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Too much of a GA(A)P. We do not rule out a small correction in the market, given the growing gap between valuations and fundamentals. 3QFY15 results dispelled hopes of a near-term recovery in earnings and economic activity. Ongoing economic reforms, macro-economic improvement and strong global liquidity have driven up valuations. Low ‘cost’ of money and lack of growth globally have perhaps contributed to a huge ‘premium’ for growth, but stocks may need the support of earnings soon
�� India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details ��
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Growing gap between valuations and fundamentals The gap between valuations and earnings of quality stocks is rising (see Exhibit 1). High multiples suggest that the market expects a sharp recovery in earnings and/or low cost of capital. The current gap between valuations and earnings/book is being ‘bridged’ by (1) strong global liquidity, (2) India’s improved macro-economic environment and (3) ongoing reforms. However, the latter two are yet to translate into higher earnings. Largely, the low cost of money globally (due to QE programs of major central banks) has driven the rerating of assets. Earnings and fundamentals will become relevant sooner than later 3QFY15 results rudely reminded us that improvement in economic activity and earnings is still a while away. The market has been forgiving of earnings misses over the past 2-3 quarters, but some stocks have seen significant corrections after results in the current results season. The market’s patience may be finally running thin. Weak volume growth in the cement and consumer staples sectors (see Exhibit 2) and rising slippages and NPLs in the banking sector (see Exhibit 3) suggest risks to earnings numbers. We will cover these issues in more detail in our quarterly results review report after the 3QFY15 results season. In the absence of earnings upgrades, more macro good news may be required in the short term We see downside risks to our earnings estimates in the auto, cement, energy and industrial sectors (see Exhibits 4-7) and expect a further increase in NPLs from continued problems in the power, steel and telecom sectors. The market may need additional positive news to sustain at current levels; low crude prices, declining inflation, strong currency and smooth passage of pending legislation (see Exhibit 8 for details of major economic bills and ordinances before the parliament) have been factored in and some of these can surprise negatively. Among positive surprises, a larger-than-expected rate cut (additional 50 bps in the next 2-3 months) will shore up sentiment. However, the forthcoming FY2016 budget may have limited positive surprises, given the conflicting objectives of fiscal consolidation and growth; the scope to provide fiscal stimulus through higher capital expenditure is somewhat limited. The government’s capital expenditure has declined 11% in 9MFY15, showing that it is under pressure to align expenditure with lower-than-expected revenues (see Exhibit 9). Too scared to sell, too afraid to buy—‘Growth at any price (GAAP)’ strategy may not last long Valuations of quality stocks in India have reached high levels in a short time, exacerbating the investors’ dilemma. We see the reward-risk balance being quite unfavorable in stocks that trade at high multiples (on FY2017E) after assuming strong growth in earnings over the next two years. We present a long list of such stocks in Exhibit 10.
