After a subdued performance in February, the domestic equity market went into standstill mode in March. The sudden collapse of three US banks along with the crisis at the storied Credit Suisse triggered alarm among investors over the health of the global banking system, pushing them away from risky asset classes like equities.
On top of that, relentless selling by foreign institutional investors kept the market in a narrow range through the month. Lack of positive domestic cues only added to the negative sentiment. The quantum of contrarian calls also remained muted for March due to an absence of stock-specific cues. A contrarian call is when an analyst recommends buying a stock although its price is falling, or the other way round.
Tech Mahindra, Asian Paints and Tata Steel were among the few stocks that saw some divergence between price action and analyst action through March even amid high volatility.
Shares of Tech Mahindra slipped 2.39 percent over the month as investors chose to book profits in a period of high uncertainty. However, a rejig of the company's management garnered favour from analysts. As per Moneycontrol's Analysts' Call Tracker, "buy" calls for the information technology company rose to 25 from the earlier 21 as one "hold" and three "sell" calls were reduced.
Tech Mahindra recently declared that Mohit Joshi will take over as managing director and chief executive officer-designate, succeeding CP Gurnani, who is scheduled to retire in December 2023. Joshi comes with a strong pedigree as he previously served as president for BFSI (banking, financial services and insurance) and healthcare at Infosys.
"Mohit Joshi, the incoming CEO-designate at Tech Mahindra, ticks most of the boxes to lead another turnaround, in our view. His deep client relationships in the BFSI space will help shore up Tech Mahindra's relatively sub-scale BFSI practice, especially in the developed markets. His large deal credentials could help improve the IT company's large deal win-rates," analysts at JM Financial Services wrote in a note. The broking firm also upgraded the stock to "hold" from "sell" on that account, along with an increase of 21.8 percent in its target price to Rs 1,170.
Emkay Global Financial Services also backed the view and feels Joshi's selection gives more credence to the company's overall turnaround efforts and the stock may potentially see a rerating. The brokerage firm has a "buy" recommendation for Tech Mahindra, with a target price of Rs 1,270.
Yet, even with the optimism seen for the stock over March, it is also important to note that Tech Mahindra is among the few names that saw contrarian downgrades over the quarter. During that period, "buy" calls for the company went down to 25 from the earlier 26 while "hold" ratings rose to 14 from 12.
Such a divergence between monthly and quarterly contrarian calls is on two accounts. The stock has risen around 8 percent over the quarter, but fell 2.39 percent in March. In addition to that, some analysts are yet to gain confidence that the management will actually turn things around for the IT giant.
"Tech Mahindra has underperformed its peers over the last 6-12 months both in terms of topline as well as earnings growth and stock performance. While its performance has been sub-par over this period, the matter of most speculation has been the appointment of the succeeding CEO—which has now been put to rest. Hereafter, the stock price movement would be determined by earnings growth trajectory, which would take time to resurrect, in our view, given structural changes the business requires to be able to compete with peers," Nuvama Institutional Equities wrote in its note.
However, the broking firm does not anticipate a steep downside for Tech Mahindra either as it believes its inexpensive valuation and high dividend yield limit its downside potential.
Among contrarian downgrades over the past month, no significant divergence in price and analyst action was seen in the past month. Even though two banking bellwethers, ICICI Bank and HDFC Bank, saw "buy" recommendations reduce by one and two, respectively, it was because the number brokerages covering the stocks had reduced. Fundamentally, no major developments were announced by the banks and their growth stories remain intact. A total of 50 brokerages out of the 52 covering ICICI Bank have a "buy" call for the lender. As for HDFC Bank, 40 of the total 43 maintain a "buy" rating.
Quarter-on-quarter changes
On a quarterly basis, HCL Technologies and Dr Reddy's Laboratories were two major players that witnessed contrasting price and analyst action. HCL Technologies saw its "buy" calls reduce to 26 from 30, while the stock gained 4.69 percent.
