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India Earnings + Growth Revised Upwards, but Underweight – HSBC

November 17, 2009

HSBC Equity Research which was one of the most conservative in Indian Earnings Growth Estimates has changed its stance and has upgraded the numbers, and it has gone ahead of the DalalStreet Consensus estimates 🙂

Economic data and Growth figures likely to surprise on the upside and lead to upgrades in EPS forecasts. Market expects policy tightening in view of a pick-up in growth and inflationary pressure and this will be not be a disaster for equities; however, evidence suggests the first move in a tightening cycle causes markets to pause.

New Estimates by HSBC:
Top-down Sensex EPS forecasts at INR920 for FY09-10 and INR1120 for FY10-11 are c6% higher than consensus.

HSBC is overweight on the following sectors – private sector banks, industrials,
consumer staples and IT, and our key underweight sectors are materials and healthcare.

Valuation and Trading range for SENSEX:
The market traded at an average multiple of 13.6x from mid-2003 to mid-2007, and traded above a multiple of 17x only 5% of the time. The typical trading range, covering more than 75% of the cycle was 11-17x 12-months forward PE.

The current multiple of 17.0x is 1.25x standard deviation above its longterm
average. The index has typically traded one standard deviation above its long-term average, closer to the peak of the market cycle.

In the last 10 years, PE expansion has accounted for only 18% of index returns, and the bulk of it has been due to EPS growth, which accounts for 58% of returns, with the remaining 24% being accounted for by a combined effect of PE expansion and EPS growth.

Finally they raise SENSEX target to 18,000 for end-2010 and gains in Indian equities may lag other markets hence remain underweight on India in Asia portfolio.

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