Thunuguntla said stocks in non-banking sectors have been languishing that reflects the impact of a slow economy
Since budget is the first week of July, the Sensex and Nifty have lost over 5 percent, largely dragged by lower-than-expected Q1 earnings.
Broader markets have fared worse with Nifty Midcap down 9 percent and Smallcap falling 11 percent.
"Corporate earnings have been a major worry for the past five years. The current quarter is presenting some interesting developments. The BFSI stocks have been doing well," Jagannadham Thunuguntla, Senior VP & Head of Research (Wealth), Centrum Broking told Moneycontrol.
He attributes the buoyant performance of banking sectors to the cleaning of the balance sheet over the last 2-3 years and low base effect.
Thunuguntla, however, said stocks in the other sectors have been languishing that reflects the impact of a slow economy.
Kotak Securities expects 5-6 percent cut in Nifty earnings forecast for FY20. "Second quarter of FY20 is also looking as challenging as the first quarter. This means the asking rate to reach full-year estimates could be a tall order in the second half of FY20," Rusmik Oza, Head of Fundamental, Kotak Securities told Moneycontrol.
Amid the gloomy outlook, there are certain companies that have posted steller profit growth in June quarter, prompting the analysts to upgrade the ratings on respective stocks.
Here are top 10 stocks which saw rating upgrade from brokerages after June quarter earnings:
Brokerage: Motilal Oswal
Voltas: Upgrade to Buy | Target: Rs 700 | Return: 16 percent
Consolidated revenue increased 24 percent YoY in Q1, led by strong 47 percent growth in unitary cooling products (UCP) segment. As a result of a higher effective tax rate (32 percent versus estimate of 27 percent) and higher losses in JVs, net profit increased at relatively low rate of 6 percent YoY (in-line).
Motilal Oswal expects Voltas to attain EBIT margin of 13 percent in FY21, slightly below the average of 14 percent over FY14-18.
The brokerage raised its adjusted consolidated earnings estimate by 2/6 percent for FY20/21, led entirely by UCP segment. It continues valuing UCP at a target multiple of 35x FY21 estimated EPS. Target price now stands at Rs 700. At CMP, the stock trades at multiples of 28x for core UCP business. It upgraded the stock to buy.
HPCL: Upgrade to Buy | Target: Rs 295 | Return: 19 percent
Low oil prices, stable rupee and benign competition would ensure that marketing margins remain healthy, benefitting HPCL the most.
HPCL plans to infuse BS-VI-compliant fuel into its pipeline from end-2019, which might earn premium margins for BS-VI fuel from FY21. The brokerage revised gross refining margin (GRM) estimate for HMEL refinery to $8 a barrel (from $12 a barrel) to take into account the poor refining environment.
Healthy marketing margins, the lack of competition, expected structural reforms and a sharp stock price correction over the last month prompted Motilal Oswal to upgrade the stock to buy, valuing it at Rs 295, at 1.2x FY21E PBV.
Mphasis: Upgrade to Buy | Target: Rs 1,120 | Return: 17 percent
Motilal Oswal's estimates for the company are largely unchanged post the results. Mphasis has been among the few mid-tier IT companies over the last few quarters, where growth visibility has been intact and margin estimates have not seen a downward revision (in part due to the already low base).
Company has amongst the best cash generation (in the top quartile of Midcap IT) and return on equity (RoE) in excess of 20 percent.
Brokerage's estimates constant currency revenue CAGR of 12.5 percent and EPS CAGR of 13 percent over FY19-21. Price target of Rs 1,120 discounts forward earnings by 15x. Hence, Motilal upgraded the rating to buy.
Brokerage: HDFC Securities
ICICI Prudential Life Insurance: Upgrade to Buy | Target: Rs 445 | Return: 13 percent
While ICICI Prudential reported an annual premium equivalent (APE) growth of a mere 5.3 percent YoY, protection share grew to 14.6 percent (up 530bps against FY19). This boosted the value of new business margin (VNBM) to an unexpected 21 percent (up 400bps versus FY19) and absolute VNB to Rs 3.1 (up 29.9 percent YoY).
HDFC Securities likes the company's re-engineered business model which focused on a more diversified product mix and an increasing protection mix. Lower-than-expected growth and lower protection share remain key risks.
It upgraded ICICI Prudential to a buy with a target price of Rs 445.
