Thematic | Contrarian Investing
India Strategy
Please refer our report dated
23 June 2017
Contrarian Investing – Quarterly Update
A review of our contrarian investment strategies
Our thematic strategy note on
Contrarian Investing,
published in June 2017 gives a
detailed account of the subject matter. In this note, we have reviewed the
performance of our strategies. Also, since we use quarterly rebalancing to test our
hypothesis, we have run the updated quintiles as on December 31, 2017 and
present key findings along with our top contrarian bets.
Key takeaways from 3QFY18 quintiles
Please refer our report dated
23 August 2017
Our analysis suggested that, over a longer term, neutral to moderately popular
stocks deliver significant outperformance, even bettering the performance of
the most popular stocks.
In this quarter, neutral to moderately popular stocks as
well as the most popular stocks failed to beat the benchmark. The most popular
stocks delivered the worst return in this quarter, whereas the least popular
stocks performed the best.
Our findings proved that, over the long term, out-of-favor low P/E stocks deliver
disproportionate returns, significantly beating the benchmark. In contrast, the
performance of high P/E stocks is dismal.
In this quarter, high P/E stocks
delivered the best returns, whereas the low P/E quintile failed to beat the
benchmark.
Similarly, out-of-favor low P/CF stocks deliver disproportionate returns,
significantly beating the benchmark. In contrast, the performance of high P/CF
stocks is dismal.
In this quarter, low P/CF stocks delivered the 2
nd
best returns,
whereas the high P/CF quintile performed the worst.
We also note that in some sub-themes, the returns from a quintile deviate from
the long-term pattern highlighted in our initial detailed note. However, this is in
line with the trends observed even in the long-term study – where returns can
deviate for a quarter here and there but over a long period, the hypothesis is
proven right. For example, in the Popularity theme, instead of Quintile-4,
Quintile-5 has delivered the best returns in 3QFY18. Quintile-5 is the worst
performing quintile over the last decade.
Best delta: Consensus change from net sell to net buy
As a part of our analysis, we
have divided BSE100 in 5
groups of 20 – Quintile-1
(Q1), Quintile-2 (Q2),
Quintile-3 (Q3), Quintile-4
(Q4) and Quintile-5 (Q5),
respectively, with Q1 being
composed of the most
popular stocks and so on
Top contrarian picks
Our findings suggested that a simple strategy of investing in stocks for which
analyst consensus has changed from “net sell to net buy” with a holding period
of one year has delivered 24.1% annual returns over the last 10 years.
Net Sell to Net Buy stocks for 3QFY18: Stocks that satisfy this criterion for
3QFY18 are – Jet Airways, Marico, PNB, United Spirits, and Dr Reddy’s.
We highlight our top contrarian Buy and Sell picks based on the various themes we
have covered in this note as well as in the past –
Popularity, Relative Valuations,
Net Sell to Net Buy, Consensus Sells.
Contrarian BUYs: Lupin, Hero Motors, Nestle, HPCL, Sun Pharma
Contrarian SELLs: KMB, Ultratech Cement, JSTL, GAIL and Bajaj Finance
Gautam Duggad – Research analyst
(Gautam.Duggad@MotilalOswal.com); +91 22 3982 5404
January 2018
Bharat Arora – Research analyst
(Bharat.Arora@MotilalOswal.com); +91 22 3982 5410
1
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.

Thematic | Contrarian Investing
Exhibit 1: Performance of our preferred quintiles
560
460
360
260
160
60
Indexed Returns
Low PE
Neutral Stocks
Perfromance of different themes
Low PCF
BSE 100
567
559
539
316
Source: Bloomberg
Exhibit 2: Top Contrarian BUY ideas
Company
Lupin
Hero Motors
Nestle
HPCL
Sun Pharma
Popularity
score
3.41
3.62
3.51
3.46
3.37
% of
Buy/Hold
Ratings
80
83
76
70
70
Correction
12 month
from 52w
return (%)
high (%)
-41.5
-12.2
-2.7
-13.7
-19.8
-38.3
19.7
33.2
29.4
-9.3
FY18E
PE (x)
21.3
19.8
54.5
10.1
27.5
PE -
Prem/Disc
to LPA (%)
-20.8
11.7
14.6
63.1
-19.6
FY18E
PB (x)
2.5
5.9
21.0
2.3
3.3
PB -
EPS CAGR
Prem/Disc
FY17-19 (%)
to LPA (%)
-50.4
-4.2
6.4
67.3
-38.0
0.3
8.2
12.8
3.6
1.7
Exhibit 3: Top Contrarian SELL ideas
Company
Kotak Mahindra Bank
Ultratech Cement
JSTL
GAIL
Bajaj Finance
Popularity
Score
4.00
3.91
3.88
3.84
3.92
% of
Buy/Hold
Ratings
92
85
88
82
88
Correction
12 month
from 52w
return (%)
high (%)
-8.5
-3.1
-1.4
-3.5
-11.0
40.6
31.1
51.8
50.8
98.5
FY18E
PE (x)
25.8
31.8
11.4
16.1
29.7
PE -
Prem/Disc
to LPA (%)
-0.6
1.0
-14.6
8.7
56.2
1 Yr Fwd
PB (x)
3.8
4.1
2.1
1.9
5.4
PB -
EPS CAGR
Prem/Disc
FY17-19 (%)
to LPA (%)
18.4
16.1
60.8
28.5
58.6
24.6
24.2
15.6
13.2
39.6
Exhibit 4: Performance of our Contrarian Buy and Contrarian Sell calls indicated in last quarterly update
Contra buys
Axis Bank
Sun Pharma
HPCL
Dabur
RECL
BSE100
Price Return
6.7
6.5
-7.5
11.2
5.8
5.4
Contra Sell
Eicher Motors
Wipro
LIC HF
Bajaj Finance
GAIL
BSE100
Price Return
-9.7
9.7
-14.0
-6.2
14.4
5.4
Note: in bold stocks which didn’t perform as per expectations, Source: MOSL, Bloomberg
January 2018
2

