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Measuring the implied value assigned to long-term growth in earnings by Mr. Market:

Long-term growth prospects as ‘perceived’ by the collective wisdom of investors (allegorised as Mr. Market) are embedded in stock prices which leads to major fluctuations in stock prices whenever those perceptions change. Change in perception regarding long-term prospects due to short term events provides maximum opportunities in investing (examples – March’20 market wide sell off; Titan in 2015-16; currently the second wave of Covid).

Segmenting the NSE200 universe based on market expectations and top picks:

Using our proprietary MILTGV framework (Market Implied Long Term Growth Value) on the NSE200 universe stocks, we classify fundamentally sound investible stocks with upsides (BUY rating by our analysts) into segments based on Mr Market’s various degrees of pessimism / optimism. Given the focus on long term growth which depends on sustainability of growth, we have preferred stocks with relatively lower ESG risk or the riskier ones showing improvement in their score

* Extreme pessimism - Negative MILTGV: Market is assigning negative value to long-term growth in earnings beyond FY23 for 18 stocks, which implies expectation of negative or near zero growth beyond FY23 consensus earnings into perpetuity.

* Stocks are largely PSUs engaged in economic activities of utilities, oil & gas and financials with a higher proportion scoring low on ESG.

* Consensus Median RoE of this bucket is 14.2% in FY23E while earnings growth over FY20-23 is 9%.

* BUY – NTPC and GAIL: Market’s assumption of negative growth into perpetuity appears too pessimistic for some of the stocks with prospects to grow and add value (RoE>ke) while improving ESG scores.

* Low expectations - 0 < MILTGV <30%: Market is assigning less than 30% of the current market value to long-term growth in earnings beyond FY23.

* 18 stocks from financials, metals and energy sector constitute the second bucket with a larger proportion of low ESG scores.

* Consensus median earnings growth of this group is expected to be 11% over FY20-23 and Median RoE in FY22 is expected to be 15.2%.

* BUY – SBI, Federal bank and BPCL: Opportunity to pick improving earnings growth and minimum value creating profile stocks with long term business track record and improving or low risk ESG score.

* Low to moderate expectations – 30% < MILTGV <50%: Market is assigning between 30% to 50% of the current market value to long-term growth in earnings beyond FY23.  32 stocks majorly from auto, financials, healthcare, IT and a mix of other sectors constitute the low to moderate expectations with lower incidence of high risk ESG scores.

* Median earnings growth of this group is expected to be 13% over FY20-23 and Median RoE in FY23 is expected to be 16.5%.

* BUY - Axis bank, Bandhan Bank, Bajaj Auto, Tata Motors: Opportunity to buy quality stocks with growth at reasonable valuations

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