Forward EPS Rising - Not current year forecasts
Tuesday, June 30, 2009
Earnings forecasts are being upgraded globally and the trend is visible in India too. However, analysis of consensus aggregates suggests that revisions are mostly for 2010 while 2009 index EPS is at the same level as it has been since February 2009.
While projected 2009 EPS is still 7% below the EPS two years back in 2007, the forecast for the rebound in 2010 is only for 20% EPS growth. In other words, projected 2010 ROE is well short of 19% versus over 21% achieved in peak economic years like 2007.
While any multiple expansions from the current level is unlikely to be sustained, 2010 EPS growth means that even without any surprises, forward EPS is rising by almost 2% every month.
Forward earnings are sharply positive, mostly due to changing time weights that include more of FY11 EPS with every passing month. [Shangri La]
In our view, Valuations look stretched on earnings - positive revisions and move of the forward EPS on account of growth to be more of the market driver ahead than multiple re-rating.
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Published by Webmaster @ 12:29 PM IST.
HSBC Bats for Midcap Stocks - Overweight
Tuesday, June 23, 2009
The Sensex trades at 16.2x 12-month forward PE. HSBC classifies stocks between Rs 2500 to Rs 4,00 cr market cap as a Midcap.
Why Midcaps ?:
The case for investing in mid-caps lies in cheaper valuations, trading at 10.7x 12-month forward PE, which is at a 28% discount to large-caps, while the valuation discount of midcap stocks tends to persist for a longer period of time.
On average, in terms of PE, the discount is 17%. Consensus forecasts that mid-cap stocks will grow earnings at a CAGR of 16.2% compared to an 11.5% CAGR for large-cap stocks over March 2009-March 2011e. We believe this makes for a compelling case for investment in mid-cap stocks.
This segment of the market has outperformed large-cap peers historically. The risks of investing in this segment relate to higher liquidity risk for mid-caps and higher leverage.
Triveni Engineering, Marico Industries and Voltas are the stocks recommended by HSBC with target prices of Rs 120, Rs 83 and Rs 150 respectively.
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Published by Webmaster @ 11:05 AM IST.
Pre + Post Budget market Performance
Friday, June 19, 2009
The Political Stability fueled rally is getting back to the basic fundamentals of the market. Now we are in a period of pre-budget and hence lets have a peek into what have been Analyst expectations in the past and what Netas turned Finance Ministers have delivered and the market reaction towards the same.
The chart below shows Historical Pre-Budget and Post Budget performance of the market since 1991.
So what is your guess on where the markets will be ?What we are looking for in the Budget ?
If the government executes on reforms, we believe there will be more
upside to growth, especially in F2011. A notable concern would be that the social agenda takes over the economic agenda, hurting confidence and growth. A boost can come from execution of reforms. Consensus estimates are not building in big reforms in the next 12 months. Will the Old Man on Hot Seat surprise the industry and the market ?
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Published by Webmaster @ 6:58 AM IST.
UBS Turning Less Bullish on India
Thursday, June 18, 2009
UBS in a report released just a while ago has set March 2010 Sensex target to
16,750 (from 13,500) based on 14.9x March 2011E P/E. UBS turned less bullish as there is only 16% upside potential from current levels to our Sensex target.
UBS Outlook on various sectors:
UBS has turned more bullish on Telecom as the sector that has under-performed significantly and Bharti's valuations appear attractive.
UBS is negative on Metals and Engg sectors due to strong price performance in these sectors. UBS is also lowering weight on Reliance Industries to reflect negative view on the stock.
Overweight:
Autos, Banks & FIs, Cement, IT Services, Real Estate and Telecom.
Underweight:
Engineering, Metals, Oil & Gas, Petrochemicals
Sensex FY10 earnings is expected to be Rs 900 while that for FY11 is estimated to be Rs 1,124 with Dec-09 target of 16,750.
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Published by Webmaster @ 11:09 AM IST.
20 Year Bull + Bear Market Duration
Wednesday, June 17, 2009
Will the current 14 week rally fizzle out ? here is a Graph which shows historical data from 1990 to 2008 on the duration and Rise / Fall of SENSEX during Bull / Bear market. 
Image can be enlarged and seen.So do we think this rally will end here ?
We do not know if this will be the case. Indian markets have materially outperformed, emerging market returns YTD. But this has happened repeatedly in the recent past.
We are concerned that the Indian market has moved up too much too fast. But we believe resistance is futile. It is extremely unusual for a market's rally to fizzle out so soon. The average bull market in India lasts for 53 weeks. In a world beset with an ever-increasing speed of response, such moves might be shrunk and play out over shorter periods. But 12-14 weeks is just too short a time for a market rally to end according to the above data.
Ya, I know it is extremely confusing as earnings don't justify the market levels yet.
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Published by Webmaster @ 1:03 PM IST.
Historical Sensex EPS Growth + Returns
Most of us are inquisitive about the rationale behind our growth and P/E targets. We offer to explain the same taking historical EPS YoY growth of BSE Sensex from 1995 to 2008.
On the basis of valuation, growth targets are modest if you look at them from a historical perspective.
In the table above, data suggests that EPS usually grows 15%-20% in the year following a declining profit year in the market. However, EPS growth would be higher if the survivorship bias in the index was adjusted.
Will history repeat itself? We think so - particularly if the country has better governance and global factors are not disabling.
