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May 08, 2013
Small could be better now
Widened valuation gap offers opportunity in the mid-cap space RBI delivers rate cut of 25 basis points but its commentary turns distinctly hawkish: The macroeconomic 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 economy’s growth rather than the monetary policy. Moreover, the decisive victory in Karnataka state election could increase the government’s 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 economy—consolidation 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. Outlook—positive stance v indicated; 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 the commodity 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.
Sensex’ one-year forward P/E band
27.0 22.0 17.0 12.0 7.0 Apr-01 Apr-03 Apr-05 Apr-07 Apr-09 Apr-11 Apr-13
+1 σ Avg PE -1 σ
Source: Bloomberg, Sharekhan Research
the RBI will be constrained to ease the rates further. the corporate earnings growth is largely in line with estimates. Corporate earnings.0 90.96% in March 2013). The improvement in the trade deficit was aided by moderation in imports and a slight pick-up in exports. the decisive victory in Karnataka could increase the government’s ability to push reforms. the governance issues have largely affected the pick-up in investments and need to be focused upon.5 8.0 2.0 80.0 4.0 95. 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. 2 May 08.0 10. Since the transmission of monetary policy has not been very active due to the tight liquidity and higher cost of deposits. GDP. The economy seems to be heading for a cyclical pick-up though the recovery will be modest. CY2013) against the expectation of a 100basis-point reduction for CY2013. given the multiple challenges the economy is facing right now.0 75. which is expected to recover gradually. the pressure on revenue growth is clearly visible due to the slowdown in the economy.0 100.7 8. the margins have come in better than expected and are driving the earnings. In the given circumstances. inflation growth 12. 2013 Easing of commodity prices provides relief Driven by global factors the commodity prices have declined significantly over the past several weeks.0 110. the rates are unlikely to decline any further significantly. However.1%. Several key bills. revenue growth concerns remain. margins rebound Amid conservative estimates.7 May-12 Feb-13 May-13 Source: Bloomberg GDP (%) WPI (%) 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 institutional integrity of the Central Bureau of Investigation the government’s reform agenda has come under cloud.market outlook Small could be better now Macro variables show mild improvement The decline in the inflation rate to a three-year low (5. the corporate earnings are likely to remain subdued in the near term and follow the revival in the economy. On the positive side. though high food inflation remains a concern.0 6. The manufacturing inflation has declined to 4. Going ahead. are likely to be stuck indefinitely. In addition.0 Nov-12 Dec-12 Mar-13 Feb-13 Jan-13 Apr-13 Brent crude Gold spot Source: Bloomberg Sharekhan Aug-12 Nov-12 . together these two constitute about 40-45% of the imports and a drop in their prices has reduced the current account deficit. Gold and crude oil prices have declined by 8-10%. As rightly pointed by the RBI.0 85. 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.0 105.9 7.1 7. Going ahead. direct tax code bill and the bill for deregulation of sugar. Crude and gold prices 115. such as the land reform bill. insurance bill. 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. The exports have shown a marginal recovery and a meaningful pick-up will happen once the global economy starts improving. 10-year G-Sec bond yields 8.0) Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 But RBI turns hawkish after reducing rates by 75 basis points 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.3 8.0 8. the outlook on the key commodities will shape the recovery trend for the domestic economy.0 (2. In view of the macroeconomic challenges (especially inflation and the twin deficits).
