2012: OUTLOOK FOR THE INDIAN ECONOMY
2012 is here and everyone is hoping for better times in the days ahead. After an eventful 2011, which brought back memories of the global slowdown and worsening fundamentals of the domestic front, one hopes that 2012 would have something positive up its sleeve? The recent trends do support this cautious optimism that the days ahead would bring cheer to investors.
On the global economic front, the United States is displaying positive signs of growth as the employment scenario improves and home sales witness an upsurge. Corporate earnings have been strong in the third quarter with 73.4% of S&P 500 companies reporting earnings that beat consensus estimates. The euro zone sovereign debt crisis remains the biggest downside risk; however, there has been continual progress on this front as is evident from the efforts of the political leaders as well as Central banks across geographies. The bigger worry for Indian investors would be on the domestic scenario given the multiple problems including elevated interest rates, high fiscal deficit, economic reform paralysis as well as a depreciated currency.
> Inflation & Interest rate will subside:
On the monetary policy front, the Central bank has given clear indications that it will pause in terms of hiking interest rates. Inflation is expected to come down from the current 9.1% to about 7% by March 2012 on the back of falling commodity prices, food prices and base effect thereby setting the tone for reversal of the monetary policy regime in CY12.
> GDP growth will be driven by domestic consumption:
We expect a GDP growth rate of 7-7.5% for the country for the fiscal year 2012 and around 7% for 2013. Although these growth rates are lower compared to the previous years, this would be sufficient to propel India to the position of the fastest growing economy after China with a GDP of at least USD 1 trillion.
> Depreciating currency:
Although the rapidly depreciating Rupee is a serious concern, the fall is largely linked to the global scenario rather than domestic concerns and hence is expected to normalize in the coming months. On the global front, particularly Eurozone, the focus would be on attempts by Eurozone banks to readjust USD 2.5 trillion worth of loan either by recapitalizing or reducing their loan books.
Equity Market Outlook:
From the investment perspective, equity as an asset class should outshine other asset classes. Indian markets have witnessed a sharp fall in 2011 with the markets tumbling 37% in dollar terms, the second worst fall in a decade. The rupee too has been among the worst performing emerging markets having declined by more than 15%, placed better only to South Africa and Turkey. In a sense, the Indian markets seem to be close to the bottom and 2012 should see an upswing as the key headwinds i.e. inflation and interest rates should fall in the coming months.
If one were to evaluate historical data points, Indian market shave generated sizeable returns over 2 years after posting negative returns in a particular calendar year.
We expect the coming year to shadow the trends of 2011 in terms of deviation in stock performance within the same sector. Although there would be anomalies in the short term, investors should be rest assured as the long term structural growth story of India hold promise. Domestic consumption is anticipated to be the key theme over the next four to five years, with the rural/ semi-urban economies growing faster vis-Ã -vis its urban counterparts. Central Government’s allocation on rural schemes has witnessed a jump over the past five years. Given this thrust and also considering that consumer staples remain under-penetrated in the hinterlands, companies engaged in this field would do well. In the financial space, especially in the banking domain, we presume firms to from the receding monetary headwinds and improvement in the credit off-take. Owing to the weakness in the rupee, which is more than likely to remain in the 50+ zone in the year ahead, we expect the IT sector to benefit from the same.
In a nutshell, the key variables that will decide the outcome of 2012 are domestic policy reforms on energy, global liquidity (mainly from the Eurozone) and growth prospects of USA and China. Even as we wait for the above variables to influence market movements, the year ahead definitely should bring in happier times for Indian investors. The BSE Sensex is forecast to trade at 14.7x 2012 earnings i.e. at a discount of 20% to the 10 year average. Given the attractive valuations as well as estimating reasonable progress on the policy front, one would do well to continue adding to their equity portfolio in the coming months.
(Authored by Gopal Agrawal, Chief Investment Officer, Mirae Asset Global Investments (I) )
2012 is here and everyone is hoping for better times in the days ahead. After an eventful 2011, which brought back memories of the global slowdown and worsening fundamentals of the domestic front, one hopes that 2012 would have something positive up its sleeve? The recent trends do support this cautious optimism that the days ahead would bring cheer to investors.
On the global economic front, the United States is displaying positive signs of growth as the employment scenario improves and home sales witness an upsurge. Corporate earnings have been strong in the third quarter with 73.4% of S&P 500 companies reporting earnings that beat consensus estimates. The euro zone sovereign debt crisis remains the biggest downside risk; however, there has been continual progress on this front as is evident from the efforts of the political leaders as well as Central banks across geographies. The bigger worry for Indian investors would be on the domestic scenario given the multiple problems including elevated interest rates, high fiscal deficit, economic reform paralysis as well as a depreciated currency.
> Inflation & Interest rate will subside:
On the monetary policy front, the Central bank has given clear indications that it will pause in terms of hiking interest rates. Inflation is expected to come down from the current 9.1% to about 7% by March 2012 on the back of falling commodity prices, food prices and base effect thereby setting the tone for reversal of the monetary policy regime in CY12.
> GDP growth will be driven by domestic consumption:
We expect a GDP growth rate of 7-7.5% for the country for the fiscal year 2012 and around 7% for 2013. Although these growth rates are lower compared to the previous years, this would be sufficient to propel India to the position of the fastest growing economy after China with a GDP of at least USD 1 trillion.
> Depreciating currency:
Although the rapidly depreciating Rupee is a serious concern, the fall is largely linked to the global scenario rather than domestic concerns and hence is expected to normalize in the coming months. On the global front, particularly Eurozone, the focus would be on attempts by Eurozone banks to readjust USD 2.5 trillion worth of loan either by recapitalizing or reducing their loan books.
Equity Market Outlook:
From the investment perspective, equity as an asset class should outshine other asset classes. Indian markets have witnessed a sharp fall in 2011 with the markets tumbling 37% in dollar terms, the second worst fall in a decade. The rupee too has been among the worst performing emerging markets having declined by more than 15%, placed better only to South Africa and Turkey. In a sense, the Indian markets seem to be close to the bottom and 2012 should see an upswing as the key headwinds i.e. inflation and interest rates should fall in the coming months.
If one were to evaluate historical data points, Indian market shave generated sizeable returns over 2 years after posting negative returns in a particular calendar year.
We expect the coming year to shadow the trends of 2011 in terms of deviation in stock performance within the same sector. Although there would be anomalies in the short term, investors should be rest assured as the long term structural growth story of India hold promise. Domestic consumption is anticipated to be the key theme over the next four to five years, with the rural/ semi-urban economies growing faster vis-Ã -vis its urban counterparts. Central Government’s allocation on rural schemes has witnessed a jump over the past five years. Given this thrust and also considering that consumer staples remain under-penetrated in the hinterlands, companies engaged in this field would do well. In the financial space, especially in the banking domain, we presume firms to from the receding monetary headwinds and improvement in the credit off-take. Owing to the weakness in the rupee, which is more than likely to remain in the 50+ zone in the year ahead, we expect the IT sector to benefit from the same.
In a nutshell, the key variables that will decide the outcome of 2012 are domestic policy reforms on energy, global liquidity (mainly from the Eurozone) and growth prospects of USA and China. Even as we wait for the above variables to influence market movements, the year ahead definitely should bring in happier times for Indian investors. The BSE Sensex is forecast to trade at 14.7x 2012 earnings i.e. at a discount of 20% to the 10 year average. Given the attractive valuations as well as estimating reasonable progress on the policy front, one would do well to continue adding to their equity portfolio in the coming months.
(Authored by Gopal Agrawal, Chief Investment Officer, Mirae Asset Global Investments (I) )
As the year 2011 comes to an end, India has been through crucial tumults questioning the credibility of our judicial system. The year 2011 was marked by a phase of high inflationary pressures, the consequent increase in interest rate in domestic economy, rising uncertainty on global growth front, increased crude oil prices and deteriorating business confidence and consumer sentiments. Persistence of high inflation in domestic economy, at a time when India was on the verge of achieving the pre-crisis growth levels, emerged as the key area of concern for the common man and the government authorities alike.
We have collated views of experts on how the markets will perform in 2012. The same is as follows:
ICICIdirect:
CY12 would be an equally challenging year and is likely to be a roller-coaster ride for the investors. Politically, this year would be a mega carnival of leadership changes in major economies such as the US, China and France among others. Policy responses in the US and Europe region would be directed towards applying the liquidity balm to iron out current issues while solvency issue would be postponed. Emerging economies would spend their time and energy towards preservation of growth as higher inflation and interest rates eat up growth. In addition, global growth faces risk from higher crude prices due to Iran-Israel induced tension, political uncertainty in the Arab world, North Korea, Afghanistan and Iraq among others. Commodity markets may crumble under the Chinese slowdown fears. Domestically, the Indian economy could spot relief in terms of interest rate cuts and lower inflation while higher fiscal deficit, currency volatility and crude oil could still knock off a few basis points from our economic growth. In addition, perceived policy paralysis and gloom associated with it would continue to lead to procrastination in our thoughts and capture headlines.
We expect the Indian equity markets to witness time based correction. Hence, we expect the Sensex to be boxed in the range of 15442 (14x FY12 Sensex EPS of 1103) -17822 (14x FY13 Sensex EPS of 1273, upside of 14%) in line with earnings growth of 15% in FY13 and historical average multiples of 14x. The fortunes of equities are also tied to the relative attractiveness of fixed income, gold and real estate. Any deterioration in risk return trade off in these asset classes would be a blessing in disguise for equities else equity markets may continue to be sidelined. In the event of an unlikely global sell off, Sensex multiples could shrink to 10-11x FY13 earnings, implying a downside of ~15%. The long term case for investments in Indian equity markets still remains intact through periodic investments while investors should grab any opportunity arising due to sharp sell-off where multiples contract further to 10-11x. Otherwise, investors should look at the next year end as a buying opportunity as by then we would have captured FY13 growth and a likely double digit growth in FY14 on the anvil, which would limit downsides from thereon.
Parallel levels on the Nifty are 4637 on the lower side and 5351 on the higher side.
We believe that relatively safer sectors would continue to lure investors as the capital preservation despite lower returns theme is unlikely to fade away. Accordingly we continue to prefer IT (rupee to benefit though valuation expensive), pharma (rupee & patent expiry to benefit yet valuation seems expensive), telecom (financials to improve, reducing regulatory uncertainty) and auto (lower base, lower commodity, peaking interest rates)”.
A K Prabhakar, Senior Vice President, Equity Research, Anand Rathi Securities:
Fundamental Outlook: Year 2012 would be year of consolidation after making panic low, sectors like Infrastructure and Realty can surprise market while IT & Pharma will be very defensive in the year. The rupee weakness (up to levels 55 and may be above that to 59) is to continue which may further impact positively to the export oriented businesses. Stocks which have corporate governance issues, pledged shares, ECB loans or FCCB maturities may witness pressure. On the other hand Cash-Rich PSU stocks with lower debt on books and good quality management stocks will be preferred. After downgrades and a view of India being replaced by Indonesia in BRICs, its just a matter of time as after this bear phase rally we will enter the consolidation phase in 2012 and later 2013, market may see out performance. Gradually the domestic situations will also improve with government action taking place, softening of inflation and reversing of interest rates will support the out performance.
Technical Outlook: Sensex to move in the range of 11500-17700 and Nifty to move in the range of 3500-5400. Nifty and Sensex has closed below 200WMA on 3 continuous weeks which normally leads to more than 20% correction. This bear phase which will see very sharp and short lived correction may see a low of 3500 in Nifty and 11500 in Sensex. This may be experienced H1 CY2012. Later after the bear phase the market may see some consolidation phase followed by a rally which may see a high of 5400 in Nifty and 17700 levels in Sensex. These levels are possibly seen in the H2CY12. This rally will be mainly lead by the top 100 market cap stocks and cash rich companies mainly from PSU and MNC basket.
Prabhakar recommends 12 Stocks that look good for 2012, which can be bought in panic - SAIL, DIVIS LAB, CAIRN INDIA, NMDC, BEML, EIL, HEXAWARE, IPCA, HUL, INDIAN HOTELS, WIPRO and OBEROI REALTY.
