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Banks continue to lead in the ‘optimism’ charts, with macro and micro narratives looking good

Going by the recent rise in upgrades, positive sentiment is gathering around autos too, a sector that has seen good volumes growth and supply-side problems waning

August 06, 2022 / 12:37 PM IST
The banks are benefitting from the inflation narrative, which seems to be suggesting that the price rise might be brought under control sooner than believed. (Photo by maitree rimthong/Pexels)

The banks are benefitting from the inflation narrative, which seems to be suggesting that the price rise might be brought under control sooner than believed. (Photo by maitree rimthong/Pexels)


Bank stocks continue to enjoy the most optimism—or maximum buy calls—from sell-side analysts in July, with the sectoral outlook improving on rising interest rates, expectations of higher credit growth and lower non-performing assets (NPAs).

All the analysts covering HDFC Bank and State Bank of India (SBI) retained their ‘buy’ call from June, but one analyst among the 51 analysts covering ICICI Bank placed a ‘hold’ call on the stock.

“The banking names were always doing well but the key variable that has changed is the Fed (US Federal Reserve) narrative. The Fed’s 75 bps (basis points) hike was read by the market to be a quite benign commentary on inflation. This basically lifted sentiment across the board, including emerging markets, and this is leading to a follow-through buying of the banking sector. Secondly, there is a positive surprise on the gross and net NPA numbers, which is lifting some of the PSU banks as well,” said Harendra Kumar, managing director of institutional equities at Elara Capital.

Infrastructure sector leader Larsen & Toubro came fourth on the optimism chart, with nearly all analysts giving it a buy and the one exception in Ambit Capital pegging it for a ‘sell’. The positive sentiment towards the stock was driven by the company’s strong order book both for the domestic and international markets, its diversification into new businesses such as hydrogen and green EPC, and good working capital management.

Healthy sales in specialty generics and opportunity in the domestic and emerging markets are making Sun Pharma look good, and 93 percent of the analysts (41 out of 44) covering the stock are giving it a ‘buy’ call. While most experts are optimistic about the stock citing the company’s minimal reliance on the US market, Goldman Sachs has given a ‘sell’ call on concern about price erosion in that market.

Optimism around agrochemicals player UPL may be driven by sector dynamics such as higher food prices in the international market and fertiliser subsidies. Then there are company-specific pluses too, such as new product launches and strong growth in its international business. One concern was its lower working-capital efficiency, with inventory build-up and receivables, but the management expressed confidence about keeping net working capital days at 80, which has been the average since FY21.

Strong demand recovery for power is helping all stocks in that sector, and NTPC is riding that wave. But there are other company-specific drivers as well. According to Kumar, the triggers include capacity additions, stable return on equity and rerating because of the renewable play. “It has now become a growth stock rather than utility stock,” he said.

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Apollo Hospitals is seeing optimism on account of its market share gains and healthy cash flows that can fund its promising digital expansion; Hindalco continues to be a favourite because of its transformation into a provider of value-added products such as aluminium plates for electric vehicle batteries and its reduced dependence on London Metal Exchange price volatility; and ITC has impressed market commentators with its cigarette sales, which also came from reclaiming a slice of the pie from the grey market, and its impressive numbers in hotels and agribusiness.

Most upgrades over one year

Grasim continues to see the maximum rise in upgrades over the past year this month too. Buy calls went up by 30 percent (9 of 10 from 6 out of 10 a year ago). Analysts are optimistic about its foray into new business segments that have adjacencies with its core business, such as paints and a B2B e-commerce platform for building materials. The latter requires a capex spend of Rs 2,000 crore, which has already been approved by the management, and analysts see this as an opportunity for the company to diversify further into associated segments.

Eicher retains the second spot this month too. The share of buy calls on the share has gone up 20 percent year-on-year. That is, a year ago, 45 percent of analysts covering Eicher gave it a buy call. This July, this has gone up to 65 percent. The company is largely riding on domestic sales going up.

Titan is a new entrant in this category and has seen a 19.45 percent increase in buy calls over the last year. Its strong sales numbers for the June quarter, which was a 205 percent increase over the previous year; rising demand for jewellery, especially in the festive season; and people moving to branded jewellery gave confidence to analysts.

Tata Motors and Maruti Suzuki seem to be riding the general upbeat attitude to the auto sector, with demand improving and the shortage of semiconductors easing. The first saw the number of buy calls rise 19.45 percent (22 out of 31 analysts this year versus 17 out of 33 last year) and the second saw a rise of 17.47 percent (40 out of 53 analysts this year versus 29 out of 50 last year). Sell calls on Maruti were down from 12 to 7 this year. “The outlook for auto has improved after a few years because volumes are better, the semiconductor supply is easing, new product launches are doing well and the festive season is coming,” said Elara’s Kumar. He believes that the sector will see 18 months of secular growth now.

Strong loan growth, improvement in its interest rate margins, and a strong digital push seem to be driving the upgrades—16.67 percent on-year rise—for Bajaj Finance. The stock had 19 buy recommendations, 6 holds and 5 sells. Its parent company Bajaj Finserv was also among the stocks that saw maximum upgrades—a 16.36 percent increase over last year—again on the back of great results and the stock split announcement that was welcomed by shareholders.

A record increase in operating profits and net profit—63 percent and 41 percent on an annualised basis—in the June quarter could have lifted analysts’ outlook on Reliance Industries Ltd (RIL). It saw a 12.82 percent increase in upgrades (with 31 out of 39 analysts giving a buy call versus 24 out of 36 last year). The company’s performance was driven by its oil-to-chemicals (OTC) business and high gross refining margins (GRMs). Cash flow from this segment of the business can help the company invest in its green-energy segment too, and the latter is seeing some positive commentary from analysts as well.

Maximum upgrades over last quarter

ITC led the pack with a 14.5 percent rise in share of upgrades. Thirty-three analysts gave this stock a buy call, while only 3 gave a hold call and none a sell. Last quarter, 27 analysts had rated it a ‘buy’, 7 ‘hold’ and one had ‘sell’.

Infosys also saw upgrades rise over last quarter, though the sector margins were under pressure. Nomura, which has a buy call on the stock, said that it prefers the stock over Tata Consultancy Services in large-caps because of Infosys’ “ongoing superior revenue growth profile”. CLSA, which too has a buy rating, said, “Large deal wins were modest but new business share has improved.” It added that all negatives have been priced in.

But Kumar believes that upgrades in the tech sector are a bit premature. “The outlook on the US economy is still hazy. We are likely to see some gyrations before they settle down to a level that is more believable,” he said.

Maximum upgrades over last month

Over the last month, sentiment towards RIL, Infosys and Nestle India seems to have improved because the three companies have moved up with their share of upgrades rising.

RIL’s upgrades went up by 10.3 percent on a monthly basis, Infosys’ by 5.8 percent and Nestle India’s by 5.6 percent.

Asian Paints came fourth with a 5 percent increase in upgrades over last month, with 19 analysts giving it a buy call versus 17 a month ago. Analysts believe that despite concerns about rising competition, the company will benefit from its strong position in the decorative-paints category, ability to take price hikes and improve margins from operating efficiencies, and expansion into home decor.

The push for clean energy, which involves considerable investment in transmission, and asset monetisation that could give good dividend yields could be what is driving the positive sentiment for PowerGrid. Twenty-two out of 27 analysts who rated the stock had a buy rating.

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Asha Menon
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