>INDIA STRATEGY: The “Sell-Side” Consensus Ratings: The Bear Hug (MORGAN STANLEY)

• Key Debate: The Indian market has rallied 15% since the start of the year, downward revisions to aggregate earnings and GDP growth estimates have slowed, and the conviction level of the buy side (if FII inflows is an indicator) has gone up. Will all this lead to change in the views of sell-side analysts, which have fallen to their lowest level since April 2010.


• What’s New: In the latest run of our bi-annual update on the consensus ratings, the sell-side conviction level on Morgan Stanley coverage stocks has fallen to 0.3 – a 22-month low from 0.42 in Aug-2011. A score greater than 0.3 implies a “buy” or equivalent rating, while a score of less than -0.1 implies a sell or an equivalent rating. Across market cap segments, we notice that consensus views are highly dispersed – with no particular market cap segment standing out as the most bullish or bearish call for consensus.


• We assign a 1 point to a buy rating, -1 point to a sell rating, and 0 score to a hold. We find that the consensus has a “buy” or equivalent rating on 59% of our coverage universe (of 130 stocks), down from 68% in Aug-11. Similarly, Morgan Stanley analysts have a “buy” (equivalent) rating for 41% of the universe vs. 46% in Aug-11. This suggests that Morgan Stanley analysts remain more bearish than consensus.


• MS Analysts vs. Consensus: Morgan Stanley analysts agree with consensus ratings on less than half of our coverage universe with consensus (62 out of the 130 stocks covered) – the lowest level since Feb-09.


• Out of the 68 stocks where they disagree, Morgan Stanley analysts have a “buy” (equivalent) rating on only 12 stocks, while consensus has a “buy” rating on 37 stocks, suggesting a more bullish consensus.


• Within the Morgan Stanley coverage universe, there are 35 stocks, or 27% of our coverage universe, in which 70% or more of the Street has a “buy” or equivalent rating. Morgan Stanley analysts differ with the street on 13 out of these 35 stocks. On the other hand, there are only four stocks on which 60% or more of the Street has a “sell” or equivalent rating. Notably, Morgan Stanley analysts have a “buy” (equivalent) rating on two of these stocks. Please see pages 4 and 5 for the most bullish and bearish consensus calls along with the contrarian calls between Morgan Stanley and consensus.


• Consensus Sector Calls: The average consensus ratings have fallen since Aug-11 for five out of the 10 sectors, with Industrials leading the charge. On the other hand, Technology gained the most. The consensus ratings are most positive for Energy & Financials, while they remain least positive for Telecoms (see page 6).


• Conclusion: The sell-side consensus conviction seems to be approaching a low point. However, the consensus seems to be more constructive than Morgan Stanley analysts. The opportunity, in our view, lies at the stock level. See page 5 (and the table on the front page) highlights these calls.


To read full report: INDIA STRATEGY
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