Mutual Funds Commodities Research Tax Planning IPO Our Team Contact Us    
Google
Web www.equitybulls.com
Union Budget
Budget 2011-2012 Home
Industry Expectations - Budget 2011-2012
Industry Reactions - Budget 2011-2012
Budget 2010-2011
Budget 2010-2011 Home
Industry Expectations - Budget 2010-2011
Industry Reactions - Budget 2010-2011
Contributor's Corner
Bonanza Portfolio
Hemant K Gupta
Krish Bhatt
S A A R T H I
Trinity Investments
Exchange Information
BSE 2009 Holidays
NSE 2009 Holidays
Investor Guide
Depository & Dematerialisation
Grievance Redressal
Investor Guide
SEBI
Trading of Securities
Transfer of Securities
Your Rights
Budget 2009-2010
Budget 2009-2010 Home
Industry Expectations - Budget 2009-2010
Industry Reactions - Budget 2009-2010
Interim Budget 2009-2010 Home
Industry Expectations - Interim Budget 2009
Budget 2008-2009
Railway Budget 2008-2009
Industry Expectations - Budget 2008
Union Budget 2008-2009
Highlights of Budget 2008-2009
Summary of Budget 2008-2009
Industry Reactions - Budget 2008
IPOs
Current IPOs
Past IPOs
IPO Subscription
Mutual Funds
Gold Exchange Traded Fund
MF Unique Holding
Forthcoming Dividends
ELSS Schemes Comparison
Tax Plans
New Fund Offers
Research
Arbitrages
Equity
Market Whispers
Tax Planning
Home
Equity Linked Savings Scheme
Post Office MIS
9% GOI Senior Citizens Savings Scheme
8% Savings (Taxable) Bonds
Kisan Vikas Patra
National Savings Certificate
Public Provident Fund
Research

| More

Strategy: The curious case of the Indian market - Kotak Institutional Equities

Posted On: 2017-04-11 21:57:49

The curious case of the Indian market.

The valuations of the Indian market look reasonable on a top-down basis but the valuations of individual stocks are super-expensive or fairly valued in most cases. The high weightage of 'low' P/E PSU banks, commodity stocks and utilities in the broader market indices pulls down the overall valuations. It may be tempting to derive solace from top-down market valuations but it would be more rewarding to disregard indices and focus on bottom-up challenges.

Market valuation may have lost its relevance some time back

We note that very few sectors trade near the market valuations and the range of valuations has widened sharply over the past few years (Exhibit 1 in the original report, which shows the 12-month forward P/E of individual sectors in the Nifty-50 Index over the past seven years on year-end basis). The range is quite high currently. At the same time, the constant changes to the composition of the Index in the past few years may preclude meaningful historical comparisons and compel investors to look at bottom-up valuations. For example, the recent inclusion of IHFL and IOCL in the Nifty-50 Index has optically reduced the valuation of the market.

Earnings increasingly dominated by 'low' P/E sectors

We note that 'high' P/E sectors account for a low share of overall profits of the Nifty-50 Index while 'low' P/E sectors account for 46% of overall FY2017 profits. More interestingly, a large share of incremental profits over FY2016-19E comes from 'low' P/E sectors. The energy sector accounts for 49% of incremental profits for FY2017E and AXSB, ICICIBC, PSU banks, metals & mining & TTMT for 54% of incremental profits for FY2018E and 33% for FY2019E.

Overall market valuations look optically reasonable but hide several disturbing facts

The overall market valuations look palatable at 15.2X FY2019E Nifty-50 Index 'EPS' but hide (1) super-rich valuations of 'growth' stocks and (2) expensive valuations of companies with mediocre business models. It seems to us that the market has largely accepted the high valuations of 'growth' stocks as 'normal' valuations without questioning the sustainability of the factors that have supported the (1) re-rating of multiples (low global bond yields; the cycle has already turned) and (2) expansion in gross and EBITDA margins (sharp decline in commodity prices).

Valuations of mid-cap. stocks in 'bubble' phase

We find valuations of several mid-cap. stocks in our coverage universe very high. In fact, it would not be wrong to say that some are in the 'bubble' phase with the market extrapolating strong growth and high returns in perpetuity. While some of the companies do have certain strengths, we find valuations at over 5X book for several semi-branded (semi-commodity) businesses absurdly high in the context of their business models and limited competitive advantages. We had covered this issue in greater detail in our April 3, 2017 report titled The curious case of investment and investment reforms and our November 1, 2016 report titled No 'easy' business.

