Hindalco tops optimism as China reopens, financials remain Street's top sectoral pick

Hindalco Industries was the frontrunner among the list of stocks that analysts were most optimistic about in January, even though financial companies occupied half of the list.

When it came to the list of stocks that analysts on the Street were most pessimistic about, information technology counters were the clear winners as four out of the five frontline large-cap IT stocks made it to the list. The list was however, topped by JSW Steel, as per  Bloomberg's Analyst Call Tracker for January.

Strong credit growth sparks optimism

Optimism for banking stocks hinged on the strong credit growth and improved asset quality in the sector.  Robust loan growth, strong recovery in demand for working capital and sustained asset quality which comforted lenders to lend more are the key factors behind the bullishness as stated by analysts.

Even though concerns of an economic slowdown in the country are running  high, brokerage firm Kotak Institutional Equities does not expect much impact on the asset quality of banks. . "We are seeing a strong recovery in loan growth after nearly a decade, suggesting that if there is a slowdown in
the near term, the impact on asset quality should be low," the brokerage said in its report.

"We shall keep our positive view on the sector, even if the probability of growth slowing down from current levels is high," Kotak Institutional Equities added.

Out of the 10 stocks that analysts were most optimistic about, 5 came from the financial space. State Bank of India, SBI Life Insurance Co, ICICI Bank, Housing Development Finance Corp and Axis Bank  enjoyed optimism scores ranging from 95 to 98 as the sector cinched the throne of the Street's darling.

We define optimism scores as the percentage of sell-side analysts who have a “buy" call on the respective stock.

Hindalco Industries emerges winner

The world's largest metal importer, China reopened its borders after three years which has sparked expectations of a demand revival and aided outlook for industry major Hindalco Industries.

Global research and broking firm CLSA Asia Pacific Markets believes that a faster reopening in China and stimulus for its battered property sector has provided a new lease of life for metal companies, although on-ground demand improvement is still elusive.

On account of the aforementioned reasons, CLSA was among the list of 24 brokerages that gave a Buy call for Hindalco Industries.

The broking firm also raised its price target for the aluminium major by 12.6 percent to factor in expectations of improved demand. All 24 brokerages covering Hindalco Industries have given a Buy rating to the stock, taking its optimism score to 100.

Pessimism clouds JSW Steel, IT stocks

January was yet another month when analysts failed to see a bright light around JSW Steel and other major IT counters. JSW Steel, Wipro and Divi's Laboratories were the top three stocks where analysts' pessimism ran the highest. Pessimism score refers to the percentage of analysts that have a "hold" or "sell" rating on the stock.

JSW Steel had the highest number of Sell ratings at 19, a number which is more than three times the number of Buy calls which stand at 6. Expensive stock valuations and higher levels of debt are the prime concerns dragging sentiment for the stock. Despite expectations of improved earnings due to the reopening of China, many analysts believe that expensive stock valuations will factor in any positive quarterly results for JSW Steel.

Also Read: Analyst Call Tracker: Why are fireworks missing for JSW Steel even as China reopens

On the other hand, four frontline IT majors- Wipro, HCL Technologies, Tata Consultancy Services and Tech Mahindra also failed to garner much bullishness from analysts. As dark clouds of a possible recession in the US and Europe gather pace, concerns of a sharp slowdown in growth for domestic IT companies is weighing on the sector.

"After the 3Q results of IT companies so far, we expect aggregate revenue for Indian IT firms to sharply moderate in the next financial year. Our growth assumptions are lower than the street and as growth expectations moderate, further derating in PE multiples is likely as seen in the past. Moreover, the Nifty IT index is still trading at an above-average premium of 17% to the Nifty 50 as its valuations remain rich," Jefferies said in a note.

Index heavyweight Infosys remains the only IT stock that enjoys a Buy call from the global research and broking firm.

Also Read: Analyst Call Tracker: How Infosys bucked the pessimistic outlook for IT cos

An unexpected participant

A surprise element in the list of stocks that garnered optimism among analysts on the Street was Adani Ports and Special Economic Zone. The stock had an optimism score of 95 as 20 out of the 21 brokerages covering the scrip had a Buy call.

Analysts were bullish on the stock as the company is the largest
commercial port operator in India with 25% share of port cargo movement in India.

"We upgrade Adani Ports to Outperform (from Neutral) based on attractive valuations post its recent correction. Strong underlying business with a robust growth outlook provide downside support," broking firm Credit Suisse said in its report.

Aside from Credit Suisse, Kotak Institutional Equities was another brokerage house that upgraded its rating for Adani Ports to factor in a favourable risk reward on the back of the recent landslide in the stock.

"Adani Ports is a strong play on India’s port sector, having attractive
characteristics – pricing power, prospects of privatization. The company also has a strong right to win in offering an end-to-end logistics offering," Kotak Institutional Equities said in its report.

Another interesting fact to note is that despite their ratings upgrades, both Credit Suisse and Kotak Institutional Equities have slashed their respective target prices for the scrip. While Credit Suisse lowered its target price for Adani Ports by around 11 percent, Kotak Institutional Equities cut its target price by 6.5 percent.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.