccelerating inflation. This in turn gives
profits a challenging time as policymakers must later wind back the stimulus.
However, we do not expect this—rather, we expect ‘stimulus-lite’. This
implies a modest growth rebound and minor inflation consequences.
The implications of the above for equity investors are: 1) the recovery is
going to depend on profits benefitting from lower cost inflation rather than a
straight interest rate cyclical story; and 2) capex should remain relatively
weak and then recover. In the interim, we believe the consumption story will
play a bigger role than the infrastructure side. Fresh reform moves are also
likely, in our view. They could boost the retail sector and the investment in
the logistics, transportation and storage sectors that India badly needs.
From the global angle, India’s growth is increasingly synchronised to the G7
economies via trade and foreign capital. The gap in the growth rate between
India and the G7 has narrowed 1% after the global financial crisis to
approximately 6%. Balance of payments data also tell us that even at today’s
yawning interest rate differentials India’s ability to draw in foreign capital is
much reduced. India must reduce inflation, companies must improve
efficiency, and the government must improve regulatory clarity and stability
if India is to continue to attract sufficient foreign funds.
�� Earnings Outlook: Our bottom-up earnings analysis of Nifty constituents
suggests earnings growth of over 14% in FY13 (see the table below for more
details). We believe there could be further downward revisions to earnings
forecasts as the economic outlook for FY13 becomes clearer over the course
of the year. We forecast earnings growth of 10% in FY13.
Macro events on the global front can have an impact on the outlook for India.
Our global equity strategy team’s view on the global macro economy is that
growth is weak and appears unlikely to rebound sharply given ongoing deleveraging,
austerity plans, and heightened uncertainty. ‘Sovereign stress’
also threatens periodic shocks to markets given the role of politics and
challenging growth.
Inflation, policy and rates
Inflation has been the number one issue in India’s economy. The wholesale
price index (WPI) rate remains at 9-10%. This dates back to Indian policy overstimulation
in 2009 and the rebound in global commodity prices. But the impact
of higher global oil pricing has almost run its full course, in our view.
Meanwhile, the Reserve Bank of India (RBI) has raised policy rates to 8.5% and
the economy is slowing. We therefore expect headline inflation to slow to 7% by
March 2012 and remain in a 6-7% range thereafter.
This inflation reprieve should allow the government to somewhat ease policies.
In 2012, we expect cuts of 100bp in the official repo rate starting in the March
quarter. We expect the fiscal deficit to rise by approximately 1% of GDP to
5.5% in 2011-12, and to remain at 5% in 2012-13. The wider fiscal deficit
mainly reflects cyclical revenue slippage and subsidy boost. Beyond this, high
inflation and bond market stresses provide little room for significant policy
stimulation.
Towards end-2011, the exchange rate is vulnerable to: 1) the wider trade deficit;
2) weaker growth; and 3) larger foreign currency debt repayments. In 2012,
however, we expect the exchange rate to stabilise and strengthen as inflation
stabilises. We do not expect further gains until the economy recovers and
official rate cuts end. We expect the USD-INR rate to weaken to 55 by end-2011
then appreciate in stages to 51 by end-2012 as it prices in ‘inflation-stabilisation’
and then ‘growth recovery’.
What are the likely key themes for 2012?
�� State assembly elections 2012: State assembly elections are scheduled in
seven states in 2012: Goa, Gujarat, Himachal Pradesh, Manipur, Punjab,
Uttarakhand and Uttar Pradesh (UP).
The UP election is a key event to watch, as it might have an impact on the
Lok Sabha elections in 2014, since UP elects approximately 15% of Lok
Sabha members. The Mayawati-led BSP has had a strong hold on the UP
electorate but has recently faced significant criticism about corruption. The
Congress Party has chosen Rahul Gandhi as its representative to take
advantage of the declining support for the BSP.
