>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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>SHAREHOLDING MONITOR

Promoters, public, FIIs and MFs are the major equity stakeholders in a listed corporate entity. Of the stakeholders, FIIs have been major investors in Indian corporates as is evident from the accompanying chart (Exhibit 1) with their holding in BSE 500 companies moving up from 11% in December 2009 to 12.2% in December 2011. The optimism displayed by FIIs in the Indian corporate growth story arises from the fact that the Indian economy remained relatively insulated from the global economic meltdown mostly on account of the strong domestic consumption, thrust on infrastructure development and a strong banking system. The resilience of the Indian economy reaffirmed the faith of FII investors who have increased their holding in Indian companies. After pulling out | 53,052 crore in CY08 during the global economic meltdown, FIIs have invested | 85,368 crore in CY09 and | 1,34,294 crore in CY10. In CY11, FII investments in equity have been volatile with a cumulative net outflow of | 3358 crore. Q1CY11 was characterised by a pre-Budget selloff with FIIs being net sellers to the tune of | 3100 crore while Q2CY11 had seen positive inflows to the tune of | 5171 crore and Q3CY11 has seen an outflow of | 2961 crore. Lastly, Q4CY11 has registered a net outflow of | 2450 crore. FII holding has declined by 4.1% in Q4CY11 with the BSE 500 index correcting by 9.5% to 5779 level in December 2011 from 6386 levels in September 2011.

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>DLF alleges INR2.8bn fraud; 4Q write-off likely

Event: According to a news report in the Times of India today, DLF has filed two complaints alleging that it was cheated out of INR2.8bn by Hyderabad based developer GSG Group, with whom it had entered into joint ventures to develop projects. The story states that as per the complaint registered by DLF with the police, the promoter of GSG Group entered into a JV with DLF to develop three projects but failed to keep its commitment on any of them and has also failed to return to DLF advances of INR2.8bn. These transactions took place between October 2006 and August 2008, while the total land area under question is 280 acres, according to the article. The report also states that the promoter of GSG Group at the moment is absconding.


Our view: This alleged fraud could result in DLF writing off INR2.8bn from its balance sheet in 4QFY12, and we estimate that this one-time loss could wipe out its profit for the quarter. While the amount is small in relation to the size of the company, we believe this case could raise questions about DLF’s management capabilities considering that despite the GSG Group failing to meet its commitment on the first project (the complaint alleges that GSG Group “deceitfully” mortgaged an alreadys old property against the advance, according to the Times of India article), DLF entered into two further alliances with the group where, too, the group failed to keep its commitment or return DLF’s advance payment, according to the report. Also, the company filed a complaint 3.5 years following the latest transaction –in our view, a significant and very surprising delay in taking action.


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>MICROSOFT CORPORATION: “Windows 8 – It’s Alive” (Positive Assessment of Windows 8 Consumer Preview)

No Surprises, Consumer Preview Looked Solid


■ First take on Windows 8 Consumer Preview
We attended Microsoft’s Consumer Preview of Windows 8 at the Mobile World Congress in Barcelona. The product looked very stable. It was running live and with live apps from the app store. The User Interface has been finished and the fit and finish looked very good. We liked the ability to use touch together with the mouse and keyboard in any combination to permit users to have the optimum experience in any of the many form factors we expect from OEM partners. The adaptation for mouse and keyboard was better than we had expected, improving the potential upgrade opportunity for notebooks and Ultrabook touch devices. We continue to expect the release to manufacturing (RTM) by August and general availability (GA) by late September or October.


■ Criticism will likely be from UI changes
The main concern may center on the difference of the overall user experience, and how jarring this change is for the end-user. Obviously, people like the touch interface of the iPad, so the fact that there is change to accommodate a new user experiences is not bad in and of itself. The issue is more how this is implemented across devices from tablets to Ultrabook touch and notebook devices, and desktops. The Windows team has made significant changes to the UI in order to optimize the experience for the introduction of touch across devices. Our assessment is that the changes are easily discoverable and enable new experiences and form factors, and while they will require users to reorient to the new interface, this is a positive end result and is well implemented across devices. Not just about competing with Apple and Android on tablets Also, in our view the key will be not just enablement of touch, but collaboration among workgroups with the new Office and integration of cloud services such as storage through SkyDrive to provide sharing of data and apps across devices. This is a big opportunity for innovation; it is not just about competing on tablets with Apple and Android. Reiterate our Buy rating on the shares and favorable valuation Still like the shares at current levels, which are trading at 10.3x our CY12 earnings estimate (ex-cash) and 9.2x EV to unlevered free cash flow.




To read full report: MICROSOFT
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