Dipen Shah, Head of Fundamental Research, Kotak Securities:
“The Global scenario looks very uncertain. What will happen to the Euro is anybody’s guess. Whatever the solution be, we are going to see a lot of pain and slow down of the Euro region for some time. While US seem to show some signs of recovery one is still not confident whether it will last or slip back. The fear of slowdown in China seems to be more certain now. All this may result in some sovereign defaults and corporate death globally and locally.
All this has dampened the business and market sentiments, the current valuation of Indian stock and indices reflect that. The question is, will this continue and worsen or will the economy show signs of improvement in 2012. While it is very difficult to make a guess given the uncertainty in many quarters, the equity markets seems to have substantially priced in the worst. It is trading at a PE of 12 times financial year 2013 estimates. Many of the large cap and mid cap stocks are trading at 52 week lows and some of them below book value. Thus, the down side seems limited to not more than 10% fall from here though it is possible due to technical factors, markets may for shorter periods of time, trade lower.
The positive part is with depreciation in currency Indian manufacturing, service and software sector has become more competitive globally. RBI is likely to pause and start reducing interest rates. With the China and rest of the globe slowing, oil and other commodity prices are likely to soften. All this will be a good base for Indian companies to show signs of improvement and grow. Post the state elections hopefully Central government will push reforms more decisively. With no major accidents globally and locally, one can expect around 15% return from Indian Equities in 2012. But one can expect high volatility and pain before things settle down by end of next year”.
Venugopal M, Co-Head - Equities, Tata Mutual Fund:
“Macro factors, both global and domestic are currently not supportive for equity markets. The sluggishness in the Indian economic growth is likely to continue for some time with GDP growth now forecasted at close to 7% even for FY13. This is a result of weak global scenario as well as lag effect of higher interest rates in the economy, which apart from lack of policy initiatives have led to much lower investment growth in the economy. Private consumption especially in urban areas is showing signs of moderation and the investment cycle is yet to show signs of recovery. Also, worsening global economic conditions could lower export growth prospects going forward. Given these conditions we believe the next few quarters could be challenging.
Earnings growth forecasts for Sensex companies have been lowered at the end of almost every quarter for several quarters now. We believe that this cycle would continue into the next calendar year and earnings growth could remain muted in FY12 and FY13. However, the positives are that the year 2012 is starting with low valuation levels and inflation is likely to cool off. Interest rates should therefore start coming down some time in the next calendar year which would be good. Given these factors, the market could be more positive in the second half while being range bound and volatile, reacting to overseas news flow as well as economic data in the first half. From current levels of the index, over a longer time horizon, one could expect reasonable returns.
We feel that the ability to do substantial fiscal or monetary easing to tackle the current downturn is limited at this juncture. Also, crude oil prices continue to be stubbornly high. Thus, recovery will be more gradual this time. In such a scenario, one needs to follow a much more stock specific approach than a sectoral approach. There could be significant divergence in performance of companies in the same sector. We are thus looking for companies with steady sales, earnings growth with good return ratios and low debt, which we feel, would continue to do well. We are also keeping a close watch on company specific valuations; as such, a scenario can present good companies at very good valuations. At current valuations, the interest rate sensitive sectors offer a good opportunity over the medium term. Over the longer term, we are quite positive on the consumption space in India”.
SMC Global:
“Indian economy is entering into the year 2012 on a much softer note in contrast to the year 2011. Fading economic growth, lack of reforms, fiscal constraints, volatility in currency, margin pressures on corporate are some of the major factors that are putting pressure on the markets. Apart from these domestic issues, global issues like debt problems in the European region, fragile recovery in U.S. is another risk to the world. So far these developed nations have adopted many policies like quantitative easing, special credit lines, etc to tackle the issues but the problem still remains very much there. In emerging markets now there is a fear of hard landing in China because of real estate market bubble and many are of the opinion that it can jeopardize the growth in the fastest growing emerging economy. So all in all we are entering the New Year on a cautionary note.
The year 2012, would be the year in which we would see pro-growth policies by RBI if not much would happen from the fiscal side as the government is already walking on a tight rope because of higher subsidies, social programs like NREGA, Food Security Bill, etc. The budget to be presented in February 2012, would not bring much cheer as the duties and taxes are still lower than the pre-crisis levels and the tax collections this year so far are not up to the expectations.
We expect RBI to begin lowering the interest rate by March 2012 and that would start yielding positive results by a lag of one to two quarters. Though the current happenings are very much discounted by the markets but lot would depend on how future shapes up. There is likelihood of market oscillating in a range next year and consolidate if things as not get worse from here. The challenging thing for the policy makers here would be to restrict any sort of moderation in economic momentum and come up with the pro-growth policies.
Interestingly, if one sees the Market cap to GDP ratio (GDP at market prices at current prices and calculated by adding the latest four quarter data), it is currently at around 62.25 as compared to the 56.22 in March 2009, when markets made lows. Typically ratio around 50 suggests value in the market and closer or above 100 indicates overvaluation.
The advice to the investors is to go with the old economy stocks and not beyond the BSE 500 index. At the moment we are recommending clients to take exposure in selected stocks in sectors like IT, Private Banks, Pharmaceuticals, FMCG, etc”.
Rajnish Kumar, Executive Vice President, Fullerton Securities and Wealth Advisors:
“2012 is likely to be a year of consolidation with limited upside for the markets. Inflation, budgetary deficit, current account deficit etc need to be controlled through policy interventions, which will then create ground for markets to take positive cues and move up. We expect 1st half of 2012 to be lackluster for the markets with significant downside risks posed by events from Europe. With state elections round the corner, government may not take bold steps to help the economy recover and this may add to the sense of policy drift felt by the industry. Things should start getting better in the 2nd half as macro indicators start looking better and we may see FII flows start trickling back. Overall we expect moderate returns from equities in 2012”.
DK Aggarwal, CMD, SMC Investments and Advisors:
“As we enter into 2012, the improved data from US and concerted efforts being put up by euro zone leaders to solve the crisis gives us the hope that may be 2012 will be a better year than 2011. All the negatives seems to have been discounted in the financial market and from the second half of 2012, we may see the beginning of better period ahead”.
Broking firm, ICICIdirect has come out with report on sector outlook for 2012. We have collated key highlights for each sector from their report. The same is as follows:
Auto - Outperform
We believe FY13E may not mimic a ‘V-shaped recovery’, as we expect modest near 11-13% growth. The rationale of the assumption on a segmental basis has been elucidated in the exhibit below. On a relative basis, our spectrum is most positive on PV segment while two-wheelers remain the least favoured.
Passenger vehicles
In FY13E, we believe PV segment would be a relative out-performer across the segments. The non-existent growth till now is expected to aid FY13E through its low base. Issue of higher interest rates had hit the small car segment the most, which could also rebound in a similar fashion post probable rate cuts. FY12 was also marred by labour issues at market leader Maruti, which has recently been resolved and FY13E could see a higher ramp-up in the same, thereby aiding volume growth.
Medium and heavy commercial vehicle
CY11 marked industrial investment climate at its weakest since `Lehman` in 2008.We believe the segment will continue to rise above the consensus outlook on the back of better monetary policy, rising business confidence and improving investment climate.
Light commercial vehicle
This segment has remained the shining beacon in the automotive space. It hardly witnessed any meaningful impact of rising rates as demand for last mile transportation continued to burgeon with rising rural penetration. We believe, lack of effective government transportation services would continue to aid the demand for this segment albeit at a slower pace.
2-wheelers
We believe the low growth demand phase of FY07-09 for two-wheelers was instrumental in the >20% growth rates since FY10. Two-wheelers could decline to normalised growth as deferred demand seems exhausted. We remain cautious on the segment and expect domestic growth for listed players to slow down significantly with strong capacity expansion by foreign challengers.
Banking - Neutral
Banking sector has grossly underperformed the index in CY11. Bankex has underperformed the Sensex by ~7% YTD. Advances break-up dictated the valuation given commanded by banks. Banks with retail exposure were spared while the ones having exposure to troubled sectors like Infra, power, iron and steel, agriculture and textiles took heavy beating. We expect this trend to continue and valuation divergence to sustain.
In the absence of major positive triggers, we believe the sector will be in a consolidation phase from here on as concerns over NPA would persist while interest rate cuts (expected in Q1FY13E) and contraction in multiples would limit downside. Banks with higher exposure to power (SEB), infra, iron & steel and textile like SBI, PNB, IOB, OBC and Dena Bank may continue to take a beating.
Capital Goods - Underperform
We remain cautious on the sector and prefer owning/buying large cap stocks on dips from a three year perspective as the sector is expected to languish in the medium term.
In terms of performance, we expect CY12 to be disappointing as H1CY12 would see tepid order inflows even though revenue growth would be reasonable, whereas H2CY12 would witness a decline in growth rates as dull order inflows in CY11 would reflect on the financial performance. Also, order inflows in H2CY12 would be a function of how fast interest rates decline, pace of implementation of reforms in power sector (fuel issues & SEB reforms) and movement in policy reforms.
We believe order inflows in the transmission sector will be relatively strong as we expect Power Grid to maintain its awarding momentum, though competition will persist. Order inflows for the generation side and other industrial sectors are expected to remain tepid until macro headwinds recede.
Valuations of most of the companies in the capital goods sector are at rock bottom levels but we expect the pain to continue at least in H1CY12, until signs of capex revival are not perceived.
Cement - Underperform
Cement demand has been sluggish in the past 20 months (growth of 4.4% in FY11 and 4% in YTDFY12) due to muted off take from construction activities. We find that cement demand growth has a high correlation with gross fixed capital formation (GFCF) growth as it captures the construction activities. GFCF declined 0.6% in Q2FY12 on account of a slowdown in infrastructure investments, keeping cement demand under pressure. We expect cement demand to grow by 4.5% in FY12E and 8% in FY13E.
FMCG - Neutral
FMCG companies would continue to witness strong top-line growth, which would largely be led by price increases. We believe a moderation in volumes in slowing down the economy is inevitable. With the rising cost pressure, margins for companies would remain under pressure. Valuations for the FMCG sector remain stretched and risk-reward is unfavourable. However, in case of a sharper sell-off in markets, FMCG being a defensive sector is not as vulnerable as others.
Hotels
Hotel industry witnessed turbulent time in the past two years on account of global economic turmoil, higher inflation and political disturbance in the domestic market. Although, our coverage universe witnessed a top-line growth of nearly 18% YoY in FY11 (mainly backed by new room additions), the growth in RevPAR (revenue per room) remained muted due to excess supply. FTAs (Foreign Tourist Arrivals) that are major revenue contributor for premium hotel rooms recorded 9% YoY jump during FY11. However, due to lower corporate spending on travel as result of economic slowdown and higher room supply, occupancy levels for FY11 (61%) remained lower compared to FY09 (63%). Though, it was up by 300bps YoY due to low base effect. The average room rate (ARR) growth also remained subdued (~1.3% YoY) especially across major business destinations such as NCR, Mumbai, Chennai and Hyderabad mainly due to oversupply of rooms. With increased room supply and moderate demand growth, we expect FY11-13E top-line CAGR of 12% of our coverage universe, supported by new room additions and marginal growth in occupancy (by~100 bps YoY in FY13E).
Infrastructure - Underperform
CY11 saw Construction & Infrastructure stocks underperforming the broader indices on account of tightening policy rates, muted order inflows across segments (except roads) & rising commodity prices affecting execution and margins. At the onset of CY12, we are at the cusp of regime where rate cut is expected (impact to be seen from H2CY12 onwards in financials) and commodity may cool off bringing down the project cost for developer and working capital for contractors. However, we maintain our cautious view due to policy stance on various issues such as fixation of aero charges for airports, delay in environment clearance & land acquisition issues.
