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Pricing in the Bear Case: Three Overweightrated
Stocks with Limited Downside
A handful of stocks under MS India coverage are trading
within a few percentage points of our bear case
valuations. We identify three stocks, namely, Jaiprakash
Associates, Tata Motors, and Oberoi Reality. These
stocks are rated Overweight, trading within c. 10% of our
bear case and for which there is an identifiable catalyst
that could push the shares higher over the next six
months.
Going Overweight Consumer Discretionary
We are incrementally more positive on domestic
cyclicals as the mid-cycle Central Bank policy action is
coming closer to an end (see Chetan Ahya's June 30,
note,“Nearing the End of Rate Hike Cycle), and the
government is showing signs of resuming reform action.
Accordingly, we are bullish on Industrials and Consumer
Discretionary. We are now going overweight Consumer
Discretionary by cutting Energy by 100bp. We are
already overweight industrials. Consumer Discretionary
is a classic contra interest rate cycle play, and the sector
performance tends to trough with peaking rates
Focus List Changes: Adding Tata Motors,
Removing Reliance Industries
We are adding Tata Motors to our Focus List and
removing Reliance Industries (see Vinay Jaising’s report
today downgrading the stock to EW), where we see
limited near-term triggers. Tata Motors, apart from
trading close to our bear case, has distinct triggers in its
overseas business even though the local business is
going through a cyclical correction. We think the bad
news on the local business is in the price, whereas the
Street may be underestimating the upside from the
launch of Evoque.
While the market remains in the range (5,300-6,300 on
the Nifty) for the near term, the case for a stronger 4Q11
and beyond is building. For now, we remain focused on
stock picking given relatively high correlations across
stocks. We are overweight Consumer Discretionary,
Energy, Industrials, Telecoms, and Utilities and
underweight Consumer Staples, Materials, Healthcare,
and Financials. We are Neutral on Technology.
Consumer Discretionary Is the Classic Late Cycle Rate Play
Consumer discretionary stocks
(includes retail, autos, media)
tend to trough with peaking
rates. The RBI has taken us
closer to the end of the rate
hike cycle.
• To that extent, we closed the
underweight position we had on
Consumer Discretionary for
several months in May. We are
now going overweight at the
expense of Energy by 100bp.
• We are adding Tata Motors to
our Focus List and removing
Reliance Industries. Reliance
continues to face challenges on
E & P and the earnings appear
tepid – essentially there is an
absence of triggers for the stock
despite its underperformance.
•
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