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India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Strategy
India
Absolute rating system to provide more clarity, focus and purpose. We have
moved to an absolute rating system from the earlier relative rating system (with BSE-30
Index as the benchmark). We believe the new rating system, in conjunction with 12-
month target prices, will unambiguously communicate our investment views on stocks.
We will continue to use the BSE-30 Index as the benchmark for measuring the
performance of our Model Portfolio.
Absolute rating system replaces previous relative rating system
We believe our new rating system will result in three improvements; the target prices of the stocks
under our coverage are unchanged and thus, will provide continuity to our investment theses.
(1) It will provide unambiguous communication to investors about stocks. Historically, we have
seen examples of stocks with downside or limited upside and BUY/ADD ratings given limited
upside to the BSE-30 Index; this was the case in January 2008 and December 2010. On the other
hand, we currently see large absolute upside in several stocks in our coverage with REDUCE/SELL
ratings under our previous rating system given 20% potential upside to our benchmark. (2) It will
compel our analysts to focus on ratings and target prices even more rigorously without the
umbrella of a relative rating system. This will sharpen our focus on bottom-up valuations based on
first principles rather than on flaky market targets. (3) It will help investors in times of extreme
investment sentiment in the market; equity is just another asset class and a relative rating system
does not help much when investors lose money. We also intend to use cash also more aggressively
in our Model Portfolio henceforth rather than having a 100%-invested portfolio at all times.
Description of the new system; 17.5% upside means BUY, downside means SELL
Under our new rating system, we rate stocks with 17.5% upside to their target prices on a 12-
month basis as BUY, >7.5%-<17.5% upside as ADD, 0%-7.5% upside as REDUCE and <0% as
SELL. We use this methodology directly for stocks that are valued on a 12-month basis (12-month
DCF valuation for example). However, we make adjustments for stocks that are valued on
FY2013E estimates (FY2013E EPS, EBITDA or BV) and raise the required returns accordingly. In
future, we propose to value all stocks simply on a 12-month basis (adjust for time value of money
using a cost of equity of 12.5%, if required or compute weighted-average price of two periods).
This will also remove some degree of anomaly currently in our rating system and avoid lumpy
movements in target prices arising from roll-forwards to the following year.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Strategy
India
Absolute rating system to provide more clarity, focus and purpose. We have
moved to an absolute rating system from the earlier relative rating system (with BSE-30
Index as the benchmark). We believe the new rating system, in conjunction with 12-
month target prices, will unambiguously communicate our investment views on stocks.
We will continue to use the BSE-30 Index as the benchmark for measuring the
performance of our Model Portfolio.
Absolute rating system replaces previous relative rating system
We believe our new rating system will result in three improvements; the target prices of the stocks
under our coverage are unchanged and thus, will provide continuity to our investment theses.
(1) It will provide unambiguous communication to investors about stocks. Historically, we have
seen examples of stocks with downside or limited upside and BUY/ADD ratings given limited
upside to the BSE-30 Index; this was the case in January 2008 and December 2010. On the other
hand, we currently see large absolute upside in several stocks in our coverage with REDUCE/SELL
ratings under our previous rating system given 20% potential upside to our benchmark. (2) It will
compel our analysts to focus on ratings and target prices even more rigorously without the
umbrella of a relative rating system. This will sharpen our focus on bottom-up valuations based on
first principles rather than on flaky market targets. (3) It will help investors in times of extreme
investment sentiment in the market; equity is just another asset class and a relative rating system
does not help much when investors lose money. We also intend to use cash also more aggressively
in our Model Portfolio henceforth rather than having a 100%-invested portfolio at all times.
Description of the new system; 17.5% upside means BUY, downside means SELL
Under our new rating system, we rate stocks with 17.5% upside to their target prices on a 12-
month basis as BUY, >7.5%-<17.5% upside as ADD, 0%-7.5% upside as REDUCE and <0% as
SELL. We use this methodology directly for stocks that are valued on a 12-month basis (12-month
DCF valuation for example). However, we make adjustments for stocks that are valued on
FY2013E estimates (FY2013E EPS, EBITDA or BV) and raise the required returns accordingly. In
future, we propose to value all stocks simply on a 12-month basis (adjust for time value of money
using a cost of equity of 12.5%, if required or compute weighted-average price of two periods).
This will also remove some degree of anomaly currently in our rating system and avoid lumpy
movements in target prices arising from roll-forwards to the following year.
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