Real-time Stock quotes, portfolio, LIVE TV and more.
Oct 21, 2011, 06.03 PM IST
ICICI Bank has come out with its report on muhurat picks.
The global economy is once again passing through turbulent weather in terms of the growth trajectory. Soft economic data points coming out of western economies (weak PMI readings breaching the critical level of 50 globally, discouraging consumer confidence retesting the 2008 lows and stressed housing sector) coupled with the perplexing sovereign debt crisis in the peripheral Euro zone has once again raised the odds of a double dip recession in the troubled western economies. Hence, the downgrade of US debt (July 2011) by the rating agencies was merely a catalyst for the ruthless sell off that risky asset prices have witnessed post the downgrade, further adding to the odds of a double dip. The impact MSCI Developed Markets were down by 15% from July-September 2011 coupled with huge volatility.
Coming to emerging markets, especially India, the main concern leading to the sell-off was the realignment of growth expectations as the EM central bankers have been tightening to avoid a hard landing. India remains no exception as the RBI has been ahead of the curve and raised rates by 350 bps on 12 counts to tame spiralling price levels. Also, stalled policy reforms from New Delhi have added fuel to the fire as we are entering a moderation period wherein we expect growth rates to cool off from 8.5% levels to 7-7.5% over the next couple of quarters. This, we believe, is clearly reflected in the asset prices (stock markets) over the previous months.
In the beginning of the year, in our strategy report we had put our Bull/Base/Bear Case targets for the Sensex at 25451/23165/16924, respectively, for December 2011. Though our bear case target has materialised given global and local macro headwinds, we are downgrading our Bull/Base/Bear Case targets further for March 2012 to 20190/18844/16310 levels, respectively. We estimate a base case valuation of 18844 for the Sensex (14x FY13 EPS of Rs 1346). In case of negative surprises wherein valuation multiples contract and future earnings are ignored, we expect the Sensex to trade at 16310 (14x FY12 EPS of Rs 1165).
The main revision in our BSE Sensex target stems from the fact that we have revised down our earnings for FY12E and FY13E by 6% and 5%, respectively, and lowered our target multiple for the base case from 17x to 14x.
We expect more of a time based correction and expect the markets to oscillate in a broad trading range till the time reasonable clarity emerges from the various local and global macro headwinds. In case of a negative outlier event, the markets may fall further in the wake of panic selling. However, we do not expect the markets to sustain at such levels. In such an environment, timing the markets would become extremely difficult. We believe any sharp cuts should be bought into from a three to five years perspective. Buying is recommended in large caps and selective quality midcaps.
On the flip side, the BSE Sensex can face further downside given there appears some Black Swan in the global backdrop (bank failure in the Euro area, default contagion in the peripheral Euro zone and policy failure, probable oil shock or some unforeseen domestic political issues) that can lead to debasement of P/E multiples as in 1992 (Harshad Mehta Scam), 1999-2000 (Ketan Parekh scam) and the most recent 2008 US crisis wherein the multiples contracted to as low as 10-11x.
Bharti Airtel : The industry scenario has improved over the past few quarters with the ongoing CBI enquiry into the 2G scam. The recent price hike by incumbents signifies reducing competitive intensity and returning pricing power. Airtel is expected to post an improvement in ARPMs in the coming quarters on the back of the recent price hike and traction in 3G services. With the withdrawal of unsustainable customer acquisition offers from the market and reducing dual SIM phenomena, margins in the domestic market are expected to improve, going ahead. Africa operations have shown continual improvement in key metrics. EBITDA margins have expanded by 276 bps in the past three quarters. With outsourcing agreement in place, the benefit in terms of further margin expansion is expected to kick in from FY13 onwards. DoT expects NTP 2011 to come into effect by December 31, 2011. Most of the negatives related to one-time spectrum fees seem to be already priced in. Spectrum trading, pooling and sharing would help larger players like Bharti Airtel. At the CMP of Rs 385, the stock is trading at 16.1x FY13EPS against its long-term average of 19.3x. Also, with most of the capex already incurred, return ratios would also improve, going ahead.
