Q4 earnings impact: Brokerages have a sell call on these 5 stocks
From Havells India, Asian Paints to Avenue Supermarts, a look at the rationale behind brokerages’ sell stance
The market this week rallied on positive sentiment around better monsoon prospects, global cues as well as likely recovery in corporate earnings.
The Nifty raced past 9,367 and made a new peak at 9451. It closed 1.2% higher at 9,400 for the week ended May 12. Meanwhile, the Sensex too clocked fresh record highs, and reclaimed mount 30K.
Experts have been hoping for a recovery in earnings from this year and that will drive the markets further up.
Earnings growth is expected to pick-up and be in the range of 15-18 percent over next two years, believes Harshad Patwardhan, Chief Investment Officer, Edelweiss Mutual Fund.
“Commodity prices having stabilized is a good news for aggregate earnings growth. We believe that growth will be in the region of 15-18 percent over the next 2 years,” Patwardhan told Moneycontrol in an interview.
Having said that, there are global voices which see them to be positive only from the next year onwards.
“Valuations are a risk. But you can live with it if earnings see a pickup, which will happen in 2018 and not this year,” Andrew Holland, CEO of Avendus Cap Alt Strategies had told CNB-TV18 in an interview.
The earnings trend so far has been marginally better compared to previous years, but there are companies which have failed to impress brokerage houses.
Moneycontrol takes a look at 5 stocks that brokerages have a sell call post their earnings announcements.
Brokerage: Kotak | Rating: Sell | Target: Rs 940
Kotak observed that even if Siemens reported 25 percent YoY jump in revenue growth, earnings before interest, taxes, depreciation and amortisation (EBITDA) margins declined by 380 basis points.
What stood out was the rise in raw material costs to a 68 percent. This actually hit the EBITDA margins. The volatility in margins is the hallmark of Siemens, it said in its report.
The brokerage house now awaits for clarification from the management.
The company’s order inflows were up 96 percent YoY led by the Pugalur-Thrissur HVDC order from PGCIL in JV with Sumitomo Electric to be executed from factories in India, the report added.
“We will update estimates post management clarification at the analyst meet on May 15, 2017,” the brokerage said in its report.
Brokerage: CLSA | Rating: Sell | Target: Rs 970
The brokerage house had a sell call on the stock as valuations appear expensive.
“Asian Paints is a strong growth story but this is well captured in the valuations at 50x Mar-18CL. We tweak our estimates and continue to rate SELL with a revised target of Rs 970 based on 35x Mar-19CL,” the brokerage said in its report.
CLSA highlighted that the Q4 EBITDA was below expectations, but was ahead in terms of net earnings, which came in at 10 percent, 3 percent ahead of the estimates.
India decorative rebounds but weak international
While the Indian decorative business saw a rebound, international business was weak, it observed. “The decorative business segment in India rebounded to low double digit volume growth. In the international business, Egypt was impacted by devaluation while Ethiopia was impacted by unavailability of foreign exchange,” it said in its report.
Brokerage: Goldman Sachs | Rating: Sell | Target: Rs 440
The global investment bank based its arguments on market expectations running ahead of fundamentals.
While Q4 results do demonstrate a strong brand power, intense competition will keep margins in check, it said.
Further, it sees limited impact on operating leverage going forward. “We incorporate the completed acquisition of Lloyd consumer business into our estimates. Hence, despite FY18E/19E revenue increasing by 24/26 percent, EBITDA increases by 12 percent/8 percent only,” it said in the report.
It retains sell on the stock trading at peak valuations and with an expectation of muted growth in profitability.
Brokerage: Goldman Sachs | Rating: Sell | Target: Rs 2,888
The global investment bank stated that its guidance was at odds with the industry trends. “Their FY18 volume guidance is of double digit growth against industry growth of high single digit. This guidance appears to be in contrast to the last 5 years when Hero grew by 1 percent CAGR against industry’s 6 percent CAGR,” it said in its report.
Given Hero’s segmental exposure (12 percent scooters, 22 percent economy motorcycles (MC), 64 percent executive MC, 2 percent premium MC and segmental growth trends Goldman Sachs thinks that the management’s expectations imply optimistic growth, especially given the increasing competition.
Going forward, it sees risks of higher than expected volume growth, decreased competition and success of new launches and lower commodity prices as key risks to the stock.
Brokerage: Kotak | Rating: Sell | Target: Rs 580
D-mart stock has had a stellar run post the IPO and is now trading at 49X FY2019E P/E which is expensive according to analysts tracking Avenue Supermarts in Kotak.
“The stock at CMP is trading at 49X FY2019E P/E, expensive in our view. We retain SELL with an unchanged DCF-based target price of Rs580,” it said.“While we remain sanguine on the company’s growth prospects as well as the profitable business model, we believe current valuations are pricing in all positives,” said the report.