Thematic | Contrarian Investing
Contrarian Strategies
1
Popularity as the selection criterion
Does a stock’s popularity with analysts have a
meaningful impact on its performance?
2
Consensus Sell rating (%) as the selection criterion
Sell recommendations are not as common as buy/hold
recommendations, and possess scarcity value.
3
Consensus Buy rating (%) as the selection criterion
With the scarcity value theme of consensus sell ratings
playing out well, we put to test the street’s capability
to predict the winners.
4
Consensus recommendation change from “Net Sell”
to “Net Buy”
Valuation
1
2
3
P/E
P/B
P/CF
January 2018
3

Thematic | Contrarian Investing
1
Neutral to moderately popular stocks (Q4) emerge
winners
In our first note on the theme,
Contrarian investing: It pays to be different,
we had
demonstrated that over longer periods of time, neutral to moderately popular
stocks have performed the best. And results are independent of whether the returns
are measured on average basis or median basis.
Exhibit 5: Stocks on which analysts are neutral to moderately positive have given best returns
600
400
200
0
Absolute Total returns(Average
)
Performance of different quintiles of BSE100 by popularity ( quarterly rebalance)
Most Popular(CAGR-14.6%)
Q3(CAGR-6.4%)
Q5(CAGR-7.3%)
Q2(CAGR-13.6%)
Q4(CAGR-16.6%)
BSE100(CAGR-11.0%)
539.3
446.8
406.9
316.4
217.5
198.4
Source: Bloomberg
Above exhibit can be read as follows:
INR1k invested in Quintile-4 in December 2006 would be worth INR5.39k today.
Similarly, it can be read for other quintiles.
Summary of 3QFY18 performance of various quintiles:
In the quarter ended December 2017,
Both the most popular stocks and neutral to moderately popular stocks failed
to beat the benchmark BSE-100.
Most popular stocks (Q1) were the worst performing group, whereas least
popular stocks (Q5) were the best performing group.
Surprisingly, Q5 is the best performing quintile, followed by Q2, Q3, Q4 and Q1.
In our first note on this theme, we had highlighted that typically Q5 and Q3 are
the worst performers – this quarter seems an exception.
It’s important to note that investing in stocks as per popularity metric (in Q4)
would deliver the best returns over a longer period of time, though there may be
periods of underperformance on quarterly basis.
Exhibit 6: Both neutral and most popular stocks fail to beat benchmark, whereas
unpopular stocks have done well
Q1
Total returns
6.8
Q2
10.6
Q3
8.7
Q4
7.9
Q5
18.1
BSE100
8.6
Source: Bloomberg
Following a simple strategy of investing in Quintile-4 (neutral to moderately popular
stocks) could generate a significant alpha over the benchmark.
January 2018
4

Thematic | Contrarian Investing
Our study had proven that the most popular (Q1) and the second-most popular (Q2)
quintiles have also beaten the BSE-100 benchmark returns. We have categorized
BSE-100 constituents in 60 winners and 40 losers.
Exhibit 7: Updated quintiles of BSE100 constituents divided in five quintiles as per
popularity
Q4
TCS IN
SUNP IN
HMCL IN
AL IN
INFO IN
POWF IN
JSTL IN
GAIL IN
WPRO IN
HCLT IN
NMDC IN
ARBP IN
RIL IN
TATA IN
BPCL IN
NTPC IN
Q1
MM IN
BHE IN
BRIT IN
Z IN
VKI IN
APNT IN
MRCO IN
SIEM IN
PIDI IN
CROMPTON IN
HUVR IN
EIM IN
NEST IN
TVSL IN
DABUR IN
CCRI IN
Q2
TTAN IN
CLGT IN
HAVL IN
GCPL IN
APHS IN
EXID IN
ABB IN
GNP IN
BHFC IN
BOS IN
HDFC IN
CDH IN
LT IN
ACEM IN
BHEL IN
KKC IN
Q3
ITC IN
MSIL IN
BJAUT IN
UTCEM IN
TGBL IN
SRCM IN
DIVI IN
ACC IN
ADSEZ IN
MSS IN
CIPLA IN
BHIN IN
PLNG IN
BAF IN
MRF IN
UPLL IN
Q5
TECHM IN
LPC IN
BHARTI IN
COAL IN
GRASIM IN
HNDL IN
VEDL IN
IOCL IN
PWGR IN
ONGC IN
HPCL IN
TPWR IN
TTCH IN
TTMT IN
LICHF IN
RECL IN
Source: Bloomberg
Among the current constituents of BSE-100, we note that Quintile-4 (Q4) has
popularity score ranging from 3.34-3.67. We are highlighting Lupin, Sun Pharma,
Hero Motors, Nestle and HPCL as our contrarian Buy ideas based on popularity
metrics.
An important question remains unanswered.
Why does the quintile composed of
stocks that have low consensus ratings/popularity (Quintile-4) outperform all the
other quintiles, even bettering the performance of the most popular stocks?
This is because the investment thesis of the most popular stocks is quite popular,
making them more likely to be discussed in the market. And, as such, there are
fewer marginal buyers with time. On the other hand, neutral to moderately popular
stocks are usually neglected by the street and their drivers are evolving. As the
drivers evolve, there is a sudden surge in investor interest in such stocks, leading to
a spike in returns. Thus, the stocks that were previously neglected by investors
deliver significant outperformance.
On the other hand, the least popular stocks underperform. This is because the least
popular stocks have a lot of sell recommendations. Sell recommendations are not
popular on the street – only about 17% of recommendations are sell as against 59%
buy and 24% hold. So, they have scarcity value and are more likely to be acted on.
January 2018
5

