The S&P 500, FTSE, Nasdaq Composite and Shanghai Composite rose 2% each, while the Taiwan...
In a report recently released by BNP Paribas, it said that the Indian markets are near the bottom and could move up 15% by end of the year. It has also shortlisted the companies it thinks would lead the rally
BNP Paribas, a France-based investment bank, feels that the markets may be poised for an uptrend despite prevailing pessimism. In its report titled 'Islands in a Sea of Gloom', dated 16 May 2012, it said that most of the top-down valuation measures indicate market could be close to bottoming out. It used metrics such as Price Earnings Ratio (PER), Price-Book Value (P/BV), yield gap and implied earnings. The investment bank believes that Sensex will end the year at 18,500, which is 15% higher from current level of around 16,038.
Further, it has also highlighted some of the stocks that could be worth buying. By focussing on companies with good execution, cash generation, good return ratios and no management-related concerns, it has come up with a list of stocks, each classified into distinct categories based on an 'investment strategy'. The three strategies are a) Good Stocks at reasonable prices b) Likeable laggards and c) Recovery plays.
With global uncertainty (Euro break-up possibility), economic headwinds (deteriorating macro-economic fundamentals vis-a-vis current account and fiscal deficit) and the current government policy paralysis (no reforms coupled with drastic retrospective measures) would indicate that the odds are stacked against the investor and the case for buying in India. However, the investment bank believes that the markets have factored all the negatives outlined and cites a few positive reasons, to buy:
a) Lower commodity prices which in turn would lead to lower imported inflation, lower current account deficit and fiscal deficit. While this is good news, it remains to be seen whether this is a definitive and secular trend, which will be good for us and it will bring down overall inflation.
b) Postponement of General Anti-Avoidance Rule (GAAR) by a year. This is a positive given that the government had taken draconian steps to implement retrospective measures on certain tax issues, especially with regard to foreign corporations doing business in India. This would have scared off them. Even though the retrospective measures haven't been abolished yet, the postponement creates a sense of relief and government will reconsider its stand on the issue.
c) Steps taken by Reserve Bank of India (RBI) to intervene and create opportunities for the Indian rupee to appreciate rather than depreciate, which would otherwise undermine the downtrend of commodity prices as mentioned earlier.
d) Valuation levels reverting back to original lows seen prior to first quarter of the 2011-12 fiscal. The report mentions that the Indian equities, at the moment, are valued at 12 times forward PER, which is one standard deviation below the long-term mean. In other words, the markets are below mean and it will eventually revert back to mean, thus citing this as a case for buying. It also believes that the 'yield gap', which is the difference between earnings yield and 10-year bond yield is 0.37%, the level at which equities usually bottom out. Yet another valuation measure used was the so called 'Implied Earnings Growth' which was quoting less than the 'Risk Free rate', which is normally a short-term indication of market bottom, according to the investment bank.
With indicators pointing towards a possible market bottom, the report goes on to highlight the stocks that could be winners, depending on your investment style.
The first category namely 'good stocks at reasonable prices' are stocks with great cash generation, excellent return ratios and top quality management & disclosures. However, their stock prices had gone down, along with the market correction. The stocks belonging to this category at Hero MotoCorp (Target Price-Rs2,050; target price is according to BNP Paribas), Tata Motors (TP-Rs375), Mahindra &Mahindra (TP-Rs800), Idea Cellular (TP-Rs120), Cairn India (TP-Rs355) and Power Grid (TP-Rs122).
The second category namely 'likeable laggards' are stocks that are currently trading at (low) levels when Sensex was quoting between 10,000 and 12,000. The report cites management concerns, debt-related issues, product pricing, increased competition and execution related concerns as being prime reasons for poor performance. However, it believes that the stocks that were long-listed in this category-BHEL, Reliance Infrastructure, Jaiprakash Associates, DLF and Reliance Communications-might be 'value traps' (i.e. stocks which are seen as cheap and 'valuable', but might not turn out to be that way). It is not a surprise to see DLF and Reliance companies in the list, given their history of governance and debt-related issues. BHEL is going through a hard time because of the government policy paralysis in the power sector, especially bankruptcy of state electricity boards, which has translated to a lower order book. The shortlist in the likeable laggards include L&T (TP - Rs1,500), SAIL (TP -Rs109) and NTPC (TP - Rs206).
Finally, the last strategy, namely 'recovery plays' are for investors who believe the market is close to bottoming out and do not mind taking additional risks to partake in the recovery, if it happens that is. These stocks are large-cap stocks which move closely in line with the market as a whole, due to their weight attributed in the index. The stocks shortlisted in this category are ICICI Bank (TP-Rs984), State bank of India (TP-Rs2,258) and Wipro (TP-Rs475).
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