INDIA_EQUITY_INSIGHTS-2013-01-14.ppt

,CP,TP,14 January 2013Stocks highlighted in this reportCompany Ticker Rating,Equity StrategyIndiaIndia Equity Insights,abcGlobal Research,ITCILFS,ITC INILFT IN,OW 280 346OW 221 265,ColgateTata Motors,CLGT INTTMT IN,OW 1,541 1760OW 327 365,Pausing for breath,Tata Power TPWR IN OW 109 123Power Grid PWGR IN OW 116 142DLF DLFU IN OW(V)234 274ICICI Bank ICICIBC IN OW 1,180 1344Petronet PLNG IN OW 165 196LNG,We identify Indian stocks that align with our four regionalequity themes for 2013 consolidation,margin power,structural trends and value over growth,Coal India,COAL IN,OW 364 415,HindustanZinc,HZ IN,OW 139 160,and six domestic trends to watch,namely 1)rotation to,Zee Z IN OW 223 272Cairn India CAIR IN OW 344 414Source:Bloomberg,HSBC estimates.Note:Prices as of 9 JanJitendra Sriram*Head of Research,IndiaHSBC Securities and Capital Markets(India)Private Limited+91 22 2268 1271jitendrasriramhsbc.co.inHerald van der Linde*,CFAHead of Equity Strategy,Asia-PacificThe Hongkong and Shanghai BankingCorporation Limited+852 2996.hkGarry Evans*Global Head of Equity StrategyThe Hongkong and Shanghai BankingCorporation Limited+852 2996.hkVikas Ahuja*Strategy AssociateBangaloreView HSBC Global Research at:http:/*Employed by a non-US affiliate ofHSBC Securities(USA)Inc,and is notregistered/qualified pursuant to FINRAregulationsIssuer of report:HSBC Securities andCapital Markets(India)Private LimitedDisclaimer&DisclosuresThis report must be readwith the disclosures andthe analyst certifications inthe Disclosure appendix,and with the Disclaimer,which forms part of it,mid-caps,2)social spending ahead of general election,3)Japanese investments,4)pricing power of incumbents,5)regulatory stability,6)low equity market volatility We are neutral on India in the regional context and reiterateour CY13 Sensex target of 21,700An encore of last years rally unlikelyIndian stocks rose 24%in 2012,as USD25bn of funds from foreign institutional investors(FII)flowed into the domestic market.But with FIIs already overweight India,the scopefor a further rerating appears limited.Thus,we expect India equities to track prospective2013e earnings growth of 11%.Our Sensex target of 21,700 assumes a 2014e PE of 14.5x marginally below the historical long-term average of 15x.But we still see plenty of opportunitiesWhile a repeat of last years rally is unlikely,we still see a number of opportunities alignedwith our regional strategy themes for 2013.These include names that benefit from:1)industryconsolidation(ITC,ILFS and Colgate);2)margin power(Tata Motors,DLF,Power Gridand Tata Power);3)structural trends(ICICI Bank,Petronet LNG and Coal India);and4)value over growth(Cairn India,Hindustan Zinc and Zee Entertainment).Six domestic trends to watch in 20131)Monetary easing is likely to help narrow the wide valuation gap between large andmid-caps.2)Social spending ahead of the 2014 elections should benefit materials butraises risks for state-owned banks.3)Japanese companies could raise capital investmentinto India,impacting autos,power equipment,and transport infrastructure.4)A lack ofinvestments in recent years has led to better pricing power for incumbents ininfrastructure,power and ports.5)Visibility should improve in some sectors once the dustsettles from last quarters regulatory shake-up.6)India equity market volatility has comeoff in the last five years.Our sector calls:overweight energy,media and powerReforms leave us more constructive on the energy,power utilities and media sectors.We areturning more selective on private banks and fast moving consumer goods(FMCG).We aremore cautious on telecoms,autos and the state-owned banks.,Equity StrategyIndia14 January 2013Stock ideas to illustratethe key themesTable 1.2013 themes and stocks,abc,ThemesConsolidationITCILFS TransportColgate-Palmolive,SectorFMCGIndustrialsFMCG,CommentsIndias largest cigarette companyPreferred play in the Indian road development sectorUnique among its fast moving consumer goods peers in that it almost exclusively focuses on oral care as the,main source of its revenuesMargin power,Tata MotorsTata PowerPower GridDLFBucking the trendICICI BankPetronet LNGCoal IndiaValue vs GrowthHindustan ZincZee EntertainmentCairn IndiaSource:HSBC2,AutosUtilitiesUtilitiesRealtyBanksEnergyEnergyMetalsMediaEnergy,Indian multinational automotive manufacturing companyState Electricity Boards increased tariffs(good for top line)while domestic coal prices decline(good forcosts)positive for both companiesBenefit from easing of liquidity and interest rates over the next 12 monthsLargest private sector bank,with highest delta in ROABest placed in our view to capture long-term gas demand growth,and has first-mover advantageIndia coal deficit playWorlds largest integrated and among the lowest cost producers of zinc/leadShould benefit from DAS and 2x jump in its domestic subscription revenue stream over the next three yearsPlay on import substitution;India oil imports at record high