The other key states are Gujarat and Punjab, where the BJP-led National
Democratic Alliance (a major opposition party at the national level) is in
power. The performance of the Congress Party in these state elections will
provide an insight into how the electorate views the Congress-led UPA
government’s term in power at the national level so far.
The recent election results in Bihar, Tamil Nadu, West Bengal and Kerala
indicate that voters have begun to reward good governance and penalise bad
governance. We therefore believe the run-up to state elections is likely to
witness increased government policy/reform/incentive/subsidy
announcements at the state and national levels, to create positive sentiment
among voters.
�� Reforms: Given the recent clamour about policy paralysis, we expect
reforms by the government to be a key driver for markets in 2012. Over the
past several months, there have been positive steps including cabinet
approval of mandatory digitisation, a promising draft National Telecom
Policy (NTP) 2011 and petrol price deregulation etc. Reforms that we think
could occur in 2012 include:
— GST: The Goods and Services Tax (GST) is a value-added tax, which is
generally expected to be implemented by October 2012. It will replace all
indirect taxes on goods and services by Central and State governments. It
is likely to help in the progress towards a more comprehensive tax
structure and is expected to lower the tax rate and broaden the tax base. It
should be a positive move towards reducing tax evasion and promoting
economic growth.
— DTC: The Direct Tax Code is likely to come into effect in 2012 and will
replace the existing Income Tax Act. A number of amendments to the
current regulations are proposed, such as raising the tax exemption limit
for men, women and seniors, removal of surcharge/cess from corporate
tax and raising the amount allowed to be allocated to tax-free investments,
and the impact should be largely positive on sentiment if implemented.
— Insurance: A hike in the FDI limit from 26% to 49%, which has been
under discussion for some time, would be positive for the banking sector
as companies would be able to access more capital. Stocks such as HDFC
and Aditya Birla Nuvo (ABNL) are likely to benefit from this, in our
view.
— New banking licences: The RBI is likely to issue new banking licences
to non-banking finance companies (NBFCs) and industrial houses. This
could be positive for small, private sector banks, which would be M&A
candidates.
— SEB reforms: State Electricity Boards (SEBs), which are presently
recording operating losses, could be given a lease of life by reforming
SEB structures (unbundling, privatising, consistent tariff revisions etc).
This would be beneficial for growth and profitability of the Power
Finance Corporation (PFC), Rural Electrification Corporation (REC), and
public sector banks.
— DoT’s views on TRAI recommendations: Over the past 12-18 months,
the Telecom Regulatory Authority of India (TRAI) has come out with
several recommendations on spectrum management, pricing, licensing
and M&A guidelines. We expect the Department of Telecommunications
(DoT) to take a view on these recommendations in H112 in the course of
drafting the new telecom policy. Among the recommendations, the
TRAI’s latest recommendations on M&A and spectrum sharing are path
breaking as the new M&A guidelines should enable meaningful
consolidation in the sector. On the issue of 2G spectrum charges (excess
spectrum and renewal of licenses), though we believe existing operators
will have to pay market prices, the DoT view remains to be seen.
— Faster clearance and smooth development of coal blocks: We expect
new initiatives from the Prime Minister’s Office (PMO) to result in better
coordination among the power ministry, the coal ministry and other
related government departments. This could improve domestic coal
availability for power projects.
— Support in power project execution: Power projects currently
experience numerous delays in matters such as land acquisition and
environmental and forest approvals. The government appears to be
prioritising faster execution of power projects and we expect processing
and approvals/clearances to become faster and more efficient.
— Duty on imported Chinese equipment: There has been very strong
newsflow on the likelihood of a 14% duty on imported Chinese
equipment. This is likely to be beneficial for Bharat Heavy Electricals
(BHEL), L&T, Thermax and other domestic equipment suppliers. We
have also spoken with management of some power companies, who think
that though power generation companies would fight the measure hard, it
looks very likely (perhaps as soon as January/February). However,
pricing is not the only issue here, as power generation companies are also
concerned with delivery schedule and financing.
