Analyst Call Tracker: Bajaj Finserv, Grasim Industries see most upgrades in April, Infosys most downgraded

Bajaj Finserv, which posted a 31.4 percent jump in consolidated net profit for the March quarter at Rs 1,769 crore, benefitted from strong growth in the lending business as well as lower provisions.

“Healthy pick-up in lending AUM and selective approach in insurance business coupled with focus on digitisation remain positives,” analysts at ICICI Direct Research said.

Digital transformation, client additions and ambitious targets on AUM growth (25-27 percent CAGR) will further boost profitability, they said, adding that the firm is expected to clock PAT growth of over 21 percent in the next two years.

Bajaj Finserv is a financial conglomerate that holds stakes in the financing business (Bajaj Finance), as well as in the life insurance (Bajaj Life Insurance) and general insurance (Bajaj General Insurance) businesses of the group.

Besides, Bajaj Finserv has received approval from the Securities and Exchange Board of India (SEBI) for its mutual fund (MF) foray, with analysts saying its extensive distribution network and experience in the financial services space will enable it to tap the growing opportunities in the MF sector.

Grasim Industries, another diversified major with interests in sectors ranging from viscose staple fibre, to chemicals, cement and financial services, was the other stock with the most upgrades.

Grasim owns over 57 percent stake in UltraTech Cement and controls 54 percent of Aditya Birla Capital, besides small stakes in other group companies, giving it a vantage position in the domestic consumption story.

It recently announced its entry in the paints segment with a capex of Rs 10,000 crore.

“In our view, the street is not giving any value to Grasim’s maiden foray into paints business (given it is highly competitive). However, Grasim’s presence in wall-care segment (through subsidiary UltraTech Cement) offers it a fair chance to make its mark in this high growth segment,” ICICI Securities said.

“Success in paints business can drive up significant valuation re-rating over the next 2-3 years. Similarly, its foray into B2B e-commerce (mainly to trade in building materials), too, has not been ascribed any value,” the brokerage added.

However, April’s star performer was HDFC Bank with 41 ‘buy’ ratings, only 1 ‘hold’ call and zero ‘sell’ recommendations.

The country’s largest private sector bank reported a 21 percent jump in consolidated Q4 net profit at Rs 12,594.5 crore on the back of a healthy growth in revenues, net interest margins and disbursements in the retail and commercial segments.

Global broking firm Bernstein said the lender's Q4 FY23 performance met expectations and it is prepared for the HDFC merger.

HDFC Bank expects to complete its reverse merger with parent Housing Development Finance Corporation Ltd (HDFC) by July this year.

Earlier in April, it received some regulatory leeway from the RBI with respect to priority sector lending (PSL) norms for the merged entity, removing a big overhang on the stock.

Performance Pain

Infosys shocked the Street with Q4 numbers which were way below expectations, setting off an avalanche of ‘sell’ ratings by brokerages.

The company was jolted by project cancellations, margin contraction and slowing order inflows triggered by the banking crisis in the US – the bread-and-butter market for India’s software services industry.

The Bengaluru-headquartered firm guided for revenue growth of just 4-7 per cent in 2023-24 (in constant currency terms). For context, its earlier guidance stood at 13-15 percent (for FY23) and 12-14 percent (FY22).

“The guidance bakes in an ambitious ask rate of 1.6-2.7 percent CQGR, which appears uncharacteristically H2 FY24 heavy. The company is prone to subsequent downgrades,” analysts at JPMorgan said.

The change in sentiment on discretionary spending in the US and other regions was a key highlight, with market watchers saying this will have medium-term implications not just for Infosys but smaller IT companies as well.

The other company which bore the brunt of a slowdown in global markets was Bajaj Auto.

Despite the two-wheeler company delivering an around 11 percent growth in both Q4 net profit (Rs 1,704.74 crore) and revenue (Rs 8,929.23 crore) – slightly better than estimates, a sharp drop in exports unnerved the Street.

Bajaj Auto’s exports skidded 41 percent year-on-year in the March quarter and 27 percent for the entire fiscal 2023 due to weak macro conditions and low availability of dollars.

“The domestic motorcycle industry continues to see demand weakness and management is now guiding for 6-8 percent volume growth over next few quarters for the industry,” HDFC Securities said.

Lacklustre domestic demand, led by weak recovery in the rural segment, and challenges on the export front also affected its peer Hero MotoCorp, which matched Infosys in terms of the most ‘sell’ ratings in April (9 each).

Hero MotoCorp, the country's largest two-wheeler maker, posted a 5 percent y-o-y dip in total wholesales (shipments to dealers) in April at 3,96,107 units. However, exports more than halved to 9,923 units from 20,132 units in the year-ago period.

“The company expects the momentum to build up in the coming months on account of a combination of multiple factors, including a slew of new product launches, healthy growth in the country's GDP and positive consumer sentiments,” Hero MotoCorp said in a statement.

Analysts, however, added that the traditional two-wheeler players face a stern challenge in the fast-growing EV space which is dominated by the likes of Ola Electric, Okinawa, Ampere, and Ather Energy.

Quarterly Scorecard

Bajaj Finserv, Grasim and HDFC Bank again dominated the list of companies which saw the highest number of upgrades over the past quarter.

A key addition in the mix was Bharti Airtel, which is seeing a turnaround in narrative as the telecom market transitions to the 5G era.

