India Strategy Earnings vs. Share Prices: Opportunities & Disconnects ::Morgan Stanley Research,

To be defensive or not to be Since the start of the year, Financials and Consumer Staples have been fighting for the position of top-performing sector in India – a trend that was last seen in 2010, although by the end of that year both sectors lost performance and finished among the bottom 4 sectors. So how will the rest 2012 shape up? The state of earnings revisions may give us some hint of coming performance.
What we have done
It is a commonly held belief that share prices lead earnings revisions. We plot relative share prices vs. relative earnings revisions for the MSCI sectors and its constituents to identify any obvious disconnects between share price and earnings expectations.
Technology appears to present opportunity
For the third consecutive quarter, the performance strength in consumer staples has been backed by earnings upgrades, likewise with Financials, albeit with some volatility. The outperformance of Energy, Healthcare and Utilities has led upward earnings revisions, while the downward revisions for the CD, Industrials, Materials and Telecoms sectors have been mirrored in the performance. Technology is seeing improving estimates, but share prices have yet to respond.
We can argue that earnings will catch up with share prices, but the opposite cannot be ruled out. Either way, these represent potential opportunities for investors. This analysis obviously ignores the starting point of valuations, which can sometimes explain the disconnect between share prices and earnings.

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Twelve MSCI constituents exhibit striking differences between relative earnings growth revisions and relative share price trend
Stocks where earnings have been raised, but stock prices have underperformed:
TTMT IN, TTAN IN, DABUR IN, CAIR IN, COAL IN, CBK IN, BOB IN, DRRD IN, UNTP IN, WPRO IN
Stocks where relative performance is down, but consensus has not revised earnings lower: BOI IN
Stocks where relative performance is up, but consensus has not revised earnings higher:
RIL IN
Our top buy trades from these disconnects:
DABUR IN, CAIR IN, COAL IN, DRRD IN, TTMT IN, WPRO IN.
No U/W trades emerging from these disconnects.
We remain focused on stock picking, but the macro influence on stock prices seems to have peaked.