The Indian equities market has clearly been a disaster in 2011, turning out to be among the worst performers. But 2012 does not look too bright either, with analysts forecasting that an immediate rebound isn’t likely just yet.
In its detailed India Strategy report, HSBC says it rates India ‘neutral’ within Asia, with a Sensex target of 16,500 for 2012.
Though HSBC sees a few positives emerging, despite the pressure on the rupee, the problems are the fiscal situation and strain on corporate earnings. This is because valuations have come off sharply with the Sensex down a hefty 25 percent in rupee terms in 2011 and EPS (earnings per share) rolled forward a year. Besides, monetary tightening is also at an ‘inflexion point’ and the bulk of EPS downgrades are over.
Calling 2011 a ‘year to forget’, the HSBC report says the Sensex fell 37 percent in dollar terms on a mix of self-inflicted paralysis in policymaking, stubbornly high inflation (which resulted in tighter monetary policy) and high oil prices.
While the MSCI India index trades at an 11.9x PE ratio (price to earnings ratio) on 2012 estimates – well below its long-term mean averages of 14.5x PE – the upside looks limited in the near term on the potential downside to earnings and valuations relative to the rest of Asia, HSBC India strategist Jitendra Sriram said in the report.
According to the brokerage, there will be four investment themes for 2012:
Amid an uncertain global environment and slowing domestic demand, HSBC says investors should position themselves defensively based on the following four themes: 1) earnings resilience (like Power Grid, ITC, Idea); 2) structural growth (Dr Reddy’s, Maruti, TCS); 3) balance sheet strength (HDFC, Hero MotoCorp, IndusInd Bank, Coal India); and 4) valuation anomalies (Cairn, Hindustan Zinc, Canara Bank).
On earnings resilience as a theme, HSBC says it looks at the resilience of corporate earnings in a cyclical downturn and asks where earnings can buck the trend of earnings downgrades.
Betting on domestic plays, it says: “The headwind of slower domestic market growth and the continuing worries around the sovereign debt crisis in Europe make us veer towards domestic growth stories despite the slowdown in growth.”
On franchise value or structural growth as a theme, it says it looks at companies that can grow because they benefit from structural changes in demand, market share gains and/or have strong pricing power. Recommending a move to generics as an investment option, the report says rising healthcare costs and a number of drugs going off-patent are likely to prompt a strong move towards branded generics.
(This writer does not hold any of the stocks mentioned in this report)