Earnings growth will be slow, the rupee will be under pressure and political uncertainties will worsen as we approach the general elections
According to ICICI Securities, even though the economic climate has improved considerably and the stock market has responded positively, expectations need to be tempered. According to the brokerage, “the earnings downgrade cycle is not over yet, current account deficit (CAD) and fiscal deficit remain big concerns, political uncertainty in H2CY13 could be a key factor and there is limited scope for further rerating of the market, 2012 having front-ended market returns.” In other words, the revival in economic growth, a possible interest rate cut on the back of likely lower inflation and more reform announcements, better macro indicators in the US and China, the world’s largest economies, have been largely factored in by the market.
ICICI Securities expects an 11% in Nifty EPS growth in FY14 and 13% growth in FY15 (adjusted downward by 3% and 1% respectively to provide for likely downgrades). It has set a December 2013 Nifty target is 6,550, an upside of ~9%, based on a P/E of 14x FY15E. This looks reasonable, except that December 2013 will not discount the 2015 earnings given the political uncertainties as we approach the general elections.
The brokerage sees significant risk to the earnings of top contributors to FY14 earnings—Tata Motors, banks, oil and gas, and capital goods companies. ICICI Securities recommends an overweight stance on IT, telecom and cement, and underweight on capital goods, power and real estate. Among frontline stocks, the brokerage sees 22 companies in the Nifty 50, which contribute over 85% of Nifty earnings growth for FY14E, while the top 12 contribute over 66%. Interestingly, it sees significant risk to consensus earnings from:
Banks: On account of a margin squeeze, PSU banks’ earnings would be further impacted by negative surprise on asset quality.
Tata Motors: On account of under-estimation of its R&D expenses and slower than expected domestic recovery.
RIL: Gross refining margin could disappoint.
ONGC: Less aggressive retail price hikes and continued 40% burden sharing
BHEL, L&T: More downside to BHEL’s earnings due to weak order inflow and stretching of execution. Stretched execution as well as order cancellation could impact L&T’s earnings, too.
Cairn India: More downside to earnings due to higher income tax rate and slower than expected production ramp-up.
ICICI Securities identifies the problematic macro issues as well. CAD is likely to end FY13 at a crisis level of 4.75% and FY14 at 3.9%. It also expects the rupee to fall to 57/dollar in FY14, which would feed into inflation as well as domestic liquidity crunch. Fiscal deficit too is likely to be stretched, despite the best efforts of the finance minister. We estimate FY13 fiscal deficit at 5.9% and FY14 at 5.2%, hardly a comfortable position. Risk of political uncertainty in H2CY12 is high, as political parties supporting the Congress are likely to find the time right to attempt shedding their anti-incumbency.
Kotak had put this as one of the top picks of 2013 along with ICICI Bank and Marico, even though the stock was exactly at the same level as it was in December 2011, when the Sensex was 15,455, as compared to 19,664 now
We have often mentioned that securities analysts and fund managers are often blind about corporate governance issues. Here is one more excellent example of that. Kotak Securities picked Arshiya International as one of the top five stocks for 2013. This company which is largely unknown to the investing public was placed in the august company of such blue chip stocks as ICICI Bank, Marico, Petronet and Engineers India as one of the tops picks for 2013. Arshiya is into a business called Foreign Trade & Warehousing Zone (FTWZ). Importers can import and stock products in the FTWZ and draw their stocks as per their needs. Kotak touted the stock as “unique business model, new in India, and adopted by Arshiya. The company is also ramping up its container rail business which will effectively complement its FTWZ business. The business model of Arshiya is completely integrated and a one-stop-shop to cater to the point-to-point logistics requirement of the customers”. Well argued by Kotak analysts as usual, and backed by excel wizardry that would pinpoint the exact profit the company would make five years later. But alas, instead, the stock is in a downward spin. It hit the lower circuit for three days in a running including today, crashing from Rs121.70 on 8th January to Rs70.20 today. Kotak has promptly suspended its coverage of the stock—whatever that means. What went wrong?
According to DNA newspaper, Arshiya is suffering from sharply reduced business, has sacked 290 employees and has not paid salaries since September. The disgruntled employees have also alleged financial irregularities. The sacked staff visited the company’s office on Tuesday and threatened the regular employees to stop working or face dire consequences. The police had to be called.
So, what does Kotak have to say about its chosen stock? According to Moneycontrol (http://www.moneycontrol.com/news/business/arshiya-down-20-for-2nd-day-kotak-suspends-coverage_805825.html) Kotak said in a note to clients, “The stock has declined by 40% over the last 12 months, largely driven by slowing economic growth which has led to less than estimated growth in segments like FTWZ/Container rail and high debt position. Given the above and lack of clarity on the alleged wrongdoing by the management we are suspending coverage on the stock till clarity emerges.”
Clearly, either the brokerage is clueless about what is really going on inside the company (often analysts are) or it had some vested interest in putting Arshiya as one of top stocks of 2013. After all, economic growth did not slow down in the last two weeks to affect only this one company so badly. And to admit to recommending a stock which has problems of governance would be affect its credibility too badly.
After the stock was badly hit, the company organised a concall where Samir Arora, the star Singapore-based fund manager, who lost a lot of money betting on the software bubble in 2000-01, grilled the management as did Pathik Gandhotra, partner of Don Capital. A lot of smart guys had bet on Arshiya’s “unique business model.”
The promoters denied that there was any margin call from the bankers but, the way Arshiya stock has been hitting the lower circuit for three days in a row shows that there are indiscriminate sellers. Such indiscriminate sellers are often financiers.
Arshiya’s stock price has completely bucked the bull market of the last one year. While the Sensex was 15,455 on 30th December 2011 and is 19,664 now, a rise of 27%, Arshiya was Rs127.50 on 30th December 2011 and It was still stuck at Rs125 (on 4 January 2013) before the stock got hit. This alone should have alerted the smart analysts and fund managers.
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