Model Portfolio changes

Model Portfolio. We reduce weight on HDFC and LICHF by 100 bps each to 700 bps and 200 bps noting their strong performance over the past 3-4 months (following the collapse post demonetization) and full valuations. We like the medium-term growth prospects of the housing and housing finance market in India but (1) high valuations and (2) growing competition with likely pressure on NIMs reduce the reward-risk balance of the stocks at current levels.

We increase weight on IOCL and PWGR by 100 bps each to 400 bps each. We find their valuations quite reasonable at 10.6X FY2018E EPS and 10.1X FY2019E EPS for IOCL and 12.5X FY2018E EPS and 11X FY2019E EPS for PWGR. We note that both these stocks have been very strong performers over the past 12 months. Nonetheless, we still see reward-risk balance as being favorable.

In the case of IOCL, we would highlight that refining margins can surprise on the upside given growing supply-demand balance for refined products led by (1) continued strong global oil demand and (2) limited new refining capacity additions in most parts of the world given concerns about the long-term future of fossil fuels. The report also gives details of global oil demand, refining capacity additions and capacity utilization over the next few years.

For PWGR, we note that growth will likely continue beyond the current phase of ongoing capacity addition, which will increase the regulated equity base and drive earnings (see Exhibit 14 for key details of capital expenditure, capitalization, regulated equity base and earnings). We acknowledge the risk to earnings from a potential downward review to regulated returns for the five-year period FY2020-24 (starting April 1, 2019). However, we believe valuations adequately capture the risk. Lastly, we expect India's requirement of transmission network to accelerate as it focuses more on renewables and thermal power plants at pitheads (to reduce the burden on India's creaking railway infrastructure), which would entail (1) production of power in remote locations and (2) distribution of power to other parts of the country through a large transmission network.

We also take a small position (or 'punt') on TPWR (200 bps) noting its exposure to Tata Group companies and potential removal of the overhang with respect to its Mundra power project in the case of a favorable decision on compensatory tariffs. Any unwinding of cross-holding within the Tata Group or a favorable final decision on the issue of compensatory tariff will result in significant value unlocking. The Supreme Court will take a final decision on the latter issue as the distribution companies are still objecting to the decision of the Central Electricity Regulatory Commission (CERC) and the Appellate Tribunal of Electricity (APTEL) to award compensatory tariffs to the Mundra-based power plants of ADANI and TPWR.

We reduce 100 bps each on Maruti to 300 bps and TTMT to 500 bps noting (1) the limited upside to our fair valuation in the case of MSIL and (2) growing concerns about potential earnings disappointment in the case of TTMT from unexpected factors despite reasonably strong volume growth.


Source: Equity Bulls

Click here to send ur comments or to feedback@equitybulls.com


Disclaimer:The article above is a gist / extract of the original report prepared by the research firm / brokerage firm. This article is not to be considered as an offer to sell or a solicitation to buy any securities. This article is meant for general information only. www.equitybulls.com, its employees or owners or the research firms, its employees or owners won't be responsible for any liability that may arise from information, errors or omissions in these articles. www.equitybulls.com or its employees or owners / the research firms or its employees or clients or owners may from time to time hold positions in securities referred in this article. For detailed research reports, please contact the concerned research firm directly.





Other Headlines:

