Edelweiss' Equity Strategy for India 2010
Thursday, December 31, 2009
We have mostly covered Equity Strategies of FII active in India. There are over 400 FIIs active on their own license or through the backdoor Promissory Note route and not all of them have their own dedicated Research Houses and hence rely on the Strategies of the FIIs you have already read. Today we would like to have a look at what is Edelweiss' strategy for the Indian Equity Asset Class.Liquidity to continue supporting Indian equities in the near-term however as we go forward volatility will remain high. EMs like India - which are passing through a phase of structural upsurge in growth - have often enjoyed clusters of great equity market returns. During the five-year spell of CY03-07, except in CY04, every single year posted a return of over 40% for the Sensex.
India looks attractive as an investment destination. However, given the current valuations, which are enjoying a premium over EMs, investors will keep spotting value. A proactive bottom-up stock selection will hold the key in CY10 and any recovery in the Global market will be a Double Edge Sword in favor of India.
Interest Rates:
Globally, particularly in developed nations, stimulus unwinding is likely to be slow as policymakers would rather prefer to err on the side of caution than putting growth recovery at risk. RBI is poised to make a "calibrated exit" from the current overtly accommodative monetary policy and will hike policy rates (repo/reverse repo rate) and/or reserve requirements (CRR) during the first quarter of CY10. However, note that India immune to fears of any rollback in stimulus as it focused on real areas of the economy and not on bailing out institutions.
Weak Greenback / USD, Nations Move Towards Gold:
Expect the USD to remain weak during CY10, primarily driven by - surging federal deficit and large treasury issuance. Sharp expansion of the Fed balance sheet and improved risk appetite globally, reducing significance of the USD as safe haven. Several emerging markets (EMs) shifting their reserves from USD to gold.
Emerging Markets are set to outperform the developed world on the back of strong capital flows. India, with strong visibility of high and stable growth, is likely to benefit more than most of its peers. India's low export dependence makes it less vulnerable to an appreciation of the domestic currency.
Recovery Indicators - Edelweiss Exclusive:
Lead indicators pointing to near term uptick - Turnaround in Indian manufacturing is reflected in an improved outlook and signs of recovery. November witnessed a huge turnaround in commercial vehicles production, indicating a strong pick-up in activity. Besides, the India PMI Index has stayed in the expansion zone of above 50 for the eighth month in a row. ET-Now Lead Indicator Index has scaled from a trough of ~73 in Q4FY09, EELII touched ~103 in Q3FY10, crossing the 100-mark for the first time since September 2007.
On Inflation:
Inflation has already touched 4.8% and is expected to be in the range of 8-9% by March 2010. A large part of this high inflation has been contributed by supply-side shocks in both domestic and global markets. Domestically, food prices are up ~18% Y-o-Y. In the global market, the recent upsurge has been driven majorly by prices of commodities like metals and fuel for which India is a complete "price-taker" in the global market. Real Demand for commodities from Developed Economies will only kick-in next fiscal and thus the speculative element already built in will cool off, helping India.
Valuations:
India is currently enjoying a valuation premium over most other EMs. Such premium for India over other EMs has, however, been the trend in the recent past and is likely to continue going forward. They go with consensus estimates for FY11 earnings for the Sensex at Rs 1054 currently with scope of upward revision.
Finally, key concerns would be continued supply of papers / IPOs, GoI's failure to deliver, and faster-than-expected stimulus withdrawal can be a near term dampener.
You can read the Top MidCap Picks of Edelweiss which we covered last month.
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Published by Webmaster @ 7:20 PM IST.
Lakshmi Vilas Bank - Buy the Turnaround Growth - ENAM
Wednesday, December 30, 2009
Lakshmi Vilas Bank (LVB), a Tamilnadu based old private sector bank, promises to be an exceptional play with regards to the turnaround growth story. The management has shown results through robust profitability growth supported by both core & other income.LVB's deposits have seen opening of current & savings accounts with Tamilnadu alone accounting for 99000 CASA accounts with an average run rate of 800 accounts/day. The bank has also restructured the employee average age to 35 from 52 earlier. The cost of deposit (CoD) for the one year term deposit stands at 7% with the card rate at 6.75% i.e. 25 bps lower , compared to some peers like Karur Vyasa Bank & Tamil Merchantile Bank.
What are ENAM's Expectation of LVB ?
Deposit to grow at 33% plus for FY10-11. 20% of bulk deposits to be repriced, which could lead to lower cost for the bank. Advances to grow at CAGR of 35% for FY09-11 with YoA at 12%+ levels. ROE to expand on account of higher profitability growth.