IT - Outperform
The IT sector had a favourable year in CY11 as the year-to-date BSE IT index outperformed the Sensex. BSE IT declined 18.3% vs. a 23.3% decline in the Sensex led in part by INR depreciation, volume growth, a healthy balance sheet and cash flow generation. As for CY12, depreciating rupee, tapering attrition, likely lower wage inflation, steady volume (off-shoring market share gains) could be likely positives while macro uncertainty, delay in budgeting cycle, discretionary spending, pricing, expensive valuations could be negatives. During the previous recession, Tier-I IT vendors bottomed at trailing 12 month PE range of 6-13x. Consequently, we assembled likely positives/negatives in our scenario builder. We believe the positives outweigh negatives excluding debt crisis in Europe, the outcome of which is indeterminate. Conversely, the macro remains uncertain and sell-offs triggered due to ‘Lehman’ like events in Europe could offer a buying opportunity in quality names for long-term investors.
Media - Neutral
CY11 was a year of economic slowdown characterised by a slowdown in ad revenue growth across all sections of the media industry. With corporates` curtailing ad spends in the event of rising input costs and subdued economic growth expected in the next few quarters, ad revenue would grow moderately at 10-12% in the next fiscal. Expected rate cuts in mid 2012 would boost economic activity, which may lead to a spurt in ad spends in the second half of the next fiscal.
Metals and Mining - Underperform
CY11 was a challenging year for the metals and mining sector on the back of a muted demand scenario, elevated raw material costs and restriction of mining of iron ore in certain areas. During the first nine months of CY11, prices of key raw materials such as iron ore and coking coal were on an upward trend while in Q4CY11 along with a decline in raw materials costs steel prices also tapered off resulting in no respite for steel companies. As a result, on the back of elevated cost structure the operating margins of steel players remained under pressure for CY11. Going forward, on the back of global uncertainty and a muted demand scenario, we expect global steel demand to remain subdued in CY12.
Oil & Gas - Neutral
The oil & gas sector reported a tepid performance in CY11 on lack of regulatory reforms, uncertainty about government policies and lower domestic gas production. In CY12, we believe elevated Brent crude oil prices on geo-political tensions and remote possibility of petroleum products` pricing deregulations would continue to remain a drag on the OMCs for H1CY12. We prefer to play the oil & gas sector through the PSU upstream companies on account of lower valuations (BSE oil and gas index has been trading near historical lows of 10-12x PE multiple) and gas utility companies as defensive bets within the sector.
Pharmaceuticals - Outperform
We remain positive about the outlook for the pharma and healthcare sectors for 2012. Our belief is based on the capabilities that most of the players have developed over the years to cope with challenges in a particular geography. We expect players with optimum geographical mix to perform better than players with focused markets. The US will remain the key market to conquer on account of impending patent cliff and, hence, opportunities in both FTF and generics. Brands worth ~$25-30 billion are expected to lose patent exclusivity in 2012 itself. Although we remain positive about the sector outlook, we may not see outright outperformance of the Healthcare index vis-Ã -vis the Sensex on account of substantial valuation premium (nearly 30% currently). We may, however, see select pharma companies outperforming the broader index.
Power - Underperform
The power sector in CY11 was characterised by robust capacity addition (12737 MW-taking total capacity to 1,85,496 MW), tariff hikes, fuel shortages, back down by SEBS, change in Indonesian coal law and rise in interest rates. We expect capacity addition to be robust in CY12 (our bottom up analysis suggests that nearly 9400 MW can be added in CY12). We are cautious as structural issues like policy reforms and fuel shortages are more critical than cyclical factors like falling interest rates. One should stick to regulated entities like NTPC, NHPC (regulated players, less fuel risk, high Actual Contract Quantity from Coal India, sustainable earnings growth via capacity addition).
Real Estate - Underperform
BSE Realty underperformed the Sensex in CY11 due to drying up of the funding (moderation in bank credit and non conducive capital market). Furthermore, sales volume has slowed down due to rising un-affordability and high home loan rates. Given the challenging macro headwinds and stretched balance sheet in the sector, the property prices could correct sharply. At the same time, wage inflation & higher interest expenses on account of rising gearing would keep their bottom line under pressure. Hence, we expect sector to underperform in CY12.
Retail - Underperform
The year 2011 was an eventful year for the retail sector considering that opening up of the sector was in discussion. The government permitted foreign direct investment in multi-brand retail up to 51% and also raised the limit for single brand retail from 51% to 100% in November 2011. However, due to severe opposition from other political parties the government was forced to put the decision on hold.
Opening up of the retail sector to FDI will prove to be a game changer for the sector as it will bring in the much needed capital to fund growth.
Shipping - Underperform
The shipping industry is currently passing through a downturn, which is likely to be prolonged. A moderation in demand and substantial increase in supply on account of new vessel additions is expected to keep freight rates subdued.
Sugar - Underperform
In the agri-commodity sector, sugar stocks have seen a sharp correction in the last one year due to subdued sugar prices, continuous increase in sugarcane cost and uncertain export policy. On the other hand, tea stocks were holding well throughout the year due to strong export prices. We believe sugar stocks have come to distress valuations levels, close to October-December 2008. Though we believe earning would continue to suffer in FY12 a decline in sugarcane area would result in lower sugar production in SY13, which should firm up sugar prices from current levels.
Telecom - Outperform
The telecom stocks have largely underperformed since early 2008, when the new licenses were issued, followed by increasing competitive intensity (visible in rising net additions and declining ARPMs). However, they have outperformed the Sensex in the last year, in spite of the continuous downgrade of their EPS (due to higher interest and amortisation cost relating to 3G related debt). The regulatory framework has improved with the new telecom minister assuming office and competitive intensity has declined resulting in stable ARPMs, which is also reflected in the stock price movement.
The sector is expected to outperform the broader index on the back of improving ARPMs, 3G uptick and lower capex. We may see further upside dependent on the timing and various aspects of policy announcement.
Textiles - Neutral
The year 2011 was a mixed bag for the Indian textiles sector. While cotton and cotton yarn prices rose in the first half of the calendar year, prices fell substantially in the second half. Textile players incurred heavy inventory losses on account of this. Domestic textile players were struck by a double whammy of lower demand and falling realisations.
The year 2012 is also likely to be a lull year for the Indian textile industry. While a depreciating rupee would work in favour of textile companies, they are also facing foreign currency losses due to foreign currency debt on their books. On the back of this, larger domestic players would be more comfortable with the currency staying in the range of ` 47-48/dollar.
SMC Global Research has selected 10 stocks picks for the year 2012. The same are as follows:
1. Tata Consultancy Services (TCS)
Investment Rationale
> Tata Consultancy Services will expand its operations in the state of Maharashtra by building a new software development campus in Nagpur with an investment of ` 6 billion in the first phase. The TCS Nagpur Campus will be located on a 54-acre property in the Mihan SEZ on the outskirts of the city. The campus will be built in two phases with Phase I containing 8,200 seats for IT services and BPO services. Phase II will be of a similar size.
> The company signed large 10 deals during the quarter ended Sept 2011, 2 each in BFS, Insurance and telecom and 1 each in Hi-tech, Retail, E&U and Pharma; Geographically, 5 in North America, 4 in UK/Europe and 1 in Latin America.
> The company was selected by a large broadband and telecommunications player in Europe and Latin America for service management & integration in a deal valuing over USD 100 M.
> The company added 35 new clients (24 in sequential quarter) and number of million dollar clients increased across all bands (+7 in >USD10 million, +3 in >USD 20 million, +3 in >USD50 million and +2 in >USD100 million band).
> The pipeline is healthy across sectors and markets, deals signings are on track and there are no delays, budget position is same and outlook is positive in financial services.
> Technology, Enterprise and Infrastructure would be the focus areas of investment and discretionary spending is seen in Digital consumer, Analytics with consumer interest in cloud computing.
> The total employee strength of TCS was 214,770 on a consolidated basis at the end of Q2. Trainees started joining the company from the beginning of the July-September quarter, resulting in the addition of 10,192 trainees and 8,125 laterals in India along with 2,032 employees overseas. The utilization rate (excluding trainees) was flat at 83.1% and that including trainees was 76. 4%.
2. Hexaware Technologies
Investment Rationale
> Hexaware Technologies has signed a deal worth USD 177 million (` 7.90 billion), its largest deal ever, with an existing US-based client. The contract has a potential of giving the company USD 100 million worth of incremental business. Under the agreement, Hexaware will offer services including ERP, business intelligence/analytics, quality assurance, testing, BPO and application management.
> Hexaware has signed a three-year contract, worth over USD 25 million, with an existing European client firm for providing remote infrastructure management services. It will manage the European client’s footprint covering American, Asia Pacific and European regions. It plans to deploy over 150 employees for this work.
> The company intends to cash in on the increase in technology spending by the companies. It intends to increase the strength of personnel operating in dedicated global delivery centres to over 600. Hexaware will offer IT and BPO services from 15 locations across the world.
> The company added 12 new clients during the quarter ended September 2011. It has added one client in the USD 20- million plus category and two in the USD 5-10 million categories. It also added 745 employees during the period, taking its total headcount to 8,164 at the end of Sept. 30, 2011.
> Hexaware Technologies has registered an increase of 9.6 % in revenues sequentially at 3.66 billion in the quarter ended Sep 2011 while net profit rose by 7.4 % to ` 647 million. Growth has been well-balanced in most sectors - 13.7 % in banking, financial services and insurance, 12.6 % in manufacturing, healthcare and services and 3.8 % in travel and transport.
3. Divis Laboratories
Investment Rationale
> Company has taken up implementation of a new DSN SEZ Project at an estimated cost of ` 2 billion to cater to new opportunities in generics as well as custom synthesis as company visualized full utilization of existing capacities. During the year, company spent an amount of ` 740 million on this Project and a further amount of ` 890 million towards enhancing capacities and upgrading utilities at the existing Units, in order to conform to best environment practices and zero discharge of effluents.
> The company has also launched several new generic products like Tamsulosin, Dexlansoprazole, Valsartan, Capecitabine, Desloratadine, Quetiapine and Telmisartan -which are expected to gather volumes in future.
> It continues to work towards optimizing the capacities created at its multi-purpose manufacturing facilities and also creating additional capacities to cater to growing business opportunities. Company continue to focus on its domain of capability in line with its strategy to work with innovators playing a complementary role and non-compete model with its generic customer.
> Company exports about 75% of its sales to advanced markets in Europe and North America. Company is planning to acquire biotechnology research companies in India and abroad. The move is to venture into the bio-similar market. The company has ` 5 billion for funding acquisitions.
> Company is planning to incur a capex of about ` 1.75 billion for the year to address capacity shortfalls too reflects the improving business landscape.
> Net profit of Divi’s Laboratories rose 45.35% - ` 1 billion in the quarter ended September 2011 as against ` 729.6 million during the previous quarter ended September 2010. Sales rose 39. 79% to ` 3.54 billion in the quarter ended September 2011 as against ` 253 billion during the previous quarter ended September 2010.
4. Sun Pharmaceuticals
Investment Rationale
> The company has given guidance of 28%-30% revenue growth in FY12 on the back of improving performance of Taro, sustained growth in the domestic business, healthy pipeline of products and pick-up in revenues from overseas markets, outside the US.
> US Food and Drug Administration have granted company’s subsidiary an approval for its Abbreviated New Drug Application (ANDA) to market a generic version of Cardizem CD, Diltiazem HCl extended-release capsules. Meanwhile Sun pharma also launched the Sumatriptan injector in US was positively received. It expects to gain traction going forward.
> During the quarter ended September 2011, it has filed 5 Abbreviated New Drug Application (ANDAs) (4 with the Sun Pharma and 1 with Taro) taking the cumulative filings to 388products as on 30th September 2011. It has received approval for the 6 ANDAs taking the total number of approvals to 238. It expects to await for the 150 products approvals including 18 tentative approvals.
> The company has entered into a non-binding proposal to acquire the remaining 33.7% stake in Taro Pharmaceutical Industries, an Israel-based pharmaceutical company, at a price of USD 24.50 per share in cash. The transaction is valued at approximately USD 367.33 million. It currently has 66. 3% stake in Taro.
> It plans to expand its business in USA and other developed and emerging economy through organic and inorganic rout to fuel growth. In US it is eyeing a piece of the USD 400 million antiepilepsy drug market captured by US-based Cephalon’s Gabitril tablets.