levels,70,65,60,55,50,45,40,35,30,Equity StrategyIndia14 January 2013Global macro outlook Growth is likely to remain sluggish in 2013,but central banks offera put option and investors may shift back from bonds to equities We think a combination of modest earnings growth and some PEexpansion means equities can produce a moderately positive return We identify the themes we think will drive relative stockperformance,abc,Another choppy yearThe storm might have abated a little,but theoutlook for equities in 2013 remains choppy.Weconclude,however,that the global stocks willmake modest gains in 2013,thanks to acombination of central bank action,earningsgrowth of about 10%,and some further rerating asinvestors slowly regain confidence in equities.Here we include a brief summary of our globalmacro outlook(see Fishing in choppy seas:Global equities in 2013,3 December 2012 for thefull version).And in the section that follows,we summarise thethemes we believe will allow investors to land ahealthy catch despite the choppiness.Sluggish global growthThe call on the global cycle is particularly trickyat the moment.The global PMI fell back below 50in June(Chart 1)and remains below,despitehaving picked up a little in the past two months.,Chart 1.World PMI and US recessions98 99 00 01 02 03 04 05 06 07 08 09 10 11 12Recessions World PMISource:MarkitThe US is showing the first stirrings of a recoverythis past autumn(the manufacturing ISM rising to51.7 from a low in August of 49.6)and Asia,ledby China,also picking up.But in Japan andGermany sentiment indicators have movedsharply downwards.HSBCs economists forecast sluggish growth nextyear,but no global recession(and only a mild onein the Eurozone).They forecast US growth at1.7%and the Eurozone at-0.1%,Garry Evans*Global Head of Equity StrategyThe Hongkong and ShanghaiBanking Corporation Limited+852 2996.hk*Employed by a non-US affiliateof HSBC Securities(USA)Inc,and is not registered/qualifiedpursuant to FINRA regulations3,40%,35%,30%,25%,20%,15%,10%,5%,0%,%,80,70,60,50,40,30,20,10,0,400,300,200,100,0,Equity StrategyIndia14 January 201313%earnings forecast for EMs in 2013Corporate earnings were disappointing in 2012.Analysts currently think that global EPS growthwas only 4%,with Europe probably recordingnegative growth and emerging markets only 3%.Analysts forecast a recovery in 2013,withglobal earnings predicted to grow by 11%(10%in,Chart 3.Central bank balance-sheets as%of GDP,abc,the US,11%in Europe ex UK and 13%in,03,04,05,06,07,08,09,10,11,12,emerging markets).,Fed,ECB,BoJ,BOE,The momentum of earnings forecasts seems tohave turned.The earnings revision ratio,whileremaining below 50%,has begun to improvebeginning in September(Chart 2).Chart 2.Earnings revisions ratio98 99 00 01 02 03 04 05 06 07 08 09 10 11 12EM DMSource:HSBC,Thomson Reuters Datastream,IBES,MSCIOur top-down earnings model suggests 13%EPSgrowth for the US in 2013,similar to theconsensus.In Europe ex-UK,the models result of6%is a little below the consensus,but mainlybecause we assume a euro appreciation;if weassume a flat euro,the two are in line.,Source:HSBC,BloombergThis seems likely only to increase over the comingyear.The Fed has indicated that it will considerfurther purchases of long-term government bondsonce Operation Twist expires,and that it is readyto inject more liquidity if fiscal consolidation in2013 risks slowing growth.The ECB will begin itsprogramme of Outright Monetary Transactions(OMT)once Spain applies for a financingprogramme,which our economists think is likelyearly in 2013.The Bank of Japan may becomemore aggressive under a new governor.Continued low volatility case forbullishnessIf equity multiples are to be rerated significantly,it isessential that investors in particular,retail investors start to become more comfortable with takingequity risk.Over the past four years,investors havepiled into fixed income investments(and,over thepast 12 months,particularly credit)and havegenerally taken money out of equities(Chart 4).Chart 4.Net cumulative flows into mutual funds globally(USDbn),QE likely to increase in 2013Central banks are increasingly providing a put,700600500,Bond,Equity,option for equities.Each time growth has slowedor risk has risen over the past year,central bankshave acted to offset this.The worlds majorcentral banks have grown their assets to 25-35%,of their respective countries GDP,up from 5-,-100 04,05,06,07,08,09,10,11,12,10%before the global financial crisis(Chart 3).4,Source:EPFR,1990,1992,1994,1996,1998,2000,2002,2004,2006,2008,2010,2012,5,4,3,2,1,0,15,10,5,0,Equity StrategyIndia14 January 2013What will it take for investors to gain more,Chart 6.DJ Global Titans:average dividend yield vs.bond yield,abc,confidence in stocks?A lot of the problem is dueto volatility.Volatility fell in 2012 for developed,76,Div,Bond,markets to the lowest level since 2007(Chart 5).Volatility is cyclical and tends to fall as arecovery unfolds.Our economic forecasts areconsistent with continued falls in volatility.Chart 