With cyclical stocks in India having rallied in anticipation of an election induced acceleration in economic momentum and sentiment in the wake of Opinion Polls projecting most progressive Global Politician Narendra Modi Ji as the Prime Minister of India, we look at blue sky valuations for domestic cylicals. We use EV/Sales as our benchmark for manufacturing companies and P/BV for financials, inherently assuming that the profitability cycle mirrors the revenue cycle.
Industrial / Auto / Cement Stocks – Only 4 companies are trading at a (EV/Sales) valuation lesser than the last 15-year median. The implied 3-year growth rate to justify current stock price is higher than the median growth rate for 10 companies. Cement stocks, L&T, Hero, M&M, BHEL and Crompton have lower than median growth expectations. Amongst auto stocks, M&M and Hero would deliver better returns in most scenarios. Bharat Forge would be the best stock to own for best valuation scenario. Amongst cement stocks, Grasim & India Cements would outperform in most scenarios. Amongst industrials, BHEL and Crompton have the highest upside in most scenarios. L&T stands out for consistency across parameters.
The above analysis is purely based on Quantitative Research Data and doesn’t account for structural changes in business environment or any other management influencing policies.
Banking Stock Historical Valuations
Only 2 of the 13 banks are trading at higher than median valuations. Amongst private banks, Axis would outperform all others under every scenario.
Choose Banks which can play the Economic Recovery story by reducing its Non Performing Assets and the ones that can survive the onslaught of new banking license that will be handed over within the next few weeks.
Update 02-04-2014
Also Look at the Metals and Mining Space Stocks on FIIs Buy List here