5. Federal Bank
Investment Rationale
> Business of the bank grew 8% q-o-q and 27% y-o-y to ` 808.70 billion while asset book grew 31% y-o-y and 9% q-o-q to ` 577.04 billion at end of September ’11. Advances grew 5% q-o-q and 22% y-o-y to ` 336.07 billion at the end of September ’11. Deposits grew 10% q-o-q and 31% yo-y to ` 472.63 billion at end of September ’11.
> CASA deposits grew 16% to ` 121.66 billion while low cost FCAB (NRE) deposits grew 68% to ` 15.31 billion. NRE deposits grew 19% to ` 66.22 billion in the quarter under review.
> Capital Adequacy ratio stood at 15. 05% with Tier I ratio of 14. 03% at end of September ’11 against 15. 57% with Tier I capital of 14. 71% in the quarter ended June ’11.
> During the second quarter ended September 11, the bank has added 11 branches. Nearly 42% of advances and 51% of deposits originate in Kerala branches at end of September ’11.
> The Bank has a network of 1700 customer touch points (823 branches and 877 ATMs) and an Overseas Representative Office at Abudhabi, UAE. The Bank has plans to expand rapidly by opening 300 more customer touch points by March 2012, taking the total no. of branches and ATMs to 2000.
> Federal Bank aims to achieve 20% growth in advances and deposits this fiscal. The bank, which currently has one representative office in Abu Dhabi, has also applied for an offshore banking unit in Dubai.
6. HDFC Bank
Investment Rationale
> Business of the bank grew 19% y-o-y and 8% q-o-q to ` 419179 crore at the end of September ’11. Balance Sheet has improved 26% y-o-y and 10% q-o-q to ` 31546 crore in the quarter under review. Advances book grew 20% y-o-y and 7% q-o-q to ` 188502 crore in quarter under review. Deposits grew 18% y-o-y and 9% q-o-q to ` 230676 crore in the quarter ended September ’11.
> Capital Adequacy ratio stood at 16. 5% with Tier I capital of 11. 4% at end of September 11 against 16. 9% with Tier I capital of 11. 4% at end of June 11. RWA at end of September 11 stood at ` 2290 billion.
> Management expects advances growth likely to be 3-4% over system growth with continued focus on retail portfolio. The management has not taken any call yet on the cancellation of prepayment charges on retail loans.
> Investments grew 23% y-o-y and 8% y-o-y to ` 786.47 billion at end of September 11. The yield on investments grew 15 bps in the quarter as the bank has placed money in Gsecs at higher yields.
> As of September 30, 2011 the Bank’s branch network stood at 2,150 branches in 1,141 cities (an increase of 385 branches from 1,765 branches as on Sept.30, 2010) and 6,520 ATMs, (an increase of 1,799 ATMs from 4,721 as of Sept. 30, 2010).
7. Power Grid Corporation of India
Investment Rationale
>Despite of the difficulties in land acquisition the company has already invested ` 43,000 of its 11th 5-year plan expenditure and is confident of incurring the balance capex of ` 120 billion before Mar. ’12. For 12th 5-year plan, the company has planned capex of ` 1000 billion and the management is confident of achieving it.
> The company is in the process of finalizing a USD 750 million loan from Asian Development Bank (ADB) for financing its transmission project namely- Establishment of High Voltage Direct Current (HVDC) inter-regional transmission system between the Northern (Haryana) and Western (Chhattisgarh) region. It would be company’s comprehensive transmission scheme for transfer of power from Independent Power Producers’ (IPP) generation projects coming up in Chhattisgarh to different regions viz. Western and Northern Region.
> It is planning for acquisitions of companies in South America. It is targeting to acquire stakes in companies in Argentina and Paraguay. The company’s overseas stake buys would offer revenue opportunities in overseas market and de-risk domestic market dependence.
> PGCIL is setting up a 1,200 KV ultra high voltage test station at Bina in Rajasthan. The test station will be set up along with experimental lines with an investment of ` 8 billion. PGCIL is also setting up 1,200 KV transmission line between Wardha and Aurangabad in Maharashtra for commercial purpose.
> For Sep. ’11 quarter, Power Grid reported net sales and PAT growth of 7% and about 9% at ` 22.64 billion and ` 7.08 billion respectively. The company owns and operates transmission network of about 87100 circuit km as on Sep. ’11 with inter regional power transfer capacity at about 23800 MW.
8. Mahindra and Mahindra
Investment Rationale
> M&M management has indicated that all its plants are running at near full capacity. M&M has started working on its expansion plans and thus the company is all set to start with new planning, which primarily aims to raise the production capacity of the company at its western India plant. The company, presently, manufactures 8,000 units and has plans to increase this figure to 12,000 vehicles a month.
> M&M is ramping up the production of its sports utility vehicle (SUV) XUV 500 to 3,000 units from January 2012 and would touch 4,000 units by May-June 2012. The company has just increased its monthly production from 2,000 units to 2,500. The company will open XUV sales by January in five to seven cities.
> M&M-owned Ssangyong Motor Co will launch four new models by 2016 and five facelifts by 2013 to boost sales across the world. The company is also aiming to sell 1. 6 lakh units by 2013 and 3 lakh units by 2016. In order to expand its global market share, Ssangyong will use Mahindra’s existing network in South Africa by March 2012.
> The company is looking forward to growth from the Rajkot unit. The plant has also scaled up its capacity from producing its current capacity of 1800 tractors to 2500 tract. The tractor is currently being sold across 300 dealerships especially within the states of Gujarat, Maharashtra, Tamil Nadu, Karnataka, Andhra Pradesh, Rajasthan, Uttar Pradesh and Madhya Pradesh.
> A strong portfolio of diesel vehicles coupled with successful launches such as a refreshed Bolero, the XUV 500, Genio, Maxximo mini van and the Gio compact cab will keep volumes ticking on the automotive front.
> Mahindra Navistar Automotives, a joint venture between Mahindra & Mahindra and the USbased Navisar International Corporation, plans to invest ` 2.50 billion at the Chakan unit to ramp up the commercial vehicle manufacturing and distribution network. The company has already invested ` 7.10 billion at the Chakan unit, out of the total project cost of ` 10 billion.
9. Bajaj Auto
Investment Rationale
> The company reported 25% increase in its motorcycle sales to 3, 31,967 units in November 2011. Exports during the month stood at 1, 29,256 units compared to 90,869 units in November 2010, a growth of 42%. The Commercial vehicle sales witnessed a growth of 24% at 42,510 during the month as against 34,195 in November last year. In October 2011 it reported 6. 46% increase in its motorcycle sales at 3, 51,083 units. The company has increased domestic motorcycle prices by ` 500 and certain domestic 3 wheeler products by ` 1000-2000 in Oct 2011.
> The company plans to increase the vehicle manufacturing capacity to 5. 5 million vehicles in H2 FY 12 from current 5 million vehicles through installment of additional equipment.
> It is planning to set up a factory near Mundra in Gujarat to make two and three-wheelers with provision for making its proposed small car. The company wants the proposed factory to be its largest in India with an investment of ` 10 billion. It proposes to export 60 % of production of 5 million units at the proposed Mundra factory.
> The company plans to set up an assembly plant in Indonesia in a bid to increase presence in Southeast Asia and gain from the lower duty structure in the world’s third-largest market at an outlay of USD 150 million (approx. ` 6.75 billion). The facility is expected to be ready by 2013 to produce 100000 units a year. Customs duty rates for SKD (Semi Knocked Down) and CKD (Completely Knocked Down) operations have been reduced by five % from December 2010 by the Indonesian Government.
> The company has hedged 90% of their exports of FY 13 at range forward of ` 47-51/52 per USD. For H2 FY 12, the exports are completely hedged.
> The company is confident of maintaining the margin at 20% in FY 12 and Company is well poised to exceed its target of 1. 5 million vehicles for the year 2011-12.
10. Dabur India
Investment Rationale
> Dabur has entered the professional grooming products market with its ‘Fem’ brand, eyeing a 10 % share of the estimated ` 10 billion markets. To begin with, it has introduced a range of facial kits which it will sell only through beauticians in parlours and salons. As part of the plan, the company has created a sales force of 200 people and is in process of placing the products in around 30,000 parlours across the country.
> Dabur India has formed a new entity, Dabur Lanka, as part of a strategy to strengthen its presence in Sri Lanka for setting up the new fruit juice facility near Colombo. It plans to invest ` 700 million over 2 years.
> Over the past few years the company has grown primarily through the inorganic rout. In FY08 it acquired Fem care pharma and in the last one and half year it has struck three deals worth over USD 170 million. Currently it has overseas presence through its personal care range but now it is keen to enter the consumer healthcare segment with over-the-counter (OTC) products through acquisitions. It is evaluating two such overseas targets, one of which is in Indonesia. An entry into Indonesia will help to grow in South-east Asia like Malaysia, Thailand and Vietnam.
> The company has acquired Ajanta Pharma’s energizer brand 30 Plus. The acquisition is expected to strengthen the healthcare over-the-counter (OTC) space. The acquisition of 30 Plus is part of an aggressive strategy to build capability on the OTC healthcare business.
> The company is planning to invest ` 1.50 billion this year to set up the third plant in Egypt and one plant in Nigeria. There are also plans to set up a plant in Johannesburg to strengthen its current business. It plans to invest around ` 15 billion next year and expect to increase its sales from the international market to 1/3 of the total sales.
Dipen Shah, head of fundamental research, Kotak Securities has selected five stocks picks for the year 2012. The same are as follows:
HDFC Bank
Consistency in it’s earning growth (grown around 30% YoY in past 38 quarters). It has consistently delivered one of the highest CASA mix in the industry. Its CASA mix remained healthy at 47.3% at the end of Q2FY12, despite the rise in FD rates in last few quarters. Valuations - P/ABV of 3.1x FY13.
Infosys
We remain positive on the medium-to-long term strategy of the company. Management has reiterated its long term commitment to increase the proportion of non-linear revenues. We concur with the management’s view that this is necessary to ensure profitable growth, while providing more value to customers. Valuations - PE of 16.8x FY13.
ITC
ITC has a long track record of high market share in the cigarette business. Coupled with pricing power, this creates an improving profit profile, and high visibility in revenue and earnings growth for the segment. Large opportunity Size in Other FMCG businesses, Positive Market Share Trends: Tobacco constitutes only 15% of India’s consumption pie; which explains ITC’s entry in the space. ITC’s products show encouraging trends in market share, creating portents for profitability toward the end of FY-13. Other businesses top-of-the-class, are self-sustaining; Over a cycle all other businesses of ITC are self-sustaining, and gel strategically with growth objectives of the company. Valuations - PE of 21.8x FY13 E.
IRB Infrastructure Developers
Experienced player in road BOT segment and likely to benefit from upcoming project awards in road segment Strong order book of ` 96 bn to drive growth in revenues at a CAGR of 36% between FY11-FY13. Valuations - PE of 9.4x FY13
Cummins India
Company is well poised to benefit from recovery in the infrastructure spending in the country. Commencement of mega production site at Phaltan is likely to ease out capacity constraints and would add to cash flow generation.
Following are the six stocks on which various brokerage houses have given a ‘Buy’ recommendation:
1. Union Bank of India (UBI)
Market price (Dec 30): ` 169.55
Target price: ` 198
Rating: Buy
Upside: 46.78%
Brokerage: Angel Broking
Public sector lender Union Bank of India has cut its base rate marginally by 10 bps to 10.65% with effect from Dec. 26, 2011. The move follows Reserve Bank of India’s pause in its previous monetary policy review on Dec. 16, 2011. The RBI had given clear indications that the interest rate cycle had peaked and was likely to reverse from now on. Having said that valuations at 0.7x FY2013E, ABV are at a substantial discount to its historic trading range of 0.95-1.50x with a median of 1.30x one year forward ABV. Hence, it maintains its ‘Buy’ recommendation on the stock with a revised target price of ` 198, implying an upside of 20% from current levels.
