New spin: Low volatility of earnings makes India good bet, says Morgan Stanley

In a bullish note to clients, the Indian equity research arm of Morgan Stanley has cited good fundamentals and low volatility as key for India’s impressive performance. But it cites past performance as an indicator to the future, without the context in which such past performance was achieved, namely low starting valuation and low interest rates

Morgan Stanley Research Asia-Pacific (Morgan Stanley), in its latest report titled “Secret Touch” is bullish and expects Indian markets to perform well, vis-à-vis her peers, on account of “superior macro growth story” and “diversified index in terms of sector concentration”. According to this view, which has come well after the market has rallied strongly against the consensus view of poor macro-economic fundamentals of India, the bottoms-up story is strong and is expected to keep earnings stable. Stability in earnings means reliability in forecasts. It said, “One of the underpinnings of this fundamental story (India’s story) is the relative stability in earnings and high earnings growth over the long term.” India has given an annual Earnings Per Share (EPS) growth return of 14% since 2001, with standard deviation of just 13%, the lowest amongst peers. While this may be impressive, averages are always deceptive. Besides, in the four of those years, the market valuation was low and interest rate were falling, which is the sweet spot for equities.

Read more of our stock market analysis here.

Morgan Stanley argues that India is fairly diversified, vis-à-vis NSE Nifty, when compared to its peers, and makes the market more stable. In Taiwan and Turkey some sectors occupy more than 50% of the weightage.

Read our analysis of Morgan Stanley report on ‘TINA’ for a brief background, especially on the aspects of sector weights and diversification.

One of the interesting observations in this report is that the “beat ratio” (the ratio at which companies beat expectations) of NSE Nifty companies is 63%, which is higher than the MSCI average of 50%. In other words, for every three companies in the Nifty, roughly two beat estimates. The report said, “These statistics just underscore the role of corporate fundamentals in the solid performance of Indian equities over the past decade.” One would be led to thinking that Indian companies are performing well. However, there’s a flip side to this approach; estimates sometimes are generously set low so that estimates can be beaten. “Despite historical low earnings volatility, consensus expectations are usually beaten,” the report said. Very often brokerages do this in order to induce clients to buy shares. For instance, in Morgan Stanley’s report, Axis Bank, Coal India and GAIL—all achieved “100% Beat Ratio” between 2005 and 2012. It is pertinent to note that Axis Bank hasn’t performed that well relative to its peer—HDFC Bank (88% beat ratio)—even though Axis Bank may have ‘beat’ every estimate set by brokers and investment banks alike. Thus, one should be careful in reading such broker reports. It can be misleading sometimes.

Volatility in earnings, apart from beat ratio, was another aspect focused. The less volatility, the more stable the earnings and easier to forecast and set expectations. HDFC Bank, Axis Bank, TCS, Infosys are some companies with low volatility (measured by coefficient of variation). While volatility maybe low future outlook could be different. For instance, Infosys has recently sounded the caution board and cited that 2013 will be a difficult year for them.

Morgan Stanley cited good fundamentals and consistency of Indian corporate earnings resulting in impressive increase in market capitalisation. The Nifty has returned 432% over the last 10 years, second to only Brazil. Again, this is more of a point-to-point analysis and past market performance without the context of global environment and interest rates and valuation levels, is meaningless. Morgan Stanley concluded by stating, “For investors, it pays to look for the best growth prospects in the market but a look at history will reveal the companies that do with least heart burn.”

Read other reports of Morgan Stanley analysed by Moneylife, here.


Is there any hope for a protective mechanism for whistleblowers?

The Supreme Court recently ruled that protection of whistleblowers is a state subject. In a murder case the Bihar State Information Commission refused to acknowledge the victim as an RTI activist; will NHRC succeed?

Perhaps not many would remember that RTI (Right to Information) activist Ram Vilas Singh who dared to use RTI to unearth corruption and misuse of development funds in the Amhara gram panchayat of Bihar was brazenly shot dead in his Bavangavan village in December last year. His crime was to ask information under RTI pertaining to financial irregularities in construction of check dams; appointment of Anganwadi workers and hoarding and black marketing of commodities distributed through the Public Distribution System.

Strangely, the Bihar State Information Commission refused to acknowledge him as a RTI activist and therefore, did not suo motu pass an order to the concerned departments of the gram panchayat to voluntarily disclose information he had asked for and put it in the public domain. Nor did the police department take immediate action, allowing miscreants to roam free.

Also, the Sub-Divisional Police Officer’s (SDPO) first report filed by his son, clearly speaks of a conspiracy to eliminate Singh due to his RTI activism. The conspiracy is said to have been hatched by one of the accused in this case who was spending time in jail on account of being an accused in another murder case. Despite this police report confirming that Singh was a RTI activist the Bihar State Information Commission has remained indifferent.

Also, the Supreme Court recently, in a hearing of a public interest litigation seeking safety for whistleblowers stated that, “the incidents of killings (of whistle-blowers and RTI activists) are tragic and unfortunate, but law and order is a state subject. It is for the state government to take action. We cannot issue guidelines…”

Taking up the cudgels of this indifference to whistleblowers and activists who stake their life for the society, social activist, Venkatesh Nayak, programme coordinator of Commonwealth Human Rights Initiative (CHRI) made a complaint to the National Human Rights Commission (NHRC) in February 2012 for justice to Ram Vilas Singh. NHRC sent a letter to the Deputy Inspector General of Police (Human Rights), Bihar, seeking a report on the incident by submitting “a further report as to the outcome of the investigation.”  Nayak received a reply last week from the NHRC containing a copy of the report submitted by SDPO on the orders of the DIGP. Nayak states that the report hints at a larger conspiracy to eliminate Singh and suggests more investigations into the conspiracy angle. The NHRC has asked Nayak and other complainants to submit their suggestions on the report sent by the SDPO by 25 January 2013. Thereafter, NHRC will take further action.