Exhibit 10: Certain high-quality stocks trade at expensive multiples for FY2017 after factoring in strong earnings growth in FY2015-17 List of stocks with high multiples and high earnings growth, March fiscal year-ends, 2015E-17E
Company Sector 2015E 2016E 2017E 2015E 2016E 2017E 2015E 2016E 2017E 2015E 2016E 2017E Bharat Forge Automobiles 35.7 45.3 56.4 70 27 24 30 24 19 7.7 6.2 4.9 Hero Motocorp Automobiles 134.5 184.3 220.8 27 37 20 21 15 13 8.4 6.9 5.7 Maruti Suzuki Automobiles 117.1 189.3 249.5 27 62 32 30 19 14 4.6 3.9 3.3 ACC Cement 45.7 63.4 84.7 (2) 39 34 33 24 18 3.4 3.1 2.8 Ambuja Cements Cement 9.1 11.5 14.3 35 26 24 27 22 17 3.5 3.3 2.8 Shree Cement Cement 206.8 350.4 473.7 (12) 69 35 49 29 21 6.9 5.7 4.5 UltraTech Cement Cement 75.6 101.8 141.4 1 35 39 41 30 22 4.5 4.0 3.4 Asian Paints Consumer Products 15.4 20.9 23.9 20 36 14 52 38 34 16.2 13.1 10.8 Page Industries Consumer Products 180.6 223.2 273.6 31 24 23 66 53 43 33.7 24.9 18.2 United Spirits Consumer Products 15.9 63.0 94.8 277 297 50 213 54 36 16.3 12.9 9.8 ABB Industrials 11.6 24.0 32.2 39 107 34 110 53 39 9.5 8.2 7.0 Bharat Heavy Electricals Industrials 11.6 13.7 15.9 (18) 18 17 25 21 18 2.0 1.9 1.7 Larsen & Toubro Industrials 40.7 58.6 78.8 (16) 44 34 41 29 21 4.1 3.7 3.3 Siemens Industrials 17.2 23.2 28.7 177 35 24 64 47 38 8.0 7.2 6.4 Thermax Industrials 23.5 32.1 38.8 14 36 21 48 35 29 6.1 5.4 4.8 Cipla Pharmaceuticals 17.3 24.2 32.3 0 39 33 39 28 21 4.9 4.3 3.7 Dr Reddy's Laboratories Pharmaceuticals 137.1 140.7 155.9 9 3 11 23 22 20 4.8 4.0 3.4 Lupin Pharmaceuticals 54.3 61.9 74.6 33 14 21 29 26 21 7.8 6.2 5.0 Sun Pharmaceuticals Pharmaceuticals 31.2 34.0 37.9 13 9 11 31 28 25 8.1 6.4 5.3 Bharti Airtel Telecom 15.5 17.1 21.1 86 10 24 24 22 17 2.3 2.1 2.0 Bharti Infratel Telecom 11.2 13.0 15.7 39 16 21 34 29 24 4.0 4.0 3.9 IDEA Telecom 8.3 8.8 8.5 39 7 (4) 19 17 18 2.4 2.2 2.0
LINK
http://www.kotaksecurities.com/pdf/indiadaily/indiadaily05022015pu.pdf
Too much of a GA(A)P. We do not rule out a small correction in the market, given the growing gap between valuations and fundamentals. 3QFY15 results dispelled hopes of a near-term recovery in earnings and economic activity. Ongoing economic reforms, macro-economic improvement and strong global liquidity have driven up valuations. Low ‘cost’ of money and lack of growth globally have perhaps contributed to a huge ‘premium’ for growth, but stocks may need the support of earnings soon
�� India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details ��
��
Growing gap between valuations and fundamentals The gap between valuations and earnings of quality stocks is rising (see Exhibit 1). High multiples suggest that the market expects a sharp recovery in earnings and/or low cost of capital. The current gap between valuations and earnings/book is being ‘bridged’ by (1) strong global liquidity, (2) India’s improved macro-economic environment and (3) ongoing reforms. However, the latter two are yet to translate into higher earnings. Largely, the low cost of money globally (due to QE programs of major central banks) has driven the rerating of assets. Earnings and fundamentals will become relevant sooner than later 3QFY15 results rudely reminded us that improvement in economic activity and earnings is still a while away. The market has been forgiving of earnings misses over the past 2-3 quarters, but some stocks have seen significant corrections after results in the current results season. The market’s patience may be finally running thin. Weak volume growth in the cement and consumer staples sectors (see Exhibit 2) and rising slippages and NPLs in the banking sector (see Exhibit 3) suggest risks to earnings numbers. We will cover these issues in more detail in our quarterly results review report after the 3QFY15 results season. In the absence of earnings upgrades, more macro good news may be required in the short term We see downside risks to our earnings estimates in the auto, cement, energy and industrial sectors (see Exhibits 4-7) and expect a further increase in NPLs from continued problems in the power, steel and telecom sectors. The market may need additional positive news to sustain at current levels; low crude prices, declining inflation, strong currency and smooth passage of pending legislation (see Exhibit 8 for details of major economic bills and ordinances before the parliament) have been factored in and some of these can surprise negatively. Among positive surprises, a larger-than-expected rate cut (additional 50 bps in the next 2-3 months) will shore up sentiment. However, the forthcoming FY2016 budget may have limited positive surprises, given the conflicting objectives of fiscal consolidation and growth; the scope to provide fiscal stimulus through higher capital expenditure is somewhat limited. The government’s capital expenditure has declined 11% in 9MFY15, showing that it is under pressure to align expenditure with lower-than-expected revenues (see Exhibit 9). Too scared to sell, too afraid to buy—‘Growth at any price (GAAP)’ strategy may not last long Valuations of quality stocks in India have reached high levels in a short time, exacerbating the investors’ dilemma. We see the reward-risk balance being quite unfavorable in stocks that trade at high multiples (on FY2017E) after assuming strong growth in earnings over the next two years. We present a long list of such stocks in Exhibit 10.
