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Contrarian calls: Retail finance gains, infra weakens over the year

Wipro is the only IT stock among those that inspired confidence among analysts despite price correction

September 07, 2022 / 10:34 AM IST
Analysts are bullish about the consumption theme despite price correction.(Photo by Mike B/Pexels)

Analysts are bullish about the consumption theme despite price correction.(Photo by Mike B/Pexels)

Its share price may have fallen 36 percent in the year to August, but analysts’ sentiment towards Wipro has been improving. It was among the scrips that witnessed the highest number of upgrades over the same period.

Analysts have largely turned bullish, despite correction in stock prices, on the consumption theme leaning heavily towards retail finance over the last one year. They have turned bearish, despite a rise in stock prices, on infra and energy sectors over the same period.

Also read: Small cap tech stocks that brave market correction, remain MF favourites

Wipro is the only stock from the IT industry in the contrarian-upgrade list. The sector has been seeing pressure on its operating profit margins with increased attrition, higher wage costs and lower billable headcount with massive new hiring. Even Wipro saw its margins fall to 15 percent because of manpower costs and because of its various acquisitions. It has spent more than $2.2 billion on its mergers and acquisition growth strategy.

But Edelweiss believes that the IT major’s margins seem to have bottomed out. The brokerage is extremely optimistic about the stock, seeing more than 100 percent upside left—the analysts gave a 12-month target price of Rs 851 in its July 20 report when the stock was trading at Rs 412. It is currently trading at around Rs 405.

They see revenue picking up. Total contract value (TCV) grew 32 percent year-on-year to $1.1 billion, led by 18 large deal wins, and Edelweiss’ analysts pointed to the quality of deals with more than half of it from “strategic focus areas”. Bookings in cloud services went up 35 percent on an annualised basis while that in engineering services doubled; and $100 million-plus accounts nearly doubled to 20 from 13 a year ago, and $50 million-plus accounts went up by more than 20 percent to 50 from 42 a year ago.

Top three

Bajaj Finance topped this list of analysts’ contrarian upgrades over the past year. The stock saw 15 percent more upgrades compared to last August, despite its price falling by nearly 3 percent over the same period. Non-banking financial companies (NBFCs) have seen a healthy growth in assets under management (AUM) over the last year and a large part of that comes from retail loans. In an August 24 report, Sharekhan said that companies it covers saw strong credit growth despite fears of rising interest rates. The brokerage’s analysts put this down to an improving business environment. They named Bajaj Finance and its parent Bajaj Finserv as preferred picks among NBFCs. Bajaj Finserv came fourth in the list of contrarian upgrades made over the year-ago period, getting 6.6 percent more upgrades despite its stock price falling by nearly 2.6% percent over this period.

Sharekhan analysts noted that Bajaj Finance registered a “strong AUM growth of 28 percent y-o-y (year-on-year) and 3 percent q-o-q (quarter-on-quarter), led by sharp recovery in the rural (38 percent y-o-y and 10 percent q-o-q) and SME (31 percent y-o-y and 6 percent q-o-q) segments”. SME is small and medium enterprises.

They added that the stock’s earnings y-o-y growth beat street estimates for the June quarter, even when the broader market’s (Nifty’s) earnings grew below expectations at 23 percent.

Tata Consumer Products and Dr Reddy’s Labs came second and third, respectively, on the list, with 7.6 percent and 6.5 percent rise in upgrades. Tata Consumer and Marico were among the few (if not the only two) listed FMCG companies that were able to post year-on-year growth in their operating profits in the June quarter. The others, despite shrinking their pack sizes or marking up their prices, were not able to protect their margins. Tata Consumer did it through premiumisation of its products and increasing digitisation of its supply chain. Analysts are optimistic about the ability of Tata Sampann, the organic foods arm of Tata Consumer Products, to capture market share from unorganised players.

