RBS Asia Securities is expecting a low gross domestic product (GDP) than the street expectations. Parul Saini, ED, RBS Asia Securities Singapore says that Indian economy is expecting a growth of 8%.
According to him, the net borrowing is likely to be at around 4.2%. “On the earnings front, we came into the year expecting earnings to be roughly 5-8% below consensus. The risk to numbers coming in below our estimates, there might probably be 2-3% downside to that but not significant at this point in time,” he adds.
Below is a verbatim transcript of Parul Saini’s interview with CNBC-TV18’s Udayan Mukherjee and Mitali Mukherjee. For complete details watch the accompanying video.
Q: What is your call on India now, post what you have seen on crude prices and the way this market has come under pressure? Are you reworking targets towards the end of the year even by way of performance?
A: In terms of what we are seeing on the market right now, a lot of the concerns we had highlighted earlier on in the year and late last year have come to pass. These concerns around inflation, current account deficit funding, are pretty well reflected in the market. I do think valuations are probably, now back to historical averages but they are still not cheap.
We will probably still wait for another 5-10% downside before we get more aggressive on the market. In terms of the year-end target, we are expecting a pretty flattish market for the full year, which is assuming that significant multiple compressions takes place, a lot of which has already happened. We are not revising our targets down as of now. It needs to be seen how earnings progress going forward and where earnings estimates essentially pan out for the rest of the year.
Q: Do you think you need to scale down earnings expectations and even macro growth expectations, in the light of how the environment has changed off-late?
A: In terms of macro growth expectations, we were already a bit lower than where the street was. Our economist was expecting growth of around 8% versus consensus which is closer to 8.4-8.5%.
There the downside maybe relatively limited. On the earnings front, we came into the year expecting earnings to be roughly 5-8% below consensus. The risk to numbers coming in below our estimates, there might probably be 2-3% downside to that but not significant at this point in time.
Q: We had a terrible FII outflow figure yesterday. A single session saw USD 600 million sold. What is the sense that you are getting? Is there a lot of pent-up selling because of crude and how it impacts India, the perception of that?
A: That continues to be a risk because even if you look at year to date numbers so far, including, yesterday’s selling, you had only around USD 2 billion worth of selling versus the USD 29-30 billion we took in last year. That continues to be a risk going forward if you want to get more positive on the market.
I would personally prefer to see some more outflows before getting more positive. Crude, of course, is on investors’ minds. The basic analysis that we have done suggests that every USD 10 increase in crude is roughly 50 bps hit to the current account deficit because it raises our import bill by roughly USD 9 billion.
On the fiscal deficit, the impact is slightly muted; it’s more like 20-30 bps. The media is reporting - we will get a fiscal deficit estimate of 4.8% for FY2012. What investors will focus on is what is the path, how exactly are we getting there.
Even if you assume that this year’s deficit comes in slightly below 5%, if you adjust it for the 3G spectrum one-off, you get to roughly 6-6.3%, in terms of what the normalised fiscal deficit is. To get to 4.8% you will need significant fiscal correction. On top of that you have this significant pressure from oil prices. If diesel price decontrol doesn’t happen, the fiscal bill will spike up quite significantly.
Q: The other concern for the market is that aside from the fiscal deficit figure they are probably watching what happens with the borrowing figure very carefully. If that is higher than what is estimated right now, how do you think equity markets will read that because that will have a direct reaction then on the bond market?
A: Our economists are forecasting the net borrowing figure to be similar to last year numbers in terms of percentage of GDP roughly around 4.2%. But there could be upside risk to that and to bond yields. That’s why we are still staying a bit cautious on the sidelines. We would like markets to come off a bit more, wait for the government borrowing programme to become clearer and get a better view of the liquidity situation before stepping in aggressively.
Q: Given what has happened with crude prices how do you approach the entire oil sector in India, whether it is ONGC or Oil Marketing Companies (OMCs) or even Reliance?
A: Our analysts recently came out and upgraded ONGC where the view was that valuations had gotten to levels where stock looks quite interesting. The other stock we still have on our model portfolio on the long side is Cairn. I know there are concerns about the deal overhang etc but from an Indian portfolio perspective it is one of the few stocks that gives you exposure to higher crude oil prices.
On RIL, at the beginning of the year, we changed our view. It is now a neutral rating and we are sticking with that. Those would be the key stocks on the long to neutral side.
On OMCs, from a strategy perspective, we are still a bit cautious given what is happening to oil prices. Our analyst has moderated his stance on those names. He is more neutral on OMCs which is from a portfolio perspective. So, given what is happening to oil prices, we still underweight the OMCs.
Q: What would you do with autos now because despite good quarterly numbers for some like Tata Motors and M&M, we have seen the stocks being under considerable pressure?
A: We have a mixed view there. We still like Mahindra & Mahindra and Tata Motors. On Hero Honda we are a bit more positive. On Tata Motors, the call is what the sustainable margins are going to be on the Jaguar-Land Rover (JLR) side. Our view is although, there might not be the 17% record in the last quarter but they will settle in 15-16% range. Given that assumption, the stock still looks attractively valued.
On M&M the call is it is still reasonably valued given the growth prospects. In terms of their portfolio of products, diesel still being deregulated, there shouldn’t be that much pressure. Higher interest rates, on a relative basis will harm their sales less, given their tractor and utility vehicle (UV) exposure versus something like Maruti.
One of the key concerns for M&M has been that the excise duty on UVs would be raised from the current 22% level but given the GST normalization we expect, we think that is a bit unlikely. Another key concern for these stocks is also margins per se and where they pan out. We need to see a couple of quarters before we get more clarity on where margins are settling in before investors become more aggressive on the stocks.
