IT, metals, banks, power, realty shares worth tracking in FY11.
The benchmark indices of the two main stock exchanges, the 30-scrip BSE Sensex at 17,451 and the 50-scrip S&P CNX Nifty at 5,225, are neither cheap nor costly if one considers the price to earnings (P/E) multiple of around 16 for the 20 per cent-plus estimated growth in net profit for financial year 2011.
If we assume that Sensex and Nifty companies maintain earnings growth estimates for FY11, they are expected to trade at an average P/E of 15.88 times by the end of financial year 2010-11.
At 17,451, the Sensex is trading at a P/E multiple of over 19.9 times. This is expected to come down to around 19.1 times on the basis of the estimated net profit growth for 2009-10 and around 15.88 times on the basis of the estimated net profit growth of over 20 per cent for 2010-11.
At the current level, 15 Sensex companies are trading at above average P/E, and for FY11 estimated earnings, 17 companies are likely to trade above the average P/E of 15.88 times. According to analysts, the market is fairly valued vis-a-vis estimated earnings for 2010-11 and marginally cheaper at a P/E of 13 times for 2011-12 earnings.
However, even on the basis of the profit for 2011, as many as 15 stocks are currently trading above 20 times their estimated earnings for those two years. The cheapest stocks based on two years’ forward earnings could be Grasim Industries, ONGC, Sterlite Industries and Tata Steel, which are trading at a P/E of below 10-12 times the estimated earnings for 2011. The forward P/Es of Tata Motors, HDFC, HDFC Bank, BHEL, Jaiprakash Associates, Larsen & Toubro, Hindustan Unilever, ITC, Cipla, Sun Pharma, Infosys Technologies, TCS and Wipro are 20-25 times their forward earnings.
The net profit of Sensex companies, based on research reports available in January-March 2010, is expected to grow 10 per cent in the current financial year over the net profit in financial year 2009. The net profit is estimated to grow 20.3 per cent in 2010-11. Equity analysts expect a substantial slowing of earnings growth for automobiles, cement and telecom companies. Information technology, metals, banks, power and realty companies are expected to excel in FY11. Capital goods, engineering and construction, fast moving consumer goods and refining companies are expected to show robust growth in 2010-11 forward earnings. (Click here for table CLOSE VIEW)
| NUMBERS AT A GLANCE | |||||
| PE Ratio | PE Ratio | ||||
| FY10E | FY11E | FY10E | FY11E | ||
| ACC | 16.81 | 16.33 | M & M | 16.09 | 15.39 |
| Bharti Airtel | 13.22 | 14.54 | Maruti Suzuki | 16.47 | 14.37 |
| BHEL | 26.75 | 21.40 | NTPC | 19.16 | 17.19 |
| DLF | 26.51 | 20.16 | ONGC | 11.38 | 10.09 |
| Grasim Ind | 9.49 | 11.64 | Reliance Comm | 7.15 | 8.22 |
| HDFC | 27.34 | 23.07 | Reliance Ind | 19.13 | 14.70 |
| HDFC Bank | 28.63 | 21.90 | Reliance Infra | 18.65 | 15.31 |
| Hero Honda | 18.29 | 16.21 | SBI | 13.22 | 11.63 |
| Hindalco | 11.11 | 12.38 | Sterlite Ind | 16.67 | 12.01 |
| HUL | 23.06 | 20.64 | Sun Pharma | 27.27 | 23.86 |
| ICICI Bank | 25.60 | 20.16 | Tata Motors | 21.14 | 21.39 |
| Infosys Techno | 25.62 | 22.59 | Tata Power | 16.90 | 14.15 |
| ITC | 24.79 | 21.47 | Tata Steel | - | |
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Interestingly, the growth in Sensex earnings in 2010-11 will be driven by commodity stocks, with Tata Steel making a strong turnaround, while the oil and gas giant, Reliance Industries, will be back to the high profit growth path on the back of higher gas output from the KG-D6 block. Cairn India is likely to post 300 per cent-plus profit growth in FY11 on the back of flow from its Rajasthan fields. The profit growth rate continued to be around 30 per cent for HDFC Bank. ICICI Bank, whose profitability suffered due to high-cost deposits, is expected to be back in its old groove, with net profit growth of over 30 per cent in FY11. DLF and Unitech are expected to post 20-plus per cent growth in profit on a low base, while telecom companies are expected to show a decline in net profit on account of a decline in margins.
Cement companies are expected to post negative returns, as ACC is currently trading at a P/E multiple of 16.95 times for FY10 and 16.47 for FY11 earnings, considerably higher compared to the current P/E of 11.75 based on trailing 12-month earnings. Cement analysts at Religare have arrived at a target price of Rs 819; in this case the stock will trade at 12.9 times for 2010 earnings. Ambuja Cement trades at a premium valuation of 15.1 times and 14.45 times forward earnings for FY10 and FY11, respectively. Analysts expects Ambuja cement to move around Rs 120-125.
Bharti Airtel, trading at a P/E of 12.83 times, at 13 times and 14.3 times, respectively, based on FY10 and FY11 forward earnings, will create value if Zain’s acquisition proves to be value-accretive. Cairn’s pricing, according to analysts at Goldman, is largely based on its work in Rajasthan.
With drilling in Sri Lanka starting only in 2011, its stock will, at best, track oil price movements in the coming quarters. Grasim is trading at 11.73 times FY11 estimated earnings, compared to the current P/E of 9.5 times, as analysts expect the company to show 18.5 per cent decline in net profit in FY11. Hindalco is banking on expiry of Novelis’ price contracts and cost savings. It is currently at a forward P/E of around 12 times its earnings for FY10 and FY11. Hindustan Unilever, likely to suffer a setback due to intense competition, may not see any big impact on its stock in the near future.
The stock is already down 20 per cent since P&G’s competitive action started and is close to bottoming out.
ITC is currently trading at a P/E of 26 times, and 24.7 times and 21.44 times its FY10E and FY11E earnings, respectively. Analysts expect ITC to post strong profit growth in the fourth quarter and a 13-17 per cent rise in net profit in FY11.