Earnings Update - KEC International (KECI IN) - Robust quarter; driven by strong growth in railway segment - CSEC Research
Earnings Update - Karur Vysya Bank (KVB IN) - Growth in loan book picks-up; margin surprises positively - CSEC Research
Earnings Update - PI Industries (PI IN) - Robust margins expansions - CSEC Research
Earnings Update - V-Guard Industries (VGRD IN) - Robust performance across segments - CSEC Research
Result Update: JSW Steel - Accumulate - TP Rs.215 - Kotak
Result Update: Pidilite Industries Ltd - Sell - TP Rs.660 - Kotak
Result Update: CENTURY PLYBOARDS LTD - BUY - TP Rs.277 - Kotak
Result Update: Entertainment Network (India) Ltd)- REDUCE - TP Rs.770 - Kotak
Result Update: Dish TV - SELL - TP Rs.82 - Kotak
Result Update: Cummins India Limited - ACCUMULATE - TP Rs. 1,018 - Kotak
Result Update: GRASIM INDUSTRIES LTD - ACCUMULATE - TP Rs. 1,236 - Kotak
Result Update: Bajaj Auto Limited - ACCUMULATE - TP Rs. 3,124 - Kotak
Result Update: Motherson Sumi Systems Limited - REDUCE - TP Rs. 439 - Kotak
Result Update: Tata Power - Accumulate - TP Rs. 89 - Kotak
Result Update: Hindustan Media Ventures Ltd. - Accumulate - TP Rs.307 - Kotak
Result Update: DB Corp - BUY - TP Rs.572 - Kotak
Banks : RBI notification casts light on measures aimed at resolving bad loans - Kotak
Result Update: GUJARAT STATE PETRONET LTD (GSPL) - ACCUMULATE - TP Rs.182 - Kotak
Result Update: Praj Industries- Reduce - TP Rs.81 - Kotak
Result Update: (Voltas Ltd) - Accumulate - TP Rs.506 - Kotak
Views on Tech Mahindra Ltd 4QFY2017 Results: Angel Broking
Views on Sun Pharmaceutical Industries Limited 4QFY2017 Results: Angel Broking
GlaxoSmithKline Pharmaceuticals - 4QFY2017 Result Update - Angel Broking
Result Update: Engineers India Ltd (EIL) BUY TP Rs.195 - Kotak
Result Update: NAGARJUNA CONSTRUCTION COMPANY (NCC) BUY TP Rs.107 - Kotak
Result Update: Tata Motors (TAMO) BUY TP Rs.539 - Kotak
Views on Lupin Limited 4QFY2017 Results: Angel Broking
Strategy: GST: The finishing line is finally here - Kotak
Views on Cipla Limited 4QFY2017 Results: Angel Broking
Technology: Job losses-beyond the noise - Kotak
Result Update: Mangalore Refinery and Petrochemicals Ltd. (MRPL) - ACCUMULATE - TP Rs.144 - Kotak
Result Update: NIIT Ltd (NIIT) - BUY - TP Rs.103 - Kotak
Strategy: GST: The final lap - Kotak
Views on GlaxoSmithKline Pharmaceuticals Limited 4QFY2017 Results: Angel Broking
GST could throw some light on market in upcoming week : Amrapali Aadya Trading & Investments
What the GST rates mean for key sectors in India? - Angel Broking
Earnings Update - HCL Technologies(HCLT IN) - Industry leading growth ahead - CSEC Research
Earnings Update - Dr Reddy's Laboratories (DRRD IN) - High competition & continued pricing pressure hammered global sales - CSEC Research
Earnings Update - KPIT Technologies (KPIT IN) - Growth momentum is gaining - CSEC Research
Earnings Update - NIIT Technologies(NTL IN) - Healthy order book - CSEC Research
Earnings Update - South Indian Bank (SIB IN) - Asset quality improves on sale to ARC - CSEC Research
Earnings Update - CEAT Ltd. (CEAT IN) - Margin declined due to higher RMC - CSEC Research
Earnings Update - Bajaj finance (BAF IN) - Continues to be consistent in its core performance - CSEC Research
Earnings Update - JK Cement (JKCE IN) - Robust quarter driven by better realization - CSEC Research
Earnings Update - JKL Cement (JKLC IN) - Cost saving measures to drive the margins - CSEC Research
Earnings Update - Kajaria Ceramics (KJC IN) -Revenue growth led by volume - CSEC Research
HCL Technologies - 4QFY2017 Result Update - Angel Broking
Result Update: Kajaria Ceramics Ltd - ACCUMULATE - TP Rs.757 - Kotak
Result Update: Colgate Palmolive (India) Ltd. - SELL - TP Rs.980 - Kotak
Result Update: Chennai Petroleum Corporation Ltd (CPCL) - ACCUMULATE - TP Rs.455 - Kotak


Website Created & Maintained by : Chennai Scripts
West Mambalam, Chennai - 600 033,
Tamil Nadu, India

disclaimer copyright © 2005 - 2017