Sakthi Siva of Credit Suisse says while MSCI India, with a 14 percent year-to-date fall, is the third-worst performer within Asia Pacific, she believes that India's underperformance is likely to continue for two simple reasons.
One is valuations and second is EPS revisions. According to her, on price/book-versus-return on equity (RoE) valuation model, India's premium to the region has dropped from a high of 55 percent in September to 46 percent currently.
Historically, India has always underperformed once its premium reaches 50 percent. She says even with the 46 percent premium, she estimates implied RoE to be 18.5 percent against the current RoE of just 13.5 percent.
She further says looking at February, India's 2016 consensus EPS downgrade of 1.7 percent is the biggest within Asia Pacific, adding this is not a one-off as India's 2016 consensus EPS has been downgraded by 21 percent since December 31, 2014 versus the region's 15 percent.
While investors worried about China's hard landing, systemic risks have been hiding in India, she feels. She reiterates her underweight call given the high implied RoE and the worst EPS revisions within Asia Pacific.
Meanwhile, Mahesh Nandurkar of CLSA says December 2015 quarter turned out to be much worse than expected, as CLSA coverage revenues declined by 6 percent and earnings grew by only 3.6 percent (YoY). Excluding financials, earnings trajectory of metals and oil PSUs improved from 1.2 percent (YoY) in the September quarter to 8.6 percent helped by the base effect. The base effect helped in pharma, RIL and select autos.
According to him, base effect should get stronger over the next 2-3 quarters. EBITDA margins improved by 1 percent (YoY) for domestic companies and continued margin improvement will be critical for double-digit earnings growth in FY17, Nandurkar says.
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