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India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Strategy
Governance: The missing link. The performance of the Indian stock market in
CY2012 will largely depend on the ability of Indian and Eurozone governments to
manage their challenges. We expect 15-20% upside to the Indian market if (1)
governance improves in India and (2) Eurozone sovereign-debt issues get resolved
favorably. In the absence of the former, India may have to contend with low GDP
growth, high fiscal and BOP deficits and limited investment opportunities.
Governance and governments: Key theme for CY2012
Our key investment theme for CY2012 is the tangible demonstration of commitment by
governments around the world to tackle their big challenges. For India, improved governance is
the key. We think India has little choice but to improve governance and reform dramatically. The
cost of ‘drift’ is extremely high in terms of time and opportunity. The Indian government has
demonstrated its ability to tackle select crises head on. Fixing the governance deficit in India will
drive faster economic growth and enhance productivity (potential GDP growth). From a narrow
perspective of the Indian stock market, such activity will spur investment opportunities, currently
very thin on the ground.
Macro-economy to get only marginal relief from respite in inflation and oil prices
In our view, improved governance is critical to overcome several key challenges before India—
slower GDP growth, weak fiscal and BOP positions, low investment activity, reforms (subsidies,
taxation). We see improvements in some macro-economic factors resulting from (1) lower interest
rates in 2HCY12 due to lower inflation and (2) modest improvement in fiscal position led by likely
lower global crude oil prices and higher domestic selling prices.
Portfolio strategy: Still hedging our bets but taking a more positive view
We focus on (1) certain high-quality names despite their somewhat rich valuations, (2) strong
companies with some governance issues but trading at inexpensive valuations, (3) companies with
natural hedges against Rupee depreciation and (4) a few beaten-down stocks with favorable
reward-risk balance if the macro-economy and governance pick up decisively.
Earnings outlook: Some resilience given composition of earnings
We estimate BSE-30 Index net income (full-float basis) to grow 14.5% in FY2012E and 17.6% in
FY2013E. We see some resilience in earnings due to support from (1) several high-quality
companies in the private banking, consumer sectors, (2) economy-agnostic companies (although
policy risks exist) and (3) global cyclical commodity and technology companies whose earnings
depend largely on global factors.
Governments can choose to turn the tide in CY2012
India is at a decisive point in its journey of development. CY2012 may see improved
governance and better macro-economic factors such as lower interest rates/inflation and
lower fiscal deficit. A dynamic response from the Government to current challenges may
result in around 15-20% return for the Indian equity market in CY2012 (BSE-30 Index 12-
month target—19,000) and more importantly, set the stage for a multi-year bull market. On
the other hand, CY2012 may turn out to be similar to CY2011, a year which saw limited
initiatives by the Government to address India’s problems; a static situation may result in -5-
+5% return for the Indian equity market.
It is for the Indian Government to decide the fate of its markets. In our view, it may
not have the option to continue with the current state of drift and weak governance. A rude
awakening from possible slowdown in growth (6-7% in FY2013E without dynamic and
immediate policy response) and continued deterioration in living standards (as opposed to
per capita GDP growth) may force the government to take decisive action.
The only certainty about CY2012—it is likely to be a very interesting year. The
response of the governments to various crises (major in Europe, minor in India, China and
the US) will determine the pace of global economic growth and shape investment sentiment
(higher or lower risk appetite for risk assets including equities). CY2012 may be a year when
the world may see a repeat of the Global Financial Crisis in CY2008-09 or it may be a year
when the world finally begins to address its problems (primarily, a slowdown in most parts
of the world and sovereign-debt crises in the Eurozone) through concerted and decisive
government action.
Exhibit 1 shows the large role of the Indian Government in various sectors. The role of the
Government has not always been benign, which has curtailed profitability and profits of
several sectors. We have highlighted the degree of influence by sectors and by factors in the
exhibit. The Government’s influence is in various ways—(1) direct ownership (banking,
energy and mining), (2) macro-economic policies (banking), (3) regulation, policy framework
and implementation (banking, infrastructure, power, telecom), (4) direct and indirect price
controls (coal, oil and gas) and (5) taxation (direct in all the sectors and indirect in cigarettes,
in particular).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Strategy
Governance: The missing link. The performance of the Indian stock market in
CY2012 will largely depend on the ability of Indian and Eurozone governments to
manage their challenges. We expect 15-20% upside to the Indian market if (1)
governance improves in India and (2) Eurozone sovereign-debt issues get resolved
favorably. In the absence of the former, India may have to contend with low GDP
growth, high fiscal and BOP deficits and limited investment opportunities.
