India Equity Insights A good start but more needs to be done ::HSBC Research

India Equity Insights
A good start but more needs to be done
 A flurry of policy announcements sparked a rerating in Indian
stocks, with foreign institutional flows surging in September
 We raise our Sensex targets to 18,700 (from 18,000) for CY12 and
20,000 (from 19,000) for CY13 on improved sentiment, but remain
underweight India in a regional context due to the rich valuation
 Our three key themes for the final quarter are: resilient
earnings, domestic consumption and domestic investment

�� -->


September’s flurry of announcements
After an extended period of inertia, the government surprised investors by announcing a
flurry of new policy initiatives in September. Along with the announcement of QE3 by the
US Fed, this triggered an 8% up leg in Indian equities during the month, with FII inflows
going into overdrive (reaching USD4bn in September and topping USD16bn year-to-date).
A three-pronged policy focus
Government action can be broadly grouped into three categories: firstly, fiscal consolidation
(eg, subsidy reductions and divestments); secondly, a revival of investment spending (eg,
reducing cost of borrowing); and thirdly, structural reforms to promote growth (eg, reducing
losses in power distribution, investment board for faster clearance of large projects). In our
view, these are encouraging moves, but they will take time to revive growth.
Raising targets for India, but remain underweight
Our underweight stance on India in a regional context is premised on a weak INR, limited
reform agenda and slowing economy. While the policy announcements have led to a surge
in foreign fund inflows, resulting in INR appreciating 5% against USD in September, it
will take time for economic growth to recover and the run-up leaves valuations expensive
(India trades at a 30% premium to the rest of Asia). As such, we remain underweight India,
albeit raising our Sensex targets to 18,700 (from 18,000) for CY12 and 20,000 (from
19,000) for CY13 after the positive turn of events.
Three key themes for the fourth quarter
We continue to like names with earnings resilience, such as Power Grid, HDFC, Wipro (an
HSBC Asia Super Ten portfolio stock) and Sun Pharma. In the consumption space, we like
Titan, LIC Housing, Coal India and DLF (debt reduction via the sale of non-core assets).
From an investment perspective, we like ICICI Bank, Jaiprakash Associates, Tata Power
(potential resolution of the Mundra power plant issues) and ILFS Transport (a mid-cap asset
owner of toll roads).


Investment summary
 Sensex up 8% in September, as reform announcements take the
market by surprise and QE3 adds fuel
 Government action is welcome, but lifting economic growth may
not be possible in the short term
 Remain underweight India within the Asian region given multiples
have expanded, but raising Sensex targets to 18,700 (from
18,000) for CY12 and 20,000 (from 19,000) for CY13


Policies galore
 Fiscal consolidation targeted via divestments, subsidy reduction
 Investment turnaround targeted via dilution of FDI, reduction in
borrowing costs for corporate India
 Structural reforms to address state electricity losses and initiatives
like national investment board


Earnings bottoming out
A slowing economy has meant that consensus
forecasts have been behind the curve, resulting in
a trimming of the earnings post each results
season in the past 7-8 quarters.
The momentum in earnings cuts now seems to be
tapering off. So far in 2H, we have only seen a 3%
earnings cut in MSCI India’s CY12 earnings
estimates. In 1Q FY13, the cut was less than 1%
(Chart 3). However, only post stabilisation of
earnings can we start expecting some
positive momentum.
In our view, consensus earnings growth is
currently pegged at 12% for CY12 and 13% for
CY13. We see limited risk of downward earnings
revisions from here on.
At the sector level, financials, consumer staples,
health care and IT contribute the most to CY12
MSCI India earnings, while sectors like telecom,
financials, consumer staples and industrials
should contribute the most to CY13 earnings.


Sector views
 Overweight domestic consumption and investment-oriented
themes, play earnings resilience
 Cautious on global cyclicals (metals, oil), moving IT to neutral on
more positive INR view
 Key stock ideas: stable earnings (Power Grid, HDFC, Sun Pharma,
Wipro, an Asia Super Ten stock); domestic consumption growth
plays (Coal India, LIC Housing, DLF, Titan); domestic investment
plays (Jaiprakash Associates, Tata Power, ILFS Transport, ICICI)