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Recalibration
India has been the best performing Asian market YTD and we believe the
strong performance would continue as the liquidity driven rally is now
getting the policy support and corporate earnings stability. Any initiative
to improve coal production and power generation, we believe, will further
increase our enthusiasm. CLSA’s global strategist Chris Wood prefers
India on sustained global liquidity conditions, and if domestic retail
investor returns to equity, the risks will be on the upside. We continue to
add more beta to our portfolios and add Tata Motors and Yes Bank to our
top 5 ideas replacing ITC and Dr Reddy’s. The rising crude and potential
delays/lower rate cuts by the RBI will be a negative.
Liquidity rally has moved the valuations back to July level
q With the liquidity driven rally, Indian stock market has now moved back to the July
2011 level, valuations are also similar at 14.5x as time effect offset by earnings
downgrade.
q Recent stock price reactions to bad results etc imply that the investors are now
much more willing to look beyond the near-term, focussing on longer-term trends.
Initial signs of policy level improvement visible
q The Government has certainly moved beyond the policy noise to some concrete
steps (refer to our earlier note: Policy Paralysis no more?). While still a few
uncertainties exist, the direction is clear.
q The possibility of Coal India being able to ramp-up production whether from the
existing mines (relatively easier and could be effective in a year) or the new mines
(production will likely take a couple of years assuming fast-track clearances) can be
rerating trigger for the Indian markets.
q With these policy initiatives and the willingness of the investors to look beyond the
near-term patches makes us more sanguine about the current rally.
CY2012 market returns to be front ended; retail support should
q With primary markets being slow to pick-up, we believe that the CY12 market
returns will be upfronted as easier global liquidity continues.
q Domestic retail investors have been virtually absent from the equity markets for the
last three years (FY10-12) with 0.2% of incremental saving going into equities as
against 5% as the trend prior. A reversion mean (3.5% average over the last 8
years), could bring in US$13-14bn creating potential buffer for equity issuances.
Adding more beta to portfolio
q Corporate earnings trend stabilising (our FY13 Sensex EPS has remained
unchanged at 1,269 over the last 45 days and through the 3QFY12 results season),
and earnings downgrade cycle has ended.
q We raise market target multiple to 14.5x – in line with the last 10 year average to
take the Sensex target to 20,800. Rising international crude prices and possible tax
hike / fuel hike may delay the potential rate cuts by RBI. This could be a risk to
market sentiments which are building in large hopes on rate cuts.
q In line with the view of our global strategist, Chris Wood, who believes in continued
global liquidity, we add more beta to our portfolio. We remove ITC and Dr Reddy’s
from our top 5 ideas and replace with Yes bank and Tata Motors.
q We raise weight on financials by 5 ppts to become OWT. We also raise industrials to
Neutral (+2). Lower pharma by 4 pts to UWT from OWT earlier. Weight in IT also
cut but 2.5ppts but maintain the OWT stance. Reduce staples weights by 2ppts to
increase our UWT further. Also reduce weight in Energy by 2pts to make it UWT.
CLSA Top-5 picks
Tata Motors
Tata Motors continues to ride multiple positive tailwinds of better than
expected volumes and margins for its new launch Evoque. Continued strong
demand from China, new product triggers (new range Rover platform by end
CY12) and structural cost savings after FY13 driven by platform
rationalisation initiatives. Despite the recent rally, the stock trades at 7.4x
FY13CL earnings and appears attractive
Mahindra & Mahindra
The stock is down nearly 25% from the 2011 peak on account of concerns on
tractor slowdown. We now build in 0% volume growth for tractors in FY13 and
yet the company’s auto business now trades at an attractive 11x FY13CL
earnings and at 25% discount to market. We do not believe that the
Government will cut its rural expenditure and on the contrary, if the proposed
food security bill is accepted, the same may go up. We believe that the
market pessimism on M&M is unjustified
Infosys
Infosys trades at 16x FY13CL earnings or only 10% premium to the market –
shrinking it from nearly 25% as at the beginning of the year, thanks to the
INR appreciation. Further appreciation of INR against USD appears unlikely.
Post the Dec-11 results, Infosys’ expectations have been re-aligned and
downside risk to US$ growth forecast appears to be limited, although
earnings could see some downside as currency assumptions get reset. With
an earnings growth expectations of 16-18% growth, risk reward seems
favourable.
ICICI Bank
Over the past 3 years, ICICI Bank has strengthened its underwriting practices
and grown at a manageable pace. Therefore we expect asset quality to fare
better than other leading banks. We note that its net NPA has declined 28%
YoY as against the sector average of +63% YoY. Margins are likely to expand
during FY13 by 10-15 bps YoY due to expansion in domestic margins (lower
securitisation losses) and some asset-repricing of international assets. Over
FY12-14, we expect earnings to grow at 20% Cagr and improvement in ROE
(~250bps to 16.6% by FY14) led by expansion in ROA and rise in leverage. At
tier I capital adequacy ratio of 12%, it’s the most well capitalised bank under
coverage.