5.Annualised equity market volatility,MSCI EM and DM(%),3025,EM,DM,05,06,07,08,09,10,11,12,20Source:HSBC,Bloomberg,MSCIYield gap widest since 2005One trigger for investors to move back intoequities would be a realisation of how little they,Source:HSBC,BloombergWhat is the implication for global equities?Thereis a good correlation between the annual changein the MSCI ACWI index and global GDP growth(Chart 7).A quick rule of thumb is that globalgrowth of 2-2.5%is needed for stocks to rise.HSBCs economists forecast of 2.4%GDPgrowth in 2013 suggests that equities could ekeout a small positive return,but that neither a bigdrop in stock prices nor a large rise is likely.Chart 7.World GDP growth and annual change in MSCI ACWI(%),are being paid to own bonds.Big flows into credit in 2012 have pushed down bothyields and spreads over Treasuries.In the US,forexample,the average BBB-rated five-year corporatebond now yields just 2.2%,with a spread overTreasuries of 160bp,the lowest since 2007.The expensiveness of bonds relative to equities is,6543210-1,88 90 92 94 96 98 00 02 04 06 08 10 12,40200-20-40,clear if we compare companies dividend yield withthe yield on their bonds.The simple average of the,World GDP grow thSource:HSBC,World Bank,Bloomberg,MSCI,Equity perf(RHS,1y lag),dividend yield on these stocks is 4.3%;the averagebond yield 1.4%(Chart 6).The gap between the twois the highest since our data begins in 2005.5,INDIA,WORLD,CHINA,RUSSIA,ASIA,EUROPE,BRAZIL,EM,Equity StrategyIndia,abc,14 January 20132013 India equity outlook We expect Indian stocks to rise 11%in 2013,with our Sensex targetunchanged at 21,700 Aside from our four regional themes,we identify six domestic trendsthat we believe will shape India equities in 2013 Four themes:1)market consolidation and polarization,2)marginpower;3)structural trends,4)value over growth.Six trends:1)highquality mid-caps,2)general elections in 2014,3)beneficiaries ofJapanese investments,4)pricing power of incumbents,5)regulatorystability,and 6)low equity market volatility,The year just goneIndia outperformed in 2012In dollar terms,the India market was up awhopping 24%in 2012,after finishing among theworst performing markets in 2011(when it fell37%).The rally was largely driven by PEexpansion(which expanded 17%),while earningsgrowth remained muted(at 11%).Chart 8.India among the best performing markets in CY1230%25%20%15%10%5%0%-5%,As the INR depreciated 4%against the USD,MSCI India was up 28%in local currency terms.We think the rerating of the India market wasmainly driven by:Coordinated monetary easing by the USFederal Reserve and European Central Bankreduced tail risk.As a high-beta market,Indiawas a key beneficiary of the liquidity injections.Chart 9.MSCI India performance drivers in 20122520151050-5-10,Jitendra Sriram*India StrategistHSBC Securities and CapitalMarkets(India)Private Limited+91 22 2268 1271jitendrasriramhsbc.co.inHerald van der Linde*Head of Equity Strategy,Asia PacificThe Hongkong and ShanghaiBanking Corporation Limited+852 2996.hk*Employed by a non-US affiliateof HSBC Securities(USA)Inc,and is not registered/qualifiedpursuant to FINRA regulations,MSCI India,PE,EPS,INR-USD,6,Source:MSCI,Thomson Reuters Datastream,Source:MSCI,Thomson Reuters Datastream,India,Indonesia,S.Korea,Philippines,Thailand,Vietnam,Taiwan,WPI,7.1,7.7,30,25,20,15,10,5,0,Equity StrategyIndia14 January 2013 Government implemented a raft of reformsafter a long period of inertia,which improvedsentiment in 4Q 2012.Since September 2012,the government has rolled out a number ofsignificant measures,such as allowing FDIinto multi-brand retail,aviation andbroadcasting;raising diesel prices by INR5,and introducing a cap on subsidized LPG,However,we do see the economy at an inflectionwith some pick-up in momentum emerging into2H 2013 both from GDP growth and an easingof inflation.Table 2.India:macro forecast(y-o-y%)GDP1Q 13 5.12Q 13 5.3,abc,cylinders.FIIs preferred India over other Asian markets,3Q 134Q 13Source:HSBC estimates,6.06.6,6.66.1,in 2012.FIIs injected nearly USD25bn intothe Indian stock market during the year.In,our view,given Indias credit rating at BBB-and on the cusp of an investment gradedowngrade,the government will do enough tohold these ratings.(see Dilip Shahanis reporton 14 December 2012,The View:A year ofsnakes and ladders)Chart 10.Foreign investors net flowsSource:Bloomberg,HSBCThe year aheadThe near-term macro outlook remains muted.Wehave recently cut our India GDP growth forecastto 6.2%for FY14 from 6.9%.With foreigninvestors appearing to be already overweightIndia,the scope for further PE expansion remainslimited.We expect markets to grow in line withearnings growth.,Given the global central bank put and a gradualshift from bonds to equities,our Asian equitystrategists believe investors should adopt thefollowing four themes in 2013(see Herald van derLindes report on 3 December 2012,Fishing inchoppy seas:Asia equities in 2013)Consolidation and polarization.In a weakoperating env