Auto, financial stocks draw more upgrades, tech suffers downgrades

The Motown push
“The passenger vehicle (PV) segment continued its good performance in Aug'22, with original equipment manufacturers (OEMs) witnessing a surge in volumes owing to a strong orderbook and an increase in production due to better semiconductor supply,” said ICICI Securities’ report released on September 2.

On Eicher, analysts at Sharekhan expect the company’s addressable market in two-wheelers to expand, thanks to its new Hunter 350, refocus on core brands, premiumisation trend in the sector and robust export opportunities. They also expect the CV segment’s contribution to the company’s PBT to quadruple over two fiscals – from 3 percent last fiscal to 12 percent in the next. According to its September 1 report, the valuation looks attractive too.

“Given a strong business outlook and robust earnings growth of 48.3 percent CAGR during FY22-24E, the valuation is yet to catch up with an expected recovery in performance, as the stock trades at a 20-25 percent discount to its historical average multiples,” the report said.

Despite seeing a contraction in its margins in the June quarter, ITC is second on the list as analysts are optimistic about the FMCG major because of its significant growth in sales, its ability to take price hikes and operating leverage and premiumisation of products.

Its hotels businesses reported a significant increase in the top line post reopening and its agri business raked in big money–-with 82 percent year–on-year (y-o-y) rise in revenue--from its exports of grains and tobacco leaf.

The company was also able to profit from cigarette sales shifting from grey market to organised retail.

“The next leg of growth for FMCG will be led by ITC’s focus on product mix, go-to-market strategy and increasing focus on direct-to-consumer platform, while prices of key input cost will be key monitorable,” noted analysts at Religare Broking in its August 2 report that gave a 'buy' call.

Titan, which saw the third-highest rise in upgrades, posted phenomenal results in the first quarter. Its net profit rose more to Rs 785 crore in Q1FY23 from Rs 20 crore in Q1FY22; and its total income went up to Rs 9,005 crore in Q1FY23 from Rs 3,314 in Q1FY22. Brokerages are particularly optimistic about its foray into wearables and about Caratlane.

Maximum upgrades q-o-q Reliance Industries saw the biggest 10.26 percent increase in ‘buy’ calls over the quarter ended August, followed by ITC (8.73 percent) and Nestle (5.41 percent) over the same period.

Despite policy uncertainty over the taxation of fuel exports, more analysts have expressed their confidence in RIL. After the recent annual general meeting, brokerages reiterated their ‘buy’ calls citing the company’s new-energy plans and 5G plans, and clarity on succession planning. Jefferies has projected an Ebitda CAGR of 19 percent and an attributable PAT CAGR of 9 percent over FY22-FY25.

Nestle’s operating margin was squeezed following input-price increases but three more analysts have given a 'buy' call over the quarter ended August. They are counting on the company’s rural push, varied and diversifying product portfolio, and its foray into pet and toddler nutrition.

Maximum downgrades
The technology sector saw the most downgrades over the year ended August. Three tech companies — HCL Technologies, Tata Consultancy Services and Tech Mahindra — saw buy calls fall by 17 percent to 26.7 percent.

After tech, infra-themed and energy have the largest presence on this list.

JSW Steel tops it with a 32 percent increase in downgrades over the past year. Buy calls have fallen from 18 to 8 over this period. Brokerages have been bearish on the steel sector itself, seeing demand revival as sluggish with the global slowdown. The sentiment is being weighed down also by export duties imposed on the commodity and China’s steel mills resuming production.

Also read: Private capex still below pre-pandemic levels, but there's reason for optimism

Over the last quarter, Britannia saw the highest increase in downgrades, with buy calls falling from 26 to 20 over the three months. The derating seems to have been led by the margin pressure the company experienced with prices of raw materials such as wheat and palm oil going up. Macquarie, which has retained its 'neutral' call, has said that the company intends to raise prices to offset input cost pressure. But that would mean concerns around the company losing its market share.

The second on the list is Bajaj Auto, with hold calls rising to 15 from 10 three months ago and sell calls rising to 7 from 4 over the same time period. Analysts have been worried about the company’s export business. The latest report from Amsec (formerly Asian Markets Securities) stated, “We have been highlighting earlier that exports from Bajaj Auto could come under significant pressure due to adverse macro factors at the importing countries (currency depreciation in LATAM, lower forex reserves may compel temporary import restrictions), Sri Lanka, Nigeria and Egypt crisis. The August exports seem to reflect these concerns (~145,000 units in Aug' 22 vs ~201,000 in Aug'21).”

Policy uncertainty seems to have driven analysts to increase their hold calls on ONGC to 7 from 2 three months ago. Meanwhile, they have reduced their buy calls to 19 from 23 over the same time period. The government had introduced a windfall tax this July, to be levied on domestically produced crude and export of fuel. The taxation rates are reviewed every fortnight and stock prices of upstream companies have reacted significantly to adverse announcements.

Month-on-month change

Increase in upgrades over the last month was between 0.4% to 5.6%, while increase in downgrades over the same period was much higher--between 3.2% and 13.2%. Upgrades were led by stocks such as ITC, Eicher Motors and Titan, which seems to indicate bullishness around retail spending. While downgrades were led by stocks such as Britannia and Bajaj Finserv, the list was dominated by PSUs such as Bharat Petroleum, Power Grid, State Bank of India and Coal India.

Over the last month, sentiment towards Britannia seems little improved. Analysts reduced their buy calls on the stock by 13%. Their hold calls on the stock rose to 16 from 10 a month ago, and sell calls remained at 4 over the same period.

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