Thematic | Contrarian Investing
Exhibit 8: Snapshot of Quintile-4 (neutral to moderately popular stocks)
Company
Ashok Leyland
Asian Paints
Axis Bank
Container Corpn.
Cipla
Divi's Lab.
Eicher Motors
Godrej Consumer
Havells India
Hero Motocorp
HPCL
IDFC Bank
Cummins India
LIC Housing Fin.
Lupin
Nestle India
Power Fin.Corpn.
Rural Elec.Corp.
Sun Pharma.Inds.
Tech Mahindra
Popularity
Score
3.6
3.3
3.4
3.4
3.7
3.6
3.6
3.6
3.4
3.6
3.5
3.6
3.6
3.6
3.4
3.5
3.5
3.6
3.4
3.6
CMP
INR
129
1,190
556
1,432
611
1,090
28,514
989
548
3,686
426
68
939
567
919
7,788
126
161
584
550
Mcap
INR B
376.6
1,141.1
1,425.1
349.1
491.4
289.4
776.6
673.7
342.5
736.1
648.6
230.2
260.2
286.1
415.5
750.9
333.2
318.3
1,401.8
539.1
Trailing PE(x)
5-year
Avg.
105.7
52.0
17.4
27.6
33.6
25.9
44.1
43.0
35.7
21.1
9.7
22.4
29.7
14.7
29.0
64.6
7.2
5.2
38.9
15.4
Current
28.1
57.3
36.6
49.1
48.6
27.5
49.5
52.2
65.2
22.4
10.3
18.1
34.0
14.7
15.6
81.9
15.1
4.9
19.7
14.3
PE
Prem/
Disc(%)
-73.4
10.1
109.9
77.8
44.6
6.3
12.1
21.5
82.6
6.1
5.9
-19.4
14.7
0.3
-46.1
26.8
110.1
-6.2
-49.4
-6.6
Pat(INR M)
FY17
13,325
20,163
36,793
9,259
12,766
10,604
16,780
12,876
5,969
33,771
62,088
10,197
7,346
19,311
25,574
11,924
67,810
61,070
62,890
27,470
FY18E
13,630
20,692
45,642
10,407
18,169
8,602
22,415
14,400
7,192
36,211
54,139
9,445
7,024
20,066
16,972
12,400
71,908
68,120
34,921
32,200
PAT
ROE(%)
CAGR(%)
FY19E FY17-19
18,244
24,793
79,810
13,457
21,719
11,612
29,151
16,679
8,908
38,724
65,098
10,984
9,285
22,954
19,297
14,166
79,822
78,639
53,096
34,910
17.0
10.9
47.3
20.6
30.4
4.6
31.8
13.8
22.2
7.1
2.4
3.8
12.4
9.0
-13.1
9.0
8.5
13.5
-8.1
12.7
FY17
23.1
28.5
6.9
10.8
10.2
22.0
37.3
24.6
18.2
35.7
32.4
7.2
21.2
19.1
20.9
40.9
17.9
19.9
18.1
18.4
Source: MOSL, Bloomberg
January 2018
6

Thematic | Contrarian Investing
Best delta: Consensus change from “net sell” to “net
buy”
We looked at instances of change in consensus rating from ‘net sell’ to ‘net buy’ over
2006-2017 across BSE-100 constituents. A change in consensus rating from ‘net sell’
to ‘net buy’ means a change in consensus rating from <3 to >3. We found that a
strategy of investing in stocks with consensus rating change from <3 (net sell) to >3
(net buy) yields better results than any other strategy discussed in this study.
Essentially, these are stocks, which have been ignored, have negative news flow, and
are battling short-to-medium-term challenges. Thus, typically they have consensus
popularity rating <3. However, marginal earnings surprise, improvement in news
flow, and beaten down valuations are some of the factors that result in popularity
scores moving closer and then upwards of 3 (Net Buy). These stocks are yet to
become over-owned/most popular names on the street (e.g. Quintile-1 of the
Popularity thesis discussed in earlier sections).
By investing in stocks for which consensus recommendation has changed from ‘net
sell’ to ‘net buy’ as soon as they have been upgraded, and then holding them for 12
months, an investor would have earned an average return of 24.1%.
Exhibit 9: Indexed return over 12 months from “net sell to net buy” change
132
124
116
108
100
t
t+1
t+2
t+3
t+4
t+5
t+6
t+7
t+8
t+9
t+10
t+11
t+12
Source: MOSL, Bloomberg
Avg. Return of stocks(consensus change from Net sell to Net Buy)
124.1
Exhibit 10: Returns have been significant across all years (2003-2017)
Average Returns
No. of companies
79.4
41
32.5
14
8
25.6
11
42.0
37
26
17
2.5
10.9
4.0
22
21
20.0
17
25.9
24.2
9
17
19.4
-5.7
Source: MOSL, Bloomberg
January 2018
7