Financials of LVB:
The yields on advances (YoA) of the bank for SME is 13-13.5%, retail is 12.89%, corporate is 12.5% (A & BBB rated) and mid segment is 13.5-14%. The capital raising through the rights issue of Rs 265 cr could aid in creating value for the bank. With a PAT of Rs 100 cr and Rs 143 cr, LVB is expcted to report an ePS of Rs 10.3 and Rs 14.4 for FY10 and FY11 respectively. ENAM recommends a BUY with a target price of Rs 105.
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Published by Webmaster @ 9:09 AM IST.
2009 - A Year of Recovery - Quick Performance Recap
Friday, December 25, 2009
After the Global Meltdown in 2008, the worst year for equities, 2009 was a year of recovery instilling hope amongst equity investors. Here is how the Indian Market reacted to National and Global News during the year.FIIs have already purchased more stock in 2009 than ever before in a single calendar year as overall institutional flows are just short of the 2007 high. Until yesterday, FIIs were the major Buyers in the Indian Cash Market with net purchases of over Rs 16,283 cr while their hedge in the Derivatives is a Negative 4,383 cr. Domestic Equity funds have bought mere Rs 614 cr while Domestic Insurance sector is another big bull in the making has bought stocks worth Rs 6500 cr.
The Indian equity market is finishing 2009 with one of its best three performances in a calendar year and as one the top 4 performing markets in the world. The best sectors were Materials, Consumer Discretionary, and Technology, whereas the worst-performing sectors were Telecoms, Consumer Staples and Utilities. Consumer Staples, Energy, and Telecoms underperformed their respective EM sector indices. Earnings revisions were positive in the second half of 2009 but estimates have just managed to return to where they were at the start of the year.
On the macro front, the interest rate markets were marked by rising long bond yields and record levels on the yield curve. The rupee was largely range bound against most currencies while appreciating modestly versus the USD. This was a big change after the volatility of the previous two years. It was a year of recovery for economic indicators. While industrial growth improved smartly, credit growth remained close to a 15-year low.
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Published by Webmaster @ 10:35 AM IST.
Expect 14% Returns in 2010 - CLSA
Wednesday, December 23, 2009
In continuing our coverage on Views and Strategies for 2010, we present Hong Kong based Institutional Investor, CLSA's Views. It expects 14% return for the market in 2010, as pick-up in the investment cycle and global recovery drive the next leg of earnings upgrades. Q1 of Calendar Year 2010 is likely to be choppy, on revival of macro concerns like inflation, monetary and fiscal tightening and the large pipeline of pending equity issuances; autos, property and power look most vulnerable.Super 2009 doesn't preclude a healthy return in 2010:
Of the six instances of +50% annual return during the past three decades, only two - 1986 (-0.9%) and 2000 (-21%) saw negative returns in the following year. Accelerating GDP growth and earnings recovery can offset pressures from monetary tightening, as seen in 2004.
Q1 Volatile and Choppy:
With the revival of macro concerns on inflation, monetary and fiscal tightening and a lull in the earnings upgrade cycle, markets can be quite volatile in 1Q. CLSA see rising WPI inflation in 1Q leading to CRR, reverse repo rate hikes. A +US$10bn equity pipeline, excluding targeted US $3bn of government disinvestment, will also weigh on performance in 1Q.
Next leg of recovery will also unfold:
The recovery in consumption is on track and will be supported by improving hiring trends. Investment growth has, however, lagged. With over 70% of Sensex earnings linked to investment upturn and global recovery, the earnings upgrade cycle should resume in FY11.
Sensex Targets and Picks:
The 12m target for the Sensex is 19,250; with the expected rise in risk free rates, they do not see prospects for re-rating of the current P/B multiple. Industrials, IT and materials which play into the second leg of the recovery are key OVERWEIGHTS; Consumer discretionary (Autos), Power and Energy key UNDERWEIGHTS.
Related Reading:
India Equity Strategy of Merrill Lynch for 2010
HSBC Equity Strategy for India
However, do not forget the SENSEX Earnings [Exclusive Coverage] to take into account before arriving at your own investment decision. Note Historical Forward P/E of SENSEX is 14.8 ~15.
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Published by Webmaster @ 8:49 AM IST.
Picks + Equity pricing for 2010 - Merrill
Thursday, December 17, 2009
If you have been tracking the Equity Strategies for 2010, then we are sure you are too excited to know the top picks by Bofa Merrill. But before BUYING into any of these, we would like to enlighten you about - What's Priced in and What's Not in the Indian market.Currently at 17x one-year forward earnings, the Indian Markets are pricing - Global liquidity is likely to stay easy, GDP to grow at 7.8% in FY11 and Earnings growth is likely to recover to over 20% in FY11.