Also read: Smaller packs, higher mark-ups fail to help FMCG cos beat inflation

Despite increasing competition in its US market and commodity-price inflation weighing on its margins, Dr Reddy’s Labs still has analysts bullish on it. This is because they see the company’s foray into newer markets such as EU5 (France, Germany, Italy, Spain and UK); new product launches in segments that see limited competition for the US market; growing market share in Russia; and easing commodity prices as a positive.

Contrarian downgrades year-on-year

Bharti Airtel’s shares have risen 18 percent over the last year, but three brokerages have changed their calls. From all 32 brokerages giving a ‘buy’ call, two have now said ‘hold’ and one has made a ‘sell’ call.

Spark Capital, which has given a sell call on the stock, had warned of higher input costs—fuel and distribution—for the telecom major. Diesel costs are a major expense for all telcos, even going up to 24 percent of their revenues. The fuel is used to power their grids and batteries.

Largely, the percentage increase in contrarian downgrades—derating despite a price increase—was in the lower single digit. Only Bharti Airtel and ONGC saw derating calls increase by 9 percent and 7.82 percent, respectively.

Bearishness around ONGC seems to have come from policy uncertainty after the government had introduced windfall taxes on the production of crude and fuel exports, and said that it would be reviewed every fortnight and later introduced modifications to the taxation policy.

ICICI Bank has been a hot favourite with Jefferies even calling it as the best banking investment globally and setting a 12-month target price of Rs 1,070 (it trades at around Rs 880 now). Analysts are largely bullish on the private sector lender with an increase of one ‘hold’ call. Bearish investors believe that ICICI Bank has largely exhausted its run up.

Contrarian calls (quarter-on-quarter)

Over the last quarter, Reliance Industries Ltd (RIL) saw the highest rise in contrarian upgrades—that is, rerating despite a price correction. ‘Buy’ calls for the stock went up by more than 10 percent over the period, compared to other contrarian upgrades, which increased between 0.89 percent and 3.1 percent.

After RIL’s recent annual general meeting, several brokerages reiterated their ‘buy’ call. According to Jefferies, succession plans were laid out as expected and the key takeaways were the management’s capex outlay of $25 billion for 5G and plans to scale up its home broadband. After factoring in the company’s plans across business segments, the analysts projected a compound annual growth rate in EBITDA (earnings before interest, tax, depreciation and amortisation) of 19 percent and attributable profit after tax CAGR of 9 percent over FY22-25E.

Over the last quarter, the increase in contrarian downgrades was much more than that in contrarian upgrades. Does it indicate increased pessimism? With ‘hold’ calls going up by 53 percent and ‘sell’ calls by 26 percent, analysts seem to be increasingly more cautious than pessimistic.

Consumption-driven stocks, such as of FMCG and retail lenders, dominated contrarian downgrades this quarter.

Britannia, Bajaj Auto and Bajaj Finserv saw the maximum increase in contrarian downgrades—16.7 percent, 14.3 percent and 10 percent, respectively. The others saw increases of between 2.7 percent and 9 percent.

Sharekhan has given a ‘hold’ call on Britannia and has said that the company’s Q1FY23 performance lagged the brokerage’s as well as the street’s expectation with revenues growing 9 percent, and higher input prices and ad spends dragging down operating profit margin by 274 basis points to 13.5 percent. “With a ~20 percent price hike in the product portfolio, recovery in biscuit sales volumes will take time,” wrote the analysts.

“In the medium term we expect volume growth to hover at 6-8 percent led by distribution expansion (especially in Hindi-speaking towns), market share gains and good traction to new launches,” they added.

Contrarian calls (month-on-month)

Over the last month, there were no contrarian rerating of stocks but at least 10 stocks saw contrarian derating.

Over this period, the infrastructure sector featured prominently in contrarian downgrades. After Bajaj Finserv, which saw the highest increase (10 percent) in contrarian downgrades, came Power Grid Corporation with a 5.5 percent increase.

Mahindra and Mahindra and Adani Ports and SEZ, which saw the highest price increases in this set at 9.65 percent and 9.52 percent, saw 1.9 percent and 0.5 percent increase in derating.

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Asha Menon