Yes Bank
Yes Bank’s asset quality should fare better as it has grown in areas of core
expertise and also consolidated its growth in the past 1 year. Similar to ICICI,
its net NPAs have declined by 17% YoY As at Dec-11, contrary to sector
trends. Yes Bank would benefit from a fall in interest rates as share of term
deposits is at 89% of total deposits. The de-regulation of savings deposit rate
would enable rise in CASA ratio, but at a significantly higher cost (700bps
versus 400bps for leading banks). We expect earnings to grow at 19% Cagr
over FY12-14 led by loan growth of 27%. Bank may need to raise capital in
the next one year.
Government policy action visible, finally – but more needed
Figure
Key policy actions taken by the government
Policy action What is the action?
Coal availability for power
producers
The Government has now asked Coal India (the state owned
coal producer) to sign FSA (fuel supply greement) to cover
80% of coal requirements of the power producers. Failure to
do so would make Coal India liable for payment of penalty.
Coal India had not signed FSAs for the post Mar’09
capacities earlier.
New Telecom Policy Approval of spectrum refarming in principal (earlier only a
recommendation), reduction in license fee to a uniform 8%
in all circles and denied permission to share 3G spectrum
among the industry players.
PSU divestments Empowered Group of Ministers has approved a 5%
divestment of its shareholding in ONGC by Mar-12 via a
priority price based auction.
Highway development The Ministry of Roads and Transport has issued a press
release assuring that 15 major projects of 1,547Kms of
Roads and Highways will be awarded within FY12.
Airline sector The Empowered Group of Ministers has approved the
proposal for airlines to import aviation turbine fuel (ATF)
directly which will help the airline companies to reduce their
tax expenditure.
Retail sector The government has now approved 100% FDI in single
brand product retailing trading.
Source: CLSA Asia-Pacific Markets
Market willing to look beyond the near-term patches
Figure 5
Price performance over next 10 days after declaration of the results that were
below expectations
Price performance (%)
Jet Airways 5.8
JSW Steel 12.8
Union Bank 11.0
United Spirits 7.2
Crompton Greaves 13.2
Shoppers Stop 16.9
Jagaran Prakashan 11.1
Jindal Steel & Power 3.7
Biocon 5.1
Zee Telefilms 6.8
Canara Bank 9.9
Punjab National Bank 7.1
Oriental Bank 18.6
DLF 10.0
Voltas 14.6
Reliance Communications 10.7
Source: Bloomberg, BSE, CLSA Asia-Pacific Markets
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Recalibration
India has been the best performing Asian market YTD and we believe the
strong performance would continue as the liquidity driven rally is now
getting the policy support and corporate earnings stability. Any initiative
to improve coal production and power generation, we believe, will further
increase our enthusiasm. CLSA’s global strategist Chris Wood prefers
India on sustained global liquidity conditions, and if domestic retail
investor returns to equity, the risks will be on the upside. We continue to
add more beta to our portfolios and add Tata Motors and Yes Bank to our
top 5 ideas replacing ITC and Dr Reddy’s. The rising crude and potential
delays/lower rate cuts by the RBI will be a negative.
Liquidity rally has moved the valuations back to July level
q With the liquidity driven rally, Indian stock market has now moved back to the July
2011 level, valuations are also similar at 14.5x as time effect offset by earnings
downgrade.
q Recent stock price reactions to bad results etc imply that the investors are now
much more willing to look beyond the near-term, focussing on longer-term trends.
Initial signs of policy level improvement visible
q The Government has certainly moved beyond the policy noise to some concrete
steps (refer to our earlier note: Policy Paralysis no more?). While still a few
uncertainties exist, the direction is clear.
q The possibility of Coal India being able to ramp-up production whether from the
existing mines (relatively easier and could be effective in a year) or the new mines
(production will likely take a couple of years assuming fast-track clearances) can be
rerating trigger for the Indian markets.
q With these policy initiatives and the willingness of the investors to look beyond the
near-term patches makes us more sanguine about the current rally.
CY2012 market returns to be front ended; retail support should
q With primary markets being slow to pick-up, we believe that the CY12 market
returns will be upfronted as easier global liquidity continues.
q Domestic retail investors have been virtually absent from the equity markets for the
last three years (FY10-12) with 0.2% of incremental saving going into equities as
against 5% as the trend prior. A reversion mean (3.5% average over the last 8
years), could bring in US$13-14bn creating potential buffer for equity issuances.
Adding more beta to portfolio
q Corporate earnings trend stabilising (our FY13 Sensex EPS has remained
unchanged at 1,269 over the last 45 days and through the 3QFY12 results season),
and earnings downgrade cycle has ended.
q We raise market target multiple to 14.5x – in line with the last 10 year average to
take the Sensex target to 20,800. Rising international crude prices and possible tax
hike / fuel hike may delay the potential rate cuts by RBI. This could be a risk to
market sentiments which are building in large hopes on rate cuts.
q In line with the view of our global strategist, Chris Wood, who believes in continued
global liquidity, we add more beta to our portfolio. We remove ITC and Dr Reddy’s
from our top 5 ideas and replace with Yes bank and Tata Motors.
q We raise weight on financials by 5 ppts to become OWT. We also raise industrials to
Neutral (+2). Lower pharma by 4 pts to UWT from OWT earlier. Weight in IT also
cut but 2.5ppts but maintain the OWT stance. Reduce staples weights by 2ppts to
increase our UWT further. Also reduce weight in Energy by 2pts to make it UWT.
