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India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Downgrade continues
While the sharp correction in the market may suggest attractive
valuations, we note that the pace of corporate earnings downgrades has
intensified in the recent results season. We see downside risk to bottomup
derived 15% earnings cagr over FY11-13 and even greater risk to the
street estimates as we are 3-5% below consensus. We lower 12-m
Sensex target to 18,200 as we lower target multiple to 13x to factor in
the earnings downgrade risk. Our portfolio continues to stay defensive as
we increase our U-WT on banks, industrials. Stay OWT on staples,
consumer discretionary and healthcare.
Pace of earnings downgrades has intensified
q We have lower FY12 and FY13 Sensex EPS estimates by 5.6% and 10.6%
respectively since the beginning of CY11.
q The pace of downgrades have increased during the recent result season with a
downgrade of 3% and 5% respectively. This also indicates that the there would be
more downside to our FY11-13 earnings cagr of 15%.
q Downgrades so far have been driven by margin disappointments and revenues
have held up well, which could be at risk going forward. We also saw interest cost
led downgrades in 1QFY12 for the first time and full impact is yet to be seen.
q The sectors that look vulnerable to earnings are PSU banks (asset quality
concerns), industrials (slower order flow), private utilities (lower utilisation rates
and fuel availability)
We are 3-5% below consensus
q Our new FY12 & FY13 Sensex EPS of 1,181 and 1,338 are 3% and 5% lower than
the street (Bloomberg consensus) respectively.
q On the negative side, our estimates are substantially below street on cement cos,
telcos, Pantaloon, Suzlon Maruti, Tata motors and HCL Tech and believe that the
consensus will likely see more earnings downgrades.
q On the positive side (which are few), our estimates are above street on IDFC, Dr
Reddy’s and BHEL and we maintain our positive views on these names.
Lower 12-m Sensex target to 18,200
q Our earlier Sensex target of 19,500 was based on 14x Mar’13CL earnings. Our new
target of 18,200 is based on 13x Sep’13CL earnings.
q Lower target multiple builds in the risks associated with more earnings downgrade.
q Key downside risk remains faster slowdown of growth while the near-term upside
risk would be potential loose monetary policy in the west.
q We will continue to stay cautious on the markets till we see some evidence of
investment demand picking-up.
Model portfolio stays defensive
q We have increased our OWT on Consumer discretionary by adding to M&M as its
reasonable valuations and visible growth being the key points of attraction. We
replace Hero Honda with Bajaj Auto. Higher share of exports and lower competitive
threats is the reason for our preference.
q We cut industrials to UWT by removing L&T from the model portfolio. The stock
has held-up well despite the ordering slowdown and we see greater risks to its
earnings / multiples. The slowdown in the investment cycle will
impact banks' earnings through lower credit growth and uptick in NPLs. We
increase our UWT on banks by taking off 2 points from Bank of Baroda.
q To maintain our UWT on IT, we have taken out e-Clerx. The stock has O-PF the
markets by 20% since its inclusion in Jan-11
q We are taking out Adani Power as we see downside earnings risk on account of
continued fuel shortages and Indonesia coal costs. Replacing with more defensive
Power grid. We also bring in JSPL as the stock has corrected by c.20% over the
last one month and downside appears limited
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Downgrade continues
While the sharp correction in the market may suggest attractive
valuations, we note that the pace of corporate earnings downgrades has
intensified in the recent results season. We see downside risk to bottomup
derived 15% earnings cagr over FY11-13 and even greater risk to the
street estimates as we are 3-5% below consensus. We lower 12-m
Sensex target to 18,200 as we lower target multiple to 13x to factor in
the earnings downgrade risk. Our portfolio continues to stay defensive as
we increase our U-WT on banks, industrials. Stay OWT on staples,
consumer discretionary and healthcare.
Pace of earnings downgrades has intensified
q We have lower FY12 and FY13 Sensex EPS estimates by 5.6% and 10.6%
respectively since the beginning of CY11.
q The pace of downgrades have increased during the recent result season with a
downgrade of 3% and 5% respectively. This also indicates that the there would be
more downside to our FY11-13 earnings cagr of 15%.
q Downgrades so far have been driven by margin disappointments and revenues
have held up well, which could be at risk going forward. We also saw interest cost
led downgrades in 1QFY12 for the first time and full impact is yet to be seen.
q The sectors that look vulnerable to earnings are PSU banks (asset quality
concerns), industrials (slower order flow), private utilities (lower utilisation rates
and fuel availability)
We are 3-5% below consensus
q Our new FY12 & FY13 Sensex EPS of 1,181 and 1,338 are 3% and 5% lower than
the street (Bloomberg consensus) respectively.
q On the negative side, our estimates are substantially below street on cement cos,
telcos, Pantaloon, Suzlon Maruti, Tata motors and HCL Tech and believe that the
consensus will likely see more earnings downgrades.
q On the positive side (which are few), our estimates are above street on IDFC, Dr
Reddy’s and BHEL and we maintain our positive views on these names.
Lower 12-m Sensex target to 18,200
q Our earlier Sensex target of 19,500 was based on 14x Mar’13CL earnings. Our new
target of 18,200 is based on 13x Sep’13CL earnings.
q Lower target multiple builds in the risks associated with more earnings downgrade.
q Key downside risk remains faster slowdown of growth while the near-term upside
risk would be potential loose monetary policy in the west.
q We will continue to stay cautious on the markets till we see some evidence of
investment demand picking-up.
Model portfolio stays defensive
q We have increased our OWT on Consumer discretionary by adding to M&M as its
reasonable valuations and visible growth being the key points of attraction. We
replace Hero Honda with Bajaj Auto. Higher share of exports and lower competitive
threats is the reason for our preference.
q We cut industrials to UWT by removing L&T from the model portfolio. The stock
has held-up well despite the ordering slowdown and we see greater risks to its
earnings / multiples. The slowdown in the investment cycle will
impact banks' earnings through lower credit growth and uptick in NPLs. We
increase our UWT on banks by taking off 2 points from Bank of Baroda.
q To maintain our UWT on IT, we have taken out e-Clerx. The stock has O-PF the
markets by 20% since its inclusion in Jan-11
q We are taking out Adani Power as we see downside earnings risk on account of
continued fuel shortages and Indonesia coal costs. Replacing with more defensive
Power grid. We also bring in JSPL as the stock has corrected by c.20% over the
last one month and downside appears limited
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