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RIL emerges as lone contrarian upgrade for July; exceptions in tech, consumer staples, metals see uptick

Infosys Technologies, Titan, UPL, Grasim see increasing upgrades although stock prices were weak in the past quarter

August 04, 2022 / 11:10 AM IST
RIL reported a strong June
quarter with 57 percent on-year revenue growth and 63 percent on-year adjusted EBITDA growth.  (Representational image/ Photo by Zukiman Mohamad/Pexels)

RIL reported a strong June quarter with 57 percent on-year revenue growth and 63 percent on-year adjusted EBITDA growth. (Representational image/ Photo by Zukiman Mohamad/Pexels)

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Other than Reliance  Industries Ltd, there's hardly any stock in the market that has seen contrarian upgrades by analysts in the past one month, reveals Moneycontrol Analyst Call Tracker July 2022, powered by data sourced from Bloomberg.

There are quite a few names that have seen the reverse, where stocks gained but analysts turned bearish. Contrarian upgrade takes place when analysts turn bullish on a stock despite a decline in the stock price, while contrarian downgrade is when they go bearish on a stock despite a rise in the stock price during the period under review.

RIL gained over 9 percent in the last three weeks after analysts started upgrading the stock on the withdrawal of windfall tax on diesel and aviation fuel by the government. It had fallen over 8.5 percent between July 1 and 13 when the levy was slapped. The company also reported a strong June

quarter with 57 percent on-year revenue growth and 63 percent on-year adjusted EBITDA growth, led by strong performance across divisions, also improved the investor sentiment.

RIL now has 31 'buy' tags now, five 'hold' tags and three 'sell' tags, compared to 27 buys, eight holds and four sells a month ago.

The company is planning to invest in a new energy business and analysts expect the venture is less appreciated by investors, given the lack of detail on capacity, capex and earnings drivers. Analysts believe $36-billion capex by RIL to set up manufacturing facilities for integrated PV cells and

batteries, and provide grid-scale power solutions for other segments.


"We expect this to drive segment revenue-to-EBITDA ratio to  Rs 942 billion to Rs 311 billion by FY30. RIL’s consumer businesses are well poised to deliver strong earnings growth. Jio drivers are improving ARPU (average revenue per user), changing subs mix, increasing FTTH penetration and 5G rollout. For Retail, we expect sustained expansion, B2B success and online format expansion to drive revenue growth with stable margins. In O2C, fuel export taxes have offset strong refining margins, driving our O2C estimates lower. Overall, we expect RIL to remain on track to deliver a 24 percent earnings CAGR over FY22-25," said UBS Research in a note to its investors.

While the number of stocks in which downgrades have taken effect outweighing the upgrades, recommendations have not changed in large numbers over the past month despite the changing economic landscape with heightening uncertainty around commodity prices and pressure on

margins across several sectors.

Broadly, contrarian downgrades over the past month were in the realm of tech, autos and defensives. Stocks that saw maximum downgrades while stock prices were in the green included Bajaj Auto, Tech Mahindra and JSW Steel. These stocks saw buy recommendations go up significantly.

Contrarian upgrades over the last one quarter

Reliance Industries, Infosys Ltd, UPL, Titan and Grasim saw contrarian upgrades. Grasim Industries became the most preferred stock last quarter after it announced it had been planning to enter the paints sector for the past few years.  For Ultratech Cement, the stock has corrected

recently which made its valuation favorable and it is currently trading below 10 year and five year average price multiple.

Ultratech now has 41 buys out of 48 total analysts recommendations from 37 buys out of 46 total analysts.  Bharti Airtel has preferred for stable growth with potential to raise tariffs.

Hindalco Industries remained a preferred stock among investors after the recent corrections. In the June quarter, the stock dropped nearly 43 percent, while it gained 24 percent since July 1. According to JM Financial, the outlook for Hindalco continues to remain buoyant, given (a) Novelis continues to maintain an EBITDA/t guidance of $500, (b) drop in energy price is likely to cushion margins amidst correction in LME prices, (c) growth capex to augment capacity in non-LME linked business – Novelis, amid encouraging demand for FRP products, and (d) enhanced coal security after the acquisition of Meenakshi and Chakla coal mines at recent auctions.

For UPL, the stock has corrected over 20 percent between May and June amid concerns of rising interest, but on the contrary, the global crisis added more opportunities, making UPL an attractive investment, analysts said.  The company recently reported better-than-expected earnings. Its revenue surged 27 percent year-on-year with strong revenue across regions led by 18 percent/6 percent rise in prices/volumes. At 21.7 percent, OPM was 65 bps above our estimate of 21 percent, reflecting the benefit of price hikes. According to Sharekhan, industry-leading growth and target to increase revenue share from differentiated and sustainable solutions would improve margin/earnings profile and drive sustainable growth and valuation re-rating.

Titan has been upgraded recently by analysts after its strong performance in the June quarter which was up nearly three-fold, helped by a low base of the Covid-19-impacted quarter last year. Centrum Broking expects continued strong revenue momentum for jewellery on the hope of strong demand revival during the forthcoming festive season, as customers had deferred the purchases due to rising gold prices in the fourth quarter.

Infosys became a top pick after the IT major recently made a surprise hike in annual revenue outlook to 14-16 percent in the fiscal year through March 2023, up from 13-15 percent projected in April in constant currency terms led by strong growth across the segment and a healthy deal pipeline. Analysts also said that the recent corrections have made the stock's valuation attractive. Within the tech sector, analysts seem to prefer Infosys among the large-cap tech names.

Cipla got upgrades as analysts say it has been one of the most consistent performers amongst Indian pharmaceutical companies over the last couple of years, driven by its success in comprehensively responding to the Indian market’s Covid treatment needs and launches in the US.

Axis Bank also got upgrades after it reported improvement in asset quality in the June quarter. Restructured loans implemented under the resolution framework for Covid-related stress are continuously declining. With higher contingency provisions, PCR and strong capital adequacy ratio, the bank is

well prepared for any future shock on the asset quality side, said brokerage firm Sunidhi Research.

Contrarian upgrades over the last one year 

Last year's worst performing Nifty stocks such as Shree Cement and Dr Reddy's have seen upgrades from analysts. Shree Cement, Ultratech Cement, UPL Ltd and Dr Reddy's saw upgrades ranging 4–11 percent in percentage terms from July 2021.

HDFC Life Insurance also got upgrades despite stock falling in the last one year.  Recently, all listed life insurers reported a sharp year-on-year increase in their new business premium and a significant improvement in their profitability metrics. Ultratech Cement Ltd, UPL Ltd and HDFC Ltd also got upgrades over one year.

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Disclaimer: MoneyControl is a part of the Network18 group. Network18 is controlled by Independent Media Trust, of which Reliance Industries is the sole beneficiary.
Ravindra Sonavane
first published: Aug 4, 2022 11:02 am
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