Brokerage: Prabhudas Lilladher
Siemens: Upgrade to Buy | Target: Rs 1,263 | Return: 8 percent
Siemens reported a good set of numbers with PAT up 21 percent YoY. The revenue growth (up 4 percent YoY) came mainly from mobility (up 17 percent YoY) and portfolio of companies (up 30 percent YoY).
Order inflow during the quarter was up 6.4 percent YoY at Rs 3,000 crore, taking order backlog to around Rs 13,000 crore. Overall investment climate looks weak, however, management is positive on digital industries and mobility segments. Sectors that are expected to drive growth are food & beverage, chemicals, water, smart infrastructure, captive power and railways.
Prabhudas expects the company to deliver earning CAGR of 15 percent over the next two years (FY18-20E).
The stock has witnessed sharp correction in the recent past and currently trading at attractive valuations of 37x/33x FY19/FY20E. Hence, it upgraded the stock to buy from accumulate with a target price of Rs 1,263.
Brokerage: Reliance Securities
Sadbhav Engineering: Upgrade to Buy | Target: Rs 195 | Return: 47 percent
The brokerage reduced its target price to Rs 195 based on SOTP valuation methodology. It valued the EPC business at a target FY21E P/E multiple of 8x, which is at a discount to other EPC companies on account of concerns over pledged shares, the slow-moving order book and the time delay of cash realization from the asset sale deal.
Adjusted for the subsidiary valuation, the stock trades at FY20/21E P/E of 3.8x/3.2x. It upgraded Sadbhav to buy on account of such attractive valuations. Over the next six months, it expects management to deliver on timely closure of the deal with cash realisation, followed by higher focus on execution.
VST Industries: Upgrade to Buy | Target: Rs 4,200 | Return: 23 percent
With over 85 years of presence, VST Industries has positioned itself as the lowest cost filter cigarette provider. The company’s fundamentals are driven by a strong capital structure, steady cash flow and adequate liquidity. VST has a healthy portfolio of investments (mainly in debt mutual funds) and cash of Rs 610 crore as on FY19, supporting liquidity.
The company has a robust margin profile with its operating margin at 32.3 percent for FY19. With robust volume growth this quarter and strong volume growth guidance of 8 percent for FY20E, ICICI direct upgraded the stock to buy recommendation with a revised target price of Rs 4,200.
Shree Cement: Upgrade to Buy | Target: Rs 23,500 | Return: 16 percent
Shree Cements reported strong results, driven primarily by a sharp increase in realisations (up 14.5 percent YoY) during the quarter.
Shree’s leadership position in the North, strengthening footprints in the East, entry in the Southern region and expansion in the West will enable the company to improve its domestic presence. Further, focus on higher realisations and cost optimisation would lead to higher margins and return metrics with RoCE expected to improve to 19.2 percent by FY21E.
Hence, ICICI direct remained positive on the business and upgraded rating to buy with a revised target price of Rs 23,500 per share.
Brokerage: Anand Rathi
HealthCare Global Enterprises: Upgrade to Buy | Target: Rs 213 | Return: 101 percent
With existing centres being ramped up, newly added centres and more registrations at Milann, Anand Rathi expects an 18 percent revenue CAGR for Healthcare Global over FY19-21. However, debt is expected to come down from FY21.
The brokerage expects improvement in earnings from FY21 as Healthcare Global will enter a consolidation phase with no major investments. With the recent fall in the stock price, valuations seem attractive. Hence, it upgraded recommendation to a buy, with an unchanged target of Rs 213.
Sonata Software: Upgrade to Buy | Target: Rs 390 | Return: 15 percent
Sonata's Q1 was in line with expectation. On the greater contribution from the domestic business, the EBIT margin slid 88bps QoQ to 9.2 percent, down 100bps YoY. There are no major revisions in earnings for FY20/21.
The brokerage valued Sonata at 14x FY21e EPS (as before), at a lower target price of Rs 390 (from Rs 400 earlier). On the recent stock-price drop, the brokerage upgraded it to a buy.Disclaimer: The above report is compiled from information available on public platforms. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.Subscribe to Moneycontrol Pro and gain access to curated markets data, trading recommendations, equity analysis, investment ideas, insights from market gurus and much more. Get Moneycontrol PRO for 1 year at price of 3 months at 289. Use code FREEDOM.