Thematic | Contrarian Investing
We highlight that the investment was made after the stock’s popularity rating
changed from -3 to +3, that is, from ‘net sell’ to ‘net buy (and not ‘consensus buy’).
Qualitatively, it suggests that when consensus recognizes the changing fortunes of
an underlying business and upgrades ratings, it pays to be among the early birds in
investing in such a business. Our study shows that returns earned from this strategy
are healthy even in absolute terms. However, one needs to be early to catch these
returns, certainly before the stock becomes a consensus buy and crosses a
popularity score of 3.5.
We applied this framework on BSE-100 constituents. Below is a snapshot of stocks
where the consensus popularity score has changed from <3 to >3.
Jet Airways
has become a “net buy” from “net sell” in January. New strategic
initiatives (focus on cost efficiency and debt reduction) taken by the newly
appointed CEO will likely ameliorate the stressed financials, whereas rising crude oil
prices can be a big overhang.
Among the BSE-100 stocks, Marico, PNB, United Spirits, and Dr Reddy’s have turned
“net buy” from “net sell” in the last two months.
Exhibit 11: Stocks where popularity has improved from <3 to >3, recently
Company
Jet Airways
Marico
PNB
United Spirits
Dr. Reddy
Sep-17
2.71
3.00
2.64
2.83
2.86
Oct-17
2.71
3.10
3.07
3.09
2.98
Nov-17
2.71
3.21
3.05
3.09
3.20
Dec-17
3.13
3.26
3.17
3.09
3.28
Source: Bloomberg
Exhibit 12: Performance of stocks that have turned ”net buy” from “net sell” in CY17
Company
Biocon
Bank of Baroda
Ambuja Cement
ACC Cement
Havells
CGPower and Indust.
NMDC
BEML
Divis Laboratories
Nestle
Marico
PNB
Shipping Corporation of India
United Spirits
Shree Cement
Dr. Reddy
Jet Airways
Month
Price Return
(as on 12th Jan.)
31-Jan
60.4
-13.1
9.3
4.1
16.1
21.8
22.3
-2.3
27.8
7.9
-0.8
-11.6
3.6
24.8
-0.3
7.2
-0.6
Nifty Returns
24.8
14.8
12.2
6.0
6.0
7.7
7.7
9.1
9.1
9.1
3.3
3.3
3.3
3.3
3.3
4.4
1.4
Alpha
35.6
-27.9
-2.9
-1.9
10.1
14.1
14.6
-11.4
18.7
-1.2
-4.2
-15.0
0.2
21.5
-3.7
2.7
-2.0
30-Apr
30-Jun
31-Jul
31-Jul
31-Aug
31-Aug
30-Sep
30-Sep
30-Sep
31-Oct
31-Oct
31-Oct
31-Oct
31-Oct
30-Nov
31-Dec
Source: Bloomberg, MOSL
January 2018
8

Thematic | Contrarian Investing
2
Consensus sells are significant underperformers
The underperformance of Quintile-5 (the least popular stocks) in the popularity
theme proves that owing to their scarcity value, sell recommendations can be quite
efficient in predicting stock performance.
This scarcity value prompted us to look at consensus sell ratings in isolation. In our
note on
Contrarian Investing,
we had highlighted our finding that Quintile-1,
composed of stocks with the highest consensus sell ratings, underperformed the
market significantly. So, the consensus has been quite right in predicting sells.
This
can have meaningful implications for investors who can short-sell stocks.
Exhibit 13: Quintile-1, with highest consensus sell ratings, is the biggest underperformer
600
400
200
0
Absolute Total returns(Average
)
Performance of different quintiles of BSE100 by consensus sell rating ( quarterly rebalance)
Q1(CAGR-7.7%)
Q2(CAGR-12.9%)
Q3(CAGR-9.8%)
Q4(CAGR-11.7%)
Q5(CAGR-14.0%)
BSE100(CAGR-11.0%)
423.7
380.0
336.5
316.4
278.8
225.7
Source: Bloomberg
On the other hand, Quintile-5, composed of stocks with the least consensus sell
ratings, performed the best.
In the September-December quarter,
Q1, with the highest consensus sells, performed the best amongst all quintiles,
whereas Q5 with the least consensus sells performed the worst. This result is in
sync with the underperformance of the most popular quintile observed in
consensus rating theme. However, it is in disagreement with our empirically
established relationship.
It’s important to note that investing in stocks as per consensus sell rating (in Q5)
would deliver the best returns over a longer period of time, though there may be
periods of underperformance on quarterly basis.
Q1 was the best performing group, followed by Q4, Q3, Q2 and Q5.
Exhibit 14: Quintile-1, with highest consensus sell ratings, performed the best during this
quarter
Q1
Total Returns
19.46
Q2
7.35
Q3
8.06
Q4
13.03
Q5
4.13
BSE100
8.57
Source: Bloomberg
January 2018
9

Thematic | Contrarian Investing
We present below the snapshot of Quintile-1 of current BSE-100 constituents, with
the highest SELL ratings and low popularity score.
Exhibit 15: Ten stocks with highest SELL ratings in BSE 100 – Quintile-1 of Consensus Sell
theme
Company
BHEL
TVS Motor Co.
ABB
Wipro
Idea Cellular
DLF
Siemens
Colgate-Palm.
Power Fin.Corpn.
Shree Cement
Buy
7
12
8
5
8
6
9
13
10
17
Sell
27
23
16
23
10
6
9
14
6
12
Hold
9
3
5
22
8
4
6
11
1
9
% of Sell
ratings
63
61
55
46
38
38
38
37
35
32
Popularity
Score
2.1
2.4
2.4
2.3
2.8
3.0
3.0
2.9
3.5
3.3
Source: Bloomberg
The list is dominated by companies from the Capital Goods sector (3),
along with one
each from Auto, Technology, Telecom, Real Estate, FMCG, NBFC and Cement.
January 2018
10

