Three bank stocks - ICICI Bank, State Bank of India and HDFC Ltd - have received ‘buy’ ratings from sell-side analysts with 100 percent consensus as of June 2022, according data sourced from Bloomberg.
It doesn't throw up a surprise because of the high level of uncertainty with respect to demand and consequently growth, and the pressure on profitability due to higher input costs. The reversal of low interest rate cycle, possible improvement in credit offtake after Covid, cleaning of balance sheets and relatively modest valuations have come together to place banks on top of the favoured list.
Bloomberg tracks recommendations of sell-side analysts regularly. But sharing of reports and recommendation is voluntary; to that extent it is not fully representative of the market.
Other stocks on the favoured list have their unique stories. Larsen & Toubro is highly favoured, thanks to the government’s push to infrastructure and capex in the energy space that has ensured a strong order book. Some 39 analysts have a ‘buy’ rating, while only one had a ‘sell’ on the stock.
Pent-up demand in the auto sector, along with a slew of good product launches, has made analysts bullish on Mahindra & Mahindra again. With undemanding valuations, power utility NTPC is strong play on surge in energy demand along with the potential to unlock value in its growing renewal energy business.
Apollo Hospitals is preferred for its stable revenue and profitability; Bharti Airtel for stable growth with potential to raise tariffs; and SBI Life for its industry leading NBP (new business premium) growth, low cost structure, and a productive agency force which drives a steady improvement in both the VNB (value of new business) margin and operating variance.
Hindalco seems to be the last man standing in the commodity space, as analysts have already changed the stance on steel companies. They are of the opinion that Hindalco’s earnings are relatively less susceptible to commodity prices and 60 percent of its EBITDA (earnings before interest, tax, depreciation and amortization) comes from conversion business which is intact. Also, the fact that after the decline in its price, the stock is available at valuations that are near to a decade low. With the fundamentals of aluminum business still intact the stock has a favourable risk-reward ratio.
Category upgrades in the past one year
Grasim Industries has witnessed highest share of upgrades in percentage terms during the past one year. Although the quantum was tiny in absolute terms, the company saw seven ‘buy’ calls and four ‘holds’ a year ago, while in June, the company had eight ‘buy’ calls and one ‘hold’ call. During the period there have been very few cases of upgrades by analysts and that's why even this tiny upgrade got the stock right to the top of the table.
Grasim has announced aggressive plans to foray into the decorative paints segment, which if successful could alter its growth and return profile for the better.
The turn of down cycle in the automobile industry has changed fortunes of auto makers like Eicher Motors and Tata Motors. Royal Enfield and Volvo Eicher Commercial Vehicles continue to perform well and add to the bottom-line while the launch and good acceptance of new products and leadership position in EV (electric vehicle) segment has helped Tata Motors deliver sterling performance.
Both the auto giants managed to gain more than 20 percent upgrades, meaning the share of buy in total recommendation were up 20 percent during the period. In absolute terms, Eicher Motors currently has 32 ‘buy’ calls from a total of 47 analysts while it had 20 ‘buy’ calls from 43 analysts during June 2021. Similarly, Tata Motors had 21 ‘buy’ calls from a total of 34 reports in June 2021 which has now increased to 27 ‘buy’ among a total of 33 analysts.
Companies like Kotak Mahindra, Titan, HDFC Life Insurance, ITC Ltd, Bajaj Auto, Shree Cement and Coal India also saw upgrades ranging between 10 – 20 percent in percentage terms from June 2021.
Category upgrades in past one quarter
FMCG major ITC led the pack of stocks which witnessed the most upgrades in their analyst ratings during Apr-Jun quarter compared to quarter ended March 2022. Its cigarette volumes reached pre-pandemic levels, while the FMCG, hotels and paper boards business delivered strong performances in the fourth quarter of FY22.
Despite the run-up in other FMCG stocks in the last few years, ITC was lurking at the back but, when as others reversed gears, ITC has made a comeback. Analysts are upbeat on the fundamentals and expect it to deliver strong performance in the coming quarters as well. ITC got four upgrades in the past quarter, mostly from those suggesting investors to ‘hold’ the stock during the March ended quarter. Currently, it has 31 buy, 4 hold and nil sell calls.
Another stock that saw upgrades in the past quarter as HDFC Life Insurance. Three analysts upgraded their ratings from ‘hold’ to ‘buy’ during the quarter. The company is seen as well on its path to add market share. It is among the largest private life insurers in the country and experts believe that its ability to deliver growth and stability in margins across cycles does provide the necessary stability in current uncertain times.
Also, the company’s ability to switch products and channels is well appreciated, and with margins plateauing, they think the company will provide the necessary stability vs peers in growth/earnings metrics.
Eicher Motors too gained favor among analysts – it saw four upgrades to ‘buy’ during the April–June 2022 period.
Upgrades in the past one month
Over the past one month there have been hardly any upgrades with the exception of Mahindra & Mahindra (M&M), Bajaj Auto and Divi's Laboratories. In M&M, two analysts graduated their reco from ‘hold’ to ‘buy’, indicating slight bullishness. Same for Bajaj Auto which witnessed one ‘hold’ and a ‘sell’ being upgraded to ‘buy’. Divis perversely entered the list of upgrades as one analysts with a sell rating earlier dropped out of the coverage list.
Overall recommendations have not changed in large numbers despite seemingly changing dynamics, heightening uncertainty in commodity prices and pressure on margins across several sectors. But the bias clearly is towards downgrades.
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