Dear All,
Forwarding you the Result Preview for 1QFY2012.
On the cusp of a turn
Indian markets have underperformed almost all major global markets in the current calendar year ostensibly due to the twin macro-concerns of high inflation and interest rates; and now the key question on the minds of investors is when the rate cycle will reverse. While the trajectory was a little less certain even a couple of months back, in our view, various indicators are signaling that inflation and interest rates are close to peak levels, with respite likely from the second half.
In our view, external issues such as the Greek crisis can contribute to near-term uncertainty and volatility, but they are unlikely to materially impact the overall upward trajectory of the Indian economy and markets, which are underpinned by strong structural growth drivers, and even in the near-term are likely to register GDP growth of 7.5-8%. Hence, we maintain our positive stance on Indian equities as we believe that valuations remain fairly attractive, especially in light of the reasonable earnings visibility over the next two years.
Why broader interest rates are close to peak in our view
Insignificant forex inflows: In this cycle, forex reserves have been relatively anaemic (up 12% since March 2010 vs. 60% growth during January 2007 - October 2008), suggesting a peaking of rates at lower levels in this cycle. In cognizance, the RBI too has not used the harsher CRR tool much, mainly sticking to repo hikes.
Cooling domestic demand: Broader interest rates have risen by 200-225bp and signs of weakening domestic demand are emerging in interest-sensitive sectors. 1) Real estate and infrastructure sectors are getting adversely impacted, 2) evidencing this slowing construction activity, cement volumes are flat on a yoy basis, 3) auto sales are decelerating, with passenger vehicles growing by just 6.2% yoy and 4) gross capital formation has been stagnant in 4QFY2011.
Deposit mobilisations up, credit offtake down: There are broader signs of slowdown in credit offtake, while deposit mobilisation has picked up significantly only to be largely deployed at a negative spread into government bonds. Accordingly, we expect deposit and lending rates to not go up further even if the RBI hikes the repo rate.
Respite on domestic food prices: With food forming 45-60% of Indian consumer inflation indices, rising food prices are a practical concern for policymakers. No doubt rather than hiking rates we need to improve supply, logistics, subsidy disbursement, etc., but nonetheless, food inflation cooling off significantly in recent weeks should reduce policymakers' need to tighten the policy even symbolically.
Respite also on global commodities, sustainable crude range US$95-105: Global demand weakness is already leading to cooling commodity prices. Also, affirming the risk to global GDP from higher crude, the IEA has decided to release reserves (third such instance since 1974). Our analysis also indicates that whenever the global oil bill exceeds 5% of GDP, crude prices tend to cool off as demand weakens. For CY2011, this gives a range of US$95-105 for crude.
US Fed still perceives deflationary pressures: Wholesale (PPI) inflation in the US is as high as 7.3%, largely similar to Indian WPI levels. The US Fed, on the contrary, is worried about deflation due to weak unemployment and housing data. It is dismissive about the current inflation readings, pointing that they are driven by global commodity price pressures that are expected to dissipate.
Overweight on sectors with good earnings visibility
Presently, we have a positive outlook on index BFSI stocks, aided by moderate credit growth, better margin performance and lower provisioning burden than small banks. Moreover, cooling of inflation and interest rates from 2HFY2012 is likely to improve credit growth and asset quality outlook for the overall banking sector. The infrastructure sector is also likely to benefit from an imminent cooling of the rate cycle and, in any case, valuations have become very cheap, offering a margin of safety.
Large-cap metals also offer strong earnings visibility, in our view, on account of capacity expansion, low-cost integrated operations and healthy export potential. Incidentally, on the export front, in the past few quarters, growth in India's exports has been phenomenal, in our view, aided by the fact that the rupee has depreciated against the euro and has become more competitive vis-à-vis the yuan as far as the US and Middle East are concerned. In the export sector, in case of the IT sector, we believe valuations factor in the positives; while in case of the pharma sector, we are overweight on account of a healthy growth outlook at reasonable valuations.
Overall, in view of the easing headwinds to growth from 2HFY2012, we estimate Sensex earnings to post an 18.4% CAGR over FY2011-13E. A fair multiple of 15x FY2013E EPS yields a Sensex target of 21,320, giving a reasonable ~14% upside from current levels. Hence, we remain positive on the Indian markets.
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.
No comments:
Post a Comment