JPMorgan has cited high near-term risks for HCL Technologies and anticipates its earnings for the fourth quarter to disappoint analyst expectations. The global research and broking firm also has a cautious stance on the overall IT sector and foresees potential downside risks to earnings and multiples due to weak fourth-quarter prints and FY24 guidance.
Also Read: Analyst Call Tracker: Why are analysts lowering expectations from HCL Technologies?
ICICI Securities, which has a "hold" rating for HCL Tech, predicts that the company's results will be the weakest in their coverage universe in terms of constant currency sequential growth, at a decline of 1.9 percent, due to weak seasonality in the product and platform business.
As for Dr Reddy's Laboratories, pessimism for the stock stems from concerns of price trends in the US market. Global research and broking firm Jefferies also sees lower-than-expected growth in the US market and lower sales of the generic version of multiple myeloma drug Revlimid as the major downside risks for the stock.
According to Nuvama Institutional Equities, which has given the stock a "hold" rating, the acquisition of Mayne Pharma's US retail generics portfolio by the drugmaker for $90 million is a low-risk move, but it will not significantly benefit the company.
Nuvama also pointed out that Dr Reddy's growth in the US, excluding generic-Revlimid, will face challenges in terms of implementation due to price erosion and competition in the market for existing molecules.
Dr Reddy's Laboratories witnessed a similar trend in the yearly period as well, with downgrades for the stock rising along with positive price action.
In terms of contrarian upgrades over the quarter, Bajaj Finserv emerged as the clear winner as "buy" ratings rose to six from five and "sell" calls reduced by one alongside an 18.5 percent correction in stock price. It is the non-banking financial company's strong growth outlook that is driving analysts' optimism for the stock.
ShareKhan by BNP Paribas is of the view that the company's digital initiatives will help Bajaj Finserv achieve the next growth stage, emphasising continuous innovation. "We believe strong growth in the lending business and an improving outlook for both the insurance businesses will likely act as a positive trigger for strong consolidated earnings going forward," the broking firm highlighted in its note.
Year-on-year changes
Apart from Dr Reddy's, another stock that saw its "buy" calls reduce over the year despite positive price action was Coal India. Investors poured money into the stock on the back of its robust earnings, which reaped the benefits of increased e-auction premiums.
Emkay Global Financial Services sees Coal India as a value trap. "Coal India utilizes a large part of its operating cash flows as capex, yet both volume and EBITDA (earnings before interest, taxes, depreciation and amortisation) growths are low. Just for maintaining production at current level, Coal India needs to make continual heavy investments for land acquisition, rehabilitation, equipment and machinery," the firm said in its note.
Analysts at Emkay Global also believe that even though Coal India appears to be a value-pick based on traditional valuation metrics, its 'cheap' valuation is an illusion in their view as these conventional valuation metrics are not applicable to a company that needs to invest sizeable amounts of operating cash flow every year just for maintaining its level of production. "We, thus, believe that Coal India is a value trap," the firm noted. Emkay Global makes up one of the total five "sell" calls for the scrip.
As far as contrarian upgrades over the year are concerned, index heavyweight Reliance Industries Ltd (RIL) showed a remarkable contrast in price and analyst action. "Buy" recommendations jumped to 32 from the earlier 23 while both "sell" and "hold" calls reduced by two and eight, respectively.
Brokerages see a favourable risk-reward emerging out of RIL, especially on the back of its 11.34 percent slide over the past year on the back of concerns over high capital expenditure and, consequently, rising debt.
Also Read: Analyst Call Tracker: Bullish calls on RIL rise as risk-reward ratio improves
"Though high capex is a near-term worry, we reiterate our high-conviction ‘Buy’ rating on RIL with a target price of Rs 2,000 per share, given its industry leading capabilities across businesses, which is likely to drive robust 13-15 percent EPS CAGR (Compounded annual growth rate) over the next three-five years," wrote analysts at broking firm JM Financial Services.
Jefferies also took note of the favourable risk reward and raised its target price for RIL to Rs 2,872, in order to reflect an upside potential of over 23 percent from Monday's closing price.
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