Dear All,
Forwarding you the Market Strategy Report for May 2011.
Reining inflation for steadfast growth
Inflation is taking centre-stage for policymakers, prompting monetary policy rate hikes on one hand and focus on fiscal consolidation on the other, which is likely to cause a moderation in GDP growth (with 7.5-8% growth in FY2012-13E looking more realistic). Signs of this are already visible in the recent economic data.
IIP growth dropped to 3.6% during February 2011 from 15.1% in February 2010, while GDP growth slowed down a bit to 8.2% in 3QFY2011 from 8.9% in the previous two quarters. With these signs of moderation emerging in the second half of FY2011, the RBI has projected real GDP growth for FY2012 to be at 7.4-8.5% (baseline projection of 8%).
While growth is moderating, on the price front, apart from crude pass-through, most of the bad news appear to be already in the headline inflation numbers. Hence, we believe the RBI could pause after at most another 25-50bp hike on the repo front, considering that M3 growth is in any case well within the 16-17% comfort zone. This view is also supported by the fact that forex reserves have not shown a material increase in this cycle, unlike in the pre-Lehman period, which we believe could lead to peaking of interest rates at a lower level in this cycle as compared to 2007.
Accordingly, we expect GDP growth of 7.5-8% in FY2012-13E and accompanying credit growth of 18-20%. In this backdrop, we estimate Sensex earnings to witness a 17.4% CAGR over FY2011-13E, which is still a reasonably healthy rate of growth. At the current juncture, the Sensex is looking reasonably valued in our view, trading at 14.4x one-year forward earnings. Further, the Sensex earnings yield is 165bp below bond yield, which is close to the long-term average discount. A multiple of 15x FY2013E EPS translates into a Sensex target of 22,326, giving an attractive ~20% upside from current levels. Hence, we remain positive on the Indian markets.
IT sector strategy: Mixed bag results; HCL Tech relative top pick
IT index has underperformed over the past one month, as 4QFY2011 panned out to be a soft quarter because of clients freezing their budgeting cycles. However, the demand outlook for IT spending remains positive as clients look forward to spend on discretionary services to drive cost efficiency, prepare for growth as well as capture market share. Hence, we expect tier-I companies such as TCS and Infosys to record a 17.6% and 17.4% CAGR in earnings over FY2011-13E, respectively.
However, in this arena, we believe HCL Tech remains a key beneficiary with strong domain capabilities in product engineering and package implementation along with levers to pull up operational performance. Thus, we expect HCL Tech to race ahead with a 32% CAGR in net profitability over FY2011-13E. The stock is trading at 11.6x FY2013E EPS with 50-60% discount to Infosys and TCS, which in our view is unwarranted considering the expected earnings momentum. Hence, we reiterate HCL Tech to be our top pick in the IT sector, valuing it at a 33% discount to Infosys. Also, given the recent price correction, we recommend a Buy rating on TCS and Infosys. That said, overall we are maintaining underweight on IT, mainly because valuations are still at a premium (Infosys at 42% premium to Sensex and TCS at 50%) and we find more value in other sectors such as Banking, Pharma and Infrastructure.
Kindly click on the following link to view the Report.
If you have any further queries, feel free to call us on 022 39357600, Extn: 6865 or mail us at advisory@angelbroking.com
With best regards,
Fundamental Advisory Desk
Angel Broking
Akruti Star,6th Floor, Road No.7,MIDC, Andheri (E),Mumbai – 93.
Call : (91) (022) 39357600 Ext. 6865
Website : www.angelbroking.com
Disclaimer: Ours is an advisory role. The final decision and consequences based on our information is solely yours. Moreover, in keeping with regulatory guidelines, we do not guarantee any returns on investments. Prospective investors and others are cautioned that any forward-looking statements are not predictions and may be subject to change without notice.
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