Top Ideas - What to buy post recent correction:: Prabhudas Lilladher

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Top Ideas - What to buy post recent correction

Investment Argument, Financials & Valuation discussion -Prabhudas Lilladher

Top Large Cap Picks -
Mahindra & Mahindra
Thermax
Union Bank of India
Asian Paints
ICICI Bank
BHEL

Other Mid-Cap Ideas
Ashok Leyland
Jagran Prakashan
YES Bank
Deepak Fertilisers
Indraprastha Gas
Petronet LNG





Summary
Earnings
Quarterlyearningshavenotdisappointed:ThefirsthalfearningsperformanceofCorporateIndiahasbeenalongexpectedlines.RevenueandPATgrewby24%and17%YoYrespectively.StrongperformancecontinuedfromAutos,BankingandConsumers,whileConstruction,TelecomandCementputupaweakshow.AsimilartrendisexpectedinQ3FY11aswell,butwilllowerPATgrowthduetopressureonmarginsandhigherinterestcosts.
Overallearningspictureislookingfairlyhealthy:WehaveintroducedourFY13numbersandbasedonthesametheearningspicturecontinuestolookfairlyhealthy.NiftyearningsareexpectedtogrowataCAGRof19.6%overFY11-13E(ex-commodities21.7%overFY11-13E).
Flows
FIIflowssharplydown,butexpectedtopickupthroughtheyear:FIIflowshavebeensignificantlyimpactedinDecemberduetorisingriskaversenessgloballyandworriesonpotentialratehikesinIndia.RelativelyhighvaluationshadalsomadeIndiasomewhatunattractiveversusothermarkets.Weexpectpickupinflowsoverthenextfewmonths.
Domesticflowspictureremainsunclear:Afterseeingsignificantoutflowsduringmuchof2010domesticmutualfundsareexperiencingsomestabilitynow.However,thepictureonInsuranceflowsremainssomewhatunclear.Thistaxseasonflowswillbekeenlywatchedtogetasenseondomesticinsuranceflows.
Macro
Inflationandliquiditykeyissues,unlikelytogetresolvedsoon:Headlineinflationiscomingoff,butfoodinflationremainsahugeconcern.Giventheglobalandsupply-sidenatureoftheinflation,monetarypolicyactionisunlikelytobringitdownsoon.Tightliquidityconditionsarealsounlikelytoeaseoffinahurry.
Overalleconomicgrowthlikelytocomeoff,butstillremainathealthylevels:Clearlywithhigherinterestratesandlowerexpectedagrioutputgrowth,GDPgrowthinFY12islikelytobelowerthanFY11.However,webelievethegrowthisstilllikelytobehealthyatabout8.5%.
Globalmacroismixedbag:TheglobalmacrosceneissomewhatofamixedbagwithimprovingprospectsintheUS,continuingconcernsinEuropeandmountingworriesofaslowingChina.TheimpactonIndiaoftheseisissuesarebothpositiveandnegative.
Valuation
IndiahasunderperformedmajorEMrecently:TheIndianmarkethasunderperformedkeyemerginganddevelopedmarketsrecently.Niftyhasreturned~(3)%overthepastthreemonthsversus~10%forKorea,~0.5%forBrazil,~18%forRussiaand~7%forChina.Clearlyinflationfears,politicaluncertaintyandrisinginterestrateshavereducedIndia’sattractionforFIIs.
Givenstrongearningsgrowth,valuationshavebecomeattractive:Niftyiscurrentlyvaluedat14.3xFY12Eand12.2xFY13E.Giventhe20%earningsCAGRexpectedoverthenexttwoyears,webelievethisisattractive.Wetarget7,000fortheNiftybyendFY2012.
SectorPreferences
OverWeight:Engineering&CapitalGoodsandTechnology
EqualWeight:Banking,Oil&Gas,ConsumerandAutomobiles
UnderWeight:MetalsandTelecomandOthers(Cement,RealEstate,etc.)


Nifty quarterly earnings analysis

 Nifty revenue growth (ex. Oil & Gas) is sustaining above the 20% YoY growth mark. Growth is being driven by growth in sectors such as Banking,
Automobiles,Metals, Technology and Capital Goods.
 However, earnings are not keeping pace and are expected to slowdown due to lower EBITDA Margins and higher Interest Cost. Both these pressures
are unlikely to come off in a hurry.

India Fund Flows


FII flows have sharply slowed down in December due to a spate of
international and local factors. Internationally increased risk aversion
due to troubles in Europe has kept investors away from emerging
markets. Domestically high inflation, rising risk of a rate hike by RBI and
higher Oil prices have made FIIs concerned about Indian investments.
 Domestic mutual fund flows have started leveling off after falling
through much of 2010. However, the picture on the Insurance flows
remains unclear. The current quarter will be crucially watched for signs
of slowdown.

India Macro Snapshot


 After hitting bottom in March 2009, India’s economic output has been
on a steadily improving path since. GDP growth is now approaching the
9+% levels last seen in 2006-2007.
 The growth is being driven primarily by a structurally strong services
growth and cyclically improving agricultural growth. Industrial growth
(as represented by IIP) is surprisingly muted. However, anecdotally we
expect the same to pick up over the next couple of quarters.
 Key infrastructure sectors have been showing muted growth. This
remains a key concern for investors, since Infrastructure opportunity
has been one of the key attractions of the India story.


 While overall inflation has been coming down steadily, food inflation
has remained stubbornly high. Food inflation is a global phenomenon
and is unlikely to come under control merely by monetary policy
action.
 On its part the government has squeezed spending to curb inflation
expectations but that is leading to tight liquidity conditions and rising
short-term interest rates.
 The chances for one more rate hike cannot be ruled out, but past
policy action is having some positive effect on headline inflation. We
expect overall inflation to come under control over the next couple of
quarters barring supply-side shocks or sharply higher Crude Oil prices


 We are seeing divergent global economic trends. While the economic
picture in the US is stabilizing and getting steadily better, the
environment in Europe (especially peripheral Europe) continues to
remain concerning. Grave fears exist on the ability of PIIGS countries to
refinance their debt requirements without a bailout from the rest of
EU.
 Chinese inflationary trends are resulting in the government trying to
cool off its economic growth. China plans to grow by an average of 7%
over the next five years compared to over 10% in the past five years.
This has significant implications for key commodity prices.