Conviction Ideas: Beyond the Euphoria

[Emkay Equity Advisory]

Conviction Ideas

Beyond the Euphoria

 

      Euphoria-Global & Local: Since late Nov the combination of optimistic outcome on the Fiscal Cliff debate and consensus turning positive on reform measures initiated by India, including the political victory of the UPA government on FDI in retail have engendered a significant rally in global and domestic equities. These factors have overshadowed on growth downgrade in Europe (more relevant for India than US growth) and muted domestic growth (including GDP. IIP, auto & commercial vehicles sales). There has been some optimism on US data and Chinese economy at the margin. We believe the global market rally of 5-6% and domestic bounce of 3.9% are backed by events and will probably head for some consolidation after the events are over

     Indian reform measures: The brinkmanship shown by the UPA government in getting parliamentary approval on FDI retail has emboldened market confidence and also eased rating downgrade concerns. Market also expects successful passage of Banking Regulation Amendment bill which will enable PSU bank mergers, facilitate new banking licenses and increase the limit for voting rights of single shareholder. This is apart from the requirement of parliamentary approval on FDI in pension and insurance.

     Macro conditions weaker than expected:

n      The 5.3% reading on Q2FY13 is likely to be followed further deceleration in Q3FY13 resulting in lower then expected GDP growth for FY13E at 5.3-5.4 vs our projection of 5.5% and projections by RBI and Finance Ministry at 5.8% and 5.5-6% respectively. Our initial prognosis is that our FY14E growth projection of 6.5% could also be exposed to downside risk given the weaker than expected trajectory over the past two years

n      Trends in growths of base money (3.9% YoY), Money supply (13%), deposit growth (13.4%) and non-food credit (16.5%) do not forebode significant improvement in economic activities

n      Monetary policy: Liquidity infusion measures still relevant viz. OMO purchases, CRR cuts. Expect unchanged rates on Dec 18th

n      Trade deficit rose to US$21 & 19 bn in Oct & Nov respectively; monthly indicators suggest BoP Deficit of US$2.5bn and US$4.3bn since Sep’12 and Aug’12 respectively (till Dec 1, 2012).

n      Truck sales (5–49 ton) contracted 33.1% YoY in Nov’12, extending the 24.5% YoY decline in Oct’12

n      Festival demand during the month of Nov’12 has been lackluster and will reflect on consumption demand indicators

n      IIP growth at -0.4% YoY during Sep’12 will likely be followed by +4.1% print for Oct’12 aided by a beneficial based year growth of -5%. We expect it to contract in Nov-Dec’12

     Our portfolio picks underperformed by 300 bps:  Against the 3.9% return on Nifty benchmark, Emkay portfolio notched 1.0% return and underperformed by 290 bps to the Nifty Benchmark. Emkay’s portfolio tuned to Defensives has underperformed since the last week of Nov, thanks to the noise surrounding reforms and positive portfolio flows to India. The Outperformers were Aurobindo Pharma (12.8%), Colgate Palmolive (7.4%), Dish TV (7.0%), Exide Industries (8.1%), Federal Bank (7.1%), LIC Housing Finance (7.5%) and NHPC (7.3%). The Underperformers were Grasim (-4.9%), Ranbaxy (-6.4%) and Tech Mahindra (-6.8%).

     Changes made to conviction list - (1) Removed from BUY List: Infosys, Ranbaxy Labs, NHPC – in lieu of achieving targeted returns or change in analyst conviction (2) Added Large Cap BUYs: HCL Tech, Cadilla, Hindustan Zinc (sustained growth momentum, expected re-rating) (3) Removed from BUY List: Aurobindo Pharma (4) Mid cap BUYs: Crisil (better earnings trajectory ahead) (5) Major Change: Upgraded Dr Reddy from SELL To BUY, after near one year of underperformance

  n     Large Cap BUY: Cadilla, Colgate, Dr Reddy, Grasim Industries, HCL Tech, Hind Zinc, ICICI Bank, Tata Motors

  n     Mid-Cap BUY: Crisil, Dish TV, Exide, Federal Bank, LIC Housing, Madras Cement, Tech Mahindra, Wockhardt

 

Top Ideas

 

	Stock Idea
Large Cap : BUY	n          Cadilla n          Colgate n          Dr Reddy n          Grasim n          HCL Technologies n          Hindustan Zinc n          ICICI Bank n          Tata Motors
Mid Cap : BUY	n          Crisil n          Dish TV n          Exide n          Federal Bank n          LIC Housing n          Madras Cement n          Tech Mahindra n          Wockhardt

 

 

Thanks & Regards,

Emkay Equity Advisory | Emkay Global Financial Services Ltd. | www.emkayglobal.com

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