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Pockets of value in uncertain times
Following a sharp selloff in equity markets on macroeconomic concerns, we
polled our analyst team to identify five stocks (not restricted only to our current
top picks) which satisfied following conditions: (i) which have fallen sharply over
past one month and are currently pricing in unwarranted stress (ii) where we see
reasonable visibility over medium-term catalysts to trigger outperformance and
(iii) where the risk reward appears favorable in a scenario which does not factor in
a recession in US/Europe. The following stocks passed the tests - : Axis Bank,
ICICI Bank, JSPL, TCS and Tata Steel.
Axis Bank
The stock is trading at an attractive valuation of 1.9x FY12E P/B – implying a 24%
discount to its past five years’ trading band. Stock is pricing in exaggerated credit
costs of 442bps vs. our baseline estimate of 90bps. Reforms in SEB power tariffs
and any indication of pause in rate tightening cycle by RBI, will be the key triggers
for value unlocking.
ICICI Bank
Trading at 22% discount to past five year average valuation. Stock seems to be
pricing in a contraction in NIIs, versus our baseline estimate of +2.6%. Also, the
stock is pricing in a higher-than-expected rise in NPL from power exposure and
low NIM in the overseas operations. Policy reforms catering to infrastructure/
power sector would assuage asset quality concerns from this sector.
Jindal Steel and Power
The stock (ex- international mining assets) is trading at 8x FY12 EPS – levels similar
to those seen during Lehman crisis. Current stock price is suggesting steel
profits/tonne dropping to
from the steel business seen during FY2008/09. News-flow on commissioning of
captive power plant will help clear risk perception over execution abilities of the
company.
Tata Consultancy Service
The stock currently trades at 17x 1 year forward earnings – factoring in a 22%
CAGR in USD revenues over FY11-13E vs our baseline estimate of 30%. Stock is
pricing in 16% earnings growth expectations for FY11-13 vs. our current
expectation of 22%. : The internal planning for the 2012 IT budgets of most
financial services companies will be underway in Sept-Oct 2011. This will set the
tone for the near term and 2012 performance. Sept-Q results to be announced
mid- Oct
Tata Steel
Stock is currently trading at FY12 P/BV of 1.5x, - 24% discount to its last 18 year
average and close to levels seen in the aftermath of the Lehman event in FY09. At
the current stock price, the residual valuation of company’s European operations
implies a discount of 90% to corresponding valuations of its peers in Europe –
Arcelor Mittal and Thyssen Krupp. Concerns over pension fund deficit – though
legitimate - seem exaggerated. Commissioning of brownfield expansion at
Jamshedpur/decline in coking coal prices will be key triggers for stock
outperformance.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Pockets of value in uncertain times
Following a sharp selloff in equity markets on macroeconomic concerns, we
polled our analyst team to identify five stocks (not restricted only to our current
top picks) which satisfied following conditions: (i) which have fallen sharply over
past one month and are currently pricing in unwarranted stress (ii) where we see
reasonable visibility over medium-term catalysts to trigger outperformance and
(iii) where the risk reward appears favorable in a scenario which does not factor in
a recession in US/Europe. The following stocks passed the tests - : Axis Bank,
ICICI Bank, JSPL, TCS and Tata Steel.
Axis Bank
The stock is trading at an attractive valuation of 1.9x FY12E P/B – implying a 24%
discount to its past five years’ trading band. Stock is pricing in exaggerated credit
costs of 442bps vs. our baseline estimate of 90bps. Reforms in SEB power tariffs
and any indication of pause in rate tightening cycle by RBI, will be the key triggers
for value unlocking.
ICICI Bank
Trading at 22% discount to past five year average valuation. Stock seems to be
pricing in a contraction in NIIs, versus our baseline estimate of +2.6%. Also, the
stock is pricing in a higher-than-expected rise in NPL from power exposure and
low NIM in the overseas operations. Policy reforms catering to infrastructure/
power sector would assuage asset quality concerns from this sector.
Jindal Steel and Power
The stock (ex- international mining assets) is trading at 8x FY12 EPS – levels similar
to those seen during Lehman crisis. Current stock price is suggesting steel
profits/tonne dropping to
from the steel business seen during FY2008/09. News-flow on commissioning of
captive power plant will help clear risk perception over execution abilities of the
company.
Tata Consultancy Service
The stock currently trades at 17x 1 year forward earnings – factoring in a 22%
CAGR in USD revenues over FY11-13E vs our baseline estimate of 30%. Stock is
pricing in 16% earnings growth expectations for FY11-13 vs. our current
expectation of 22%. : The internal planning for the 2012 IT budgets of most
financial services companies will be underway in Sept-Oct 2011. This will set the
tone for the near term and 2012 performance. Sept-Q results to be announced
mid- Oct
Tata Steel
Stock is currently trading at FY12 P/BV of 1.5x, - 24% discount to its last 18 year
average and close to levels seen in the aftermath of the Lehman event in FY09. At
the current stock price, the residual valuation of company’s European operations
implies a discount of 90% to corresponding valuations of its peers in Europe –
Arcelor Mittal and Thyssen Krupp. Concerns over pension fund deficit – though
legitimate - seem exaggerated. Commissioning of brownfield expansion at
Jamshedpur/decline in coking coal prices will be key triggers for stock
outperformance.
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