MOSL: Morning India (30/October/17): 1. India Strategy- 2. ITC- 3. Maruti Suzuki- 4. ONGC- 5. IOCL- 6. ICICI Bank- 7. United Spirits- 8. L&T Fin.Holdings- 9. Canara Bank- 10. Cummins India
​MOrning India (30/October/17): 1. India Strategy; 2. ITC; 3. Maruti Suzuki; 4. ONGC; 5. IOCL; 6. ICICI Bank; 7. United Spirits; 8. L&T Fin.Holdings; 9. Canara Bank; 10. Cummins India
Today’s top research theme
- India Strategy: De-constructing market valuations, Lower CoE aids re-rating
- Given the context of rich valuations, in this note, we look at valuations from multiple perspectives, and present a few RoE-based frameworks to identify stocks.
- The P/E and P/B ratios do not factor in cost of equity v/s RoE dynamics. While the market is richly valued on P/B v/s RoE framework vis-Ã -vis past, the valuations are not materially different when viewed with the prism of P/B v/s excess RoE (RoE-CoE).
- Conclusions from back-testing on RoE framework: (i) Companies with the highest absolute RoE (>30) have not delivered the best returns. (ii) Companies having RoE between 15% and 20% have delivered the maximum returns. (iii) We note that RoE is an important indicator, but a significant change in RoE is more important. (iv) Companies earning well above their CoE with excess RoE (>10%) have been re-rated the most from 17x to 25x, re-emphasizing the importance of excess RoE.
- Top ideas based on excess and delta RoE: Eicher Motors, HDFC, KMB, HUL, Coal India, Sun Pharma, HPCL, Ashok Leyland, and PNB.
Piping hot news
IDFC Bank, Shriram set to call off merger talks
IDFC Bank and Shriram Capital are set to call off merger talks as both sides have failed to arrive at an acceptable valuation after four months of negotiations and regulatory misgivings, three people familiar with the matter said.
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