2. Deepak Fertilisers
Market price (Dec 30): ` 122
Target price: ` 185
Rating: Buy
Upside: 51.64%
Brokerage: Emkay Global Financial Services
Recent media reports suggest that EGOM will soon decide on a proposal from the Petroleum Ministry on a cut in the supply of 0.178 mmscmd of KG D-6 gas to Deepak Fertilizers. Deepak’s total requirement of gas is 0.68mmscmd with 0.15mmscmd of gas being sourced from Reliance’s KGD-6 basin. With growing uncertainty, it has reduced its target P/E multiple from 8x to 6x FY13 estimates (based on previous five years average) and subsequently reduce its price target to ` 185 (from ` 250). At CMP stock offers attractive dividend yield of 5%+ and trades at 20% discount to book value. It continues to maintain its Buy recommendation on the stock.
3. Bajaj Electricals
Market price (Dec 29): ` 140
Target price: ` 208
Rating: Buy
Upside: 48.57%
Brokerage: Kantilal Chhaganlal Securities
Consumer durables segment (small appliances & fans business units) has grown exponentially with the CAGR of 28.4% between FY08-FY11 and is expected to grow at the CAGR of 22%% between FY11-FY13E backed by company’s aggressive promotion strategies, extensive dealer network, strong brand franchise, introduction of newer products. The business unit (BU) contributes 46.6% to total revenue of Bajaj Electricals Ltd (BJE) and the contribution is expected to go to 50.3% by FY13E. Around 35% of total sales in consumer segment come from rural and semi-urban areas which are growing at approximately three times the growth in urban markets. At CMP of ` 140/ share, BJE is currently trading at P/E Multiple of 9.1 x on FY12E EPS of ` 15.4 and at 7.4x on FY13E EPS of ` 18.9. It recommends ‘BUY’ on BJE with target price of ` 208/ share (11x P/E on FY13 EPS of ` 18.9), which is strongly supported by BJE`s renowned brand, collaboration with strong foreign players and wide distribution providing an competitive advantage to BJE and will help BJE to improve its margins in coming year ` BJE is a dominant player in Appliances, luminaries & lot of product categories in fans division.
4. ICICI Bank
Market price (Dec 29): ` 697
Target price: ` 1,089
Rating: Buy
Upside: 56.24%
Brokerage: Kotak Securities
The loan growth for FY12 is likely to be in the range of 17-18%, while next year (FY13) could be even more subdued (in the range of 15-16%). They have also indicated that focus on asset quality and NIM would continue, going forward. It reiterates Buy on the stock with the revised TP of ` 1,089 (SOTP method), where the value of its standalone business comes to ` 865 (1.6x FY13E ABV) and the value of subsidiaries at ` 224 (holding company discount: 20% to the fair value of its subsidiaries at ` 280).
5.. ING Vysya Bank
Market price (Dec 29): ` 293
Target price: ` 436
Rating: Buy
Upside: 48.81%
Brokerage: Shah Investors
ING Vysya Bank is one of the oldest private sector banks with history of 80 years and is headquartered in Bangalore. Subsequent to acquisition of stake in the bank by the global financial powerhouse ING Group in August 2002, the name of the bank was changed from ‘The Vysya Bank’ to ‘ING Vysya Bank’. At CMP ` 293 ING Vysya Bank is trading at P/B multiple of 1.13x its FY12E BV of ` 259 and 1.02x its FY13E BV of ` 287. It value the bank at its 5-Year average P/BV multiple of 1.52x on its FY13E BV of ` 287. It initiate coverage with a BUY rating and target price ` 436 (1.52x FY13E BV of ` 287) with investment horizon of 12 months and an upside potential of 49%.
6. Micro Technologies (India)
Market price (Dec 27): ` 155
Target price: ` 200
Rating: Buy
Upside: 29.03%
Brokerage: Sunidhi Securities & Finance
MTIL’s vision is to emerge as a Global IT based solution for customers in the field of Security, Life Style & Life Support Systems. To identify, source and deploy infrastructure, talent and resource in order to render superior Information Technology solutions worldwide. MTIL intends to maintain focus on Research & Development with a view to capitalize on the first mover advantage and further plans to expand the size of its market while mitigating business risk by reducing its dependence on only a few products. MTIL is likely to post an EPS of ` 85 in FY12. At the CMP of ` 155, the share is trading at a P/E of 1.8x on FY12E. It recommends Buy with a target of ` 200 in the medium term.
We have collated views of experts on how the markets will perform in 2012. The same is as follows:
ICICIdirect:
CY12 would be an equally challenging year and is likely to be a roller-coaster ride for the investors. Politically, this year would be a mega carnival of leadership changes in major economies such as the US, China and France among others. Policy responses in the US and Europe region would be directed towards applying the liquidity balm to iron out current issues while solvency issue would be postponed. Emerging economies would spend their time and energy towards preservation of growth as higher inflation and interest rates eat up growth. In addition, global growth faces risk from higher crude prices due to Iran-Israel induced tension, political uncertainty in the Arab world, North Korea, Afghanistan and Iraq among others. Commodity markets may crumble under the Chinese slowdown fears. Domestically, the Indian economy could spot relief in terms of interest rate cuts and lower inflation while higher fiscal deficit, currency volatility and crude oil could still knock off a few basis points from our economic growth. In addition, perceived policy paralysis and gloom associated with it would continue to lead to procrastination in our thoughts and capture headlines.
We expect the Indian equity markets to witness time based correction. Hence, we expect the Sensex to be boxed in the range of 15442 (14x FY12 Sensex EPS of 1103) -17822 (14x FY13 Sensex EPS of 1273, upside of 14%) in line with earnings growth of 15% in FY13 and historical average multiples of 14x. The fortunes of equities are also tied to the relative attractiveness of fixed income, gold and real estate. Any deterioration in risk return trade off in these asset classes would be a blessing in disguise for equities else equity markets may continue to be sidelined. In the event of an unlikely global sell off, Sensex multiples could shrink to 10-11x FY13 earnings, implying a downside of ~15%. The long term case for investments in Indian equity markets still remains intact through periodic investments while investors should grab any opportunity arising due to sharp sell-off where multiples contract further to 10-11x. Otherwise, investors should look at the next year end as a buying opportunity as by then we would have captured FY13 growth and a likely double digit growth in FY14 on the anvil, which would limit downsides from thereon.
Parallel levels on the Nifty are 4637 on the lower side and 5351 on the higher side.
We believe that relatively safer sectors would continue to lure investors as the capital preservation despite lower returns theme is unlikely to fade away. Accordingly we continue to prefer IT (rupee to benefit though valuation expensive), pharma (rupee & patent expiry to benefit yet valuation seems expensive), telecom (financials to improve, reducing regulatory uncertainty) and auto (lower base, lower commodity, peaking interest rates)”.
A K Prabhakar, Senior Vice President, Equity Research, Anand Rathi Securities:
Fundamental Outlook: Year 2012 would be year of consolidation after making panic low, sectors like Infrastructure and Realty can surprise market while IT & Pharma will be very defensive in the year. The rupee weakness (up to levels 55 and may be above that to 59) is to continue which may further impact positively to the export oriented businesses. Stocks which have corporate governance issues, pledged shares, ECB loans or FCCB maturities may witness pressure. On the other hand Cash-Rich PSU stocks with lower debt on books and good quality management stocks will be preferred. After downgrades and a view of India being replaced by Indonesia in BRICs, its just a matter of time as after this bear phase rally we will enter the consolidation phase in 2012 and later 2013, market may see out performance. Gradually the domestic situations will also improve with government action taking place, softening of inflation and reversing of interest rates will support the out performance.
Technical Outlook: Sensex to move in the range of 11500-17700 and Nifty to move in the range of 3500-5400. Nifty and Sensex has closed below 200WMA on 3 continuous weeks which normally leads to more than 20% correction. This bear phase which will see very sharp and short lived correction may see a low of 3500 in Nifty and 11500 in Sensex. This may be experienced H1 CY2012. Later after the bear phase the market may see some consolidation phase followed by a rally which may see a high of 5400 in Nifty and 17700 levels in Sensex. These levels are possibly seen in the H2CY12. This rally will be mainly lead by the top 100 market cap stocks and cash rich companies mainly from PSU and MNC basket.
Prabhakar recommends 12 Stocks that look good for 2012, which can be bought in panic - SAIL, DIVIS LAB, CAIRN INDIA, NMDC, BEML, EIL, HEXAWARE, IPCA, HUL, INDIAN HOTELS, WIPRO and OBEROI REALTY.
Dipen Shah, Head of Fundamental Research, Kotak Securities:
“The Global scenario looks very uncertain. What will happen to the Euro is anybody’s guess. Whatever the solution be, we are going to see a lot of pain and slow down of the Euro region for some time. While US seem to show some signs of recovery one is still not confident whether it will last or slip back. The fear of slowdown in China seems to be more certain now. All this may result in some sovereign defaults and corporate death globally and locally.
All this has dampened the business and market sentiments, the current valuation of Indian stock and indices reflect that. The question is, will this continue and worsen or will the economy show signs of improvement in 2012. While it is very difficult to make a guess given the uncertainty in many quarters, the equity markets seems to have substantially priced in the worst. It is trading at a PE of 12 times financial year 2013 estimates. Many of the large cap and mid cap stocks are trading at 52 week lows and some of them below book value. Thus, the down side seems limited to not more than 10% fall from here though it is possible due to technical factors, markets may for shorter periods of time, trade lower.
The positive part is with depreciation in currency Indian manufacturing, service and software sector has become more competitive globally. RBI is likely to pause and start reducing interest rates. With the China and rest of the globe slowing, oil and other commodity prices are likely to soften. All this will be a good base for Indian companies to show signs of improvement and grow. Post the state elections hopefully Central government will push reforms more decisively. With no major accidents globally and locally, one can expect around 15% return from Indian Equities in 2012. But one can expect high volatility and pain before things settle down by end of next year”.
Venugopal M, Co-Head - Equities, Tata Mutual Fund:
“Macro factors, both global and domestic are currently not supportive for equity markets. The sluggishness in the Indian economic growth is likely to continue for some time with GDP growth now forecasted at close to 7% even for FY13. This is a result of weak global scenario as well as lag effect of higher interest rates in the economy, which apart from lack of policy initiatives have led to much lower investment growth in the economy. Private consumption especially in urban areas is showing signs of moderation and the investment cycle is yet to show signs of recovery. Also, worsening global economic conditions could lower export growth prospects going forward. Given these conditions we believe the next few quarters could be challenging.
Earnings growth forecasts for Sensex companies have been lowered at the end of almost every quarter for several quarters now. We believe that this cycle would continue into the next calendar year and earnings growth could remain muted in FY12 and FY13. However, the positives are that the year 2012 is starting with low valuation levels and inflation is likely to cool off. Interest rates should therefore start coming down some time in the next calendar year which would be good. Given these factors, the market could be more positive in the second half while being range bound and volatile, reacting to overseas news flow as well as economic data in the first half. From current levels of the index, over a longer time horizon, one could expect reasonable returns.
We feel that the ability to do substantial fiscal or monetary easing to tackle the current downturn is limited at this juncture. Also, crude oil prices continue to be stubbornly high. Thus, recovery will be more gradual this time. In such a scenario, one needs to follow a much more stock specific approach than a sectoral approach. There could be significant divergence in performance of companies in the same sector. We are thus looking for companies with steady sales, earnings growth with good return ratios and low debt, which we feel, would continue to do well. We are also keeping a close watch on company specific valuations; as such, a scenario can present good companies at very good valuations. At current valuations, the interest rate sensitive sectors offer a good opportunity over the medium term. Over the longer term, we are quite positive on the consumption space in India”.
SMC Global:
“Indian economy is entering into the year 2012 on a much softer note in contrast to the year 2011. Fading economic growth, lack of reforms, fiscal constraints, volatility in currency, margin pressures on corporate are some of the major factors that are putting pressure on the markets. Apart from these domestic issues, global issues like debt problems in the European region, fragile recovery in U.S. is another risk to the world. So far these developed nations have adopted many policies like quantitative easing, special credit lines, etc to tackle the issues but the problem still remains very much there. In emerging markets now there is a fear of hard landing in China because of real estate market bubble and many are of the opinion that it can jeopardize the growth in the fastest growing emerging economy. So all in all we are entering the New Year on a cautionary note.