Thematic | Contrarian Investing
Consesus buys are not always great investments
3
To test the efficacy of consensus buy ratings, we repeated the analysis with buy
ratings (%), and found that consensus buys are not necessarily great investments.
Q4, the quintile with the second-lowest (in terms of percentage) consensus buy
ratings, delivered the maximum returns! Q4 has been the front runner, almost
through the entire decade.
Exhibit 16: Quintile-4 has been the best performer amongst all quintiles
550
450
350
250
150
50
100
Absolute Total returns(Average
)
Performance of different quintiles of BSE100 by consensus buy rating ( quarterly rebalance)
Q1(CAGR-11.6%)
Q3(CAGR-10.8%)
Q5(CAGR-5.9%)
Q2(CAGR-10.8%)
Q4(CAGR-14.6%)
BSE100(CAGR-10.5%)
472.4
346.5
334.9
316.4
219.9
Source: Bloomberg
So, contrarian investing does work with consensus buy recommendations, and in
fact, Q4 of popularity theme and consensus buy theme have several common
members amongst themselves.
In the quarter ended December 2017,
Q1, with the highest consensus buys, was the worst performer amongst all
quintiles, failing to beat the benchmark.
On the other hand, Q5, with the least
buy ratings, performed the best.
Q2, with the second-highest buy ratings, was the second best-performing group,
followed by Q4, Q3 and Q1.
Q4, the contrarian quintile for generating returns, came up third in this quarter.
It’s important to note that Q4 of popularity theme and consensus buy rating
theme have several members in common. For more details, please refer to our
first note on the theme.
Exhibit 17: Q5, with the least consensus buy ratings, performed the best, whereas Q4
came up third
Q1
Total Returns
6.2
Q2
10.8
Q3
7.6
Q4
9.3
Q5
18.7
BSE100
8.57
Source: Bloomberg
January 2018
11

Thematic | Contrarian Investing
Exhibit 18: Ten stocks with highest BUY ratings in BSE 100 – Quintile-1 of Consensus Buy
theme
Company
Bajaj Holdings
MRF
Vakrangee
Vedanta
M&M
HDFC Bank
ICICI Bank
Tata Global
Tata Chemicals
Titan Company
Buy
3
7
6
23
41
50
46
9
8
27
Sell
0
0
0
0
0
2
2
1
0
2
Hold
0
0
0
1
4
3
3
0
1
2
% of Buy
ratings
100
100
100
96
91
91
90
90
89
87
Popularity
Score
5.0
5.0
5.0
4.9
4.8
4.7
4.7
4.6
4.8
4.6
Source: Bloomberg
Amongst these companies,
Tata Global
has amongst the lowest return ratios
amongst consumer companies, and after the appointment of Mr N Chandra as
Director of Tata Sons, the stock has garnered the street’s attention in anticipation of
major strategic changes in the business model.
M&M
is the best bet on rural recovery, as recovery in rural markets improves
visibility of volumes in the tractor and UV businesses.
ICICI Bank
is showing early
signs of stabilization in asset quality as evident from the steady decline in its
stressed assets pool. Operating performance in the core business remains on track
while 18-20% growth in the retail business will further help de-risk the loan
portfolio.
January 2018
12

Thematic | Contrarian Investing
Low P/E stocks outperform high P/E stocks
1
The most favored stocks by the market – the stocks with the highest P/E ratio – give
dismal returns. On the other hand, the least favored stocks – the stocks with the
lowest P/E ratio – are rewarded by the market.
The results of this quarter are
different from expected lines – high P/E stocks are the best performing group and
low P/E stocks have been the second-best performing group.
Exhibit 19: Low P/E stocks outperform market, whereas high P/E stocks fail to beat the market
600
400
200
0
High PE(CAGR-8.0%)
Q3(CAGR-14.0%)
Low PE(CAGR-16.1%)
Q2(CAGR-10.0%)
Q4(CAGR-5.3%)
BSE100(CAGR-10.5%)
Performance of different quintiles of BSE100
544.7
439.6
316.3
301.3
275.6
180.5
Source: Bloomberg
Investors/analysts have consistently overvalued the favorite stocks and undervalued
the out-of-favor stocks! We repeated the same analysis with trailing multiples, and
found that trailing multiples are better predictors of returns, generating significant
alpha over the benchmark, BSE-100.
Exhibit 20: The results are better with trailing P/E ratio
575
400
225
50
Absolute Total returns(Average
)
High PE(CAGR-5.3%)
Q3(CAGR-11.3%)
Low PE(17.1%)
Performance of different quintiles of BSE100
Q2(CAGR-11%)
Q4(CAGR-7.4%)
BSE100(CAGR-11.0%)
567.5
325.9
316.4
314.4
218.7
176.5
Source: Bloomberg
Key updates from 3QFY18 on P/E quintiles
In the quarter ended December 2017,
The high P/E quintile has performed the best, generating significant alpha over
the benchmark, contrary to the established thesis. On the other hand, low P/E
stocks were the second worst performing group on trailing P/E metric.
It’s important to note that quintile performance can depart from our assertion
that “low P/E stocks dominate other quintiles” in some quarter, but over a longer
period, low P/E stocks should outperform other quintiles as per our detailed
study over ten years.
January 2018
13

