maverick
10-07-2008, 06:57 AM
The Sensex has corrected by 35% from its peak: In CY08 YTD, India has turned out to be one of the worst performing markets, globally. The BSE Sensex has corrected by 35.5% from its peak of 20,873 to close the quarter at 13,462. This has been the most severe correction of this bull-run that started in 2003. What started with a valuation correction, picked up downward momentum, as oil prices rose and inflation and interest rates kept on making multi-year highs.
Indian economy reeling under rising oil prices: In CY08 YTD, oil prices have gained 53%. India is on the wrong side of the oil boom, as it imports a large part of its oil requirements. We see three key risks from higher oil prices in FY09:
n India’s rising oil import bill could increase its current account deficit and put pressure on the rupee
n The government may be forced to put additional burden of subsidy sharing on some companies
n Higher petro-product prices in the domestic market could further fuel rising inflation
Rising inflation, interest rates worrying: Inflation has been most the worrying factor for Indian markets and investors. Higher oil prices, spike in global commodity prices, and strong demand in the domestic economy has led to inflation crossing 11.63%. The immediate fallout of rising inflation has been more aggressive monetary tightening by RBI. Benchmark interest rates have risen to multi-year highs, adversely impacting demand.
Bottom-up earnings estimates still indicate positive outlook: Despite all the concerns, our bottom-up compilation of aggregate earnings do not show any evidence of slowdown. As their balance sheets remain in good health, the impact of higher interest rates on large companies would be limited. A number of companies in our universe are debt-free / have net cash. Our Sensex EPS estimate for FY09 is Rs1,011 – a growth of 20.5%.
Lot of comfort in current valuations: The valuations of Indian equities are below their long-term averages and are close to the lows. From a high of 20.6x one-year forward earnings in January 2008, the markets have corrected to a one-year forward P/E of 12.9x. If we adjust for embedded value, the Sensex P/E stands reduced to 10.3x, which is close to its lowest P/E of 10.2x, made in June 2004. We see lot of comfort in current valuations.
Buy stocks with high earnings visibility and valuable franchise:
Our top picks are HDFC Bank / Axis Bank, Bharti / Idea, Infosys / TCS, ONGC, JSPL, Jaiprakash, Dr Reddy’s, Maruti / M&M, and ITC. Amongst the mid-caps, we like IVRCL, Indiabulls Real Estate, Bajaj Auto, Bombay Rayon, and LIC Housing.
Indian economy reeling under rising oil prices: In CY08 YTD, oil prices have gained 53%. India is on the wrong side of the oil boom, as it imports a large part of its oil requirements. We see three key risks from higher oil prices in FY09:
n India’s rising oil import bill could increase its current account deficit and put pressure on the rupee
n The government may be forced to put additional burden of subsidy sharing on some companies
n Higher petro-product prices in the domestic market could further fuel rising inflation
Rising inflation, interest rates worrying: Inflation has been most the worrying factor for Indian markets and investors. Higher oil prices, spike in global commodity prices, and strong demand in the domestic economy has led to inflation crossing 11.63%. The immediate fallout of rising inflation has been more aggressive monetary tightening by RBI. Benchmark interest rates have risen to multi-year highs, adversely impacting demand.
Bottom-up earnings estimates still indicate positive outlook: Despite all the concerns, our bottom-up compilation of aggregate earnings do not show any evidence of slowdown. As their balance sheets remain in good health, the impact of higher interest rates on large companies would be limited. A number of companies in our universe are debt-free / have net cash. Our Sensex EPS estimate for FY09 is Rs1,011 – a growth of 20.5%.
Lot of comfort in current valuations: The valuations of Indian equities are below their long-term averages and are close to the lows. From a high of 20.6x one-year forward earnings in January 2008, the markets have corrected to a one-year forward P/E of 12.9x. If we adjust for embedded value, the Sensex P/E stands reduced to 10.3x, which is close to its lowest P/E of 10.2x, made in June 2004. We see lot of comfort in current valuations.
Buy stocks with high earnings visibility and valuable franchise:
Our top picks are HDFC Bank / Axis Bank, Bharti / Idea, Infosys / TCS, ONGC, JSPL, Jaiprakash, Dr Reddy’s, Maruti / M&M, and ITC. Amongst the mid-caps, we like IVRCL, Indiabulls Real Estate, Bajaj Auto, Bombay Rayon, and LIC Housing.