Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Summary
The macro challenges reinforce our view of a new normal growth, lower than the much claimed
9% (vs our expectation of 7.6%) for FY12E. A moderation in broader earnings estimates is
camouflaged by steep upgrades in a few companies, leading us to a selective market view.
�� Overstatement of GDP growth; FY11 probably inflated by 90bp: Over the past two years,
several changes have been made in GDP numbers, including disproportionately large revisions,
change in base year to 2004-05, change in deflator, and expansion in coverage for various
components. While these changes have resulted in an obfuscating flux and increased frequency, of
errors the disconnection with a wide set of leading indicators suggest inconsistencies. Our analysis
indicates widespread up-scaling, but the largest bias to GDP growth comes from financial & trade
services and manufacturing. Working backwards to extend the old series leads us to real GDP
growth for Q1-Q3FY11 of 7.7% vs CSO’s estimate of 8.6%
�� “Negotiating the new normal” is intact; FY12E GDP at 7.6% with an upside bias: While the
finance minister maintains an optimistic 9% GDP growth forecast in FY12, the RBI’s statements are
sombre. In our view, FY12 will see a transition from the stimulus-driven economic rebound to a new
normal trend around 7.5-8% growth. In our view, the near-term downside risks would dominate the
upside impulses, which would likely emerge gradually and more strongly in FY13. We maintain our
7.6% GDP growth estimate for FY12 with an upside bias. Contraction in real fiscal spending would
potentially create positive supply impulses, its instant impact will be contractionary. Every 100bp
negative shock in real fiscal spending growth translates into a 50bp fall in GDP growth. The factors
weighing on our outlook include subdued investments, lagged negative impact of past fiscal
expansion, downward inelastic interest rates. Amplified inclusion of informal sector in CSOs is an
estimation risk for our projections. Low risk could arise from tightening of global financial
conditions – rate hikes in the US and Europe and decline in savings in Japan.
�� Declining food inflation and rising cost pressures: Inflation in Feb 2011 rose to 8.3% from 8.2%
in Jan 2011 despite the sharp fall in food inflation. While manufactured product inflation climbed
up, it is relatively small compared to persistent rise in cost of raw materials. Implying intensifying
margin pressure and declining pass-through coefficient. While the risk of further escalation of costs
persists, we believe the onward trend in inflation is likely to decline due to demand moderation. We
expect WPI inflation to decline to 5-6% in FY12 with a reasonable probability of a 100bp upside
from potential increase in fuel prices.
�� Food surplus beats the facile structural demand-supply shortage thesis: Qfficial position that
food price shocks resulted from structural supply-demand deficit, a thesis we have consistently
refuted, is challenged by recent government decision to lift export ban on rice, sugar and onions to
stabilise declining domestic prices. Wheat export is expected to follow. These imply an oversupply
situation. WPI for most protein based items have declined from their 2010 peaks
�� Ballooning under-recoveries of oil PSUs: If crude prices remains at US$115 levels (Brent), underrecoveries
would be fairly large (Rs1.75-1.8trn with INR/USD at 46). Our oil analyst believes average
crude price would be US$95 in FY12E, translating into under recovery of around Rs1trn. While this is
manageable, sustenance of crude prices at US$115 would imply intense liquidity pressure.
�� Rural theme – Rising NPA in agri-lending: We maintain our theme “Fragility of rural growth”. As
per recent reports, PSU banks are reporting sharp rises in farms loan NPAs, between 80%-2,000%
during Q1-Q3FY11. While Budget FY12 enhanced agri credit target to Rs4,750bn, we believe
volatility in farm income arising from supply surpluses, high indebtedness and rising NPAs will force
banks to concentrate on recoveries. While aggressive lending may have fed into consumption
spending, rising indebtedness will result in a bigger default and fiscal problem in the future.
�� Market strategy: The continued moderation in earning estimates for the boarder markets, though
camouflaged by steep upgrades in a few companies, reflect better expectations for global-oriented
companies and domestic macro stress. While structural changes in the composition of index
earnings make historical comparison less relevant, we believe at 15.32 x FY12E EPS, the market may
still be expensive. Factors that are likely to be critical in the coming quarters are margin pressure,
volume growth moderation, upside risk to lending rates, and the multiplier impact of fiscal
contraction. Hence, we are overweight global/export-dependent themes (tactical positive on IT),
sectors less sensitive to commodity prices (pharma), and consumer non-durables. Rate-sensitive
like infrastructure and real estate sectors would continue to be under stress. While not so positive
on two-wheelers and commercial vehicles, we have a constructive view on LCVs and passenger
vehicles. The steel sector will likely see margin pressure beyond the short-term improvements.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Summary
The macro challenges reinforce our view of a new normal growth, lower than the much claimed
9% (vs our expectation of 7.6%) for FY12E. A moderation in broader earnings estimates is
camouflaged by steep upgrades in a few companies, leading us to a selective market view.