What's Not in the Current Pricing ?
Exit policies by the Government could create worries of a slower economy. Overpriced IPOs and private supply of paper will continue to be huge absorbing excess liquidity and keep secondary markets in check. Also valuations look expensive compared to historical average of 15x forward earnings, but still far from the 22x bubble territory.
And here are the Top Picks by BOFA-Merrill on Absolute Returns Basis. EPS expectations for FY 2010-11 and P/E as on current market prices of stocks.
So rejig your portfolio, cherry picking Merrill's choice, but not in entirety.You maybe interested to know the basis on Statistics and Analytics that Indian market may hit a new high in 2010 itself.
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Published by Webmaster @ 12:30 PM IST.
Merrill's Equity Strategy 2010 - Pick Cherries
Wednesday, December 16, 2009
Earlier BOFA-Merrill in its expectations for 2010 has said it will be the year of consolidation. In continuing its coverage on equity strategy for 2010, Merrill advises investors to pick cherries. Since company and sector performances are growing more differentiated, suggesting the market is responding less to macro economic news and more to business specifics. Thus, adopt a stock-specific approach for portfolio construction in 2010. With the availability of incremental positive data investors must increase the weight of equities in their overall asset allocation to an overweight position. Also, investors position for an economic upturn and use any pullback to position more aggressively.
Business Outlook 2010:
The easy money that the market offered briefly in 2009 is no longer available. The classical macro concerns - inflation vs. growth, fiscal deficit vs. financial
inclusion - may dominate headlines. INR Bulls - BofAML fx strategists expect the INR to appreciate to Rs43/US$ by December 2010. Expect Emerging Markets to play a central role again in 2010, but the growth driver may change this time. As G10 countries stage their own recoveries, we expect the external demand to drive the growth.
GDP Outlook:
The economic growth should bottom out to 7.8% in FY11E. Strong domestic demand from a good harvest and higher public spending. In contrast, a faster than expected industrial recovery riding G-3 bottoming is buffering this year's worse than anticipated drought. If monsoons normalize next year, rural revival should join rising export demand in propelling India to 8% growth in FY11E-12E.
So most of this Article is related to Macro Economic and Corporate Outlook. In the next part we will cover directly what most investors look for - Favorite Stock Picks and Stock Market Target :-)
Related Reading:
- Morgan Stanley Equity Strategy for 2010
- HSBC Expectations for Indian Market - FY2010-11
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Published by Webmaster @ 7:45 PM IST.
WPI nears 5% - Rising Faster than Markets
Monday, December 14, 2009
India's WPI inflation rose more than expected by 4.78% y-o-y in November from 1.34% in October. On a seasonally adjusted MoM basis, inflation was up 2.2% v/s 0.4% last month. Given the current uptrend, inflation could likely cross 6% in December and 8% by March 10.Growth was led primarily by Primary Articles (+11.8% YoY), with food being the major driver (+16.7%). Within this category, key commodities driving prices were pulses (+35.2%), fruits and vegetables (+13.7%), rice (+ 13%), and milk (+11.5%).
More worryingly, prices of non-food manufactured products such as beverages & tobacco, textiles, paper products,basic metals and alloys, machinery are also on the rise.
When growth is subdued, inflation can be ignored. However, with both growth and inflation surprising on the upside we believe that a policy action is imminent.
Consensus estimate that the WPI will touch 8% by March-2010 and rate tightening will begin in Jan-2010. Can the Finance Minister really handle it before it totally out of control ?
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Published by Webmaster @ 3:29 PM IST.
Valuations Still Attractive for Longterm Investors - Morgan
Thursday, December 10, 2009
The biggest debate is about India's multiple and whether it deserves to trade at a P/E premium to emerging markets. What is the sustainable premium for Indian equities, if any, and whether the current market multiple makes the market vulnerable to relative underperformance ?On the long-term relative multiple, Morgan's opinion is Indian equities deserve to trade at a premium (of around 25-30% versus the historical average of 8%) driven by the factors listed below. [This explains their optimistic target in the past.]
India is likely to add around 10 million new workers to its workforce on an annual basis. As the workforce grows, so will the savings and hence the growth rate. This will be the key driver to profit growthIndia will need to grow at 7% or more (vs. 7.1% over the past decade). This means to us that the country
is underinvested and will guzzle capital in the coming years. The implication of this is that India will depend on global capital market cycles unless it shifts funding sources to FDI.