Analysts maintain the worst is over for the sector now.

“The single-biggest disappointment for Bharti since FY10 has been its inability to generate healthy FCF (free cash flow). It has barely registered any FCF after interest payments, which has capped value creation for shareholders through dividends, buybacks or simple net-debt-reduction, which boost equity value,” ICICI Securities said.

The major factors that adversely impacted FCF generation were competitive intensity in the telecom sector, investments needed to augment spectrum portfolio and AGR dues and penalties.

However, as the industry has now consolidated into a three-player market, the scenario is set to change. Moreover, with Vodafone Idea facing a risk to its ‘going concern’ status, an effective duopoly may be in the works.

Global brokerage Jefferies believes Vodafone Idea may potentially be able to secure incremental funding given government's support but this is unlikely to match Bharti Airtel and Jio's capex plans of $9 billion and $25 billion over the next three years.

"Initials signs are already visible in recent market share trends where in VIL has lost 3 percentage points market share in metro circles in Q3 FY23. As per calculations, Bharti Airtel's fair value could rise by Rs120 per share in a duopoly," it said in a research note.

Bharti Airtel has also started taking large tariff interventions supporting revenue growth, and has built a very large spectrum portfolio across technologies, which should aid in its 5G rollout.

“Bharti’s cashflow will also benefit from steady growth in non-mobile services including FTTH and enterprise. Dividends from Airtel Africa and Indus will add to India FCF generation. Spectrum moratorium is due to end in FY26 and this will increase cash outflow towards government payment from FY27,” ICICI Securities added.

No such worries for Titan, which continued to remain a market favourite due to its continued momentum and long runway for future growth.

Titan has come a long way from pioneering in just branded wrist watches to carving a place for itself in segments like jewellery, wearables, fragrances, eyewear and accessories.

“Titan has ample opportunities for growth, given its market share of sub-10% in jewellery and the ongoing challenges faced by its unorganized and organized peers. Its medium-to-long-term earnings growth potential is unparalleled,” analysts at Motilal Oswal said.

In contrast, Infosys once again topped the list of companies with the highest number of downgrades over the past quarter, followed by HDFC Life Insurance.

HDFC Life Insurance suffered from the aftershocks of the Union Budget proposals on taxing proceeds of insurance policies with premiums in excess of Rs 5 lakh and introduction of the new tax regime, which removes almost all exemptions.

The company also reported an almost flat net profit of Rs 359 crore for the fourth quarter of FY23, as against Rs 357 crore last year, even though net premium income increased 36 percent to Rs 19,426 crore.

“HDFC Life’s share price has underperformed in the past three years. Focus is expected to shift towards protection and annuity business but sustainability of margins along with healthy premium growth needs to be watched,” ICICI Direct Research pointed out.

In absolute terms, however, the company which received the most ‘sell’ ratings over the past quarter was Divi’s Laboratories.

Revenue collapse following abatement of COVID-19 conditions, no clear visibility of a significant recovery in growth or profitability in the near term and elevated valuations are major headwinds for the active pharmaceutical ingredients (APIs) manufacturer.

Yearly Trends

Market heavyweight Reliance Industries had the maximum upgrades over the past year, with 33 ‘buy’ calls compared to 26 a year ago.

The oil-to-telecom conglomerate beat estimates with a 19 percent jump in net profit attributable to the owners of the company at Rs 19,299 crore for the March quarter of 2022-23.

Gross revenue from operations of India's most valued company came in at Rs 2.39 lakh crore, registering a year-on-year rise of 2.8 percent.

Goldman Sachs said the sequential earnings growth was led by the O2C segment on stronger gross refining margins (GRMs), and falling petchem earnings turned into a tailwind with the correction in feedstock US ethane and LPG.

The firm noted that retail continued to gain market share, with grocery revenue driven by rapid store expansion.

The capex rose to $17.6 billion in FY23 but was fully funded by cash profits. The net debt to EBITDA is well below 1x in FY23.

Many analysts said the capex/debt commentary was positive and the company's comments on disciplined capital allocation and maintaining net debt/EBITDA below 1x should assuage investor concerns on leverage.

Cigarette-to-soap maker ITC too posted better-than-expected Q4 numbers, leading to a host of positive brokerage commentary.

"With per capita consumption 1/18th of China’s, the cigarette opportunity in India remains attractive. However, with cig still contributing 85 percent to EBIT, reliance on regulated business remains high," Edelweiss said in a report.

The stock is trading at a discount to its Indian FMCG peers at 28.6 times its estimated earnings for FY19, and 25.2 times its estimated earnings for FY20. However, it is trading at a premium to global cigarette majors.

The domestic consumption story also boosted other names like Titan, Nestle India and HDFC Bank.

But bad tidings continued to stalk Divi’s Laboratories, which saw the most downgrades over the past year, followed by JSW Steel at 17 ‘sell’, 8 ‘hold’ and 7 ‘buy’ calls.

However, it was Wipro which emerged as the firm with the maximum number of ‘sell’ calls over the past year.

The company disappointed analysts with a 0.4 percent year-on-year (YoY) decline in consolidated net profit for the March quarter at Rs 3,075 crore and guided for muted 1H FY24.

Motilal Oswal expects FY24 organic growth to be one of the lowest among Tier-1 IT services peers, with margins below the management’s medium-term guided range of 17.0-17.5 percent.

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