Source: http://www.moneycontrol.com
According to him, the net borrowing is likely to be at around 4.2%. “On the earnings front, we came into the year expecting earnings to be roughly 5-8% below consensus. The risk to numbers coming in below our estimates, there might probably be 2-3% downside to that but not significant at this point in time,” he adds.
Below is a verbatim transcript of Parul Saini’s interview with CNBC-TV18’s Udayan Mukherjee and Mitali Mukherjee. For complete details watch the accompanying video.
Q: What is your call on India now, post what you have seen on crude prices and the way this market has come under pressure? Are you reworking targets towards the end of the year even by way of performance?
A: In terms of what we are seeing on the market right now, a lot of the concerns we had highlighted earlier on in the year and late last year have come to pass. These concerns around inflation, current account deficit funding, are pretty well reflected in the market. I do think valuations are probably, now back to historical averages but they are still not cheap.
We will probably still wait for another 5-10% downside before we get more aggressive on the market. In terms of the year-end target, we are expecting a pretty flattish market for the full year, which is assuming that significant multiple compressions takes place, a lot of which has already happened. We are not revising our targets down as of now. It needs to be seen how earnings progress going forward and where earnings estimates essentially pan out for the rest of the year.
Q: Do you think you need to scale down earnings expectations and even macro growth expectations, in the light of how the environment has changed off-late?
A: In terms of macro growth expectations, we were already a bit lower than where the street was. Our economist was expecting growth of around 8% versus consensus which is closer to 8.4-8.5%.
There the downside maybe relatively limited. On the earnings front, we came into the year expecting earnings to be roughly 5-8% below consensus. The risk to numbers coming in below our estimates, there might probably be 2-3% downside to that but not significant at this point in time.
Q: We had a terrible FII outflow figure yesterday. A single session saw USD 600 million sold. What is the sense that you are getting? Is there a lot of pent-up selling because of crude and how it impacts India, the perception of that?
A: That continues to be a risk because even if you look at year to date numbers so far, including, yesterday’s selling, you had only around USD 2 billion worth of selling versus the USD 29-30 billion we took in last year. That continues to be a risk going forward if you want to get more positive on the market.
I would personally prefer to see some more outflows before getting more positive. Crude, of course, is on investors’ minds. The basic analysis that we have done suggests that every USD 10 increase in crude is roughly 50 bps hit to the current account deficit because it raises our import bill by roughly USD 9 billion.
On the fiscal deficit, the impact is slightly muted; it’s more like 20-30 bps. The media is reporting - we will get a fiscal deficit estimate of 4.8% for FY2012. What investors will focus on is what is the path, how exactly are we getting there.
Even if you assume that this year’s deficit comes in slightly below 5%, if you adjust it for the 3G spectrum one-off, you get to roughly 6-6.3%, in terms of what the normalised fiscal deficit is. To get to 4.8% you will need significant fiscal correction. On top of that you have this significant pressure from oil prices. If diesel price decontrol doesn’t happen, the fiscal bill will spike up quite significantly.
Q: The other concern for the market is that aside from the fiscal deficit figure they are probably watching what happens with the borrowing figure very carefully. If that is higher than what is estimated right now, how do you think equity markets will read that because that will have a direct reaction then on the bond market?
A: Our economists are forecasting the net borrowing figure to be similar to last year numbers in terms of percentage of GDP roughly around 4.2%. But there could be upside risk to that and to bond yields. That’s why we are still staying a bit cautious on the sidelines. We would like markets to come off a bit more, wait for the government borrowing programme to become clearer and get a better view of the liquidity situation before stepping in aggressively.
Q: Given what has happened with crude prices how do you approach the entire oil sector in India, whether it is ONGC or Oil Marketing Companies (OMCs) or even Reliance?
A: Our analysts recently came out and upgraded ONGC where the view was that valuations had gotten to levels where stock looks quite interesting. The other stock we still have on our model portfolio on the long side is Cairn. I know there are concerns about the deal overhang etc but from an Indian portfolio perspective it is one of the few stocks that gives you exposure to higher crude oil prices.
On RIL, at the beginning of the year, we changed our view. It is now a neutral rating and we are sticking with that. Those would be the key stocks on the long to neutral side.
On OMCs, from a strategy perspective, we are still a bit cautious given what is happening to oil prices. Our analyst has moderated his stance on those names. He is more neutral on OMCs which is from a portfolio perspective. So, given what is happening to oil prices, we still underweight the OMCs.
Q: What would you do with autos now because despite good quarterly numbers for some like Tata Motors and M&M, we have seen the stocks being under considerable pressure?
A: We have a mixed view there. We still like Mahindra & Mahindra and Tata Motors. On Hero Honda we are a bit more positive. On Tata Motors, the call is what the sustainable margins are going to be on the Jaguar-Land Rover (JLR) side. Our view is although, there might not be the 17% record in the last quarter but they will settle in 15-16% range. Given that assumption, the stock still looks attractively valued.
On M&M the call is it is still reasonably valued given the growth prospects. In terms of their portfolio of products, diesel still being deregulated, there shouldn’t be that much pressure. Higher interest rates, on a relative basis will harm their sales less, given their tractor and utility vehicle (UV) exposure versus something like Maruti.
One of the key concerns for M&M has been that the excise duty on UVs would be raised from the current 22% level but given the GST normalization we expect, we think that is a bit unlikely. Another key concern for these stocks is also margins per se and where they pan out. We need to see a couple of quarters before we get more clarity on where margins are settling in before investors become more aggressive on the stocks.
Source: http://www.moneycontrol.com
No comments:
Post a Comment