Thematic | Contrarian Investing
Exhibit 21: Low P/E stocks delivered the second worst returns, whereas high P/E stocks
delivered the best returns
Q1
Total Returns
12.76
Q2
13.85
Q3
7.80
Q4
5.75
Q5
6.95
BSE100
8.57
Source: Bloomberg
Low P/E stocks offer higher dividend yield (2.5%) than the market (1.5%), which acts
as a support for stock performance in a downturn. On the other hand, stocks with
high P/E ratios offer lower dividend yield (0.4%) than the market. Worse, they fail to
deliver the growth they promise based on higher P/E ratios!
Exhibit 22: High dividend yield supports performance of low P/E stocks in bear phases
%
Perfomance of Quintiles
Total Return
Price Return
17.1
14.5
Dividend Return
2006-2017(curr.)
11.0
7.4
5.2
0.4
Q1
Q2
1.4
Q3
1.7
Q4
2.1
Q5
2.5
1.5
BSE 100
Source: Bloomberg
9.5
11.0
5.3
4.9
9.5
11.3
9.6
Exhibit 23: Snapshot of winners – low P/E stocks
Company
Bajaj Holdings
BPCL
Grasim Inds
HCL Technologies
HPCL
Indiabulls Hous.
Infosys
IOCL
LIC Housing Fin.
Lupin
NMDC
NTPC
ONGC
Power Fin.Corpn.
Power Grid Corpn
Rural Elec.Corp.
Tech Mahindra
Popularity
Score
5.0
3.9
4.0
3.9
3.5
4.0
3.8
4.1
3.6
3.4
3.3
4.5
4.3
3.5
4.5
3.6
3.6
CMP
INR
2,816
490
1,222
926
426
1,227
1,078
388
567
919
155
172
200
126
197
161
550
Mcap
INR B
313.4
1,063.6
803.3
1,288.6
648.6
523.1
2,355.2
1,884.1
286.1
415.5
489.8
1,418.2
2,569.9
333.2
1,028.0
318.3
539.1
Trailing PE(x)
5-year
Avg.
7.7
13.8
14.8
18.3
9.7
10.9
17.8
13.7
14.6
29.7
11.8
11.2
12.0
6.8
13.9
5.4
15.1
Current
12.6
10.6
16.7
14.5
10.5
17.5
14.3
9.6
16.4
17.9
14.6
12.9
10.7
15.1
14.8
4.8
13.9
PE
Prem/
Disc(%)
64.2
-22.9
12.6
-20.6
7.8
60.2
-19.9
-30.4
12.2
-39.8
23.7
15.0
-10.8
121.9
6.3
-10.4
-8.3
Pat(INR M)
FY17
24,732
95,070
31,673
84,570
62,088
29,064
143,830
198,495
19,311
25,574
31,504
98,595
210,759
67,810
73,090
61,070
27,470
FY18E
80,496
38,257
87,625
54,139
35,456
145,022
183,784
20,066
16,972
43,273
110,862
246,034
71,908
91,204
68,120
32,200
PAT
CAGR(%)
FY19E FY17-19
100,651
54,511
90,309
65,098
45,068
150,112
194,484
22,954
19,297
40,235
129,251
299,745
79,822
106,738
78,639
34,910
-100.0
2.9
31.2
3.3
2.4
24.5
2.2
-1.0
9.0
-13.1
13.0
14.5
19.3
8.5
20.8
13.5
12.7
ROE(%)
FY17
14.9
32.4
10.8
27.5
32.4
25.5
22.0
20.7
19.1
20.9
13.5
10.5
10.1
17.9
15.6
19.9
18.4
Source: MOSL, Bloomberg
January 2018
14

Thematic | Contrarian Investing
Exhibit 24: Snapshot of high P/E stocks
Company
ABB
ACC
Ambuja Cem.
Apollo Hospitals
Asian Paints
Bharti Airtel
BHEL
Britannia Inds.
Crompton Gr. Con
DLF
Havells India
Hind. Unilever
M & M Fin. Serv.
Nestle India
Pidilite Inds.
Titan Company
TVS Motor Co.
Vakrangee
Popularity
Score
2.5
3.2
3.1
4.4
3.3
4.2
2.2
4.1
4.5
2.9
3.4
4.0
4.0
3.5
3.8
4.5
2.4
5.0
CMP
INR
1,472
1,805
270
1,161
1,190
509
103
4,705
272
268
548
1,373
480
7,788
907
904
751
442
Mcap
INR B
311.8
339.0
535.4
161.6
1,141.1
2,036.3
377.1
564.9
170.4
478.5
342.5
2,971.2
296.7
750.9
465.3
802.8
356.7
468.0
Trailing PE(x)
5-year
Avg.
95.0
31.5
32.0
48.6
51.2
38.4
25.7
46.1
47.7
41.9
33.9
41.9
23.8
63.0
44.6
42.3
32.0
64.4
Current
78.8
51.6
54.5
49.0
56.0
57.5
62.0
61.8
45.0
41.0
56.0
56.6
64.6
75.1
52.7
68.1
55.9
83.8
PE
Prem/
Disc(%)
-17.1
63.7
70.1
0.9
9.3
49.9
141.5
34.1
-5.6
-2.1
65.1
34.9
171.2
19.2
18.0
61.0
74.5
30.0
Pat(INR M)
FY17
4,175
6,788
9,703
2,210
20,163
44,421
4,917
8,843
2,932
7,148
5,969
42,490
4,002
11,924
8,579
8,017
5,581
5,308
FY18E
4,032
9,132
12,178
3,797
20,692
11,950
10,770
10,142
3,250
6,293
7,192
49,366
8,284
12,400
8,824
11,041
6,754
10,253
PAT
CAGR(%)
FY19E FY17-19
5,995
12,739
15,263
5,527
24,793
22,518
8,626
12,823
4,068
8,240
8,908
59,723
11,475
14,166
10,653
14,104
12,186
13,251
19.8
37.0
25.4
58.1
10.9
-28.8
32.4
20.4
17.8
7.4
22.2
18.6
69.3
9.0
11.4
32.6
47.8
58.0
ROE(%)
FY17
12.7
7.9
5.1
6.3
28.5
6.6
1.5
36.9
76.4
2.9
18.2
66.5
6.4
40.9
28.2
20.6
25.6
29.2
Source: MOSL, Bloomberg
January 2018
15

