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Indian cyclicals: More room to run? Credit Suisse says

The only four cyclicals that are trading on premiums above 100% are Ultratech Cement, Larsen & Toubro, Adani Ports and TCS

May 29, 2014 4:11 IST | India Infoline News Service
Indian cyclicals (ex-tech) have outperformed defensives by 35%, but During our visit to investors in Hong Kong last week, the three most frequently asked questions were: (1) is it time to take profits in India? (2) is there still room for Indian cyclicals to outperform defensives? and (3) is it time to buy Japan? In this note, we address the second question. Cyclicals (ex tech) to defensives price-to-book gap has narrowed from -7.7x at the May 2013 lows to -5.9x currently. But the current gap is still much larger than the gap of -3.3x at the 2008 lows.

Indian cyclicals: What is the implied ROE? Most Indian cyclicals are still only priced for a modest rise in ROE. BHEL implied ROE is 14.2% versus current ROE of 11.1%. Cyclicals such as Tata Motors, Hindalco and Hindustan Zinc are still trading on discounts using our P/BV vs ROE valuation modelso implied ROE is still lower than current ROE. The only four cyclicals that are trading on premiums above 100% are Ultratech Cement, Larsen & Toubro, Adani Ports and TCS.

The five most overvalued Indian stocks. We continue to OVERWEIGHT cyclicals and suggest funding that from expensive defensives. The five most overvalued Indian stocks using our P/BV vs ROE valuation model are Hindustan Unilever, ITC, TCS, Hero Motocorp and Sun Pharma.

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