The year 2012, would be the year in which we would see pro-growth policies by RBI if not much would happen from the fiscal side as the government is already walking on a tight rope because of higher subsidies, social programs like NREGA, Food Security Bill, etc. The budget to be presented in February 2012, would not bring much cheer as the duties and taxes are still lower than the pre-crisis levels and the tax collections this year so far are not up to the expectations.
We expect RBI to begin lowering the interest rate by March 2012 and that would start yielding positive results by a lag of one to two quarters. Though the current happenings are very much discounted by the markets but lot would depend on how future shapes up. There is likelihood of market oscillating in a range next year and consolidate if things as not get worse from here. The challenging thing for the policy makers here would be to restrict any sort of moderation in economic momentum and come up with the pro-growth policies.
Interestingly, if one sees the Market cap to GDP ratio (GDP at market prices at current prices and calculated by adding the latest four quarter data), it is currently at around 62.25 as compared to the 56.22 in March 2009, when markets made lows. Typically ratio around 50 suggests value in the market and closer or above 100 indicates overvaluation.
The advice to the investors is to go with the old economy stocks and not beyond the BSE 500 index. At the moment we are recommending clients to take exposure in selected stocks in sectors like IT, Private Banks, Pharmaceuticals, FMCG, etc”.
Rajnish Kumar, Executive Vice President, Fullerton Securities and Wealth Advisors:
“2012 is likely to be a year of consolidation with limited upside for the markets. Inflation, budgetary deficit, current account deficit etc need to be controlled through policy interventions, which will then create ground for markets to take positive cues and move up. We expect 1st half of 2012 to be lackluster for the markets with significant downside risks posed by events from Europe. With state elections round the corner, government may not take bold steps to help the economy recover and this may add to the sense of policy drift felt by the industry. Things should start getting better in the 2nd half as macro indicators start looking better and we may see FII flows start trickling back. Overall we expect moderate returns from equities in 2012”.
DK Aggarwal, CMD, SMC Investments and Advisors:
“As we enter into 2012, the improved data from US and concerted efforts being put up by euro zone leaders to solve the crisis gives us the hope that may be 2012 will be a better year than 2011. All the negatives seems to have been discounted in the financial market and from the second half of 2012, we may see the beginning of better period ahead”.
Broking firm, ICICIdirect has come out with report on sector outlook for 2012. We have collated key highlights for each sector from their report. The same is as follows:
Auto - Outperform
We believe FY13E may not mimic a ‘V-shaped recovery’, as we expect modest near 11-13% growth. The rationale of the assumption on a segmental basis has been elucidated in the exhibit below. On a relative basis, our spectrum is most positive on PV segment while two-wheelers remain the least favoured.
Passenger vehicles
In FY13E, we believe PV segment would be a relative out-performer across the segments. The non-existent growth till now is expected to aid FY13E through its low base. Issue of higher interest rates had hit the small car segment the most, which could also rebound in a similar fashion post probable rate cuts. FY12 was also marred by labour issues at market leader Maruti, which has recently been resolved and FY13E could see a higher ramp-up in the same, thereby aiding volume growth.
Medium and heavy commercial vehicle
CY11 marked industrial investment climate at its weakest since `Lehman` in 2008.We believe the segment will continue to rise above the consensus outlook on the back of better monetary policy, rising business confidence and improving investment climate.
Light commercial vehicle
This segment has remained the shining beacon in the automotive space. It hardly witnessed any meaningful impact of rising rates as demand for last mile transportation continued to burgeon with rising rural penetration. We believe, lack of effective government transportation services would continue to aid the demand for this segment albeit at a slower pace.
2-wheelers
We believe the low growth demand phase of FY07-09 for two-wheelers was instrumental in the >20% growth rates since FY10. Two-wheelers could decline to normalised growth as deferred demand seems exhausted. We remain cautious on the segment and expect domestic growth for listed players to slow down significantly with strong capacity expansion by foreign challengers.
Banking - Neutral
Banking sector has grossly underperformed the index in CY11. Bankex has underperformed the Sensex by ~7% YTD. Advances break-up dictated the valuation given commanded by banks. Banks with retail exposure were spared while the ones having exposure to troubled sectors like Infra, power, iron and steel, agriculture and textiles took heavy beating. We expect this trend to continue and valuation divergence to sustain.
In the absence of major positive triggers, we believe the sector will be in a consolidation phase from here on as concerns over NPA would persist while interest rate cuts (expected in Q1FY13E) and contraction in multiples would limit downside. Banks with higher exposure to power (SEB), infra, iron & steel and textile like SBI, PNB, IOB, OBC and Dena Bank may continue to take a beating.
Capital Goods - Underperform
We remain cautious on the sector and prefer owning/buying large cap stocks on dips from a three year perspective as the sector is expected to languish in the medium term.
In terms of performance, we expect CY12 to be disappointing as H1CY12 would see tepid order inflows even though revenue growth would be reasonable, whereas H2CY12 would witness a decline in growth rates as dull order inflows in CY11 would reflect on the financial performance. Also, order inflows in H2CY12 would be a function of how fast interest rates decline, pace of implementation of reforms in power sector (fuel issues & SEB reforms) and movement in policy reforms.
We believe order inflows in the transmission sector will be relatively strong as we expect Power Grid to maintain its awarding momentum, though competition will persist. Order inflows for the generation side and other industrial sectors are expected to remain tepid until macro headwinds recede.
Valuations of most of the companies in the capital goods sector are at rock bottom levels but we expect the pain to continue at least in H1CY12, until signs of capex revival are not perceived.
Cement - Underperform
Cement demand has been sluggish in the past 20 months (growth of 4.4% in FY11 and 4% in YTDFY12) due to muted off take from construction activities. We find that cement demand growth has a high correlation with gross fixed capital formation (GFCF) growth as it captures the construction activities. GFCF declined 0.6% in Q2FY12 on account of a slowdown in infrastructure investments, keeping cement demand under pressure. We expect cement demand to grow by 4.5% in FY12E and 8% in FY13E.
FMCG - Neutral
FMCG companies would continue to witness strong top-line growth, which would largely be led by price increases. We believe a moderation in volumes in slowing down the economy is inevitable. With the rising cost pressure, margins for companies would remain under pressure. Valuations for the FMCG sector remain stretched and risk-reward is unfavourable. However, in case of a sharper sell-off in markets, FMCG being a defensive sector is not as vulnerable as others.
Hotels
Hotel industry witnessed turbulent time in the past two years on account of global economic turmoil, higher inflation and political disturbance in the domestic market. Although, our coverage universe witnessed a top-line growth of nearly 18% YoY in FY11 (mainly backed by new room additions), the growth in RevPAR (revenue per room) remained muted due to excess supply. FTAs (Foreign Tourist Arrivals) that are major revenue contributor for premium hotel rooms recorded 9% YoY jump during FY11. However, due to lower corporate spending on travel as result of economic slowdown and higher room supply, occupancy levels for FY11 (61%) remained lower compared to FY09 (63%). Though, it was up by 300bps YoY due to low base effect. The average room rate (ARR) growth also remained subdued (~1.3% YoY) especially across major business destinations such as NCR, Mumbai, Chennai and Hyderabad mainly due to oversupply of rooms. With increased room supply and moderate demand growth, we expect FY11-13E top-line CAGR of 12% of our coverage universe, supported by new room additions and marginal growth in occupancy (by~100 bps YoY in FY13E).
Infrastructure - Underperform
CY11 saw Construction & Infrastructure stocks underperforming the broader indices on account of tightening policy rates, muted order inflows across segments (except roads) & rising commodity prices affecting execution and margins. At the onset of CY12, we are at the cusp of regime where rate cut is expected (impact to be seen from H2CY12 onwards in financials) and commodity may cool off bringing down the project cost for developer and working capital for contractors. However, we maintain our cautious view due to policy stance on various issues such as fixation of aero charges for airports, delay in environment clearance & land acquisition issues.
IT - Outperform
The IT sector had a favourable year in CY11 as the year-to-date BSE IT index outperformed the Sensex. BSE IT declined 18.3% vs. a 23.3% decline in the Sensex led in part by INR depreciation, volume growth, a healthy balance sheet and cash flow generation. As for CY12, depreciating rupee, tapering attrition, likely lower wage inflation, steady volume (off-shoring market share gains) could be likely positives while macro uncertainty, delay in budgeting cycle, discretionary spending, pricing, expensive valuations could be negatives. During the previous recession, Tier-I IT vendors bottomed at trailing 12 month PE range of 6-13x. Consequently, we assembled likely positives/negatives in our scenario builder. We believe the positives outweigh negatives excluding debt crisis in Europe, the outcome of which is indeterminate. Conversely, the macro remains uncertain and sell-offs triggered due to ‘Lehman’ like events in Europe could offer a buying opportunity in quality names for long-term investors.
Media - Neutral
CY11 was a year of economic slowdown characterised by a slowdown in ad revenue growth across all sections of the media industry. With corporates` curtailing ad spends in the event of rising input costs and subdued economic growth expected in the next few quarters, ad revenue would grow moderately at 10-12% in the next fiscal. Expected rate cuts in mid 2012 would boost economic activity, which may lead to a spurt in ad spends in the second half of the next fiscal.
Metals and Mining - Underperform
CY11 was a challenging year for the metals and mining sector on the back of a muted demand scenario, elevated raw material costs and restriction of mining of iron ore in certain areas. During the first nine months of CY11, prices of key raw materials such as iron ore and coking coal were on an upward trend while in Q4CY11 along with a decline in raw materials costs steel prices also tapered off resulting in no respite for steel companies. As a result, on the back of elevated cost structure the operating margins of steel players remained under pressure for CY11. Going forward, on the back of global uncertainty and a muted demand scenario, we expect global steel demand to remain subdued in CY12.
Oil & Gas - Neutral
The oil & gas sector reported a tepid performance in CY11 on lack of regulatory reforms, uncertainty about government policies and lower domestic gas production. In CY12, we believe elevated Brent crude oil prices on geo-political tensions and remote possibility of petroleum products` pricing deregulations would continue to remain a drag on the OMCs for H1CY12. We prefer to play the oil & gas sector through the PSU upstream companies on account of lower valuations (BSE oil and gas index has been trading near historical lows of 10-12x PE multiple) and gas utility companies as defensive bets within the sector.
Pharmaceuticals - Outperform
We remain positive about the outlook for the pharma and healthcare sectors for 2012. Our belief is based on the capabilities that most of the players have developed over the years to cope with challenges in a particular geography. We expect players with optimum geographical mix to perform better than players with focused markets. The US will remain the key market to conquer on account of impending patent cliff and, hence, opportunities in both FTF and generics. Brands worth ~$25-30 billion are expected to lose patent exclusivity in 2012 itself. Although we remain positive about the sector outlook, we may not see outright outperformance of the Healthcare index vis-Ã -vis the Sensex on account of substantial valuation premium (nearly 30% currently). We may, however, see select pharma companies outperforming the broader index.
Power - Underperform
The power sector in CY11 was characterised by robust capacity addition (12737 MW-taking total capacity to 1,85,496 MW), tariff hikes, fuel shortages, back down by SEBS, change in Indonesian coal law and rise in interest rates. We expect capacity addition to be robust in CY12 (our bottom up analysis suggests that nearly 9400 MW can be added in CY12). We are cautious as structural issues like policy reforms and fuel shortages are more critical than cyclical factors like falling interest rates. One should stick to regulated entities like NTPC, NHPC (regulated players, less fuel risk, high Actual Contract Quantity from Coal India, sustainable earnings growth via capacity addition).
Real Estate - Underperform
BSE Realty underperformed the Sensex in CY11 due to drying up of the funding (moderation in bank credit and non conducive capital market). Furthermore, sales volume has slowed down due to rising un-affordability and high home loan rates. Given the challenging macro headwinds and stretched balance sheet in the sector, the property prices could correct sharply. At the same time, wage inflation & higher interest expenses on account of rising gearing would keep their bottom line under pressure. Hence, we expect sector to underperform in CY12.
Retail - Underperform
The year 2011 was an eventful year for the retail sector considering that opening up of the sector was in discussion. The government permitted foreign direct investment in multi-brand retail up to 51% and also raised the limit for single brand retail from 51% to 100% in November 2011. However, due to severe opposition from other political parties the government was forced to put the decision on hold.