Public debt and fiscal deficit (read: politics) will drive long-term interest rates or the cost of capital (in the absence of large-scale capital flows). Another aspect of politics is the democratic system, which works in India's favor with respect to property rights even as it works against the country in terms of driving capital accumulation and capital efficiency.
As domestic savings rise, a younger population will likely take more risk with its savings, causing higher flows into riskier asset classes like equity shares. The flow of savings into equities is supported by a strong capital market infrastructure. Evolution of this capital market infrastructure determines access to stock markets and influences the market's multiple.
And the other way of looking at it by Morgan - Indian equities are fairly valued. Whilst returns in 2009 were driven by the rerating of absolute valuations, stock returns in 2010 will likely be driven be earnings growth. India's absolute multiples are trading at around the historical average
finally, The broad market appears distinctly more attractive than the narrow market. For one, the multiples are low and, for another, earnings prospects look better. The broad market will outperform the narrow market in 2010 and witness a rise in relative multiples.
So if you are a LONG TERM Investor, keep BUYING the Dips, contrary to what Kotak says, wait for the opportunity. Tailor it depending on your holding capacity.
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Published by Webmaster @ 8:06 PM IST.
Essar Oil - Focus on Integrated Play
Wednesday, December 09, 2009
Like its enviable neighbor in Gujarat, Essar Oil Ltd too is emerging as an integrated player across the energy chain with value-creation options in refining and upstream.Essar is upgrading its 10.5mmtpa refinery to 16mmtpa, adding significant secondary processing capacities. The expansion would give ESOIL significant advantages in: complexity allowing ESOIL to process a tougher crude diet (API 24.8), enabling better GRMs; and (2) competitive cost structure.
Essar will start monetizing the Raniganj CBM reserves from FY11. Raniganj block has significant value (US$662 million in our estimate) based on the proposed 17 year plateau of 3.5mmscmd, and the current unavailability of competitive gas in Eastern India. We estimate Rs5.8 billion of EBITDA contribution from CBM over FY11-12.
Essar Oil has the option to go for a significant low-cost refinery expansion (to 34mmtpa) which will be value accretive. The company also has concession for Ratna fields (161 million bbls of reserves), awarded to the company pre-NELP. A dispute on the royalty/cess payable for the field has delayed the commencement of development of the block.
Other Positive Drivers - Brownfield project, low capital costs and option on further expansion, Complexity and scale advantage, Fiscal and Tax benefits.
Essar Oil is expected to report an EPS of Rs 2.63 and Rs 4.61 for FY10 and FY11 respectively.
JP Morgan has initiated coverage with a Price Target of Rs 160 based on 7x EV/ EBTIDA for 16mmtpa refinery, NPV for Raniganj, and the value of tax incentives. Do not BUY at current levels, HOLD or ADD on significant Decline.
Update on 22/12/2009:
HDFC Institutional Research has initiated coverage on Essar Oil with the following comment,
Essar Oil is set to emerge as India’s third largest oil refining company and one of the most complex refineries worldwide. While refinery expansions will result in ~US$3/bbl premium over Singapore complex GRM (Dubai crude), strategic focus on
product evacuation will help maintain high capacity utilization. The company is strengthening its presence in the E&P segment. The company is expected to report an EPS of Rs 1.8 for Fy10 and Rs 8.0 for FY11 respectively.
Expect EBITDA margins to improve from 3.1% in FY09 to above 10% by FY13E. Our target of Rs191/share provides an upside of 41%.
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Published by Webmaster @ 5:49 PM IST.
Gold - Soaring Prices, Imports Down - Remaking in the Rise ?
Monday, December 07, 2009
Indian gold demand has been price inelastic, with the bulk of Indian demand being jewellery. But record-high prices and the global recession, coupled with the drought, have kept away consumers this year. Latest data by the World Gold council indicate that India's gold demand stood at 137.6 tonnes in 3Q09, down 49% YoY.Cumulatively, demand in 9M09 was 264 tonnes, vs. 553 tonnes in the same period last year. This could be due to consumers meeting demand by (1) exchanging old items - exchange activity accounts for 60% of retail turnover in recent quarters. (2) melting down and re-making old pieces, (3) shifting to costume/gold-plated jewellery.
While the jury is still out on whether the current trend seen in India gold demand is cyclical or structural, an interesting trend is that in contrast to the past.
WorldWide commodity experts tell that continued USD weakness, and attempts by governments to weaken currencies will remain the main source of support for gold at US$1,200/oz over 6-12M.
Gold should be brought in the form of GoldBEES or ETF for investment. Do not BUY it from Banks as they don't BUY Back Gold.
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Published by Webmaster @ 9:36 PM IST.
