Nomura has come up with its fortnight valuation monitor and finds that forward Sensex PE is at 13.3x after a minor downgrade in EPS. Earnings for Sun Pharmaceuticals, NTPC, Power Grid Corporation, GAIL and UltraTech Cement have been upgraded

Nomura Equity Research (Nomura) has come out with its fortnightly valuation monitor and has made huge downgrades to DLF, Ranbaxy and Tata Steel while upgrading Sun Pharmaceuticals, Power Grid Corporation and Gas Authority of India (GAIL). Meanwhile, its forecast of Sensex earnings multiple has declined from 13.6 times to 13.3 times, lower than its 5-year average of 14.98.

If you look at the above chart, it will show that FY14 EPS consensus forecasts have been down-trending since February 2012, while the Sensex forward PE has more or less remained steady despite economic stress and upcoming elections next year.

The table below shows some of the biggest upgrades and downgrades:

If you notice the above chart, Tata Motors has performed quite well (price-wise) but it was severely downgraded. Apparently, sales of Tata Motors were extremely disappointing and reflect the difficult times ahead for the automobile sector. If you recall, earlier, we had written how auto ancillaries shot up when the industry was actually going through a hard time (Is the auto industry booming or stagnating?).
 

However, as far as the Tata Group of companies is concerned, TCS seems to have done extremely well, by utilizing its scale to score more orders while Tata Steel has been performing poorly as its business model depends on how good the global and domestic economy is faring, which is to say—not very good.

The top five stocks upgraded are: Sun Pharmaceuticals, GAIL, NTPC, Power Grid Corporation and UltraTech Cement.
 

The top five stocks downgraded are: DLF, Ranbaxy, Tata Steel, Ambuja Cement and Tata Motors.
 

Nomura screened stocks on the basis of PE, PB and EV/EBITDA multiples. Take a look at select individual forecasts charts below:

Bharti Airtel has been performing average of late. Even though it raised tariffs, the move wasn’t good enough to offset declining margins in a competitive environment. If you look at the PE chart above, the market seems to be attaching a huge premium to this stock, in possible anticipation of outperformance. Yet, in the past, it hasn’t performed that well in relative to Sensex. Consensus is also consistently downgraded.
 

Asian Paints, DLF and BPCL would also seem ‘overpriced’. Nomura has seen consensus rating on DLF downgraded by over 20%, despite one positive aspect emanating from the budget on home loans. DLF also had been in the news for the wrong reasons last year, when it was linked to Robert Vadra.
 

Sesa Goa is on top of the EV/EBITDA valuation even though it isn’t the exactly the beacon for corporate governance. With analysts expecting commodity prices expected to correct in the next few years, this stock doesn’t look too good. In fact, consensus expectations on the stock are reaching new lows with each passing day.
 

According to the report, companies from the power & financials sector were screened based on price to book values. Cement, metals & mining, Tata Motors and Jaiprakash Associates were screened on the basis of EV/EBITDA multiple. All other stocks were screened based on P/E multiple. However, it is not known why Jaiprakash Associates and Tata Motors were singled out for EV/EBITDA valuation.
 

One of the few stocks that have been upgraded consistently and beating the Sensex is Sun Pharmaceuticals. This is because its subsidiary Taro Pharmaceuticals has been coming up with phenomenal performance numbers. However, some of the minority shareholders of Taro were, and still are, enraged about the price at which Sun Pharmaceuticals seems to have offered to buy out the remaining stake (which was way less than Taro’s prevailing market price), that Sun Pharma has dropped its plans of acquiring the company fully. It still retains a “controlling stake”, after years of legal wrangling. Taro Pharma was founded in Israel.

None of the Nifty 50 stocks, according to Nomura, are overpriced on the price-to-book basis, but NTPC, Power Grid Corporation and Punjab National Bank seem to be tantalising as far as value is concerned, but should be examined on a case-to-case basis. Coal India is undervalued on an EV/EBITDA basis.