Opening up of the retail sector to FDI will prove to be a game changer for the sector as it will bring in the much needed capital to fund growth.
Shipping - Underperform
The shipping industry is currently passing through a downturn, which is likely to be prolonged. A moderation in demand and substantial increase in supply on account of new vessel additions is expected to keep freight rates subdued.
Sugar - Underperform
In the agri-commodity sector, sugar stocks have seen a sharp correction in the last one year due to subdued sugar prices, continuous increase in sugarcane cost and uncertain export policy. On the other hand, tea stocks were holding well throughout the year due to strong export prices. We believe sugar stocks have come to distress valuations levels, close to October-December 2008. Though we believe earning would continue to suffer in FY12 a decline in sugarcane area would result in lower sugar production in SY13, which should firm up sugar prices from current levels.
Telecom - Outperform
The telecom stocks have largely underperformed since early 2008, when the new licenses were issued, followed by increasing competitive intensity (visible in rising net additions and declining ARPMs). However, they have outperformed the Sensex in the last year, in spite of the continuous downgrade of their EPS (due to higher interest and amortisation cost relating to 3G related debt). The regulatory framework has improved with the new telecom minister assuming office and competitive intensity has declined resulting in stable ARPMs, which is also reflected in the stock price movement.
The sector is expected to outperform the broader index on the back of improving ARPMs, 3G uptick and lower capex. We may see further upside dependent on the timing and various aspects of policy announcement.
Textiles - Neutral
The year 2011 was a mixed bag for the Indian textiles sector. While cotton and cotton yarn prices rose in the first half of the calendar year, prices fell substantially in the second half. Textile players incurred heavy inventory losses on account of this. Domestic textile players were struck by a double whammy of lower demand and falling realisations.
The year 2012 is also likely to be a lull year for the Indian textile industry. While a depreciating rupee would work in favour of textile companies, they are also facing foreign currency losses due to foreign currency debt on their books. On the back of this, larger domestic players would be more comfortable with the currency staying in the range of ` 47-48/dollar.
SMC Global Research has selected 10 stocks picks for the year 2012. The same are as follows:
1. Tata Consultancy Services (TCS)
Investment Rationale
> Tata Consultancy Services will expand its operations in the state of Maharashtra by building a new software development campus in Nagpur with an investment of ` 6 billion in the first phase. The TCS Nagpur Campus will be located on a 54-acre property in the Mihan SEZ on the outskirts of the city. The campus will be built in two phases with Phase I containing 8,200 seats for IT services and BPO services. Phase II will be of a similar size.
> The company signed large 10 deals during the quarter ended Sept 2011, 2 each in BFS, Insurance and telecom and 1 each in Hi-tech, Retail, E&U and Pharma; Geographically, 5 in North America, 4 in UK/Europe and 1 in Latin America.
> The company was selected by a large broadband and telecommunications player in Europe and Latin America for service management & integration in a deal valuing over USD 100 M.
> The company added 35 new clients (24 in sequential quarter) and number of million dollar clients increased across all bands (+7 in >USD10 million, +3 in >USD 20 million, +3 in >USD50 million and +2 in >USD100 million band).
> The pipeline is healthy across sectors and markets, deals signings are on track and there are no delays, budget position is same and outlook is positive in financial services.
> Technology, Enterprise and Infrastructure would be the focus areas of investment and discretionary spending is seen in Digital consumer, Analytics with consumer interest in cloud computing.
> The total employee strength of TCS was 214,770 on a consolidated basis at the end of Q2. Trainees started joining the company from the beginning of the July-September quarter, resulting in the addition of 10,192 trainees and 8,125 laterals in India along with 2,032 employees overseas. The utilization rate (excluding trainees) was flat at 83.1% and that including trainees was 76. 4%.
2. Hexaware Technologies
Investment Rationale
> Hexaware Technologies has signed a deal worth USD 177 million (` 7.90 billion), its largest deal ever, with an existing US-based client. The contract has a potential of giving the company USD 100 million worth of incremental business. Under the agreement, Hexaware will offer services including ERP, business intelligence/analytics, quality assurance, testing, BPO and application management.
> Hexaware has signed a three-year contract, worth over USD 25 million, with an existing European client firm for providing remote infrastructure management services. It will manage the European client’s footprint covering American, Asia Pacific and European regions. It plans to deploy over 150 employees for this work.
> The company intends to cash in on the increase in technology spending by the companies. It intends to increase the strength of personnel operating in dedicated global delivery centres to over 600. Hexaware will offer IT and BPO services from 15 locations across the world.
> The company added 12 new clients during the quarter ended September 2011. It has added one client in the USD 20- million plus category and two in the USD 5-10 million categories. It also added 745 employees during the period, taking its total headcount to 8,164 at the end of Sept. 30, 2011.
> Hexaware Technologies has registered an increase of 9.6 % in revenues sequentially at 3.66 billion in the quarter ended Sep 2011 while net profit rose by 7.4 % to ` 647 million. Growth has been well-balanced in most sectors - 13.7 % in banking, financial services and insurance, 12.6 % in manufacturing, healthcare and services and 3.8 % in travel and transport.
3. Divis Laboratories
Investment Rationale
> Company has taken up implementation of a new DSN SEZ Project at an estimated cost of ` 2 billion to cater to new opportunities in generics as well as custom synthesis as company visualized full utilization of existing capacities. During the year, company spent an amount of ` 740 million on this Project and a further amount of ` 890 million towards enhancing capacities and upgrading utilities at the existing Units, in order to conform to best environment practices and zero discharge of effluents.
> The company has also launched several new generic products like Tamsulosin, Dexlansoprazole, Valsartan, Capecitabine, Desloratadine, Quetiapine and Telmisartan -which are expected to gather volumes in future.
> It continues to work towards optimizing the capacities created at its multi-purpose manufacturing facilities and also creating additional capacities to cater to growing business opportunities. Company continue to focus on its domain of capability in line with its strategy to work with innovators playing a complementary role and non-compete model with its generic customer.
> Company exports about 75% of its sales to advanced markets in Europe and North America. Company is planning to acquire biotechnology research companies in India and abroad. The move is to venture into the bio-similar market. The company has ` 5 billion for funding acquisitions.
> Company is planning to incur a capex of about ` 1.75 billion for the year to address capacity shortfalls too reflects the improving business landscape.
> Net profit of Divi’s Laboratories rose 45.35% - ` 1 billion in the quarter ended September 2011 as against ` 729.6 million during the previous quarter ended September 2010. Sales rose 39. 79% to ` 3.54 billion in the quarter ended September 2011 as against ` 253 billion during the previous quarter ended September 2010.
4. Sun Pharmaceuticals
Investment Rationale
> The company has given guidance of 28%-30% revenue growth in FY12 on the back of improving performance of Taro, sustained growth in the domestic business, healthy pipeline of products and pick-up in revenues from overseas markets, outside the US.
> US Food and Drug Administration have granted company’s subsidiary an approval for its Abbreviated New Drug Application (ANDA) to market a generic version of Cardizem CD, Diltiazem HCl extended-release capsules. Meanwhile Sun pharma also launched the Sumatriptan injector in US was positively received. It expects to gain traction going forward.
> During the quarter ended September 2011, it has filed 5 Abbreviated New Drug Application (ANDAs) (4 with the Sun Pharma and 1 with Taro) taking the cumulative filings to 388products as on 30th September 2011. It has received approval for the 6 ANDAs taking the total number of approvals to 238. It expects to await for the 150 products approvals including 18 tentative approvals.
> The company has entered into a non-binding proposal to acquire the remaining 33.7% stake in Taro Pharmaceutical Industries, an Israel-based pharmaceutical company, at a price of USD 24.50 per share in cash. The transaction is valued at approximately USD 367.33 million. It currently has 66. 3% stake in Taro.
> It plans to expand its business in USA and other developed and emerging economy through organic and inorganic rout to fuel growth. In US it is eyeing a piece of the USD 400 million antiepilepsy drug market captured by US-based Cephalon’s Gabitril tablets.
5. Federal Bank
Investment Rationale
> Business of the bank grew 8% q-o-q and 27% y-o-y to ` 808.70 billion while asset book grew 31% y-o-y and 9% q-o-q to ` 577.04 billion at end of September ’11. Advances grew 5% q-o-q and 22% y-o-y to ` 336.07 billion at the end of September ’11. Deposits grew 10% q-o-q and 31% yo-y to ` 472.63 billion at end of September ’11.
> CASA deposits grew 16% to ` 121.66 billion while low cost FCAB (NRE) deposits grew 68% to ` 15.31 billion. NRE deposits grew 19% to ` 66.22 billion in the quarter under review.
> Capital Adequacy ratio stood at 15. 05% with Tier I ratio of 14. 03% at end of September ’11 against 15. 57% with Tier I capital of 14. 71% in the quarter ended June ’11.
> During the second quarter ended September 11, the bank has added 11 branches. Nearly 42% of advances and 51% of deposits originate in Kerala branches at end of September ’11.
> The Bank has a network of 1700 customer touch points (823 branches and 877 ATMs) and an Overseas Representative Office at Abudhabi, UAE. The Bank has plans to expand rapidly by opening 300 more customer touch points by March 2012, taking the total no. of branches and ATMs to 2000.
> Federal Bank aims to achieve 20% growth in advances and deposits this fiscal. The bank, which currently has one representative office in Abu Dhabi, has also applied for an offshore banking unit in Dubai.
6. HDFC Bank
Investment Rationale
> Business of the bank grew 19% y-o-y and 8% q-o-q to ` 419179 crore at the end of September ’11. Balance Sheet has improved 26% y-o-y and 10% q-o-q to ` 31546 crore in the quarter under review. Advances book grew 20% y-o-y and 7% q-o-q to ` 188502 crore in quarter under review. Deposits grew 18% y-o-y and 9% q-o-q to ` 230676 crore in the quarter ended September ’11.
> Capital Adequacy ratio stood at 16. 5% with Tier I capital of 11. 4% at end of September 11 against 16. 9% with Tier I capital of 11. 4% at end of June 11. RWA at end of September 11 stood at ` 2290 billion.
> Management expects advances growth likely to be 3-4% over system growth with continued focus on retail portfolio. The management has not taken any call yet on the cancellation of prepayment charges on retail loans.
> Investments grew 23% y-o-y and 8% y-o-y to ` 786.47 billion at end of September 11. The yield on investments grew 15 bps in the quarter as the bank has placed money in Gsecs at higher yields.
> As of September 30, 2011 the Bank’s branch network stood at 2,150 branches in 1,141 cities (an increase of 385 branches from 1,765 branches as on Sept.30, 2010) and 6,520 ATMs, (an increase of 1,799 ATMs from 4,721 as of Sept. 30, 2010).
7. Power Grid Corporation of India
Investment Rationale
>Despite of the difficulties in land acquisition the company has already invested ` 43,000 of its 11th 5-year plan expenditure and is confident of incurring the balance capex of ` 120 billion before Mar. ’12. For 12th 5-year plan, the company has planned capex of ` 1000 billion and the management is confident of achieving it.
> The company is in the process of finalizing a USD 750 million loan from Asian Development Bank (ADB) for financing its transmission project namely- Establishment of High Voltage Direct Current (HVDC) inter-regional transmission system between the Northern (Haryana) and Western (Chhattisgarh) region. It would be company’s comprehensive transmission scheme for transfer of power from Independent Power Producers’ (IPP) generation projects coming up in Chhattisgarh to different regions viz. Western and Northern Region.
> It is planning for acquisitions of companies in South America. It is targeting to acquire stakes in companies in Argentina and Paraguay. The company’s overseas stake buys would offer revenue opportunities in overseas market and de-risk domestic market dependence.
> PGCIL is setting up a 1,200 KV ultra high voltage test station at Bina in Rajasthan. The test station will be set up along with experimental lines with an investment of ` 8 billion. PGCIL is also setting up 1,200 KV transmission line between Wardha and Aurangabad in Maharashtra for commercial purpose.
> For Sep. ’11 quarter, Power Grid reported net sales and PAT growth of 7% and about 9% at ` 22.64 billion and ` 7.08 billion respectively. The company owns and operates transmission network of about 87100 circuit km as on Sep. ’11 with inter regional power transfer capacity at about 23800 MW.