Thematic | Contrarian Investing
Low P/B stocks dominate, but overall results mixed
2
Our empirical analysis suggests that high P/B stocks have delivered the best returns
over the last 10 years, closely followed by Q2, which is followed by low P/B stocks.
However, low P/B stocks have dominated other quintiles for most of the decade.
P/B
Exhibit 25: Returns of BSE-100 and all quintiles barring Quintile-4 are quite close
450
350
250
150
50
High PB(CAGR-14.3%)
Q3(CAGR-10.1%)
Low PB(CAGR-12.7%)
Q2(CAGR-13.1%)
Q4(CAGR-7.9%)
BSE 100(CAGR-11.0%)
Performance of different quintiles of BSE100
432.6
385.9
371.4
316.4
286.7
231.0
Absolute Total returns(Average
)
Source: Bloomberg
We have repeated the same analysis with trailing P/B ratio. The low P/B stocks
based on trailing BV did better than low P/B stocks based on forward BV, whereas
the high P/B stocks did somewhat worse. Again, low P/B stocks led the other groups
for the majority of the decade and are the second-best performing group.
Exhibit 26: Trailing P/B ratio also presents the same picture
450
350
250
150
50
Absolute Total returns(Average
)
High PB(CAGR-12.7%)
Q3(CAGR-7.2%)
Low PB(CAGR-14.0%)
Q2(CAGR-12.8%)
Q4(CAGR-9.9%)
BSE 100(CAGR-11.0%)
Performance of different quintiles of BSE100
420.4
374.9
371.5
316.4
281.5
215.3
Source: Bloomberg
However, the results are again much less appealing as compared to the P/E theme.
In the September-December quarter, the results were on expected lines, with low P/B
stocks delivering the best returns, followed by high P/B quintile.
Exhibit 27: Low P/B stocks (Q5) have delivered the best return, followed by high P/B stocks
(Q1)
Q1
Total Returns
12.13
Q2
2.79
Q3
6.59
Q4
10.11
Q5
20.24
BSE100
8.57
Source: Bloomberg
January 2018
16

Thematic | Contrarian Investing
Low P/CF stocks outperform high P/CF stocks
P/CF
The least popular (out of favor) stocks with low P/CF ratio outperformed every other
group, generating an alpha of 4.4% (returns CAGR of 15.4%) over the benchmark
(BSE-100: CAGR of 11%). High P/CF stocks also delivered decent returns, beating the
BSE-100 benchmark.
Exhibit 28: Low P/CF stocks beat high P/CF stocks
650
450
250
50
Absolute Total returns(Average
)
High PCF(CAGR-11.6%)
Q3(CAGR-11.2%)
Low PCF(CAGR-15.4%)
Q2(CAGR-10.9%)
Q4(CAGR-6.4%)
BSE 100(CAGR-11.0%)
Performance of different quintiles of BSE100
482.5
335.3
322.8
316.4
312.6
197.0
Source: Bloomberg
We repeated the same analysis with trailing P/CF ratios. The outperformance
increased with trailing ratios. The low P/CF quintile outperformed every other
group. The high P/CF quintile delivered the least returns, failing to beat the
benchmark and underperformed every other quintile. This is in harmony with our
analysis on the P/E theme.
Exhibit 29: Margin of outperformance increases significantly with trailing P/CF ratios
650
450
250
50
Absolute Total returns(Average
)
High PCF(CAGR-5.1%)
Q3(CAGR-12.6%)
Low PCF(CAGR-16.9%)
Q2(CAGR-10.7%)
Q4(CAGR-13.0%)
BSE 100(CAGR-11.0%)
Performance of different quintiles of BSE100
558.5
382.1
367.7
316.4
306.1
172.2
Source: Bloomberg
Key updates from 3QFY18 on P/CF quintiles
In the quarter ended December 2017,
The low P/CF quintile (Q5) has performed the second-best, beating the BSE-100
benchmark.
The high P/CF quintile (Q1) has performed the worst, in accordance with our
analysis and failed to beat the BSE-100.
It’s important to note that quintile performance can depart from our assertion
that “low P/CF stocks dominate other quintiles” in some quarter, but over a
longer period, low P/CF stocks have outperformed every other quintile.
January 2018
17

