Banks, Auto, Steel, Cement, Real Estate, Infra To Get Severely Hit – “I”s Don’t Lie
Indian markets have corrected 8% since we last wrote a month back. We still retain our negative stance on Indian markets, and believe that macro headwinds will continue for some more time. Inflation is unlikely to fall till September as Indian markets digest possible diesel price hikes. Interest rates have another 50bp to go in our view, as the RBI rightly focuses on sacrificing short term growth for longer term health.
Consumption seems to be slowing down a bit and the investment cycle is yet to pick up, reflected in very low demand growth in cement and steel over the last few months. The exports outlook has also deteriorated to some extent, given the slowing pace of recovery in the developed world. In our view, the market needs to consolidate at the current levels before it can move up, but another 7-8% dip can’t be ruled out.
Earnings downgrades – more to come
As highlighted in our last note “Can?t see I to I”, earnings estimates looked extremely high and we had estimated 12-15% growth for FY12 based on our topdown model for the Sensex. We note that consensus earnings have indeed seen downward revision by 2% but are still projecting 17.5% growth. Since lots of cost increases are being reflected from 1Q FY12, we expect the earnings downgrade trend to continue.
We think the reduction due to the lower demand scenario may take a bit longer to get built into the estimates, as most companies are still guiding reasonable numbers.
Valuations – reasonable but not a deep discount
Indian markets are now trading close to the long term average of 14.5x PER; while this is reasonable historically, we have seen the market hit a bottom of 12-13x. The premium to emerging markets still remains at 35% against the 10-yr average of 26%. This premium had expanded as India’s strong domestic demand differentiated it from other economies during the Lehman crisis.
However, the current concerns on a possible slowdown in consumption may lead to marginal reduction here. Among sectors which are above long-term averages are Consumer Staples, Energy, Financials and Utilities while the ones below are Materials, IT, Healthcare and Consumer Discretionary.
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