Post on 14-Apr-2018
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May 08, 2013Visit us at www.sharekhan.com
Small could be better nowWidened valuation gap offers opportunity in the mid-cap space
RBI delivers rate cut of 25 basis points but its
commentary turns distinctly hawkish: The macro-
economic variables have shown a mild recovery with
moderation in inflation and narrowing of the trade deficit
for March 2013. The softening of the commodity prices
(especially crude oil and gold) is like manna from heaven
for the import dependent Indian economy. Despite this,
one cannot neglect the challenges facing the economy.For FY2014 the Reserve Bank of India (RBI) has projected
a growth rate of about 5.7%, which is marginally higher
than the FY2013 growth rate. The central bank has obliged
by cutting policy rates by 25 basis points but expressed
concerns related to the unsustainable level of current
account deficit (CAD) and persistent inflationary pressures.
The tone has distinctly turned hawkish and the pace of
monetary easing is likely to turn subdued going ahead.
Political crisis deepens, economic reforms in limbo: The
ongoing political crisis over the leak of the coal scam report
and a slew of other scams (railgate being the latest in the
list of scams) leaves limited room for the government to
push through important pending legislative bills (such as
the land reforms bill, the insurance bill and the GST bill)
that require parliamentary nod. The RBI in its recent policy
statement articulated that governance issues were
dragging the economys growth rather than the monetary
policy. Moreover, the decisive victory in Karnataka state
election could increase the governments assertiveness
on reforms and/or prompt the ruling party to call for early
national election.
Q4 earnings meet expectations; margin expansion is
an encouraging sign: The corporate earnings growth for
Q4FY2014 trended largely in line with the estimates though
the estimates themselves were quite conservative. In
terms of the Sensex companies, the earnings growth was
largely in line with expectations (automobile and metal
companies delivered a surprise) though the revenue growth
fell short of estimates. In the near term, the corporate
earnings growth will remain subdued and may pick up
towards H2FY2014, led by improved macro-economic
conditions and the accumulated effect of some of the
measures announced earlier.
Global economyconsolidation in progress: The US
economy is showing firm signs of recovery as indicated by
the falling unemployment numbers and the recovery in
the housing sector. The fiscal stimulus announced by the
US government and the other governments (of China,
Japan etc) is likely to support the cyclical upturn in the
global economy. However, the European economies remain
in shambles and could continue to trigger bouts of risk
aversion.
Outlookpositive stance vindicated; expect
outperformance in the mid-cap space: We had been
constructive on equities in our last Market Outlook report
(Policy push dated March 6, 2013) and had expected
the budget hangover to recede and the global environment
to be supportive. The benchmark indices have performed
ahead of the consensus expectation and the crash in thecommodity complex has provided the trigger for a sharp
bounce. For the next two months, we see limited scope
for re-rating and the benchmark indices would do well to
consolidate in a range in the seasonally weak period of
May and June. However, we expect quality stocks in the
mid-cap space to outperform the broader market due to
the widened valuation gap and the expected improvement
in corporate earnings in the next few quarters.
7.0
12.0
17.0
22.0
27.0
Apr-01
Apr-03
Apr-05
Apr-07
Apr-09
Apr-11
Apr-13
Sensex one-year forward P/E band
Source: Bloomberg, Sharekhan Research
+1
Avg PE
-1
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2Sharekhan May 08, 2013
market outlook Small could be better now
75.080.0
85.090.095.0
100.0105.0
110.0115.0
Nov-12
Dec-12
Jan-13
Feb-13
Mar-13
Apr-13
Brent crude Gold spot
(2.0)
-
2.0
4.0
6.0
8.0
10.012.0
Mar-09
Mar-10
Mar-11
Mar-12
Mar-13
GDP (%) WPI (%)
7.7
7.9
8.1
8.3
8.5
8.7
May-12
Aug-12
Nov-12
Feb-13
May-13
Macro variables show mild improvement
The decline in the inflation rate to a three-year low (5.96%
in March 2013), a moderate pick-up in the Index of Industrial
Production (IIP) and contraction in the trade deficit (in
March 2013) are the variables that point to the easing of
concerns pertaining to the economy. The manufacturing
inflation has declined to 4.1%, though high food inflationremains a concern. The improvement in the trade deficit
was aided by moderation in imports and a slight pick-up in
exports. The economy seems to be heading for a cyclical
pick-up though the recovery will be modest, given the
multiple challenges the economy is facing right now. Apart
from policy action the economy needs to be supported by
sustained softness in the commodity prices and monetary
easing which seem a bit uncertain at this point of time.
