Analysts’ pessimism continues to be concentrated around some of the top metal and IT names on Nifty 50 in July too. The share of sell/hold calls was highest for JSW Steel, Wipro, Shree Cement, TCS and Asian Paints, data available at Bloomberg shows.
We define pessimism as the percentage of sell-side analysts who have a “hold” or “sell” calls.
JSW Steel continues to be the stock analysts are most pessimistic about. Only 8 out of 24 analysts tracking the stock have a ‘buy’ call on it. In fact, it has twice the number of ‘sell’ calls than ‘buy’ calls (16 versus 8). The stock has fallen out of favour largely because of its rich valuations compared to its peers. Moreover, decline in steel price and increased tariffs on exports have also worked against the stock’s outlook.
The IT sector outlook has weakened on fears of recession in the US and Europe, and three stocks seem to be bearing the heaviest impact from this sentiment. First is Wipro, which comes second on this list, with only 15 out of 45 analysts saying ‘buy’. Besides the sector outlook, what weighs on the stock is also its growth expectations which is the weakest when compared to peers. Second IT stock is TCS, which comes fourth on the list, and it has fallen behind Infosys on growth concerns. HCL Technologies, which is ninth on the list, saw its margins contract by 100bps qoq and there are concerns around higher subcontracting. “We also see risks to its FY23 margin guidance of 18-20% and lower our forecasts by 1-4%. We expect further cuts to consensus EPS before the stock turns,” stated Jefferies, which has given a ‘hold’ rating.
Rich valuations compared to peers is what is the primary drag on Shree Cement, which has less than half of the calls in its favour (19 out of total 47). Moreover, the cement industry is going through a phase of disruption with the entry of the Adani Group and expansion plan announced by a number of companies including UltraTech Cement, which is a leader in the industry.
Asian Paints too figures among the top five that analysts are not so hopeful about. Out of 40 analysts tracking the company, only 19 are bullish on the stock. The company has been dealing with high input costs, though lately that pressure has eased with decline in crude oil price. Rich valuation does not help.
Nestle India, Divi's Laboratories, Bajaj Auto and Kotak Mahindra Bank are other names in the top 10 list. Nestle has seen margin pressure from raw-material inflation while Divi’s Labs has been struggling for growth ever since the pandemic subsided. Analysts cite raw-material inflation and likely slowdown in demand once recession kicks in among the key reasons behind their unfavourable view on Bajaj Auto.
Exports–a large part of it to Africa, Southeast Asia and Latin America–formed 58% of Bajaj Auto’s volumes in FY22. But the export outlook looks poor with emerging market currencies weakening and low availability of the US dollar, according to Jefferies. Added to that, the company may have to deal with a 2W ban that Nigeria is considering.
Which stocks have seen the most downgrades?
JSW Steel, Divi's Laboratories and HCL Technologies–which are the top names that analysts are pessimistic about–have also seen the most number of downgrades over the last one year, data shows. For JSW Steel, buy calls plunged by more than half–eight from 19 a year ago–while HCL Tech and Tech Mahindra have seen buy calls come down to 28 and 31 from 41 each during the same period. Divis saw hold and sell calls rise from 3 to 10.
From the IT services industry, two names have seen the most number of downgrades – Tech Mahindra and TCS. These downgrades have been done despite the company executives’ efforts to downplay the impact of impending recession in their key markets.
In the metal sector, Tata Steel and Hindalco Industries join JSW Steel on this list, but at the fifth and ninth spots. Analysts have tapered their expectations for the sector itself, with decline in prices and a cooling demand scenario.
Over the last quarter, metal and IT names again feature among those that have seen the most downgrades–JSW Steel and Tata Steel from metals; and HCL Technologies, Tech Mahindra, Wipro and Tata Consultancy Services from the IT sector.
Among stocks that have seen the most downgrades are also two energy stocks--Bharat Petroleum Corp and Oil & Natural Gas Corp. The sentiment around the two seems to have soured with volatile crude oil prices and uncertainty around taxation policy.
On tracking sentiment over a month, using downgrades done over this period, names of the usual suspects feature again – Tech Mahindra, HCL Technologies, JSW Steel, Oil & Natural Gas Corp, Wipro and Tata Consultancy Services. Besides them, Bajaj Auto, Mahindra & Mahindra, Hindustan Unilever and Britannia Industries are other names – two each from the auto sector and FMCG segment. Both these sectors have been facing raw material inflation that has put pressure on their margins.
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