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India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
What to BUY after this correction
Post correction, markets trading at 1-yr fwd P/E of 14.5x
Large cap picks: ICICIBC, SBIN, BJAUT, TTMT, CRG (click on company name below for report)
Small cap picks: SINF, PSYS, KECI (click on company name below for report)
Sharp market correction; some sectors and stocks corrected more
Since the recent peak on 5th November, the Indian equity market has corrected 14% due to
concerns over potential impact on corporate earnings and economic growth of sticky
inflation, monetary tightening, political uncertainty and persistence of tight liquidity. Some
sectors – like real estate, construction, financials, engineering - have corrected lot more.
Valuations seem reasonable, but difficult to call a bottom
At current level Sensex is trading at PE of 14.5x 1-year forward – at 5% discount to the long
term average of 15.2x. In a situation where new concerns are emerging everyday, it is
difficult to call a market bottom, but in similar circumstances earlier, Sensex traded at trough
valuations of 11-13x. Average of such a valuation range on today’s EPS would imply a worst
case Sensex of 15300.
Many stocks appear attractive among large caps…
While calling the market in near term is difficult we do know there are several fundamentally
strong companies that are trading at attractive valuations now. ICICI Bank, State Bank of
India, Tata Motors, Bajaj Auto, and Crompton Greaves are examples among large caps.
… mid caps…
IRB Infrastructure, Shree Renuka Sugars, Indian Hotels, Housing Development &
Infrastructure, and Sintex Industries are key mid-cap picks.
And small Caps…
Simplex Infra, Persistent systems, and KEC International.
Some stocks and sectors corrected far more than the market
Since its recent peak (5 November), the Indian market (as represented by Sensex) has
corrected 14%. That may not sound like much, given the accumulation of headwinds to
the market, such as:
1 Sticky inflation leading RBI to restart monetary policy tightening;
2 Withdrawal of FII funds after a record year of inflows;
3 Combination of infrastructure order slowdown and liquidity deficit depressing IIP
growth;
4 Successive scandals putting pressure on the ruling coalition and leading,
potentially, to populist policy-making in the near term; and
5 Unrest in Middle East threatens to push up oil prices further – potentially leading to
increase in India’s current account deficit and inflation (or fiscal deficit).
However, even though the market has corrected by 14%, several stocks and sectors
have declined much more in the same period. Banks and financials, engineering and
construction, infrastructure, automobiles and property have suffered the most. The
market’s concern seems to be primarily on rate sensitive sectors.
Outperformers, understandably, were from the defensive sectors: regulated utilities, IT
& telecom and also from commodities – e.g. Nalco, Sesa and NMDC.
Is this the market bottom?
An honest answer is: We don’t know. From a fundamental analysts’ perspective, it is
always difficult to predict absolute tops and bottoms of the market. But we can
confidently say that for quite a few stocks and sectors the risk-return trade-off appears
to be in the investors’ favour.
1 While bad news abounds – particularly on the politics and policy-making front – we
believe a few silver linings could appear over the near term and the long term;
2 Inflation, particularly primary inflation, is likely to decline in the near term.
Vegetable prices in urban retail outlets have declined 30-50% in the past two
weeks, and this decline is likely to be reflected in headline inflation as well;
3 Recent data on fiscal deficit (43% down compared to April-Dec last year) takes
away some concern about liquidity tightness;
4 After the ministerial portfolio reshuffle, the road-orders award process seems to be
accelerating slightly (as companies like IRB stated recently);
5 Following the state assembly elections in April and May, the government should be
relatively free from political compulsions of populist policy making.
At its current level, the Sensex is trading at PE of 14.5x 1-year forward, at a 5%
discount to the long-term average of 15.2x. This is by no means the historical trough.
Sensex went down to 9-10x PE on three occasions in past three years: September
2011, May 2003 and March 2009. However, such trough valuations were reached only
in times of global turmoil: After the 9/11 terrorist attacks on the US, and during the
financial crisis of 2008-09. Today, we are in a situation where global economic
conditions are actually improving.
Today’s situation seems similar to the period between mid-2004 to mid-2006, when we
had concerns about the government’s business friendliness (in the aftermath of 2004
general elections), or concerns about interest-rate spikes and commodity price spikes
(during June-July 2006). During this period, trough valuation of the market used to be in
the range of 11x to 13x. If the market reaches those valuation ranges on today’s
earnings estimates, the bottom of Sensex could be between 14,100 to 16,600. That’s a
rather broad range, but taking the middle point of that range (for lack of any better
alternative) gives us a theoretical “bottom” of 15,300 on Sensex.
