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The better half
Over the past decade, a successful stock-picking strategy has been as
rewarding as sector selection strategy. We believe this trend will continue as
our study of stock pairs shows that the correlation between performances
has weakened in recent years, emphasising the importance of stock picking.
We analysed 18 pair trades and picked out the potential winners. We prefer
M&M over Maruti, IDFC over REC, ONGC over Cairn, HCL Tech over Wipro,
Zee over Sun TV, Jubilant over Titan and Sun Pharma over Cipla.
Stock selection key to outperformance
Over the past 10 years, a successful sector-selection strategy (invest in all stocks in
the outperforming sectors) would have delivered 27% outperformance.
Whereas a successful stock-picking approach (invest in only outperforming stocks
across all sectors) would have beaten the index by 33%.
A successful long-short tactic would have delivered an absolute return of 47% over
the past five years.
In the sideways market that we are in, the threshold for outperformance becomes
lower, making stock selection even more important.
Stock correlation on a decline
Company-specific events have become a bigger driver of stock-price performance
recently.
Our study of 92 pairs of stocks across our coverage universe reveals the average
correlation between stock performance as measured by R2
has dropped from 30.5%
three years ago to 19.3% over the past 12 months.
We have seen visible reduction in stock-performance correlation in IT services, banks,
property, cement and telecoms.
Our key ideas
We compared 18 pairs of stocks to pick out winners over the next six to 12 months.
Among the pairs, our key ‘buy’ ideas generally offer a better earnings trend.
ICICI Bank vs HDFC Bank, ONGC vs Cairn and Bharti vs Idea Cellular are the key
contrarian bets given the recent stock-performance trend.
Our other high-conviction pair ideas include M&M over Maruti, Gail over Gujarat
Petronet, IDFC over Rural Electrification, HCL Tech over Wipro, Zee Entertainment
over Sun TV, Jubilant Food over Titan and Sun Pharma over Cipla.
Summary of the pair ideas
Buy Sell Key argument
ICICI HDFC Bank ICICI's ROA and ROE will improve going forward and reduce the gap with HDFC Bank.
Bank of Baroda
(BoB)
Punjab National Bank
(PNB)
BoB has a better asset quality and investment in liability franchise has helped to
improve CASA ratio.
IDFC Rural Electrification IDFC is a more diversified play on uptick of investment in infrastructure and likely to see
faster growth
Bharti Idea Cellular Bharti’s superior 3G footprint and a better non-mobile business will mean a better ability
to gain market share. Regulatory payments risk higher for Idea with limited free cash
flows and rising debt burden.
Zee Ent Sun TV Sun TV's 60% premium rate to Zee bouquet in DTH unsustainable. Zee is better placed to
benefit from DTH boom and cable digitisation and has a more diversified revenue base.
Change of government in Tamil Nadu a negative for Sun TV.
Tata Steel Steel Authority of India Tata steel has better visibility on expansion plans, higher earnings growth and cheaper
valuations. SAIL has higher risk of delays.
Mahindra &
Mahindra (M&M)
Maruti M&M enjoys better industry growth, lower competitive pressures, stronger product
pipeline.
ITC Hindustan Unilever HUL faces much higher competitive pressures than ITC. Also ITC's FY12 volume growth
will be better than historical.
Godrej Consumer
(GCPL)
Dabur Dabur faces higher competitive intensity than GCPL. Also, GCPL's earnings estimates carry
an upside risk while Dabur's management is guiding down expectations.
ONGC Cairn The potential Cairn-Vedanta deal will be a positive for ONGC vis-à-vis Cairn. Possibility of
some favourable policy action ahead of the proposed ONGC FPO.
Gas Authority (Gail) Gujarat State Petronet
(GSPL)
Gail's tariffs have been recently reviewed whereas GSPL faces the risk of tariff cut. Also,
some reforms ahead of ONGC FPO will be a likely positive for Gail as well.
Sun Pharma Cipla Sun's lifestyle oriented therapy profile and niche pipeline in the US is a positive. Cipla's
domestic growth under pressure and international business has a lower return.
DLF Unitech DLF's higher exposure to more secure office space is a positive. Lack of clarity on Unitech's
potential liability on the 2G scam issue. Potential deleveraging more obvious in DLF.
Jubilant Food Titan Jubilant's has superior store growth outlook and modest cost inflation pressures, also
modest guidance leave earnings upside. Titan's earnings estimates have a downside risks.
Power Grid NTPC Possibility of NTPC surprising negatively due to lower utilisation rates due to lower coal
supplies. Power Grid stable.
HCL Tech Wipro HCL Tech's focus on volume growth strategy has been working. Wipro's new organisation
structure will take time to deliver.
UltraTech Ambuja UltraTech's higher south exposure will help deliver higher earnings growth in FY12. Also,
medium term capacity addition/volume growth outlook better. Holcim's buying support for
Ambuja now over.
Tata Consultancy
(TCS)
Infosys TCS has been consistently beating its guidance while Infosys struggling to meet it. Infosys'
restructuring will take some time to deliver.