Biocon : The out-licensing deal with Pfizer to launch four human insulin products in emerging and advanced markets post patent expiry augurs well for Biocon. It has started supplying Fidaxomicin (antiinfective) API to US based Optimer’s patented product Dificid for which the company is a sole supplier. The recent launch of reusable pen in the domestic market is a promising move for the company. Divestment in Axicorp is expected to boost EBITDA margins. The R&D services business is witnessing a consistent improvement both in terms of revenues and profitability over the last three quarters. The key trigger will be the unlocking of R&D business through IPO. We expect sales and profits (after adjusting Axicorp numbers in FY11) to grow by 22% and 20%, respectively, between FY11 and FY13E. Biocon is currently trading at ~18x FY12E EPS of Rs 19.3 and ~15x FY13E EPS of Rs 24.
HDFC Bank : We expect healthy business growth of 20% CAGR over FY11-13E with a well diversified loan book (~50:50 between retail and wholesale) and strong liability franchise (CASA ratio of ~48%). Margins will be protected at over 4% (one of the best across industry). Healthy asset quality will lead to lower credit costs. The bank commands a premium multiple of 3.8x FY13E ABV because of consistent track record of 30% YoY growth in PAT, higher margins and healthy asset quality. We expect PAT growth of 30% CAGR over FY11-13E and RoA of ~1.9% and RoE of 21% by FY13E.
HPCL : Hindustan Petroleum Corporation (HPCL), a Fortune 500 company, is engaged in refining and marketing of petroleum products in India. It operates two refineries with 16.3 mmtpa capacity in FY11 and has ~18% share in marketing of petroleum products. HPCL, in a joint venture with Mittal Energy, is setting up a 9 mmtpa refinery at Bhatinda, which would be operational in FY12E. We believe capacity expansion, increase in retail sales volume and higher refining margins would create value for investors, going forward. Also, government policy and reforms in the pricing of sensitive petroleum products could reduce net under recoveries of the company. We have assumed Brent crude oil prices of US$100 per barrel and net under-recoveries of 8.8% for OMCs in FY13E. HPCL is trading at 7.5x FY12E and 6.3x FY13E EPS of Rs 46.1 and Rs 55.2. HPCL’s book value of Rs 439 in FY13E also offers good risk reward ratio to long-term investors. Sustained higher crude oil prices and adverse government policy remain risks to our recommendation.
ITC : With a leading position in its various businesses, we expect ITC to sustain its gross revenue growth at 12.6% (CAGR from FY11- 14E), driven by healthy growth in FMCG (18.6%), agri business (16.3%) and paperboards (13.7%) with a moderate growth in cigarette (10.1%) and hotel (8.8%) revenues. ITC is the market leader in the Indian cigarettes industry and enjoys ~75% volume share (FY11). Its cigarette revenues (gross) have grown by ~1.5x, from Rs 12833.7 crore in FY07 to Rs 19827.6 crore in FY11, largely driven by price growth of 11.3% with volume growth remaining flat. Being a dominant player, passing on the impact of higher taxes through price increases has not been tough for ITC. Therefore, we expect revenues from cigarettes to continue growing at a CAGR of 10.1% (FY11-14E) driven by 5.3% price growth and a lower volume growth of 4.5%. Comparing with global peers like British American tobacco (BAT), Philip Morris and Japan Tobacco, ITC should trade at a premium given the opportunity size of the Indian market and expected higher earning growth. Simultaneously, a substantial reduction in FMCG losses and visibility of break-even would result in the FMCG segment commanding a higher valuation than the historic average. We remain positive on the stock from a 9 to 12 months perspective.
Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
To read the full report click here
Action in Bharti Airtel
Jun 19 2013, 12:44
- in MARKET OUTLOOK
Jun 19 2013, 12:44
- in MARKET OUTLOOK