Exaggerated enthusiasm

Written by Devangi Gandhi | Mumbai | Updated: Jun 14 2014, 09:47am hrs
The latest market rally is driven by the expectation that the BJP government will fast-track pro-industry policy changes. Anticipations of an economic revival and its positive fallout on the earnings trajectory of corporate India, especially in certain cyclical sectors, is cited as the key sentiment steering stock prices to multi-year highs.

While analysts also endorse the earnings potential of cyclical companies, the upward revisions to target prices of many stocks are not accompanied by significant rating upgrades.

An FE compilation of Bloomberg consensus data on analyst ratings and 12-month target price shows that for several stocks the revised target prices appear to be in line with the current momentum in prices even as rating upgrades trail. For example, one-year consensus target prices of stocks like Coal India, Tata Power, BPCL, NMDC, ONGC and RIL and Tata Steel, which have observed several rating downgrades since mid-April, have enjoyed 8-15% upside revisions since May 16, 2014, when the BJP government achieved a strong mandate.

While one would expect the earnings revision to be the reason for such upbeat price targets, that is not the case for most stocks. For example, in case of ONGC while FY16 consensus earnings upgrades (earnings per share) remained quite robust between mid-February and mid-May, rising from R36.93 to R39.27, after the elections it remained flat more or less. ONGC has been downgraded by three broking houses, including HSBC, and total buy ratings on the stock as a percentage of total recommendations have come down to 10.3% from 75.5% in mid May. However, for several stocks, such as Axis bank, SBI and L&T, higher targets are accompanied by sustained momentum in higher earnings revisions and a good number of rating upgrades.

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