Eye on India - Size and attractiveness:: Macquarie Research,

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Eye on India
Size and attractiveness
Event
 Mark Twain said “It's not the size of the dog in the fight; it's the size
of the fight in the dog”. It has proved right over the last decade: the CNX
mid cap index has outperformed the large cap index (Nifty) by a staggering
250%. However, Nifty mid-caps do tend to underperform significantly during
slower growth/recessionary times. Interestingly, mid caps have performed in
line with large caps and we think it is not too late to sell.
 Nifty is trading at a PER premium of just 21% as compared to 50%+ seen in
last dip in 2008, and the 28% average for the last 5 years. CNX mid cap
earnings are virtually unchanged for FY13 and FII holdings are also mildly up,
while debt: equity is ominously up and interest coverage ratios have dropped.
We cover 44 mid cap stocks, and highlight the following as most risky –
GVKP, MMFS, India Cements, Omaxe, Marico and Emami.
What caught our eye?
 Risk aversion at its peak: This week global equities fell as the Fed’s ‘twist’
couldn’t instil confidence in markets. As of yesterday’s closing prices, Indian
indices were down ranging 3-4% vs a 7% fall in MSCI World and 10% fall in
EMs. The worst performing Indian sector was capital goods (-7.7%). Our top-
10 stocks fell in line with the market with only Dr. Reddy’s in positive territory;
the top-10 list continues to outperform MSCI India by 660bps since Aug-10.
 Deputy Governor hints at the rate hike cycle „nearing its end‟: Although
RBI’s latest statement was reasonably hawkish, it appears optimistic about
inflation moderating soon. The deputy Governor mentioned - “oil prices do not
appear to be going higher,” and “we are seeing some deceleration in domestic
growth because demand is being moderated”. (Link)
 USD-INR hits 28-month low: Even as we wrote last week about the currency
impact on sector performance (See link) the rupee was hovering around
47/US$; within a week it is close to hitting 50/US$. The INR has fallen by
8.4% in September alone and by 11% in the past 3 months. We expect the
INR to end at 47.5 by Mar-12 before reverting to the 45-46 range post Jun-12.
 Scrapping of „go; no-go‟ could make it easier to mine in forest areas: A
Group of Ministers (GoM) scrapped the environment ministry's categorising
non-mining areas, as it had no legal basis, while upholding the intent behind
the policy of preserving forests. It has now asked the Forest Survey of India
(FSI) to demarcate areas based on scientifically agreed norms. (Link)
Outlook
 Meltdown finally starts and nowhere to hide: As anticipated, the meltdown
across asset classes is just starting. Commodities, gold, Chinese property,
and equities are all now starting to crack. Remember we are at the start and
not the end of it. India remains in an even tighter spot, with the depreciating
rupee negating the impact of falling commodity prices and limiting policy
action. We believe you should stay defensive, consider cash.