Morgan Stanley Institutional Investor Survey: The Waiting Game

The Indian market is sandwiched between domestic
issues – depressed savings, falling capital productivity
and an election cycle, on one side, and an ever
changing global environment, on the other. Our semi-
annual investor survey of 95 institutional investors
reveals how they are positioned and what they think is
important for Indian equities in the coming months:
 Positioning – Investors turn E-W on India: Only
21% of the investors have an overweight position (vs.
39% in Feb-13) – the lowest level since 2011 and the
lowest since we began this survey. Stock picking is
their preferred portfolio strategy. Only a third of the
polled investors believe that India will beat EM in the
next 12 months – albeit higher than in 2011.
 Waning return and earnings expectations: On
average, investors expect BSE Sensex to be at
20,949 in 12 months, up 2% from current levels. Their
earnings growth expectation for F2014 is 5% vs. 13%
in our February survey and compared to our top down
estimate of 4% and the sell-side consensus number of
10%.

India Consumer Q2F14 Earnings: Remain Selective :: Morgan Stanley Research

India Consumer
Q2F14 Earnings: Remain
Selective
Quick Comment: We expect our India consumer
coverage to report revenue, operating profit, and net
profit growth of 13%, 14%, and 13%, respectively. We
expect some moderation in volume growth across
consumer segments, especially in discretionary product
categories even as companies re-invest part of their
gross margin flexibility in ad-spends to support volume
growth. Higher tax rates will impact earnings growth for
most of the consumer companies in our coverage. We
expect United Spirits, Tata Global Beverages, Marico,
ITC and Dabur to report the strongest Q2F14 PAT
growth. Investors will likely to reward companies with
operating margin expansion this quarter.
HUL – Expect 4-5% volume growth: We expect HUL
to report revenue, operating profit and PAT growth of
9%, 9.9% and 4.8%, respectively. We forecast 7% and
8% volume led growth in soaps & detergents and
personal products, respectively. Operating margins will
likely remain flat in Q2, due to 80bps decline in soaps &
detergents offset by a similar increase Personal Product
margins. Key risk is sluggish volume growth across
business segments.
ITC – Cigarette EBIT growth to remain strong: We
expect ITC to report top-line growth of 15%, driven by
16%, 16% and 15% revenue growth in cigarettes,
non-tobacco FMCG, and agri businesses, respectively.
We forecast (-)2% cigarette volume growth and cigarette
EBIT growth of 18.1% YoY. ITC’s hotel business should
remain sluggish in Q2F14. We expect Q2F14 net profit
growth of 15.2%. The key metric to track this quarter is
non-tobacco FMCG business growth and profitability.
USL – Subdued quarter: We expect USL to report
revenue, operating profit and net profit growth of 8%, 1%
and 79% yoy, respectively. Revenue growth will likely be
driven by price/mix. We expect operating margins to
decline by 70bps yoy, driven by rising spirit costs. Lower
interest cost will drive net profit growth of 79% for the
quarter, we believe.

Hero MotoCorp:: Centrum

Stays on course, retain Buy
We retain Buy rating on Hero MotoCorp (HMCL) with a TP of Rs2,377. EBITDA margins
continued to remain strong at 14.5% vs. our est. of 14%. It is encouraging to note that,
retail level sales of the company were up 7-8% in 1HFY14 vs. flat numbers for the industry.
It expects to exceed 1.1mn units combined for Oct-Nov’13 implying strong dispatches
during the upcoming festive season. We continue to prefer HMCL over Bajaj Auto given
reasonable valuations, ability to retain its market share and strong presence in the fast
growing scooter segment and rural markets. HMCL has announced it will look at
annualized savings of Rs15bn by FY17-18E with benefits flowing in from 3QFY14 itself.
Though this might seem a tall order, it at least gives us confidence on the sustainability of
current margins.

Wipro - 2QFY14 Result Update - Centrum

Revenue traction returns, likely to sustain
We revise our estimates for Wipro revenues marginally and margins upwards,
maintain Buy rating and set a new Sep’14 TP of Rs 600 (up from Rs567). Though
Wipro’s 2QFY14 revenues were somewhat below our expectations with IT Svcs up
3.2%/2.7% QoQ in constant currency/USD terms (vs. our estimate of 3.7%), with
broad-based growth across verticals, strong revenue additions in the US, we think
Wipro’s legacy issues are largely behind it. The strong improvement in IT Svcs EBIT
margin (up 252 bps QoQ, 33bps higher than our estimate) despite June salary hikes
is encouraging. With account management improvements in place and a new focus
on hunting and on BFSI, we expect the rebound in revenue momentum to persist.

Solar Industries:: Centrum

Defence potential remains exciting despite challenges
Our recent plant visit to Solar’s defence and explosives facility reaffirms our view on
the strong potential for the defence business but revenue monetisation could take
time as it has to cross key hurdles. We were accompanied on our visit by Mr. Subimal
Bhattacharjee (defence expert and Ex-country head, General Dynamics India) who
affirmed the huge potential for the defence business in the long run notwithstanding
the near term bottlenecks and challenges. The company’s core business of explosives
is expected to pick up in H2 after a subdued H1 but we see slower overall growth in
FY14E and revise our estimates marginally. We shift our valuation base to Sep’15E and
revise our target upwards to Rs1140 but downgrade the stock to Hold from Buy earlier
on the back of smart recent stock performance.

Who scores on consistency:: Business Line

Like any other season, 2013 so far has some winners and losers among equity funds. But do the funds that regularly figure on our list of recommended funds make the cut?

Rest assured — funds such as ICICI Pru Focused Bluechip, Birla Sunlife Frontline Equity, UTI Equity, UTI Opportunities and Franklin Bluechip have all fared better than the broader markets. Focused Bluechip and Frontline Equity have done better than the Nifty as well.

Although they may not be in the top ten in this round, these funds score on the consistency parameter. For a five-year period, they have clocked better returns than their benchmarks 80-93 per cent of the time.

This implies that if you invested in these funds at any point in time in the last five years, it had an 80-93 per cent chance of beating the index.

Taking into account their dependable track record, their ability to contain losses during market falls while and doing well in rallies, these funds can continue to be part of your core portfolio.

That cannot yet be said of funds that have topped this season. Axis Equity has done well so far no doubt, but it is a relatively new fund, launched only in December 2009.

BNP Paribas and Religare Equity too don’t score well on consistency, with five-year rolling returns showing that they won only 60-65 per cent of the time.

Franklin India Smaller Companies Fund: Invest:: Business Line