* INR faces several idiosyncratic headwinds but some key dynamics are
different from what precipitated its 1991 crisis or the Asian crisis in 1997. Pressure points would likely drive the Government to undertake more structural reforms; but the positives will be visible only from late FY15. Except IT and Pharma, corporate earnings continue to see downgrades and we believe a further 8-10% downgrades to our macro base case of 5.5% GDP growth in FY15 and INR at 70-72. We believe outflows driven PE derating is a bigger risk than earnings downgrade. Stocks at risk due to higher FII participation and little valuation support / currency hedge in business are Bharti, HDFC group, Hero, ITC, Ultratech, HUL and A Paints. INR’s misunderstood adjustment * q INR is inflicted by structural, cyclical, global and balance of payments (BoP) financing headwinds. Political apathy towards structural changes in the real economy worsens the adverse impact of the multiple headwinds. q The on-going INR adjustment is neither new nor temporary. INR had depreciated significantly even before the recent hit from the fears about Fed tapering emerged. q INR is oversold and undervalued in REER terms. It can get some temporary respite but its adjustment to weaker levels is not over. We maintain our long-held nonconsensus view that INR is headed back to the pre-2002 depreciation pattern. * India’s mix of problems unlike its 1991 crisis or 1997 Asian crisis * q BoP financing pressures are common to most EM countries but India’s mix of the current problems is different from what led to its 1991 crisis or to the 1997 Asian crisis. It is also different from a typical external debt-driven EM crisis. q The most differentiating aspect has been RBI’s hands-off approach towards the INR. This prevented burning foreign reserves to defend unrealistic INR levels. If adopted, it would have likely precipitated a BoP, and possibly, a banking crisis. q India has fiscal issues but government debt sustainability is less of an immediate concern. Also, external debt ratios are not too worrisome although the rise in corporate borrowing, especially the unhedged portion, is. q Adjusted for NRI deposits (typically rolled over) and trade credits (an issue if 2008- like explosion in counterparty risk), short-term debt profile is less of a worry. * FII flows at risk – will impact PEs * q India’s equities saw inflows of US$100bn since 2009 until May this year. Bulks of these flows have come from international funds that can easily play the DM vs EM trade. q Since May, FII outflow of US$3.7bn has taken place from equities. Our estimate of the current FII stock in domestic equities is US$170bn. With ‘relatively safe’ stocks such as HDFC group, ITC etc falling by 23-30% from their peaks, risk of outflows has increased. q Among US$5bn+ market cap stocks with high FII / free float ratio that appear vulnerable are HDFC group, Bharti, Hero, ITC, Ultratech and HUL. q Other high ownership stocks are either have some valuation support (banks & financials) or have a currency hedge in business (IT and Pharma). * More earnings downside to FY14/15 estimates * q In our macro base case of Rs70-72/US$ in FY15 and 5.5% as the GDP growth, we see more downside risk to our earnings estimates. More risk to FY15 than FY14. q Bigger downside risk exists in banks, autos and cement. In banks, credit growth could be lower at 14-15% as against assumed the 17%; also NPAs could be higher by 50-70bps at 5% of loans. Cement and four wheelers could also witness 10-20% earnings cut. Property cos will also likely see downgrade on higher rates. q For 1% INR depreciation, pharma earnings move up by 0.5-1% and IT cos earnings move up 1.5-2%. q OWT IT, Pharma, PSU power utilities, Reliance and Zee. Stay selective in cyclicals with ICICI, L&T and Maruti as preferred picks. -- -- For Anything related with Stock market be Online at http://www.niftyviews.com/ Get free updates on your mobile phone. Sms "Join TSR " and send to 09223492234 FOR TRIAL STOCK/NIFTY/OPTION CALLS You received this message because you are subscribed to Google Group "STOCKRESEARCHER" group. To post to this group, send an email to [email protected] To unsubscribe email [email protected] for more info visit http://groups.google.com/group/STOCKRESEARCHER?hl=en-GB . This is Not a Spam Mail. Disclaimer :- "The opinions expressed by the members on this board are based on their individual experience and perceptions and to share information with other members with the best of intentions to help fellow members in investment decisions as equity investment is a risky venture." --- You received this message because you are subscribed to the Google Groups "TEAM STOCKRESEARCHERS" group. To unsubscribe from this group and stop receiving emails from it, send an email to [email protected]. For more options, visit https://groups.google.com/groups/opt_out.
