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MOSL: India Strategy-Contrarian Investing- Digging deeper, Exploring more angles

​India Strategy (Contrarian Investing: Digging deeper; Exploring more angles)

We interacted with 100+ investors to discuss our recently released thematic report on Contrarian Investing. Interestingly, the discussions have brought to light several fresh angles, which we will explore in this sequel report.

Price-to-Cash flow theme of Contrarian Investing: Does it work?

In the first version of ‘Contrarian Investing,’ we explored the theme using relative valuation multiples and dwelt upon P/E and P/B. We concluded that stocks belonging to low P/E quintile have significantly outperformed those from high P/E quintile over the last decade, and that the margin of outperformance is higher on trailing multiples compared to forward multiples. In this report, we will explore if it works the same way for the price-to-cash-flow (P/CF) multiple.

Our analysis reaches a similar conclusion and suggests that, in India, low P/CF stocks outperform high P/CF stocks, and that the margin of outperformance is higher with trailing multiples compared to forward multiples.

Telecom sector: A review of our framework

The Telecom sector is attracting significant attention, especially after the disruptive entry of RJio. In the previous version, we applied our framework to Metals, IT and Pharma, and concluded that (i) Metals qualified as a Contrarian Investing sector in Mar’16 quarter and (ii) Pharmaceuticals is a sector ripe for Contrarian Investing now. In this sequel, we look at the Telecom sector.

Popularity of the Telecom sector is at a multi-year low, whereas valuation is at an 11% discount to its long-term average EV/EBITDA. The combination of (a) discounted valuations relative to historical averages and (b) low popularity on ratings vis-à-vis history makes Telecom a good contrarian bet, in our view.