Exhibit 10: Certain high-quality stocks trade at expensive multiples for FY2017 after factoring in strong earnings growth in FY2015-17 List of stocks with high multiples and high earnings growth, March fiscal year-ends, 2015E-17E
Company Sector 2015E 2016E 2017E 2015E 2016E 2017E 2015E 2016E 2017E 2015E 2016E 2017E Bharat Forge Automobiles 35.7 45.3 56.4 70 27 24 30 24 19 7.7 6.2 4.9 Hero Motocorp Automobiles 134.5 184.3 220.8 27 37 20 21 15 13 8.4 6.9 5.7 Maruti Suzuki Automobiles 117.1 189.3 249.5 27 62 32 30 19 14 4.6 3.9 3.3 ACC Cement 45.7 63.4 84.7 (2) 39 34 33 24 18 3.4 3.1 2.8 Ambuja Cements Cement 9.1 11.5 14.3 35 26 24 27 22 17 3.5 3.3 2.8 Shree Cement Cement 206.8 350.4 473.7 (12) 69 35 49 29 21 6.9 5.7 4.5 UltraTech Cement Cement 75.6 101.8 141.4 1 35 39 41 30 22 4.5 4.0 3.4 Asian Paints Consumer Products 15.4 20.9 23.9 20 36 14 52 38 34 16.2 13.1 10.8 Page Industries Consumer Products 180.6 223.2 273.6 31 24 23 66 53 43 33.7 24.9 18.2 United Spirits Consumer Products 15.9 63.0 94.8 277 297 50 213 54 36 16.3 12.9 9.8 ABB Industrials 11.6 24.0 32.2 39 107 34 110 53 39 9.5 8.2 7.0 Bharat Heavy Electricals Industrials 11.6 13.7 15.9 (18) 18 17 25 21 18 2.0 1.9 1.7 Larsen & Toubro Industrials 40.7 58.6 78.8 (16) 44 34 41 29 21 4.1 3.7 3.3 Siemens Industrials 17.2 23.2 28.7 177 35 24 64 47 38 8.0 7.2 6.4 Thermax Industrials 23.5 32.1 38.8 14 36 21 48 35 29 6.1 5.4 4.8 Cipla Pharmaceuticals 17.3 24.2 32.3 0 39 33 39 28 21 4.9 4.3 3.7 Dr Reddy's Laboratories Pharmaceuticals 137.1 140.7 155.9 9 3 11 23 22 20 4.8 4.0 3.4 Lupin Pharmaceuticals 54.3 61.9 74.6 33 14 21 29 26 21 7.8 6.2 5.0 Sun Pharmaceuticals Pharmaceuticals 31.2 34.0 37.9 13 9 11 31 28 25 8.1 6.4 5.3 Bharti Airtel Telecom 15.5 17.1 21.1 86 10 24 24 22 17 2.3 2.1 2.0 Bharti Infratel Telecom 11.2 13.0 15.7 39 16 21 34 29 24 4.0 4.0 3.9 IDEA Telecom 8.3 8.8 8.5 39 7 (4) 19 17 18 2.4 2.2 2.0
LINK
http://www.kotaksecurities.com/pdf/indiadaily/indiadaily05022015pu.pdf
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