Stock picks: Large caps
We have defined stocks with market capitalisation larger than USD 3bn as large caps,
those between USD 500m to USD 3bn as mid-caps, and those with market
capitalisation lower than USD 500m as small caps.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
What to BUY after this correction
Post correction, markets trading at 1-yr fwd P/E of 14.5x
Large cap picks: ICICIBC, SBIN, BJAUT, TTMT, CRG (click on company name below for report)
Mid cap picks: IRB, SHRS, HDIL, SINT, IH (click on company name below for report)
Small cap picks: SINF, PSYS, KECI (click on company name below for report)
Sharp market correction; some sectors and stocks corrected more
Since the recent peak on 5th November, the Indian equity market has corrected 14% due to
concerns over potential impact on corporate earnings and economic growth of sticky
inflation, monetary tightening, political uncertainty and persistence of tight liquidity. Some
sectors – like real estate, construction, financials, engineering - have corrected lot more.
Valuations seem reasonable, but difficult to call a bottom
At current level Sensex is trading at PE of 14.5x 1-year forward – at 5% discount to the long
term average of 15.2x. In a situation where new concerns are emerging everyday, it is
difficult to call a market bottom, but in similar circumstances earlier, Sensex traded at trough
valuations of 11-13x. Average of such a valuation range on today’s EPS would imply a worst
case Sensex of 15300.
Many stocks appear attractive among large caps…
While calling the market in near term is difficult we do know there are several fundamentally
strong companies that are trading at attractive valuations now. ICICI Bank, State Bank of
India, Tata Motors, Bajaj Auto, and Crompton Greaves are examples among large caps.
… mid caps…
IRB Infrastructure, Shree Renuka Sugars, Indian Hotels, Housing Development &
Infrastructure, and Sintex Industries are key mid-cap picks.
And small Caps…
Simplex Infra, Persistent systems, and KEC International.
Some stocks and sectors corrected far more than the market
Since its recent peak (5 November), the Indian market (as represented by Sensex) has
corrected 14%. That may not sound like much, given the accumulation of headwinds to
the market, such as:
1 Sticky inflation leading RBI to restart monetary policy tightening;
2 Withdrawal of FII funds after a record year of inflows;
3 Combination of infrastructure order slowdown and liquidity deficit depressing IIP
growth;
4 Successive scandals putting pressure on the ruling coalition and leading,
potentially, to populist policy-making in the near term; and
5 Unrest in Middle East threatens to push up oil prices further – potentially leading to
increase in India’s current account deficit and inflation (or fiscal deficit).
However, even though the market has corrected by 14%, several stocks and sectors
have declined much more in the same period. Banks and financials, engineering and
construction, infrastructure, automobiles and property have suffered the most. The
market’s concern seems to be primarily on rate sensitive sectors.
Outperformers, understandably, were from the defensive sectors: regulated utilities, IT
& telecom and also from commodities – e.g. Nalco, Sesa and NMDC.
Is this the market bottom?
An honest answer is: We don’t know. From a fundamental analysts’ perspective, it is
always difficult to predict absolute tops and bottoms of the market. But we can
confidently say that for quite a few stocks and sectors the risk-return trade-off appears
to be in the investors’ favour.
1 While bad news abounds – particularly on the politics and policy-making front – we
believe a few silver linings could appear over the near term and the long term;
2 Inflation, particularly primary inflation, is likely to decline in the near term.
Vegetable prices in urban retail outlets have declined 30-50% in the past two
weeks, and this decline is likely to be reflected in headline inflation as well;
3 Recent data on fiscal deficit (43% down compared to April-Dec last year) takes
away some concern about liquidity tightness;
4 After the ministerial portfolio reshuffle, the road-orders award process seems to be
accelerating slightly (as companies like IRB stated recently);
5 Following the state assembly elections in April and May, the government should be
relatively free from political compulsions of populist policy making.
At its current level, the Sensex is trading at PE of 14.5x 1-year forward, at a 5%
discount to the long-term average of 15.2x. This is by no means the historical trough.
Sensex went down to 9-10x PE on three occasions in past three years: September
2011, May 2003 and March 2009. However, such trough valuations were reached only
in times of global turmoil: After the 9/11 terrorist attacks on the US, and during the
financial crisis of 2008-09. Today, we are in a situation where global economic
conditions are actually improving.
Today’s situation seems similar to the period between mid-2004 to mid-2006, when we
had concerns about the government’s business friendliness (in the aftermath of 2004
general elections), or concerns about interest-rate spikes and commodity price spikes
(during June-July 2006). During this period, trough valuation of the market used to be in
the range of 11x to 13x. If the market reaches those valuation ranges on today’s
earnings estimates, the bottom of Sensex could be between 14,100 to 16,600. That’s a
rather broad range, but taking the middle point of that range (for lack of any better
alternative) gives us a theoretical “bottom” of 15,300 on Sensex.
Stock picks: Large caps
We have defined stocks with market capitalisation larger than USD 3bn as large caps,
those between USD 500m to USD 3bn as mid-caps, and those with market
capitalisation lower than USD 500m as small caps.
Stock picks: Mid-caps
Stock picks: Small caps
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