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Strategy: All is good except for valuations
Extent of rate cut will depend on external situation - domestic factors very
supportive
Reforms will continue through executive actions or legislations - low scope
for positive surprise
Steep valuations for quality sectors and limited earnings upgrades a
dampener
A few changes to the Model Portfolio
�� India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details ��
��
All is good except for valuations. India’s macroeconomic story has not looked so
good in a long time and we expect the government to plough ahead with economic
reforms. However, we expect muted returns from the Indian market over the next few
months in light of (1) stretched valuations of quality stocks and (2) possible earnings
downgrades. Higher-than-expected rate cut is the only positive trigger but the RBI may
be constrained by external factors to act aggressively.
Extent of rate cut will depend on external situation—domestic factors very supportive
We see the extent of rate cut by the RBI as the biggest variable for the market over the next few
months. The market has largely factored in a 25-50 bps cut in 1HCY15. The extent of rate cut
will depend on (1) domestic factors such as inflation and fiscal improvement and (2) external
factors. We see domestic factors being fairly supportive for 100-150 bps rate cut in CY2015
with inflation dropping sharply (see Exhibit 1) and continued fiscal improvement (see Exhibit 2).
However, external factors, an overvalued currency and the uncertainty surrounding the US Fed’s
rate increase may restrain the RBI, in our view. We see 100 bps as the outer limit currently.
Reforms will continue through executive actions or legislations—low scope for positive surprise
The government’s recent decision to promulgate three ordinances (see Exhibit 3 for details)
shows its intent to implement economic reforms, especially in the areas related to investment.
Fiscal reforms are broadly on track. The government’s failure to convert the ordinances into
‘proper’ acts would be a key risk for the market. The government may opt for joint sessions if
any of the bills to replace the ordinances is rejected by one of the two houses of the parliament
(upper houses most likely where the government is in a minority). Several other reforms with
respect to fiscal, banking sector and governance are largely on track (see Exhibit 4) though.
Steep valuations for quality sectors and limited earnings upgrades a dampener
We find valuations of quality stocks in high-growth sectors quite expensive and see risks of
downgrades to earnings in case of certain sectors such as automobiles and industrials if
economic recovery is weaker than our expectations. We have already cut earnings numbers for
the energy sector in light of the sharp fall in crude prices (huge positive for India’s macro story
though). With investment recovery still 3-4 quarters away, consumption demand likely to
remain weak and the government unable to spend aggressively due to its fiscal consolidation
strategy, earnings upgrades look difficult (see Exhibit 5). Exhibits 6-9 show valuations, earnings
growth and earnings breakdown of the BSE-30 and the Nifty-50 indices.
A few changes to the Model Portfolio
Exhibit 10 is our revised Model Portfolio. (1) We add M&M (200 bps) noting its inexpensive
valuations after is large underperformance versus peers and potential recovery in UV volumes
from launch of new models and lower taxes on implementation of GST (UVs are taxed at 38%
at the retail level, which will likely reduce to 20% post implementation of GST) and reduce 100
bps each from Hero and MSIL noting their rich valuations and limited scope for positive
surprises on volumes and margins. (2) We remove UNSP (200 bps earlier) and add ITC (300 bps
versus nil earlier) noting its severe underperformance and possibly lower threat of large increase
in excise duties on cigarettes in the forthcoming budget. We note that the government will gain
an additional `560 bn on an annualized basis from higher excise duties on diesel and gasoline.
(3) We remove OIL (200 bps) noting limited upside to our reduced target price now given our
assumptions of lower crude oil prices for FY2016-17. (4) We allocate 100 bps additional to
HDFCB (10% in the portfolio).
LINK
http://www.kotaksecurities.com/pdf/indiadaily/indiadaily13012015ba.pdf
Strategy: All is good except for valuations
Extent of rate cut will depend on external situation - domestic factors very
supportive
Reforms will continue through executive actions or legislations - low scope
for positive surprise
Steep valuations for quality sectors and limited earnings upgrades a
dampener
A few changes to the Model Portfolio
�� India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details ��
��
All is good except for valuations. India’s macroeconomic story has not looked so
good in a long time and we expect the government to plough ahead with economic
reforms. However, we expect muted returns from the Indian market over the next few
months in light of (1) stretched valuations of quality stocks and (2) possible earnings
downgrades. Higher-than-expected rate cut is the only positive trigger but the RBI may
be constrained by external factors to act aggressively.
Extent of rate cut will depend on external situation—domestic factors very supportive
We see the extent of rate cut by the RBI as the biggest variable for the market over the next few
months. The market has largely factored in a 25-50 bps cut in 1HCY15. The extent of rate cut
will depend on (1) domestic factors such as inflation and fiscal improvement and (2) external
factors. We see domestic factors being fairly supportive for 100-150 bps rate cut in CY2015
with inflation dropping sharply (see Exhibit 1) and continued fiscal improvement (see Exhibit 2).
However, external factors, an overvalued currency and the uncertainty surrounding the US Fed’s
rate increase may restrain the RBI, in our view. We see 100 bps as the outer limit currently.
Reforms will continue through executive actions or legislations—low scope for positive surprise
The government’s recent decision to promulgate three ordinances (see Exhibit 3 for details)
shows its intent to implement economic reforms, especially in the areas related to investment.
Fiscal reforms are broadly on track. The government’s failure to convert the ordinances into
‘proper’ acts would be a key risk for the market. The government may opt for joint sessions if
any of the bills to replace the ordinances is rejected by one of the two houses of the parliament
(upper houses most likely where the government is in a minority). Several other reforms with
respect to fiscal, banking sector and governance are largely on track (see Exhibit 4) though.
Steep valuations for quality sectors and limited earnings upgrades a dampener
We find valuations of quality stocks in high-growth sectors quite expensive and see risks of
downgrades to earnings in case of certain sectors such as automobiles and industrials if
economic recovery is weaker than our expectations. We have already cut earnings numbers for
the energy sector in light of the sharp fall in crude prices (huge positive for India’s macro story
though). With investment recovery still 3-4 quarters away, consumption demand likely to
remain weak and the government unable to spend aggressively due to its fiscal consolidation
strategy, earnings upgrades look difficult (see Exhibit 5). Exhibits 6-9 show valuations, earnings
growth and earnings breakdown of the BSE-30 and the Nifty-50 indices.
A few changes to the Model Portfolio
Exhibit 10 is our revised Model Portfolio. (1) We add M&M (200 bps) noting its inexpensive
valuations after is large underperformance versus peers and potential recovery in UV volumes
from launch of new models and lower taxes on implementation of GST (UVs are taxed at 38%
at the retail level, which will likely reduce to 20% post implementation of GST) and reduce 100
bps each from Hero and MSIL noting their rich valuations and limited scope for positive
surprises on volumes and margins. (2) We remove UNSP (200 bps earlier) and add ITC (300 bps
versus nil earlier) noting its severe underperformance and possibly lower threat of large increase
in excise duties on cigarettes in the forthcoming budget. We note that the government will gain
an additional `560 bn on an annualized basis from higher excise duties on diesel and gasoline.
(3) We remove OIL (200 bps) noting limited upside to our reduced target price now given our
assumptions of lower crude oil prices for FY2016-17. (4) We allocate 100 bps additional to
HDFCB (10% in the portfolio).
LINK
http://www.kotaksecurities.com/pdf/indiadaily/indiadaily13012015ba.pdf
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