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India Equity Research Reports, IPO and Stock News
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What’s in the Price?: A Market, Sector and Stock Guide
: The recent fall in Indian equities is arguably due to Key Debate •
fears that growth in India is likely to surprise on the downside.
Indeed, some investors are debating India’s mid- to long-term growth
story, i.e., it is not sustainable due to India’s inability to contain
inflation. What’s now in the price and is this attractive enough for
investors to consider buying equities?
: Our The market is implying an equity risk premium of 6.2% •
residual income model indicates that implied equity risk premium is
at 6.2%. At the current long bond yield, this implies a long term return
of 14.3%. We think investors are receiving a reasonable risk
premium for buying Indian equities. Put another way, the market is
assigning 59% of the MSCI Index value to future growth. This is just
year average and puts equities in a slightly more than the trailing five
positive light for long-term investors.
pears to be particularly bullish At the sector level, the market ap •
on consumer stocks while appearing less gung-ho on cyclicals
: Consumer staples are pricing in excess of 20% and financials
growth for the next five years. In contrast, the number is 11% for
industrials and 7% for financials. Generally speaking, Morgan
optimistic than the consensus. Stanley analysts appear to be less
Thus, for most sectors, (Consumer Staples, Healthcare, Technology,
Telecoms and Utilities), the growth embedded in share prices is
lower when we use the consensus estimates for the next three years.
The exception is Materials where the Morgan Stanley analyst is more
bullish on near term earnings prospects.
: Our work at the stock level shows that the Stock level standouts •
market is pricing in negative EPS growth for the next five years for 18
stocks from our coverage universe (6 in financials, 3 in industrials, 3
hnology and 1 in utilities). From our in energy, 4 in materials, 1 in tec
vely valued stocks (the ones with coverage universe, the most attracti
the least amount growth embedded in the price) and vice versa are
listed on page 4. The sector level analysis is from page 5 onwards.
Of course all this analysis has to be combined with what investors
that companies will deliver. believe is the likely growth
: We compare the implied growth rates for stocks in our Key Ideas •
coverage universe with our analyst ratings and the implied growth
rate for the respective sector to assess potential areas for mispricing.
The most undervalued stocks using these filters are Adani Power,
Lanco, Tata Steel, Jaiprakash Associates, Oberoi Realty, Dr.
Reddy’s, State Bank of India, Coal India and Mahindra & Mahindra.
The richest valuations appear to be in BHEL, Hindustan Unilever,
frastructure, Glaxo Smithkline, HDFC, Reliance Capital, GMR In
National Aluminium, TCS and Tata Power.
: We use our growth discounter model to compute the implied EPS Our Methodology •
growth. This model has a two stage process. We first compute the EPS growth that
the market is discounting (g(mkt)) using the Gordon’s Growth Model. We then
compute the EPS growth that the sector or stock is discounting by using the following
identity:
PE (Sector or Stock)/PE for mkt = ((1+g(sector/stock))^5)/(1 + g(mkt)))^5)
We use the F2013 PE for both the sector/stock and the market given that we have
explicit forecasts the next two years for both Morgan Stanley and the consensus.
Thus the model gives us the growth embedded in the stock or sector for the ensuing
five years.
e sector or stock will l. It assumes that th Of course there are assumptions in this mode
grow at the market rate for year 6 onwards. It also assumes that the sector and stock
multiples converge to the market multiple beyond five years. This penalizes growth
sectors but is largely balanced out by the assumption that all sectors have a beta of
one (which flatters growth sectors).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
What’s in the Price?: A Market, Sector and Stock Guide
: The recent fall in Indian equities is arguably due to Key Debate •
fears that growth in India is likely to surprise on the downside.
Indeed, some investors are debating India’s mid- to long-term growth
story, i.e., it is not sustainable due to India’s inability to contain
inflation. What’s now in the price and is this attractive enough for
investors to consider buying equities?
: Our The market is implying an equity risk premium of 6.2% •
residual income model indicates that implied equity risk premium is
at 6.2%. At the current long bond yield, this implies a long term return
of 14.3%. We think investors are receiving a reasonable risk
premium for buying Indian equities. Put another way, the market is
assigning 59% of the MSCI Index value to future growth. This is just
year average and puts equities in a slightly more than the trailing five
positive light for long-term investors.
pears to be particularly bullish At the sector level, the market ap •
on consumer stocks while appearing less gung-ho on cyclicals
: Consumer staples are pricing in excess of 20% and financials
growth for the next five years. In contrast, the number is 11% for
industrials and 7% for financials. Generally speaking, Morgan
optimistic than the consensus. Stanley analysts appear to be less
Thus, for most sectors, (Consumer Staples, Healthcare, Technology,
Telecoms and Utilities), the growth embedded in share prices is
lower when we use the consensus estimates for the next three years.
The exception is Materials where the Morgan Stanley analyst is more
bullish on near term earnings prospects.
: Our work at the stock level shows that the Stock level standouts •
market is pricing in negative EPS growth for the next five years for 18
stocks from our coverage universe (6 in financials, 3 in industrials, 3
hnology and 1 in utilities). From our in energy, 4 in materials, 1 in tec
vely valued stocks (the ones with coverage universe, the most attracti
the least amount growth embedded in the price) and vice versa are
listed on page 4. The sector level analysis is from page 5 onwards.
Of course all this analysis has to be combined with what investors
that companies will deliver. believe is the likely growth
: We compare the implied growth rates for stocks in our Key Ideas •
coverage universe with our analyst ratings and the implied growth
rate for the respective sector to assess potential areas for mispricing.
The most undervalued stocks using these filters are Adani Power,
Lanco, Tata Steel, Jaiprakash Associates, Oberoi Realty, Dr.
Reddy’s, State Bank of India, Coal India and Mahindra & Mahindra.
The richest valuations appear to be in BHEL, Hindustan Unilever,
frastructure, Glaxo Smithkline, HDFC, Reliance Capital, GMR In
National Aluminium, TCS and Tata Power.
: We use our growth discounter model to compute the implied EPS Our Methodology •
growth. This model has a two stage process. We first compute the EPS growth that
the market is discounting (g(mkt)) using the Gordon’s Growth Model. We then
compute the EPS growth that the sector or stock is discounting by using the following
identity:
PE (Sector or Stock)/PE for mkt = ((1+g(sector/stock))^5)/(1 + g(mkt)))^5)
We use the F2013 PE for both the sector/stock and the market given that we have
explicit forecasts the next two years for both Morgan Stanley and the consensus.
Thus the model gives us the growth embedded in the stock or sector for the ensuing
five years.
e sector or stock will l. It assumes that th Of course there are assumptions in this mode
grow at the market rate for year 6 onwards. It also assumes that the sector and stock
multiples converge to the market multiple beyond five years. This penalizes growth
sectors but is largely balanced out by the assumption that all sectors have a beta of
one (which flatters growth sectors).
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