Thematic | Contrarian Investing
Exhibit 30: Low P/CF stocks deliver the best returns, whereas high P/CF stocks deliver the
worst returns
Q1
Total Returns
7.99
Q2
8.80
Q3
10.02
Q4
8.64
Q5
9.15
BSE100
8.57
Source: Bloomberg
The low P/CF stocks offer higher dividend yield (2.2%) than the market (1.5%); this
acts as a support for stock performance during a market downturn. On the other
hand, stocks with the highest P/CF ratios offer lower dividend yield (0.50%) than the
market. Worse, they often fail to deliver the growth that analysts envisage for them.
Exhibit 31: High dividend yield supports low P/CF stocks in bear market
%
Perfomance of Quintiles
Total Return
12.6
9.0
1.66
Q2
Q3
Price Return
13.0
Dividend Return
16.9
14.7
11.2
11.0
9.5
2006-2017(curr.)
10.7
5.1 4.6
0.52
Q1
10.5
2.09
Q4
1.79
Q5
2.22
1.50
BSE 100
Source: Bloomberg
Exhibit 32: Summary of low P/CF stocks
Company
Bharti Airtel
Coal India
Grasim Inds
Hindalco Inds.
HPCL
IOCL
LIC Housing Fin.
Lupin
ONGC
Power Grid Corpn
Rural Elec.Corp.
Tech Mahindra
Tata Power Co.
Tata Chemicals
Tata Motors
Vedanta
Popularity
Score
4.2
3.7
4.0
4.6
3.5
4.1
3.6
3.4
4.3
4.5
3.6
3.6
3.2
4.3
4.3
4.9
INR
509
308
1,222
269
426
388
567
919
200
197
161
550
99
764
436
339
INR B
2,036.3
1,911.9
803.3
603.2
648.6
1,884.1
286.1
415.5
2,569.9
1,028.0
318.3
539.1
268.0
194.7
1,387.7
1,258.6
5-year
Avg.
6.0
11.0
8.0
6.3
4.4
7.0
6.8
26.7
5.5
5.9
3.2
10.9
12.8
8.2
5.1
4.7
P/CF
Current
9.2
8.6
8.0
7.9
6.4
6.6
5.5
9.9
6.5
6.5
4.0
10.7
5.9
5.9
5.6
7.5
Prem/
Disc(%)
52.8
-22.4
0.3
26.0
45.9
-18.1
-62.9
10.9
24.4
-1.8
-54.0
-28.3
9.0
61.9
FY17
44421.1
31673.0
19068.8
62088.0
19310.5
25574.3
73089.8
61069.6
27470.4
20063.9
9931.1
56266.1
Pat(INR M)
FY18E
11950.3
38257.2
41408.0
54139.0
20066.0
16971.8
PAT
ROE(%)
CAGR(%)
FY19E FY17-19
22517.6
54511.0
57597.4
65098.0
22953.5
19296.6
-28.8
33.9
31.2
73.8
2.4
-1.0
9.0
-13.1
19.3
20.8
13.5
12.7
5.7
7.6
75.1
70.1
FY17
6.6
37.8
10.8
7.4
32.4
20.7
19.1
20.9
10.1
15.6
19.9
18.4
17.1
13.5
9.8
9.7
92677.5 114612.7 166177.2
-6.1 198494.9 183783.6 194484.1
18.5 210758.9 246033.8 299744.7
91204.4 106737.8
68119.7
32199.7
19969.6
11033.7
78638.6
34910.4
22399.9
11496.5
67288.3 111373.4 206259.2
91115.0 162768.1
Source: MOSL, Bloomberg
January 2018
18

THEMATIC/STRATEGY RESEARCH GALLERY

Disclosures:
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the subject company at the end of the month immediately preceding the date of publication of the Research Report.
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as the recommendations made by the analyst(s) are completely independent of the views of the associates of MOSL even though there might exist an inherent conflict of interest in some of the stocks mentioned in the
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Research Analyst may have served as director/officer, etc. in the subject company in the last 12 month period. MOSL and/or its associates may have received any compensation from the subject company in
the past 12 months.
Thematic | Contrarian Investing
.
So, we repeated the same analysis on BSE-100 excluding banks. The results were
similar, with low P/B stocks dominating, but high P/B stocks have also delivered
significant returns. Similar results were achieved with forward P/B ratios.
In the last 12 months period ending on the last day of the month immediately preceding the date of publication of this research report, MOSL or any of its associates may have:
a)
managed or co-managed public offering of securities from subject company of this research report,
b)
received compensation for investment banking or merchant banking or brokerage services from subject company of this research report,
c)
received compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company of this research report.
d)
Subject Company may have been a client of MOSL or its associates during twelve months preceding the date of distribution of the research report.
MOSL and it’s associates have not received any compensation or other benefits from the subject company or third party in connection with the research report. To enhance transparency, MOSL has incorporated a Disclosure
of Interest Statement in this document. This should, however, not be treated as endorsement of the views expressed in the report. MOSL and / or its affiliates do and seek to do business including investment banking with
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appropriate to your specific circumstances. The securities discussed and opinions expressed in this report may not be suitable for all investors, who must make their own investment decisions, based on their own investment
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the information and opinions contained in this document. The Disclosures of Interest Statement incorporated in this document is provided solely to enhance the transparency and should not be treated as endorsement of the
views expressed in the report. This information is subject to change without any prior notice. The Company reserves the right to make modifications and alternations to this statement as may be required from time to time
without any prior approval. MOSL, its associates, their directors and the employees may from time to time, effect or have effected an own account transaction in, or deal as principal or agent in or for the securities
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Registration details of group entities.: MOSL: SEBI Registration: INZ000158836; CDSL: IN-DP-16-2015; NSDL: IN-DP-NSDL-152-2000; Research Analyst: INH000000412. AMFI: ARN 17397. Investment Adviser: INA000007100.
Motilal Oswal Asset Management Company Ltd. (MOAMC): PMS (Registration No.: INP000000670) offers PMS and Mutual Funds products. Motilal Oswal Wealth Management Ltd. (MOWML): PMS (Registration No.:
INP000004409) offers wealth management solutions. *Motilal Oswal Securities Ltd. is a distributor of Mutual Funds, PMS, Fixed Deposit, Bond, NCDs, Insurance and IPO products. * Motilal Oswal Commodities Broker Pvt. Ltd.
offers Commodities Products. * Motilal Oswal Real Estate Investment Advisors II Pvt. Ltd. offers Real Estate products. * Motilal Oswal Private Equity Investment Advisors Pvt. Ltd. offers Private Equity products
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