�� Overstatement of GDP growth; FY11 probably inflated by 90bp: Over the past two years,
several changes have been made in GDP numbers, including disproportionately large revisions,
change in base year to 2004-05, change in deflator, and expansion in coverage for various
components. While these changes have resulted in an obfuscating flux and increased frequency, of
errors the disconnection with a wide set of leading indicators suggest inconsistencies. Our analysis
indicates widespread up-scaling, but the largest bias to GDP growth comes from financial & trade
services and manufacturing. Working backwards to extend the old series leads us to real GDP
growth for Q1-Q3FY11 of 7.7% vs CSO’s estimate of 8.6%
�� “Negotiating the new normal” is intact; FY12E GDP at 7.6% with an upside bias: While the
finance minister maintains an optimistic 9% GDP growth forecast in FY12, the RBI’s statements are
sombre. In our view, FY12 will see a transition from the stimulus-driven economic rebound to a new
normal trend around 7.5-8% growth. In our view, the near-term downside risks would dominate the
upside impulses, which would likely emerge gradually and more strongly in FY13. We maintain our
7.6% GDP growth estimate for FY12 with an upside bias. Contraction in real fiscal spending would
potentially create positive supply impulses, its instant impact will be contractionary. Every 100bp
negative shock in real fiscal spending growth translates into a 50bp fall in GDP growth. The factors
weighing on our outlook include subdued investments, lagged negative impact of past fiscal
expansion, downward inelastic interest rates. Amplified inclusion of informal sector in CSOs is an
estimation risk for our projections. Low risk could arise from tightening of global financial
conditions – rate hikes in the US and Europe and decline in savings in Japan.
�� Declining food inflation and rising cost pressures: Inflation in Feb 2011 rose to 8.3% from 8.2%
in Jan 2011 despite the sharp fall in food inflation. While manufactured product inflation climbed
up, it is relatively small compared to persistent rise in cost of raw materials. Implying intensifying
margin pressure and declining pass-through coefficient. While the risk of further escalation of costs
persists, we believe the onward trend in inflation is likely to decline due to demand moderation. We
expect WPI inflation to decline to 5-6% in FY12 with a reasonable probability of a 100bp upside
from potential increase in fuel prices.
�� Food surplus beats the facile structural demand-supply shortage thesis: Qfficial position that
food price shocks resulted from structural supply-demand deficit, a thesis we have consistently
refuted, is challenged by recent government decision to lift export ban on rice, sugar and onions to
stabilise declining domestic prices. Wheat export is expected to follow. These imply an oversupply
situation. WPI for most protein based items have declined from their 2010 peaks
�� Ballooning under-recoveries of oil PSUs: If crude prices remains at US$115 levels (Brent), underrecoveries
would be fairly large (Rs1.75-1.8trn with INR/USD at 46). Our oil analyst believes average
crude price would be US$95 in FY12E, translating into under recovery of around Rs1trn. While this is
manageable, sustenance of crude prices at US$115 would imply intense liquidity pressure.
�� Rural theme – Rising NPA in agri-lending: We maintain our theme “Fragility of rural growth”. As
per recent reports, PSU banks are reporting sharp rises in farms loan NPAs, between 80%-2,000%
during Q1-Q3FY11. While Budget FY12 enhanced agri credit target to Rs4,750bn, we believe
volatility in farm income arising from supply surpluses, high indebtedness and rising NPAs will force
banks to concentrate on recoveries. While aggressive lending may have fed into consumption
spending, rising indebtedness will result in a bigger default and fiscal problem in the future.
�� Market strategy: The continued moderation in earning estimates for the boarder markets, though
camouflaged by steep upgrades in a few companies, reflect better expectations for global-oriented
companies and domestic macro stress. While structural changes in the composition of index
earnings make historical comparison less relevant, we believe at 15.32 x FY12E EPS, the market may
still be expensive. Factors that are likely to be critical in the coming quarters are margin pressure,
volume growth moderation, upside risk to lending rates, and the multiplier impact of fiscal
contraction. Hence, we are overweight global/export-dependent themes (tactical positive on IT),
sectors less sensitive to commodity prices (pharma), and consumer non-durables. Rate-sensitive
like infrastructure and real estate sectors would continue to be under stress. While not so positive
on two-wheelers and commercial vehicles, we have a constructive view on LCVs and passenger
vehicles. The steel sector will likely see margin pressure beyond the short-term improvements.