retransmission. Affiliates of Sharekhan may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this report. Kindly note that this document does not constitute an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. The emerging markets continue to witness healthy consumption and investments in infrastructure which will support the global growth.0 Apr-01 Apr-03 Apr-05 Apr-07 Apr-09 Apr-11 Apr-13 +1 σ Avg PE -1 σ World GDP (LHS. Each recipient of this document should make such investigations as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved). 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. state. the major achievement has been that the region has averted major crises which could have destabilised the global economy. there may be regulatory. Any review. CDSL-IN-DP-CDSL-271-2004 . F&O-INF011073351 . However. For any complaints email at igc@sharekhan. CD . The advanced economies like the USA are showing firm signs of recovery while stimulus offered by several other countries (Japan.0 7. Without limiting any of the foregoing. Mumbai – 400042. The securities described herein may or may not be eligible for sale in all jurisdictions or to certain category of investors. Tel: 022 . While we would endeavour to update the information herein on reasonable basis. Disclaimer: Client should read the Risk Disclosure Document issued by SEBI & relevant exchanges and Do’s & Don’ts by MCX & NCDEX and the T & C on www. their directors and employees (“SHAREKHAN and affiliates”) are under no obligation to update or keep the information current.0 (1. The user assumes the entire risk of any use made of this information. or other services for. average consumer prices (%) Source: IMF Source: Bloomberg. Sharekhan Ltd. Sensex’ one-year forward P/E band 27.0 3.(SHAREKHAN) This Document is subject to changes without prior notice and is intended only for the person or entity to which it is addressed to and may contain confidential and/or privileged material and is not for any type of circulation. Global GDP growth (IMF) 6. any company mentioned herein.0 12. Though disseminated to all the customers simultaneously. 2013 3 herein are those of the analyst and do not necessarily reflect those of SHAREKHAN. CD . Beta Building. Maharashtra.INE271073350 . Also. may from time to time purchase or sell or may be materially interested in any of the securities mentioned or related securities.0 22.INE261073330 . SHAREKHAN & affiliates may have used the information set forth herein before publication and may have positions in. (MCX/TCM/CORP/0425) .0 6. in no event shall SHAREKHAN. Ltd. Sharekhan Research Sharekhan Limited. In case of the euro zone. 2013) and had expected the budget hangover to recede and the global environment to be supportive. or related Sharekhan to. PMS-INP000000662 . availability or use would be contrary to law. Persons in whose possession this document may come are required to inform themselves of and to observe such restriction. Cyclical recovery in global economy underway As mentioned in our previous reports. Regd Add: 10th Floor. or use by. Lodha iThink Techno Campus.0 2. DP-NSDL-IN-DP-NSDL233-2003 .INE231073330 . (NCDEX/TCM/CORP/0142) . Off. any of its affiliates or any third party involved in.0 4. 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. Opp.0 17. SHAREKHAN. or other reasons that may prevent SHAREKHAN and affiliates from doing so.0 2.com. its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article. there could be some downward revisions. For Private Circulation only Sharekhan Ltd.61150000.: MCX-10080 . Any comments or statements made May 08. as had happened in FY2013.0 5. Nos.0 0. This document is prepared for assistance only and is not intended to be and must not alone betaken as the basis for an investment decision. NCDEX -00132 .0 4. We do not represent that information contained herein is accurate or complete and it should not be relied upon as such. Commodity trading through Sharekhan Commodities Pvt.0 1. We do not undertake to advise you as to any change of our views. Given the expectation of ~14% earnings growth in FY2014.com before investing. SHAREKHAN will not treat recipients as customers by virtue of their receiving this report. and should consult its own advisors to determine the merits and risks of such an investment. euro zone) will facilitate the global recovery.0 1. NSEL-12790 . Kanjurmarg (East).0 5. where such distribution.0) 2007 2008 2009 2010 2011 2012 2013 2014 2015 7. The investment discussed or views expressed may not be suitable for all investors. compliance. or any other use is prohibited. JVLR. not all customers may receive this report at the same time. regulation or which would subject SHAREKHAN and affiliates to any registration or licensing requirement within such jurisdiction. the global economy is heading for a cyclical recovery in 2013 and may pick up momentum in 2014. computing or compiling the information have any liability for any damages of any kind. BSE-Cash-INB011073351 . SHAREKHAN may from time to time solicit from. Disclaimer This document has been prepared by Sharekhan Ltd. Mutual Fund-ARN 20669 . This report is not directed or intended for distribution to. NSE – INB/INF231073330. expect outperformance in the mid-cap space: We had been constructive on equities in our last Market Outlook report (“Policy push” dated March 6. its subsidiaries and associated companies. or perform investment banking.sharekhan. Kanjurmarg Railway Station.0 Outlook—positive stance v indicated.: SEBI Regn. The benchmark indices have performed ahead of the consensus expectation and the crash in the commodity complex has provided the trigger for a sharp bounce. %) Inflation. The information contained herein is from publicly available data or other sources believed to be reliable. publication. For the next two months.0 3.market outlook Small could be better now possibly towards the second half of FY2014. . country or other jurisdiction. United Stock Exchange: CD . MCX Stock Exchange: INB/INF-261073333 . any person or entity who is a citizen or resident of or located in any locality.
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