Goldman Sachs
India Research
It is a GS contention that FY12 earnings for Sensex companies have been over-estimated by as much as 22 per cent by consensus street analysts. If FY12 Sensex earnings come a cropper at just about Rs 1050-1100 then a very shaky base case for the Sensex would be 15000-16000.
Construction, Real Estate, Infrastructure and Cement will be the biggest sufferers in a stagflation scenario. Top sells will include SBI, BOI and ACC.
Scenario to 7.5% and 6.9% GDP growth
We have run two scenarios for our coverage in India. The first assumes a further 75bps hike to rates, oil prices of $115/bbl and GDP growth of 7.5% in FY2012. The second, more aggressive scenario, assumes a further 150bps hike to rates, oil prices of $130/bbl and GDP growth of 6.9% in FY2012. Under the first scenario, we conclude that our average earnings would be cut by 6.4% (taking them 16% below current consensus) and under the second scenario, our earnings would be cut by 12.4% (going to 22% below consensus).
GS forecasting 7.5% inflation in FY 2012
Our ECS team has increased their forecast for inflation from 6.7% to 7.5% for FY12. In this note, we explore how inflation has impacted corporate profitability and valuations in previous cycles and seek to identify companies that could be shielded in a difficult macro environment.
High inflation a harbinger of lower growth, lower margins and compressed multiples
Previous periods of high inflation in India have led to a 200bps compression in EBIT margins, 250-300bps compression in net margins and a 15% contraction to earnings multiples. Against this backdrop, we note that consensus is forecasting a 70bps improvement to EBIT margins and a 30bps improvement to net margins in CY2011E. Our earnings forecasts for our coverage group are 10% below consensus in FY 2012.
We expect consensus earnings to decline in the months ahead. In this note we seek to identify companies that are relatively insulated from a dynamic of decelerating growth, as well as those particularly exposed to the same.
Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.
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