According to the earlier SDPO’s report, a first information report (FIR) was filed on the basis of information given by the Late Ram Vilas Singh’s son who is an eye witness to the murder. Three accused were identified by name. Two others were mentioned in the FIR as accomplices of the accused but could not be identified in the melee. The SDPO’s investigation report identifies the remaining two accused by name. A charge-sheet was filed in the trial court in January this year. The police have arrested only two of the accused. The remaining three accused have been declared absconders and the trial is on against the two accused. The main accused Rakesh Kumar Singh alias Bambam Singh remains untraceable along with two of the accomplices. The main accused in this case is also wanted for trial in relation to other murders committed earlier.

Adds Nayak, “when he was alive, Ram Vilas Singh had also filed several RTI applications with the State Election Commission and various authorities in the Police Department asking why the main accused was not being arrested despite him moving around freely and committing offences during elections to the local bodies (panchayats) last year but he got no answers nor was any action taken.”

Nayak has made an appeal to citizens to suggest ways to put pressure on the Bihar State Information Commission to act, now that the “further report” also confirms that Singh was a RTI activist. In his appeal Nayak says: “I request readers to send suggestions for next steps in this case. Please send suggestions as to how to make the Bihar State Information Commission order disclosure of information in all the matters filed by the Late Ram Vilas Singh and pending before them instead of denying the RTI link to the murder.”


On 19 November 2012, a RTI activist in Odisha who has been filing RTI applications to procure information from the mining sector has been threatened but no protection has been provided to him despite his request. With the judiciary as well as the state throwing up its hands to protect whistleblowers, the situation for pro-active and participatory governance is very dim.


Says Nayak, “so who then will defend and protect human rights defenders such as RTI users, anti-corruption crusaders and whistleblowers of wrongdoing in government? Should they be at the mercy of that very government whose functionaries harass them or even cause their murder in collusion with criminal elements? Can we have some protective mechanism instituted by then next Human Right Day (which falls on 8th December) in December 2013? We have a whole year to discuss, debate and get some advocacy going.”  Interested readers may get in touch with Nayak at: B-117, First Floor, Sarvodaya Enclave

New Delhi- 110 017, INDIA, Tel: +91-11-43180215/ 43180201,Fax: +91-11-26864688

Skype: [email protected]

Alternate Email: [email protected]



(Vinita Deshmukh is the consulting editor of Moneylife, an RTI activist and convener of the Pune Metro Jagruti Abhiyaan. She is the recipient of prestigious awards like the Statesman Award for Rural Reporting which she won twice in 1998 and 2005 and the Chameli Devi Jain award for outstanding media person for her investigation series on Dow Chemicals. She co-authored the book “To The Last Bullet - The Inspiring Story of A Braveheart - Ashok Kamte” with Vinita Kamte and is the author of “The Mighty Fall”.)


IIP grows 8.2% in October, Chidambaram sees green shoots

IIP, soared to 16-month high of 8.2% in October on good performance of the manufacturing, power sector and higher output of capital as well as consumer goods, indicating sudden recovery in the economy

New Delhi: Encouraged by the 8.2% growth in industrial output in October, Finance Minister P Chidambaram on Wednesday said that it reflected emergence of "green shoots" in the economy, reports PTI.


"I am very encouraged by the indications of the green shoots in economy in terms of production. IIP figures are very encouraging", he told reporters here.


The factory output, as measured by the Index of Industrial Production (IIP), soared to 16-month high of 8.2% in October on good performance of the manufacturing, power sector and higher output of capital as well as consumer goods, indicating sudden recovery in the economy. It had contracted by 5% in October in the previous fiscal.


So far this fiscal, Chidambaram said, IIP had shown positive growth only in May at 2.5% and August at 2.3%.


"Let's see what the next four months bring us. Investments are taking place, capacity is being created and consumption is happening in consumer durables and non-durables", the Minister said.


He said that intermediate goods, a good indicator of future production, grew by 9.4%.


"Capital goods output at 7.5% is very encouraging. Since April it was in negative. This is the first month of positive growth", he added.


The capital goods output, it may be recalled, dipped by a whooping 26.5% in October 2011.


The manufacturing sector, which constitutes over 75% of the index, grew by robust 9.6% in October, as against a contraction of 6% in same month last year.




4 years ago

Like a magician, He has been showing things which ain't there, while not seeing things as they are - but, as they ought to be.

Those who fool others in the public, fool themselves in the private.

We are listening!

Solve the equation and enter in the Captcha field.

To continue

Sign Up or Sign In


To continue

Sign Up or Sign In



The Scam
24 Year Of The Scam: The Perennial Bestseller, reads like a Thriller!
Moneylife Magazine
Fiercely independent and pro-consumer information on personal finance
Stockletters in 3 Flavours
Outstanding research that beats mutual funds year after year
MAS: Complete Online Financial Advisory
(Includes Moneylife Magazine and Lion Stockletter)