8. Mahindra and Mahindra
Investment Rationale
> M&M management has indicated that all its plants are running at near full capacity. M&M has started working on its expansion plans and thus the company is all set to start with new planning, which primarily aims to raise the production capacity of the company at its western India plant. The company, presently, manufactures 8,000 units and has plans to increase this figure to 12,000 vehicles a month.
> M&M is ramping up the production of its sports utility vehicle (SUV) XUV 500 to 3,000 units from January 2012 and would touch 4,000 units by May-June 2012. The company has just increased its monthly production from 2,000 units to 2,500. The company will open XUV sales by January in five to seven cities.
> M&M-owned Ssangyong Motor Co will launch four new models by 2016 and five facelifts by 2013 to boost sales across the world. The company is also aiming to sell 1. 6 lakh units by 2013 and 3 lakh units by 2016. In order to expand its global market share, Ssangyong will use Mahindra’s existing network in South Africa by March 2012.
> The company is looking forward to growth from the Rajkot unit. The plant has also scaled up its capacity from producing its current capacity of 1800 tractors to 2500 tract. The tractor is currently being sold across 300 dealerships especially within the states of Gujarat, Maharashtra, Tamil Nadu, Karnataka, Andhra Pradesh, Rajasthan, Uttar Pradesh and Madhya Pradesh.
> A strong portfolio of diesel vehicles coupled with successful launches such as a refreshed Bolero, the XUV 500, Genio, Maxximo mini van and the Gio compact cab will keep volumes ticking on the automotive front.
> Mahindra Navistar Automotives, a joint venture between Mahindra & Mahindra and the USbased Navisar International Corporation, plans to invest ` 2.50 billion at the Chakan unit to ramp up the commercial vehicle manufacturing and distribution network. The company has already invested ` 7.10 billion at the Chakan unit, out of the total project cost of ` 10 billion.
9. Bajaj Auto
Investment Rationale
> The company reported 25% increase in its motorcycle sales to 3, 31,967 units in November 2011. Exports during the month stood at 1, 29,256 units compared to 90,869 units in November 2010, a growth of 42%. The Commercial vehicle sales witnessed a growth of 24% at 42,510 during the month as against 34,195 in November last year. In October 2011 it reported 6. 46% increase in its motorcycle sales at 3, 51,083 units. The company has increased domestic motorcycle prices by ` 500 and certain domestic 3 wheeler products by ` 1000-2000 in Oct 2011.
> The company plans to increase the vehicle manufacturing capacity to 5. 5 million vehicles in H2 FY 12 from current 5 million vehicles through installment of additional equipment.
> It is planning to set up a factory near Mundra in Gujarat to make two and three-wheelers with provision for making its proposed small car. The company wants the proposed factory to be its largest in India with an investment of ` 10 billion. It proposes to export 60 % of production of 5 million units at the proposed Mundra factory.
> The company plans to set up an assembly plant in Indonesia in a bid to increase presence in Southeast Asia and gain from the lower duty structure in the world’s third-largest market at an outlay of USD 150 million (approx. ` 6.75 billion). The facility is expected to be ready by 2013 to produce 100000 units a year. Customs duty rates for SKD (Semi Knocked Down) and CKD (Completely Knocked Down) operations have been reduced by five % from December 2010 by the Indonesian Government.
> The company has hedged 90% of their exports of FY 13 at range forward of ` 47-51/52 per USD. For H2 FY 12, the exports are completely hedged.
> The company is confident of maintaining the margin at 20% in FY 12 and Company is well poised to exceed its target of 1. 5 million vehicles for the year 2011-12.
10. Dabur India
Investment Rationale
> Dabur has entered the professional grooming products market with its ‘Fem’ brand, eyeing a 10 % share of the estimated ` 10 billion markets. To begin with, it has introduced a range of facial kits which it will sell only through beauticians in parlours and salons. As part of the plan, the company has created a sales force of 200 people and is in process of placing the products in around 30,000 parlours across the country.
> Dabur India has formed a new entity, Dabur Lanka, as part of a strategy to strengthen its presence in Sri Lanka for setting up the new fruit juice facility near Colombo. It plans to invest ` 700 million over 2 years.
> Over the past few years the company has grown primarily through the inorganic rout. In FY08 it acquired Fem care pharma and in the last one and half year it has struck three deals worth over USD 170 million. Currently it has overseas presence through its personal care range but now it is keen to enter the consumer healthcare segment with over-the-counter (OTC) products through acquisitions. It is evaluating two such overseas targets, one of which is in Indonesia. An entry into Indonesia will help to grow in South-east Asia like Malaysia, Thailand and Vietnam.
> The company has acquired Ajanta Pharma’s energizer brand 30 Plus. The acquisition is expected to strengthen the healthcare over-the-counter (OTC) space. The acquisition of 30 Plus is part of an aggressive strategy to build capability on the OTC healthcare business.
> The company is planning to invest ` 1.50 billion this year to set up the third plant in Egypt and one plant in Nigeria. There are also plans to set up a plant in Johannesburg to strengthen its current business. It plans to invest around ` 15 billion next year and expect to increase its sales from the international market to 1/3 of the total sales.
Dipen Shah, head of fundamental research, Kotak Securities has selected five stocks picks for the year 2012. The same are as follows:
HDFC Bank
Consistency in it’s earning growth (grown around 30% YoY in past 38 quarters). It has consistently delivered one of the highest CASA mix in the industry. Its CASA mix remained healthy at 47.3% at the end of Q2FY12, despite the rise in FD rates in last few quarters. Valuations - P/ABV of 3.1x FY13.
Infosys
We remain positive on the medium-to-long term strategy of the company. Management has reiterated its long term commitment to increase the proportion of non-linear revenues. We concur with the management’s view that this is necessary to ensure profitable growth, while providing more value to customers. Valuations - PE of 16.8x FY13.
ITC
ITC has a long track record of high market share in the cigarette business. Coupled with pricing power, this creates an improving profit profile, and high visibility in revenue and earnings growth for the segment. Large opportunity Size in Other FMCG businesses, Positive Market Share Trends: Tobacco constitutes only 15% of India’s consumption pie; which explains ITC’s entry in the space. ITC’s products show encouraging trends in market share, creating portents for profitability toward the end of FY-13. Other businesses top-of-the-class, are self-sustaining; Over a cycle all other businesses of ITC are self-sustaining, and gel strategically with growth objectives of the company. Valuations - PE of 21.8x FY13 E.
IRB Infrastructure Developers
Experienced player in road BOT segment and likely to benefit from upcoming project awards in road segment Strong order book of ` 96 bn to drive growth in revenues at a CAGR of 36% between FY11-FY13. Valuations - PE of 9.4x FY13
Cummins India
Company is well poised to benefit from recovery in the infrastructure spending in the country. Commencement of mega production site at Phaltan is likely to ease out capacity constraints and would add to cash flow generation.
Following are the six stocks on which various brokerage houses have given a ‘Buy’ recommendation:
1. Union Bank of India (UBI)
Market price (Dec 30): ` 169.55
Target price: ` 198
Rating: Buy
Upside: 46.78%
Brokerage: Angel Broking
Public sector lender Union Bank of India has cut its base rate marginally by 10 bps to 10.65% with effect from Dec. 26, 2011. The move follows Reserve Bank of India’s pause in its previous monetary policy review on Dec. 16, 2011. The RBI had given clear indications that the interest rate cycle had peaked and was likely to reverse from now on. Having said that valuations at 0.7x FY2013E, ABV are at a substantial discount to its historic trading range of 0.95-1.50x with a median of 1.30x one year forward ABV. Hence, it maintains its ‘Buy’ recommendation on the stock with a revised target price of ` 198, implying an upside of 20% from current levels.
2. Deepak Fertilisers
Market price (Dec 30): ` 122
Target price: ` 185
Rating: Buy
Upside: 51.64%
Brokerage: Emkay Global Financial Services
Recent media reports suggest that EGOM will soon decide on a proposal from the Petroleum Ministry on a cut in the supply of 0.178 mmscmd of KG D-6 gas to Deepak Fertilizers. Deepak’s total requirement of gas is 0.68mmscmd with 0.15mmscmd of gas being sourced from Reliance’s KGD-6 basin. With growing uncertainty, it has reduced its target P/E multiple from 8x to 6x FY13 estimates (based on previous five years average) and subsequently reduce its price target to ` 185 (from ` 250). At CMP stock offers attractive dividend yield of 5%+ and trades at 20% discount to book value. It continues to maintain its Buy recommendation on the stock.
3. Bajaj Electricals
Market price (Dec 29): ` 140
Target price: ` 208
Rating: Buy
Upside: 48.57%
Brokerage: Kantilal Chhaganlal Securities
Consumer durables segment (small appliances & fans business units) has grown exponentially with the CAGR of 28.4% between FY08-FY11 and is expected to grow at the CAGR of 22%% between FY11-FY13E backed by company’s aggressive promotion strategies, extensive dealer network, strong brand franchise, introduction of newer products. The business unit (BU) contributes 46.6% to total revenue of Bajaj Electricals Ltd (BJE) and the contribution is expected to go to 50.3% by FY13E. Around 35% of total sales in consumer segment come from rural and semi-urban areas which are growing at approximately three times the growth in urban markets. At CMP of ` 140/ share, BJE is currently trading at P/E Multiple of 9.1 x on FY12E EPS of ` 15.4 and at 7.4x on FY13E EPS of ` 18.9. It recommends ‘BUY’ on BJE with target price of ` 208/ share (11x P/E on FY13 EPS of ` 18.9), which is strongly supported by BJE`s renowned brand, collaboration with strong foreign players and wide distribution providing an competitive advantage to BJE and will help BJE to improve its margins in coming year ` BJE is a dominant player in Appliances, luminaries & lot of product categories in fans division.
4. ICICI Bank
Market price (Dec 29): ` 697
Target price: ` 1,089
Rating: Buy
Upside: 56.24%
Brokerage: Kotak Securities
The loan growth for FY12 is likely to be in the range of 17-18%, while next year (FY13) could be even more subdued (in the range of 15-16%). They have also indicated that focus on asset quality and NIM would continue, going forward. It reiterates Buy on the stock with the revised TP of ` 1,089 (SOTP method), where the value of its standalone business comes to ` 865 (1.6x FY13E ABV) and the value of subsidiaries at ` 224 (holding company discount: 20% to the fair value of its subsidiaries at ` 280).
5.. ING Vysya Bank
Market price (Dec 29): ` 293
Target price: ` 436
Rating: Buy
Upside: 48.81%
Brokerage: Shah Investors
ING Vysya Bank is one of the oldest private sector banks with history of 80 years and is headquartered in Bangalore. Subsequent to acquisition of stake in the bank by the global financial powerhouse ING Group in August 2002, the name of the bank was changed from ‘The Vysya Bank’ to ‘ING Vysya Bank’. At CMP ` 293 ING Vysya Bank is trading at P/B multiple of 1.13x its FY12E BV of ` 259 and 1.02x its FY13E BV of ` 287. It value the bank at its 5-Year average P/BV multiple of 1.52x on its FY13E BV of ` 287. It initiate coverage with a BUY rating and target price ` 436 (1.52x FY13E BV of ` 287) with investment horizon of 12 months and an upside potential of 49%.
6. Micro Technologies (India)
Market price (Dec 27): ` 155
Target price: ` 200
Rating: Buy
Upside: 29.03%
Brokerage: Sunidhi Securities & Finance
MTIL’s vision is to emerge as a Global IT based solution for customers in the field of Security, Life Style & Life Support Systems. To identify, source and deploy infrastructure, talent and resource in order to render superior Information Technology solutions worldwide. MTIL intends to maintain focus on Research & Development with a view to capitalize on the first mover advantage and further plans to expand the size of its market while mitigating business risk by reducing its dependence on only a few products. MTIL is likely to post an EPS of ` 85 in FY12. At the CMP of ` 155, the share is trading at a P/E of 1.8x on FY12E. It recommends Buy with a target of ` 200 in the medium term.
(source: myiris)
