Anand Shanbhag, Executive Director & Head of Research , Avendus Securities
What is your Sensex target by December 31, 2012? Why?
We have currently not published a Sensex target for Dec12 but we expect the index to deliver at least 20% return over the next year. This would be driven by a retreat of many of the negative macro-economic factors that have eroded sentiment in 2011 such as, interest rates, inflation and the economic downturn. It is also likely that the global economic crisis, particularly in Europe, is likely to near a resolution; this could unwind the negative forces that have contributed to derating of global equities.
How much downside you see for Sensex and Nifty from present levels? By when do you think market will bottom out?
The worst case situation may be 15% below these levels. That would take the P/E of the indices below the lows seen in 2008-09. Market may bottom out by the first quarter of FY13.
What is your Sensex EPS estimate for FY12 and FY13? What are the possibilities of this estimates getting revised?
We do not publish estimates for Sensex EPS. But we believe downgrades to consensus forecasts may continue till the results for the first quarter of FY13 are released.
Which are the three large-cap stocks you will recommend investors to buy at current prices for 2-3 years time horizon? Please give a brief rationale for your recommendations.
Bharti: Revenue growth in Indian wireless business is likely to grow at a CAGR of 11% over FY12f-FY14f, led by tariff hikes and pick up in data usage. EBITDA for India and South Asia is likely to grow at a CAGR of 14% over FY12f-FY14f and for Africa to grow at a CAGR of 43%. Cash profit of INR700bn over FY12f-FY14f may help reduce the net debt by a greater extent. The strong operating cash flow is likely to absorb the impact of regulatory levies for excess spectrum and renewal of license. We have a Buy rating on the stock with Sep12 TP of Rs 482.
Axis Bank: AXSB’s mean RoE for FY12f-FY13f is likely to stay at c20% despite factoring in high loan-loss provisions. Net profit CAGR is forecast at 20%. Savings deposits growth has been ahead of the peers, above 20%, in the past three quarters despite sharp rise in interest rates. Strong liability franchise, with CASA ratio of 42.2%, is likely to protect NIM in the range of 3.0% - 3.5%. The stock currently trades at a P/B of 1.4x FY13f adjusted book value. While NPL risk may stay an overhang in the near-term, large discount to peers with similar RoEs is unlikely to sustain.
Sun Pharma: Sun Pharma is one of the fastest growing listed pharmaceutical companies in India. With a portfolio focused on chronic therapies, the company has consistently grown above the market rate. In US generics Sun has enjoyed success in Para-IV/FTF launches; with its subsidiary Taro, Sun is likely to strengthen its base business in the region, focusing on niche technologies and therapy areas. The non-US export business is also gathering momentum; the alliance with Merck & Co is likely to provide a fillip over the long term. Sun has a strong balance sheet with virtually no debt and cash to the tune of $1bn.
Larsen and Toubro: L&T enjoys premier position in terms of size, execution capability and diversification in the industry and is well placed to participate in any upswing in the infrastructure spending in the country. Its expansion into the power, defense and shipbuilding sectors are likely to create new growth opportunities in the coming years. Overseas expansion would help it maintain order inflows despite a sharp slowdown in the domestic market. With a comfortable gearing, it is better placed to increase participation in development projects. With superior profitability and cash flows, it is best placed to face any industry headwinds.
Which are the stocks/sectors you will avoid in 2012? Why?
Given the very low valuations there is almost no sector we would avoid in total. 2012 demands an approach where investors should also focus on a bottom-up approach across sectors. However, some of the stocks that have been good preservers of value during the volatility of the past six months may potentially underperform when the market regains momentum.
Which are the key events/triggers (both negative and positive) to look for from the stock market perspective in 2012?
Positive: Passage of important economic legislation by parliament; cutback in fuel subsidy; reversal of hikes in repo rate and CRR; Quick end to the legal process in the 2G scam
Negative: Extended stalemate in government decision making
