Oil Trips, Hail Equities - India Strategy - Antique

The Indian economy is seeing noticeable changes, for better, after a long time in recent past. Crude oil and gold prices have slumped, making us believe that India is past its CAD nightmare, which should eventually help INR recover over next few quarters. WPI inflation is at 3-year low, indicating that worst is behind as far as price rises are concerned, which will encourage RBI to take more aggressive stance towards rate-cuts. We believe that these developments will support market valuations in CY13, despite political uncertainty.

Lower import bill will help arrest CAD, significant positive for Indian equities

India's Current Account Deficit (CAD) worsened to US$33b in 3QFY13, from US$22b in 2QFY13 and US$16b in 1QFY13, fueled by rising crude and gold imports. We estimate that CAD will reverse in 4QFY13, and will head meaningfully lower if oil and gold prices continue to soften. A basic calculation will suggest that a 10-15% decline in crude oil and gold prices will result into lower CAD by approximately USD18-20bn in FY14 (USD95bn in FY13). We believe that this will act as a significant re-rating catalyst for Indian equities.

Correction in oil prices; better times ahead for oil PSUs and 4-wheelers

We estimate a measured price hike of INR4/ltr in diesel over FY14 and INR3/ltr over FY15, coupled with direct transfer of cash subsidies in LPG and kerosene, would bring down total u/r to INR1100bn, benefitting companies like BPCL. Upstream companies like ONGC who is currently earning ~USD45/bbl would see net realizations move toward USD60/bbl, leading to a 30% jump in FY15e earnings. We further note that even without any further hike in diesel prices, a ~10% fall in average Brent price at USD100/bbl would lower upstream subsidy by over 28% YoY in FY14e and hence result in earnings upside for the company. ONGC and BPCL are top picks in the sector. We like Maruti, as the biggest beneficiary of lower petrol price.

Inflation moderating; rate cuts will boost outlook for financials

There is increasing probability that RBI will take more proactive approach towards policy rate-cuts in the wake of declining inflation, and falling growth in the economy. We see May 3 meeting as the first step towards that. Sustained rate cuts will support market valuations, in particular, financial stocks. We like ICICI bank and Yes bank in the space. We also like L&T as the biggest beneficiary of any possibly recovery in capex cycle in India.

Lower commodity prices augur well for several sectors

We are witnessing correction in commodities across sectors. This, coupled with possible appreciation in INR, will significantly improve cost structure of many sectors, like Autos and Auto ancillaries, FMCG, Engineering, Chemicals, etc. We like consumer companies like Asian Paint, HUL, auto component manufactures like tyres, batteries, etc, benefiting from the trend.

Maintain Sensex target; See improving outlook

We expect Sensex earnings to grow by 10% in FY13, but pick up to 17% in FY14. Based on our estimates, Sensex will post earnings CAGR of 14% over FY10-14e, after remaining flat over FY08-10. Our CY13-end Sensex target is 21093, based on 15x FY14 Sensex EPS. We believe that rate cuts, lower inflation and improving macros will act as key triggers for markets in future. We remain bullish on Private banks and NBFCs, 4- wheeler automobiles, pharmaceuticals and public sector utilities, Select oil companies, consumer monopolies (ITC, Nestle), and select infrastructure stocks.

Source : Equity Bulls

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