Source: CLSA Asia-Pacific Markets
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
The better half
Over the past decade, a successful stock-picking strategy has been as
rewarding as sector selection strategy. We believe this trend will continue as
our study of stock pairs shows that the correlation between performances
has weakened in recent years, emphasising the importance of stock picking.
We analysed 18 pair trades and picked out the potential winners. We prefer
M&M over Maruti, IDFC over REC, ONGC over Cairn, HCL Tech over Wipro,
Zee over Sun TV, Jubilant over Titan and Sun Pharma over Cipla.
Stock selection key to outperformance
Over the past 10 years, a successful sector-selection strategy (invest in all stocks in
the outperforming sectors) would have delivered 27% outperformance.
Whereas a successful stock-picking approach (invest in only outperforming stocks
across all sectors) would have beaten the index by 33%.
A successful long-short tactic would have delivered an absolute return of 47% over
the past five years.
In the sideways market that we are in, the threshold for outperformance becomes
lower, making stock selection even more important.
Stock correlation on a decline
Company-specific events have become a bigger driver of stock-price performance
recently.
Our study of 92 pairs of stocks across our coverage universe reveals the average
correlation between stock performance as measured by R2
has dropped from 30.5%
three years ago to 19.3% over the past 12 months.
We have seen visible reduction in stock-performance correlation in IT services, banks,
property, cement and telecoms.
Our key ideas
We compared 18 pairs of stocks to pick out winners over the next six to 12 months.
Among the pairs, our key ‘buy’ ideas generally offer a better earnings trend.
ICICI Bank vs HDFC Bank, ONGC vs Cairn and Bharti vs Idea Cellular are the key
contrarian bets given the recent stock-performance trend.
Our other high-conviction pair ideas include M&M over Maruti, Gail over Gujarat
Petronet, IDFC over Rural Electrification, HCL Tech over Wipro, Zee Entertainment
over Sun TV, Jubilant Food over Titan and Sun Pharma over Cipla.
Summary of the pair ideas
Buy Sell Key argument
ICICI HDFC Bank ICICI's ROA and ROE will improve going forward and reduce the gap with HDFC Bank.
Bank of Baroda
(BoB)
Punjab National Bank
(PNB)
BoB has a better asset quality and investment in liability franchise has helped to
improve CASA ratio.
IDFC Rural Electrification IDFC is a more diversified play on uptick of investment in infrastructure and likely to see
faster growth
Bharti Idea Cellular Bharti’s superior 3G footprint and a better non-mobile business will mean a better ability
to gain market share. Regulatory payments risk higher for Idea with limited free cash
flows and rising debt burden.
Zee Ent Sun TV Sun TV's 60% premium rate to Zee bouquet in DTH unsustainable. Zee is better placed to
benefit from DTH boom and cable digitisation and has a more diversified revenue base.
Change of government in Tamil Nadu a negative for Sun TV.
Tata Steel Steel Authority of India Tata steel has better visibility on expansion plans, higher earnings growth and cheaper
valuations. SAIL has higher risk of delays.
Mahindra &
Mahindra (M&M)
Maruti M&M enjoys better industry growth, lower competitive pressures, stronger product
pipeline.
ITC Hindustan Unilever HUL faces much higher competitive pressures than ITC. Also ITC's FY12 volume growth
will be better than historical.
Godrej Consumer
(GCPL)
Dabur Dabur faces higher competitive intensity than GCPL. Also, GCPL's earnings estimates carry
an upside risk while Dabur's management is guiding down expectations.
ONGC Cairn The potential Cairn-Vedanta deal will be a positive for ONGC vis-à-vis Cairn. Possibility of
some favourable policy action ahead of the proposed ONGC FPO.
Gas Authority (Gail) Gujarat State Petronet
(GSPL)
Gail's tariffs have been recently reviewed whereas GSPL faces the risk of tariff cut. Also,
some reforms ahead of ONGC FPO will be a likely positive for Gail as well.
Sun Pharma Cipla Sun's lifestyle oriented therapy profile and niche pipeline in the US is a positive. Cipla's
domestic growth under pressure and international business has a lower return.
DLF Unitech DLF's higher exposure to more secure office space is a positive. Lack of clarity on Unitech's
potential liability on the 2G scam issue. Potential deleveraging more obvious in DLF.
Jubilant Food Titan Jubilant's has superior store growth outlook and modest cost inflation pressures, also
modest guidance leave earnings upside. Titan's earnings estimates have a downside risks.
Power Grid NTPC Possibility of NTPC surprising negatively due to lower utilisation rates due to lower coal
supplies. Power Grid stable.
HCL Tech Wipro HCL Tech's focus on volume growth strategy has been working. Wipro's new organisation
structure will take time to deliver.
UltraTech Ambuja UltraTech's higher south exposure will help deliver higher earnings growth in FY12. Also,
medium term capacity addition/volume growth outlook better. Holcim's buying support for
Ambuja now over.
Tata Consultancy
(TCS)
Infosys TCS has been consistently beating its guidance while Infosys struggling to meet it. Infosys'
restructuring will take some time to deliver.
Source: CLSA Asia-Pacific Markets
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