Time to remain in the market. but cautiously Sunil Jain Head Equity Research (Retail) Date: Nov 2014
Indian equity outperformed all other markets in 2014 Country Index YTD % India NIFTY 32.97% US S&P 500 11.01% Germany DAX -0.62% France CAC -0.60% UK FTSE -0.78% Japan NIKKEI 6.12% Hong Kong HANG SENG 0.29% China Shanghai 15.83% Brazil IBOVESPA 1.08% Indonessia Jakarta 19.97% Currency Index YTD% INR NIFTY 32.97% US Dollar NIFTY 32.72% Yen NIFTY 48.19% Euro NIFTY 45.58% Nifty in other currencies - USD, Yen and Euro, has even given higher returns. Like, FII from Japan invested in NIFTY at start of year has gained more than domestic investors
Apr-99 Apr-00 Apr-01 Apr-02 Apr-03 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Apr-13 Apr-14 Nov 2014 Valuations post Nifty s excellent performance 30 S&P CNX Nifty Trailing P/E Current PE - 21.33 15 Year Average PE - 18.50 25 Liquidity Driven Area 20 15 10 Nifty P/E Scope for re-rating is limited and corporate performance will drive the equity market now
Macro factors driving earnings for corporate Decline in commodity prices Across the board, commodity prices have seen decline, be it Oil, metal, plastic, chemical and even some agro commodities, driven by international market Company consuming these commodities are likely to benefit especially in improving demand environment Some companies may be negatively impacted but Weightage of commodity companies in NIFTY is only 17% So overall decline in commodity prices is earning accretive
Macro factors driving earnings for corporate Decline in commodity prices 16.0% 14.0% 12.0% 14.3% 15.2% EBIT Margin 14.5% 13.3% 13.3% 12.9% 12.2% 12.8% 12.9% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 H1FY15 EBIT margin has scope to grow and decline in commodity prices is likely to support the same
Macro factors driving earnings for corporate Better capacity utilization Assets turnover ratio shows scope for improvement This will lead to higher earnings without much investment - resulting into improvement of ROCE Assets Turnover 5.00 4.50 4.00 3.50 3.00 2.50 2.00 1.50 1.00 0.50 0.00 4.41 4.06 3.68 3.71 3.82 3.42 2.97 2.97 2.78 2.91 2.80 2.62 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14
Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Nov 2014 Macro factors driving earnings for corporate Decline in Interest rate Inflation may bounce back in Jan on account of lower base CPI 12.00% 10.00% 8.00% 8.24% 6.00% 4.00% 5.52% 4.77% 5.70% 2.00% 0.00% Though Interest rate cut cycle may still be 6 months away but direction is on the down side
Macro factors driving earnings for corporate Decline in Interest rate 12 months from now, we may see short term interest rates down by 100 bps The decline in interest rate will have direct and indirect positive impact on corporates
Macro factors driving earnings for corporate Government pro-business policy to drive growth Faster decision making Building investor confidence Activating Bureaucracy
Earnings Growth will drive market in the long term 700 644 30.00% 600 24.70% 560 25.00% 500 400 300 200 319 352 355 10.42% 467 404 15.82% 13.79% 19.80% 20.00% 15.00% 15.00% 10.00% 100 5.00% 0 0.77% FY11 FY12 FY13 FY14 FY15 FY16 FY17 0.00% EPS Growth
NIFTY may see 10,000 by March 2016 At 1 year forward Year EPS Growth NIFTY PE FY11 319 24.70% FY12 352 10.42% FY13 355 0.77% FY14 404 13.79% 8382 20.8 FY15 467 15.82% 8382 17.9 FY16 560 19.80% 8960 16 FY17 644 15.00% 10304 16 PE multiple of 16x and with the earnings improvement of NIFTY stocks, it can see 10,000 mark by March 2016 So Use every major dip to BUY.
Sep-00 Jul-01 May-02 Mar-03 Jan-04 Nov-04 Sep-05 Jul-06 May-07 Mar-08 Jan-09 Nov-09 Sep-10 Jul-11 May-12 Mar-13 Jan-14 Nov 2014 Dec-99 Nov-00 Oct-01 Sep-02 Aug-03 Jul-04 Jun-05 May-06 Apr-07 Mar-08 Feb-09 Jan-10 Dec-10 Nov-11 Oct-12 Sep-13 Oct-08 Mar-09 Aug-09 Jan-10 Jun-10 Nov-10 Apr-11 Sep-11 Feb-12 Jul-12 Dec-12 May-13 Oct-13 Mar-14 Aug-14 The ride may not be smooth - we may see volatility Global uncertainty persist GDP Euro Area 25 China IIP 6 4 2 0-2 -4-6 20 15 10 5 0 15 10 5 0-5 -10-15 -20 Japan GDP Euro Area is expected to again enter Deflation China Growth rate has slowed down considerably. Japan has already entered deflation again
The ride may not be smooth we may see volatility Rupee appreciated agent various currencies Variation since Currency Cross Currancy 1st Aug 2014 American Dollar USDINR -1.37% Chinese Yuan CNYINR -2.22% South Korean won KRWINR 6.02% Euro EURINR 5.22% British Pound sterling GBPINR 5.58% Swiss francs CHFINR 4.07% Australian Dollar AUDINR 6.08% Brazilian Real BRLINR 10.80% Japanese yen JPYINR 13.89% Russian Ruble RUBINR 28.33% Though INR has not varied much in last 4 months against USD and CNY but appreciation against other currencies is making India export uncompetitive in their market
The ride may not be smooth we may see volatility Global commodity prices are moving in deferent direction than equity Down 15% Equity Index 6 M Var % S&P 500 - US 9.39% NIKKEI - Japan 22.92% Shanghai - China 22.14% NIFTY - India 15.48% DAX - Germany -2.26%
Conclusion Indian equity outperformed all other markets in 2014 Limited scope for re-rating Earnings growth will drive market from here March 2016 target for NIFTY is 10300 Going forward, ride may not be smooth
Stocks May be purchased on decline Large Cap Aurobindo Pharma State Bank of India Axis Bank Larsen & Tubro Mahindra & Mahindra Small Cap PI Industries Ltd Astral Poly Finolex Ind Asian Paints Dewan Housing Everest Industries Dolphin offshore
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