Morgan Stanley
India Equities Research
What are the risks to earnings? What is the impact of potential funding stress?
Worse, Tail risks not in the price
The known "unknowns" are an uncertain DM world, weak domestic policy response, oil prices, inflation, high rates, slowing growth, and alleged corruption scandals. During the 2008 crisis, Indian earnings outperformed, but equities fell due to a large outflow of capital. A recession with no seizing up of capital markets is India's best case in the context. Massive global stimulus or a breakdown in capital markets will hurt India on a relative basis a la 2008.
Key Debate: We have cut our global and India GDP growth forecasts. What's the impact on earnings and how much is in the price?
F2013 Sensex earnings cut by 3ppt to 15%
Reflexivity is at work – lower share prices are affecting growth and vice versa. F2012 earnings growth forecast is unchanged at 18%. Consensus is expecting 20% and 17% growth for F2012 and F2013, respectively. Earnings have support from decade-low gross margins and strong balance sheets, but face headwinds from fragile global growth. We think broad market earnings growth may have troughed.
Sensex target implies returns of 11% to Dec-11 and 35% to Dec-12
Following the cut in absolute targets by our fellow strategists, notably on EM and AXJ, our new Sensex target for Dec-11 is down 15% to 18,850. We roll out our Dec-12 target at 22,750. The Dec-12 target implies P/E multiples of 18x and 16x on F2012 and F2013 earnings, respectively.
Key Positives for Indian equities
Corporate activity is surging.
Policy announcements have picked up pace.
The sowing season is going well, and this is good news for prospective rural incomes and food inflation.
Valuations look compelling on an absolute basis.
Interest rates could be peaking.
Our proprietary sentiment and market timing indicators are firmly perched in buy zone. What to buy and sell; still a stock picker's market We remain focused on domestic cyclicals versus global cyclicals with emphasis on discretionary names. Our top picks include DRRD, INFO and MM.
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