CLSA Top-5 picks
Tata Motors
Tata Motors continues to ride multiple positive tailwinds of better than
expected volumes and margins for its new launch Evoque. Continued strong
demand from China, new product triggers (new range Rover platform by end
CY12) and structural cost savings after FY13 driven by platform
rationalisation initiatives. Despite the recent rally, the stock trades at 7.4x
FY13CL earnings and appears attractive
Mahindra & Mahindra
The stock is down nearly 25% from the 2011 peak on account of concerns on
tractor slowdown. We now build in 0% volume growth for tractors in FY13 and
yet the company’s auto business now trades at an attractive 11x FY13CL
earnings and at 25% discount to market. We do not believe that the
Government will cut its rural expenditure and on the contrary, if the proposed
food security bill is accepted, the same may go up. We believe that the
market pessimism on M&M is unjustified
Infosys
Infosys trades at 16x FY13CL earnings or only 10% premium to the market –
shrinking it from nearly 25% as at the beginning of the year, thanks to the
INR appreciation. Further appreciation of INR against USD appears unlikely.
Post the Dec-11 results, Infosys’ expectations have been re-aligned and
downside risk to US$ growth forecast appears to be limited, although
earnings could see some downside as currency assumptions get reset. With
an earnings growth expectations of 16-18% growth, risk reward seems
favourable.
ICICI Bank
Over the past 3 years, ICICI Bank has strengthened its underwriting practices
and grown at a manageable pace. Therefore we expect asset quality to fare
better than other leading banks. We note that its net NPA has declined 28%
YoY as against the sector average of +63% YoY. Margins are likely to expand
during FY13 by 10-15 bps YoY due to expansion in domestic margins (lower
securitisation losses) and some asset-repricing of international assets. Over
FY12-14, we expect earnings to grow at 20% Cagr and improvement in ROE
(~250bps to 16.6% by FY14) led by expansion in ROA and rise in leverage. At
tier I capital adequacy ratio of 12%, it’s the most well capitalised bank under
coverage.
Yes Bank
Yes Bank’s asset quality should fare better as it has grown in areas of core
expertise and also consolidated its growth in the past 1 year. Similar to ICICI,
its net NPAs have declined by 17% YoY As at Dec-11, contrary to sector
trends. Yes Bank would benefit from a fall in interest rates as share of term
deposits is at 89% of total deposits. The de-regulation of savings deposit rate
would enable rise in CASA ratio, but at a significantly higher cost (700bps
versus 400bps for leading banks). We expect earnings to grow at 19% Cagr
over FY12-14 led by loan growth of 27%. Bank may need to raise capital in
the next one year.
Government policy action visible, finally – but more needed
Figure
Key policy actions taken by the government
Policy action What is the action?
Coal availability for power
producers
The Government has now asked Coal India (the state owned
coal producer) to sign FSA (fuel supply greement) to cover
80% of coal requirements of the power producers. Failure to
do so would make Coal India liable for payment of penalty.
Coal India had not signed FSAs for the post Mar’09
capacities earlier.
New Telecom Policy Approval of spectrum refarming in principal (earlier only a
recommendation), reduction in license fee to a uniform 8%
in all circles and denied permission to share 3G spectrum
among the industry players.
PSU divestments Empowered Group of Ministers has approved a 5%
divestment of its shareholding in ONGC by Mar-12 via a
priority price based auction.
Highway development The Ministry of Roads and Transport has issued a press
release assuring that 15 major projects of 1,547Kms of
Roads and Highways will be awarded within FY12.
Airline sector The Empowered Group of Ministers has approved the
proposal for airlines to import aviation turbine fuel (ATF)
directly which will help the airline companies to reduce their
tax expenditure.
Retail sector The government has now approved 100% FDI in single
brand product retailing trading.
Source: CLSA Asia-Pacific Markets
Market willing to look beyond the near-term patches
Figure 5
Price performance over next 10 days after declaration of the results that were
below expectations
Price performance (%)
Jet Airways 5.8
JSW Steel 12.8
Union Bank 11.0
United Spirits 7.2
Crompton Greaves 13.2
Shoppers Stop 16.9
Jagaran Prakashan 11.1
Jindal Steel & Power 3.7
Biocon 5.1
Zee Telefilms 6.8
Canara Bank 9.9
Punjab National Bank 7.1
Oriental Bank 18.6
DLF 10.0
Voltas 14.6
Reliance Communications 10.7
Source: Bloomberg, BSE, CLSA Asia-Pacific Markets
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