Higher CAPEX Growth in FY11- HSBC
Friday, December 04, 2009
HSBC economists have an above-consensus GDP growth forecast of 8.5% for the next fiscal year. This forecast is led by an above consensus investment growth forecast of 14%, following a pickup in the capex cycle at the turn of the calendar year. Indian companies have raised INR528bn in equity in the current fiscal year, the second-highest level ever, and INR315bn in debt.Interest rates also a useful indicator of investment spending, and lending rates have softened by 150bp from their high in 2008. Loan growth remains a weak point, but believe it will pick up in the next two quarters.
The power sector is likely to see a strong pickup. The infrastructure space will also likely see a pickup in investment spending. In the steel sector, high capacity utilisation and strong demand growth will likely lead to capex growth. Cement is likely to be a laggard. Banks also give exposure to the economic recovery, as they stand to benefit from rising rates as economic activity picks up.
Usual caveats of failure of demand pick-up with rising interests and deterioration in financial market apply :-)
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Published by Webmaster @ 10:11 AM IST.
Sun Pharma - Inching Closer to Taro
Thursday, December 03, 2009
Templeton's [largest minority shareholder (c10% stake) in Taro] decision to switch sides and support Sun's stance on the Taro impasse significantly boosts Sun's chances of closing the Taro acquisition, in our view. While there are legal issues still pending in Israel & New York, with the largest minority shareholder on its side, Sun is likely to be able to go ahead even if a special tender offer is required.
Taro will help Sun Pharma gain scale & reach in the US market much faster than it would have been able to on its own - especially important given the disruption in its business from Caraco. Further, given that Sun will be funding the acquisition by using idle cash on its balance sheet.
SUN is legally not allowed to buy TARO shares from other shareholders at any price other than open offer which is currently on. This offer is at US$7.75 a share while market price is well in excess of the offer price (~US$9 a share). As a result, a shareholder may not participate in open offer.
However, the management is striving hard to negotiate and get things going. Sun Pharma is expected to report an EPS of Rs 57 and Rs 65 for FY10 and FY11 respectively.
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Published by Webmaster @ 11:23 AM IST.
Reliance Industries - No Tax Holiday - Underperformer
Wednesday, December 02, 2009
The finance ministry's refusal to extend the 7-year tax holiday to gas production, as reported in media [Yet to be confirmed], to be negative for RIL's earnings and valuations. Fair valuation for RIL will also decline by Rs45/share due to removal of tax holiday.
Kotak Sec in a somewhat Bold move maintains SELL rating on RIL in view of (1) a weak business environment, (2) several potential negative developments and (3) lack of positive triggers.
Core Business: Refining margins have declined sharply from 2QFY10 and is at - US$2.8/bbl in the recent week. Expect refining margins to remain subdued over FY2010-11E given large supply-demand imbalance. Additionally, expect chemical margins to be very weak due to the large surplus; CY2010E will likely see the lowest rates for global capacity utilization for base polymers in the past 15 years.
Kotak's Sum of the Parts Valuation of RIL
Chemicals - 214
Refining - 334
Oil & Gas - 31
Gas Developing - 252
OIL KG DWN - 28
Retail + SEZ + Investments - 40
Kotak's price target based on the above SOTP valuation is Rs 900.
This does not mean you have to SELL, but you have to wait to BUY at lower levels than what it is already quoting. Long Term investors can continue to HOLD.
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Published by Webmaster @ 12:15 PM IST.
Insight on July-September GDP 7.9%
Tuesday, December 01, 2009
India's July-September 2009 real GDP growth came in at 7.9% yoy, much higher than the 6.1% yoy growth in the previous quarter and overshooting consensus expectations of 6.3% yoy and our estimate of 6.4% yoy by a big margin. The sequential momentum leaped 13.1% qoq s.a. annualized, from 8.3% qoq in the previous quarter.While trends in industry (8.3%) and services (9.3%) were broadly in line, agriculture surprised on the upside with a positive reading of 0.9%. Although we had factored that most of the 17.9% production decline in the summer crop would take place in 3QFY10 (Oct-Dec). Perhaps the most encouraging data point is the 9% rise in non-farm GDP in 2QFY10 v/s 6.9% last quarter.
And What is likely to Happen:
The recovery in activity will drive the INR stronger and expect the RBI to start hiking rates in January. Expect WPI inflation to move rapidly from 1.5% in October to 6.5% by March 2010. The latest GDP and IP readings suggest that risks to both growth and inflation are to the upside. Therefore, we expect 300 bp of effective tightening in policy rates in calendar year 2010,in part by moving the effective policy rate from the reverse repo rate to the repo rate.
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Published by Webmaster @ 11:29 AM IST.