For our market P/E target, we are assuming a relatively modest expansion of P/Es from the current 15.5x one-year forward to 17-19x one- year forward as investors’ increase their appetite for risk. This is the normal trend 12 months from the bottom of every past cycle.
Clear picture will emerge not just after the Budget presentation but after Q1-FY10 management guidance. Long Term, stay bullish and take the opportunity to invest on every dip.
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Published by Webmaster @ 12:39 PM IST.
Setback to Reliance Industries in Gas Case
Tuesday, June 16, 2009
The Bombay High Court today gave its judgment on the RIL-RNRL dispute on KG gas and directed RIL to supply 28 mmscmd to RNRL for 17 years at a price of US$2.34/mmbtu. This is lower than the gas price realization of US$4.2/mmbtu as per our current estimates.
Following this decision, this E&P value could reduce to Rs544/share assuming that RIL begins its supply of 28mmscmd of gas FY11E onwards (which is clearly a worst-case scenario given ADAG's non-readiness of power plants to intake gas). The FY11E EPS could decline to Rs151 in this case from our base case of Rs165. If 12 mmscmd gas to NTPC is also sold at US$2.3/mmbtu, then E&P valuation reduces to Rs465 and EPS to Rs145
Based on this judgment, we estimate that our NAV of RIL's E&P business would be reduced to Rs467/share from Rs521 earlier. If gas to NTPC is also sold at lower prices, we estimate the NAV to drop to Rs452.
RIL is expected to report an EPS of Rs 136 for Fy10 and Rs 165 for FY11.
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Published by Webmaster @ 10:42 AM IST.
Industrial activity reviving April IP
Sunday, June 14, 2009
India's industrial production (IP) increased 1.4% YoY, well above the Bloomberg survey of -0.1% but slightly below our estimate of 2.0%. It is quite likely that revised data (due next month) will show the April IP growth at around 2.0%.
The March outcome was revised significantly to show a much smaller decline of 0.8% YoY, compared to the -2.3% announced previously. This means that along with other revised data, the recently announced GDP growth for FY3/09 could revised to be closer to 7.0% from 6.7%.
Manufacturing output grew 0.7% YoY in April, following two consecutive months of declines. Mining output increased 3.8% YoY, while electricity production was unexpectedly strong, gaining 7.1%.
Apart from higher electricity output, the production of intermediate goods surged 7.1% YoY in April, probably hinting at better IP data in the coming months.
April is the start of India's new fiscal year, and it has begun on a positive note. The industrial activity will gain more traction as the favourable effect of lower bank lending rates and continuing fiscal boost offsets the still weak export sector. Improving investment spending in the months ahead will also positively affect IP.
The upcoming Budget will emphasise fiscal consolidation, kickoff disinvestment in baby steps, extend the coverage of populist social programs, and announce limited sector-specific sops for exports, IT and autos. The Fringe Benefit Tax could be removed but Securities Transaction Tax will likely stay for now. The government could enjoy a windfall of up to US$ 8 - 10bn windfall from 3G/WiMax.
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Published by Webmaster @ 1:09 PM IST.
Volatility High Across the Board
Thursday, June 11, 2009
The obvious worries about the ongoing rally in equity markets is the heightened volatility across asset classes. However, the bigger concern could be the spike up in volatility in underlying fundamentals. Put another way, markets are only reflecting the increased volatility in economic and fundamental indicators. For the rally to sustain, we believe it is important that the volatility in macro variables subsides, which could happen if the government were to follow up with strong policy action.
The absolute realized volatility of the BSE Sensex is slightly below a 29-year high.Fundamental variables are exhibiting very high volatility. Thus, the volatility in inflation rate and industrial production growth are at multi-year highs. The volatility in economic fundamentals reflects the unprecedented macro environment of the past 12 months. The increased volatility in macro variables has also translated into more realized volatility in the bond markets with the 10-year treasury yields oscillating much more than they have in the past 10 years.
The median 12-month forward volatility BSE-200 is expected to rise slightly from 80% to 87%. [Volatility is the difference between the bull and bear case for the stock divided by its current share price.]
Markets are clearly running ahead of fundamentals and in our view it is unlikely that the budget will meet the expectations across the board as expected by the market.
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Published by Webmaster @ 7:23 AM IST.
India GDP Forecast Revised Upwards
Tuesday, June 02, 2009
The release of 4QFY09 GDP data which pegged growth at 5.8% resulted in the government's advance GDP estimates being revised from 7.1% to 6.7%. Given that data in the last few months was weak (contraction in industry and exports), a revision was on the cards but growth would have been weaker were it not for higher govt spending.
Key things to note are,
A slump in private consumption to 2.9% while public consumption was up 20% - the highest since the 1960's - largely due to the pay commission..
Investment growth slowing down from double-digit growth to 8.3%. GDP by activity was led by services up 9.7% (spike in govt spending reflected in community services) while industry and agriculture were up 3.9% and 1.6% respectively.
On the back of the election results and incorporating the CSO's new numbers for FY09, Citigroup is revising our FY10 GDP from 5.5% to 6.8% and FY11 GDP from 6.6% to 7.8%. The upward revision is primarily due to higher investment growth, raised from 4% to 9% in FY10 and from 5.4% to 11.3% in FY11.
A stable government, policy certainty and access to capital market funding bode well for a pick-up in the investment cycle.
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Published by Webmaster @ 10:02 AM IST.