Thursday, March 4, 2010

>The “Sell-Side” Consensus: Growing Conviction in Stocks (MORGAN STANLEY)

Key Debate: When we last visited the consensus ratings in Jul-09 on our coverage universe, they were the most bearish since we started collecting this data in Jun-06. Has the performance of markets changed the views of sell-side analysts? Are we approaching levels of conviction that should worry money managers?

Growth and earnings estimates have been raised by “sell-side” consensus over several months, although they appear to be lower than MS estimates. We are ahead of the consensus in terms of our top-down estimates. Our economist expects GDP growth of 7.2% and 8.5% for F10 and F11, respectively, versus consensus expectations of 7% and 8%. We expect earnings for the BSE Sensex constituents to grow at 15% and 23% for F10 and F11, respectively, versus consensus estimates of 3% and 22% for the same period.

The mean consensus rating for the MS coverage universe has been on an upward trajectory after plummeting to a low in Jul-09, and is currently at a 12-month high. On a relative basis versus July 2009, the positive conviction among the consensus appears to be stronger across the cap curve. Consensus seem sto be most bullish on mega caps, followed by mid-caps and small caps, and least positive on large-caps (market cap of US$6-9 billion). The overall conviction level has risen to 0.28 (wherein a stock rated buy gets 1, hold gets 0, and sell gets -1) from 0.07 seven months ago. Please see slide 6 for methodology even as stock prices have headed higher and valuations are richer. We find that the consensus as well as MS have a “buy” or equivalent recommendation on 51% of our coverage universe considered for this study (versus 32% in Jul-09).

MS analysts differ from the consensus on about 43% of our universe considered for this study. The MS rating is below the consensus rating in about half of these stocks and above for the rest. The strongest differences in opinion can be identified in 11 of these 46 stocks (see page 5 for details).

Within the MS coverage universe, there are 21 stocks in which 70% or more of the Street has a “Buy” or equivalent rating. MS analysts differ with the Street on three out of these 21 stocks. About half of these 21 stocks are in the Financials and Industrials sectors. Similarly, there are six stocks in which 65% or more of the Street has a “Sell” or equivalent rating. Four out of the six are in the Telecoms sector. Interestingly, MS analysts’ ratings for these six stocks are no different from the Street. The consensus ratings are most positive for Consumer Staples, Technology and Utilities, and least positive for Telecoms, Energy, and Consumer Discretionary. Our sector model portfolio is underweight Consumer Staples, Technology, and Utilities whereas it is overweight Energy and neutral on Consumer Discretionary.

Conclusion: The sell-side consensus conviction is rising but is still not at levels comparable with the end of 2007, which would worry us. We believe that the consensus needs to raise earnings estimates for the coming 12 months, which gives us comfort with respect to the rising positive opinions among the sell-side consensus. The sector level positions may be interesting, especially in Consumer Staples, Technology, Utilities, and Energy.

To read the full report: INDIA STRATEGY


‘What if’ note highlights the potential of Indian consumer finance market In an idea piece today titled ‘
What if… Chinese and Indians used more personal credit?’, Asian product manager Simon Smiles highlights the potential consumer finance market size in India which could grow multi fold from current levels if penetration reaches a fraction of that in developed markets.

Under penetrated market
Consumer finance in India even after a healthy 23% CAGR growth during FY05- 09 is still fairly underpenetrated with housing loan to GDP at ~9% and total consumer loans to GDP at ~16%. Key players in the consumer market are 1) ICICI Bank 2) HDFC Group (HDFC Bank +HDFC) and 3) State Bank of India.

Structural drivers are in place
Falling dependency ratio, rising income levels, urbanization and banks’ increasing focus on consumer loans; all of these strengthen the prospects of consumer finance in our view. Attractive risk adjusted return (normally) in consumer loans is likely to make the business more competitive but incumbents are well placed in our view.

ICICI, HDFC (group) and SBI best placed; prefer ICICI the most
Consumer loan business is cost intensive which makes achieving scale critical in ensuring sustainable profitability. ICICI, HDFC group (HDFC+HDFC Bank) and SBI are market leaders across various consumer products. We find ICICI Bank attractively valued at 1.3x PBR FY2011E (standalone entity) while SBI (1.3x FY11E PBR) is our least preferred pick. HDFC and HDFC Bank are Neutral rated.

To read the full report: INDIA CONSUMER FINANCE

>Capex Interrupted (CITI)

Global capex cycle interrupted — Global capex experienced a sharp decline during the financial crisis and economic downturn. Even with an improvement in global credit markets and corporate profitability, any capex is likely to be muted in the near term, in part reflecting tremendous excess capacity.

Secular Infrastructure Spending Disrupted by the Economic Cycle

Secular infrastructure spending — The biggest increase in capex in coming years is likely to be in areas benefiting from secular trends. This includes investment in (i) Asian infrastructure; (ii) infrastructure in the Middle-East and North Africa; (iii) developed market telecom equipment; (iv) European utilities; and (v) social
infrastructure in China.

Investment implications — We highlight 36 well-positioned companies likely to benefit from these secular trends. These companies by geography: GEMS (12),Europe (9), U.S. (8), Japan (5), U.K. (2).

To read the full report: CAPEX INTERRUPTED