Governance and governments: Key theme for CY2012
Our key investment theme for CY2012 is the tangible demonstration of commitment by
governments around the world to tackle their big challenges. For India, improved governance is
the key. We think India has little choice but to improve governance and reform dramatically. The
cost of ‘drift’ is extremely high in terms of time and opportunity. The Indian government has
demonstrated its ability to tackle select crises head on. Fixing the governance deficit in India will
drive faster economic growth and enhance productivity (potential GDP growth). From a narrow
perspective of the Indian stock market, such activity will spur investment opportunities, currently
very thin on the ground.
Macro-economy to get only marginal relief from respite in inflation and oil prices
In our view, improved governance is critical to overcome several key challenges before India—
slower GDP growth, weak fiscal and BOP positions, low investment activity, reforms (subsidies,
taxation). We see improvements in some macro-economic factors resulting from (1) lower interest
rates in 2HCY12 due to lower inflation and (2) modest improvement in fiscal position led by likely
lower global crude oil prices and higher domestic selling prices.
Portfolio strategy: Still hedging our bets but taking a more positive view
We focus on (1) certain high-quality names despite their somewhat rich valuations, (2) strong
companies with some governance issues but trading at inexpensive valuations, (3) companies with
natural hedges against Rupee depreciation and (4) a few beaten-down stocks with favorable
reward-risk balance if the macro-economy and governance pick up decisively.
Earnings outlook: Some resilience given composition of earnings
We estimate BSE-30 Index net income (full-float basis) to grow 14.5% in FY2012E and 17.6% in
FY2013E. We see some resilience in earnings due to support from (1) several high-quality
companies in the private banking, consumer sectors, (2) economy-agnostic companies (although
policy risks exist) and (3) global cyclical commodity and technology companies whose earnings
depend largely on global factors.
Governments can choose to turn the tide in CY2012
India is at a decisive point in its journey of development. CY2012 may see improved
governance and better macro-economic factors such as lower interest rates/inflation and
lower fiscal deficit. A dynamic response from the Government to current challenges may
result in around 15-20% return for the Indian equity market in CY2012 (BSE-30 Index 12-
month target—19,000) and more importantly, set the stage for a multi-year bull market. On
the other hand, CY2012 may turn out to be similar to CY2011, a year which saw limited
initiatives by the Government to address India’s problems; a static situation may result in -5-
+5% return for the Indian equity market.
It is for the Indian Government to decide the fate of its markets. In our view, it may
not have the option to continue with the current state of drift and weak governance. A rude
awakening from possible slowdown in growth (6-7% in FY2013E without dynamic and
immediate policy response) and continued deterioration in living standards (as opposed to
per capita GDP growth) may force the government to take decisive action.
The only certainty about CY2012—it is likely to be a very interesting year. The
response of the governments to various crises (major in Europe, minor in India, China and
the US) will determine the pace of global economic growth and shape investment sentiment
(higher or lower risk appetite for risk assets including equities). CY2012 may be a year when
the world may see a repeat of the Global Financial Crisis in CY2008-09 or it may be a year
when the world finally begins to address its problems (primarily, a slowdown in most parts
of the world and sovereign-debt crises in the Eurozone) through concerted and decisive
government action.
Exhibit 1 shows the large role of the Indian Government in various sectors. The role of the
Government has not always been benign, which has curtailed profitability and profits of
several sectors. We have highlighted the degree of influence by sectors and by factors in the
exhibit. The Government’s influence is in various ways—(1) direct ownership (banking,
energy and mining), (2) macro-economic policies (banking), (3) regulation, policy framework
and implementation (banking, infrastructure, power, telecom), (4) direct and indirect price
controls (coal, oil and gas) and (5) taxation (direct in all the sectors and indirect in cigarettes,
in particular).
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