ESS has come out up with its monthly report and realised that its expectations were too high and needs toning down. But it still remains optimistic and expects the economy to recover and RBI to slash interest rates

The latest brokerage to get “seduced and dumped” is Espirito Santo Securities (ESS). Like BNP Paribas, it had kept its expectations rather high and was let down by P Chidambaram’s budget. ESS said, in its latest “Blackbook” titled Waiting for Dawn: “FII flows and market movements since August 2012 show that (high expectations). And the budget, with media hype around a ‘dream budget’ in the run up, was expected to provide the next leg up to reforms, but the FM disappointed." Despite the disappointment, ESS is optimistic that the Reserve Bank of India (RBI) would do its bit to stimulate the economy by cutting interest rates by as much as 50 basis percentage points (bps) within the next two months. ESS said, “On balance we’re slightly more bullish on rate cuts than consensus, and expect the RBI to cut the repo rate by another 50 bps by its May 2013 policy meeting, with a likely 25 bps cut in the March policy meeting." This is a big expectation indeed, given that inflation risks continue to persist.
 

Earlier we had written how other brokers like BNP Paribas fell for FM’s hardsell and were left high and dry. Check here for more information. Of course, it finally dawned to ESS that there was no basis for such hopes. In the report, it cautioned investors of the finance minister's so called ‘tricks’. It was stated: “And investors should be careful of expecting too many more reform rabbits up Chidambaram’s sleeve to offset disappointment in the actual fundamentals.” Oh well, the reality is dawning on analysts.
 

ESS expects populist measures to take the centre-stage as the election nears. This is something it should have thought of much before the budget and before the finance minister sold the idea of ‘reforms’ and India being the premier investment destination. The report said, “as elections draw closer in H2 pro-growth and pro-investment reforms are likely to take a back seat, and the shift will be towards more inclusive and populist measures.”
 

Given that the finance minister has all but dashed ESS’s hopes for a ‘reform’ budget, the brokerage has moderated India's GDP forecast to 6.6%. The report said: “Overall our analysis still suggests a recovery, just a slow and difficult one, with 6.6% GDP growth for 2014 probably a best case scenario now”.
 

It is also optimistic on inflation and expects 'core' inflation to “tread below 4.5%”, even though the government is going into full blown expenditure mode. It is hard to see how inflation go down can given how much headwinds is there in the economy, especially one reliant on imports and breaks in domestic competition and distribution.
 

With the markets in a ‘correction’ mode post-budget, ESS thinks there is value in select stocks and it has come up with a “silver bullet” list of stocks to buy and sell. They are ING Vysya Bank, Wipro, Gujarat Pipavav, Cipla, Jindal Steel & Power and Motherson Sumi. ESS has put a sell on L&T and Marico.
 

Apart from the “silver bullet” list, it has also come up with conviction ideas, a list of stocks which are primed to do well, according to its sales desk and analyst. One of its picks caught our eye—Dewan Housing Finance (DHFL). This is one of the companies which had been in the news for all the wrong reasons. According to the report, DHFL was accused of rigging of its share price at the time of the QIP offer. However, SEBI had reportedly investigated the company and given it a clean chit. This isn't surprising given how ineffectual SEBI has been in apprehending and punishing corporate wrong-doers.
 

The reason ESS has given this company a buy based on ‘facts’ is that its valuation is really low (according to the report, the stock is trading at 1x FY14 estimated price/book ratio).

Other “conviction ideas” includes Oriental Bank of Commerce and Shriram Transport Finance.
 

Another section of ESS report caught our attention was the IPO snapshot. A lot of investors are interested in raking in big bucks by investing in the primary market. But not all companies do well either because their pricing is totally out of whack with reality and works against investors. We noticed that in the ESS list, all the companies that were listed last year have given negative returns so far. Moreover, out of the 34 companies that were listed since 2010, according to the report, as many as 22 companies have given negative returns. Poor post-IPO returns shows how greedy the promoters have been egged on by investment bankers.