India Heading For Sub 7% GDP Growth in FY12: Goldman Sachs

Goldman Sachs

India Research

It is a GS contention that FY12 earnings for Sensex companies have been over-estimated by as much as 22 per cent by consensus street analysts. If FY12 Sensex earnings come a cropper at just about Rs 1050-1100 then a very shaky base case for the Sensex would be 15000-16000.

Construction, Real Estate, Infrastructure and Cement will be the biggest sufferers in a stagflation scenario. Top sells will include SBI, BOI and ACC. 
Scenario to 7.5% and 6.9% GDP growth

We have run two scenarios for our coverage in India. The first assumes a further 75bps hike to rates, oil prices of $115/bbl and GDP growth of 7.5% in FY2012. The second, more aggressive scenario, assumes a further 150bps hike to rates,oil prices of $130/bbl and GDP growth of 6.9% in FY2012. Under the first scenario, we conclude that our average earnings would be cut by 6.4% (taking them 16% below current consensus) and under the second scenario, our earnings would be cut by 12.4% (going to 22% below consensus). 

GS forecasting 7.5% inflation in FY 2012

Our ECS team has increased their forecast for inflation from 6.7% to 7.5% for FY12. In this note, we explore how inflation has impacted corporate profitability and valuations in previous cycles and seek to identify companies that could be shielded in a difficult macro environment. 

High inflation a harbinger of lower growth, lower margins and compressed multiples

Previous periods of high inflation in India have led to a 200bps compression in EBIT margins, 250-300bps compression in net margins and a 15% contraction to earnings multiples. Against this backdrop, we note that consensus is forecasting a 70bps improvement to EBIT margins and a 30bps improvement to net margins in CY2011E. Our earnings forecasts for our coverage group are 10% below consensus in FY 2012. 

We expect consensus earnings to decline in the months ahead. In this note we seek to identify companies that are relatively insulated from a dynamic of decelerating growth, as well as those particularly exposed to the same.

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