Analyst ratings on cyclicals yet to reflect Street optimism

In last three months, cyclical stocks are riding high on expectations of a stable govt.

Mumbai | Published: May 16, 2014 1:32:28 am

By FE Bureau

Even as market experts expect cyclical stocks to extend their recent gains and lead the market rally after the election results, analyst ratings are still to reflect this optimism. A compilation of Bloomberg data shows certain bluechip front-runners in last three months have run ahead of their respective 12-month consensus target price even as buy ratings on these stocks remain relatively low.

Stocks like BHEL, State Bank of India, Ambuja Cements, Hindalco and Punjab National Bank (PNB) are trading at 30% to 10% premium to one-year consensus target price. The buy recommendations on these stocks also remain muted accounting for 15%-40% of the total analyst ratings.

In the last three months, cyclical stocks from financial, capital goods, infra and auto space are riding high on expectations of a stable government and economic recovery. Even those stocks with beaten-down valuations added to the rally even as fundamentals, including the order book, higher bad loan levels, leveraged balance sheets and demand recovery weighed on the earnings of these companies. However, compounding hopes of the Bhartiya Janta Party winning the election have fuelled the Street’s enthusiasm in anticipation of a faster project clearances and fiscal prudence helping the business environment.

Nomura had recently reiterated its preference for rate cyclicals that it expects to benefit from higher growth expectations, a compression of credit risk premiums and potential fiscal consolidation.

According to Edelweiss Securities, a stable NDA government with Narendra Modi as the Prime Minister, will be a clear positive for investors and business confidence. The domestic broking house thinks the current risk-reward is in favour of staying invested in the market and remains biased towards cyclicals.

“Among sectors, our bias is towards cyclicals, particularly banks and autos, as these are inexpensive and will be the first to witness cyclical recovery,” Edelweiss said in a strategy report.

Based on such hopes, scrips like Hindalco, L&T, BHEL, SBI, PNB and Bank Of Baroda have rallied over 40%, although analyst calls — primarily based on the future cash flow a company and the fundamentals of the sector to which they belong — remain subdued.

For example, while the total buy ratings constitute only 15% of the total recommendations on BHEL, the stock which has rallied 44% since mid-February now trades 30% above the consensus target price of Rs 152.34.

Meanwhile, defensive stocks from IT and Pharma space that have underperformed the Sensex gains (19%) in the last three months offer 15% to 20% upside for the next one year based on the consensus price target. Nearly two third of the total ratings on such bluechips are to buy these stocks.


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