But RBI turns hawkish after reducing rates by 75 basispoints in CY2013
Including the recent reduction in the repo rates the RBI
has reduced the repo rates by 75 basis points in the year
till date (YTD; CY2013) against the expectation of a 100-
basis-point reduction for CY2013. In view of the macro-
economic challenges (especially inflation and the twindeficits), the RBI will be constrained to ease the rates
further. Since the transmission of monetary policy has not
been very active due to the tight liquidity and higher cost
of deposits, the rates are unlikely to decline any further
significantly.
GDP, inflation growth
Source: Bloomberg
Easing of commodity prices provides relief
Driven by global factors the commodity prices have declined
significantly over the past several weeks. Gold and crude
oil prices have declined by 8-10%; together these two
constitute about 40-45% of the imports and a drop in their
prices has reduced the current account deficit. The exports
have shown a marginal recovery and a meaningful pick-up
will happen once the global economy starts improving. Going
ahead, the outlook on the key commodities will shape the
recovery trend for the domestic economy.
Crude and gold prices
Source: Bloomberg
10-year G-Sec bond yields
Source: Bloomberg
Reform momentum to be affected by political crisis
Due to the face-off with the opposition over several issues
ranging from the coal scam investigations to the institutionalintegrity of the Central Bureau of Investigation the
governments reform agenda has come under cloud. Several
key bills, such as the land reform bill, insurance bill, direct
tax code bill and the bill for deregulation of sugar, are likely
to be stuck indefinitely. In addition, the government has
entered into election mode with election in Karnataka and
four other major states which will shift focus towards
populist bills such as the food security bill. As rightly pointed
by the RBI, the governance issues have largely affected
the pick-up in investments and need to be focused upon.
Going ahead, the decisive victory in Karnataka could
increase the governments ability to push reforms.
Corporate earnings; revenue growth concerns remain,margins rebound
Amid conservative estimates, the corporate earnings growth
is largely in line with estimates. However, the pressure on
revenue growth is clearly visible due to the slowdown in
the economy. On the positive side, the margins have come
in better than expected and are driving the earnings. In
the given circumstances, the corporate earnings are likely
to remain subdued in the near term and follow the revival
in the economy, which is expected to recover gradually,
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3Sharekhan May 08, 2013
market outlook Small could be better now
(1.0)
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2007
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2014
2015
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World GDP (LHS, %)Inflation, average consumer prices (%)
possibly towards the second half of FY2014. Given the
expectation of ~14% earnings growth in FY2014, there could
be some downward revisions, as had happened in FY2013.
Cyclical recovery in global economy underway
As mentioned in our previous reports, the global economy
is heading for a cyclical recovery in 2013 and may pick upmomentum in 2014. The advanced economies like the USA
are showing firm signs of recovery while stimulus offered
by several other countries (Japan, euro zone) will facilitate
the global recovery. The emerging markets continue to
witness healthy consumption and investments in
infrastructure which will support the global growth. In
case of the euro zone, the major achievement has been
that the region has averted major crises which could have
destabilised the global economy.
Global GDP growth (IMF)
Source: IMF
Outlookpositive stance vindicated; expect
outperformance in the mid-cap space: We had been
constructive on equities in our last Market Outlook report
(Policy push dated March 6, 2013) and had expected
the budget hangover to recede and the global environment
to be supportive. The benchmark indices have performed
ahead of the consensus expectation and the crash in thecommodity complex has provided the trigger for a sharp
bounce. For the next two months, we see limited scope
for re-rating and the benchmark indices would do well to
consolidate in a range in the seasonally weak period of
May and June. However, we expect quality stocks in the
mid-cap space to outperform the broader market due to
the widened valuation gap and the expected improvement
in corporate earnings in the next few quarters.
Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.
+1
Avg PE
-1
Sensex one-year forward P/E band
Source: Bloomberg, Sharekhan Research
7.0
12.0
17.0
22.0
27.0
Apr-01
Apr-03
Apr-05
Apr-07
Apr-09
Apr-11
Apr-13
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