— FDI in multi-brand retail: The Cabinet has recently permitted 51%
foreign direct investment (FDI) in multi-brand retail. Once implemented,
we expect FDI in multi-brand retail to benefit: 1) major consumer staples
companies, especially those that have dominant market shares, as retailers
will require their support to expand; 2) backend logistics, as 50% of the
investment has to be earmarked for the back end; 3) consumer durables,
as funds required for expansion will be easily available in an industry
with significant scope for growth; and 4) retailers, which could be
acquired or become JV partners for MNCs.
�� Consumer growth to remain strong: Despite high food inflation the
underlying trends in the consumer sector seem to suggest strong growth in
volumes and uptrading to better quality products. This should provide
momentum in consumer spending. Private consumption contributed 58% of
FY11 GDP.
�� Emergence of pricing power in telecom: We believe India’s mobile sector
is going through a paradigm shift, with the leading companies (Bharti Airtel,
Idea Cellular, Vodafone and Reliance Communications) increasing tariffs as
the current pricing is not sustainable. We believe that price increases mark a
turning point in the sector’s competitive dynamics. The emergence of pricing
power over the next year is likely to lead to better financial performance and
further re-rating of the sector, in our view.
�� Mining pick up: We expect timely environmental approvals/forest
clearances for various coal blocks/other mines that are pending at various
stages, as the government realises these are needed to promote coal output
that is required for India’s economy. We believe any such speedy action by
the government could be a positive for companies such as Coal India,
Hindalco Industries and Sterlite Industries.
Additionally, resolution of the mining ban in Karnataka, which is widely
expected by early 2012 (at least to meet the requirements of domestic steel
producers, though exports might still not be allowed) would be a positive for
mining companies like Sesa Goa and steel companies like JSW Steel, in
addition to the general benefits of the positive impact on employment in the
region, contribution to state and central government taxes and Index of
Industrial Production (IIP) and GDP.
However, ongoing mining investigations (related to illegal
mining/environmental damages) remain a key event risk for metals and
mining companies in India.
What may surprise on the upside or downside?
�� On the upside, if the government is able to successfully carry out reforms
planned for 2012, it should be positive for the market.
�� Encouraging data on inflation, industrial production, GDP and quarterly
earnings growth could also be positive for sentiment.
�� On the downside, global events such as commodity price increases or
worsening conditions in the Euro-zone could have a negative effect.
What are the likely key catalysts in 2012?
�� Falling inflation followed by a loosening monetary policy that revives
economic growth is likely to be the key catalyst to watch out for.
�� Successful progress on reforms by the government in 2012 could be a
catalyst for the market.
�� The demonstration of fiscal discipline in the Union Budget announcement in
February 2012 could also be a key driver.
�� Negative catalysts include stubborn inflation, higher crude prices, further
rupee depreciation and continued policy paralysis.
What are our most non-consensus country
calls?
Negative on IT services: We are negative on the sector and expect vendors to
become more cautious on their outlook by early 2012. Our key concerns
include: 1) slower demand growth over the medium term in large sectors such as
banking and financial services and telecom; 2) aggressive competition from
lower margin vendors; 3) rising supply costs; and 4) near-term cyclical demand
weakness. We expect the near-term cyclical weakness to result in weaker-thanexpected
IT services budgets in 2012, which should impact newsflow and share
prices by late December 2011, or early January 2012.
We expect Infosys Technologies (Infosys) and Tata Consultancy Services (TCS)
to be relatively defensive in a prolonged sector downturn due to their high
quality management, strong balance sheets and potential earnings benefits from
currency depreciation.
Most Preferred Stock Ideas for 2012
Bharti Airtel
Least Preferred Stock Ideas for 2012
Bank of India
Most & Least Preferred Stock Ideas for 2012
Most preferred: Bharti Airtel, Coal India, Federal Bank, Idea Cellular and
Mahindra & Mahindra. Least preferred: Bank of India, HCL Technologies, LIC
Housing Finance and Tata Motors.
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