JSW Steel's profit in Q1FY19 rose nearly four-fold to Rs 2,366 crore from Rs 626 crore in year-ago period, backed by higher realisations and strong volume growth.
After this decision, Lupin stock fell 1.6 percent on Wednesday but rebounded on following days to rally 5 percent in two consecutive sessions.
However, JSW Steel surged 9 percent on Wednesday followed by 0.6 percent correction on Thursday and Friday last week.
The immediate sentiment impact was seen in both stocks which was temporary in nature but that does not change companies' fundamentals or outlook, experts said.
Generally, exchanges regularly restructure indices through various criteria including trading volume, free float, liquidity etc, which help exchanges maintain the quality of every index.
If we look at the performances of these stocks, JSW Steel gained 20 percent in August and 47 percent year-to-date, while Lupin rallied just 14 percent in the last month and 5.4 percent year-to-date.
The major change that will happen after the rejig will be the sectoral weightage in Nifty50.
After excluding Lupin, there would be just three stocks — Dr Reddy's Labs, Sun Pharma and Cipla — in the index which would bring down the weightage of pharma sector to around 2.5 percent from 3.14 percent earlier.
At the same time, entry of JSW steel will lead to metal sector weightage to increase from 2.5 percent to around 3.2 percent though still lower from 4.4 percent weightage it had in 2015, she said.
As there is no change in fundamentals of the companies post Nifty50 rejig, most experts are either advise holding these stocks or buying them for long term. They believe these stocks will give good returns in long term.
Here are experts' views that will help you to take decision on both stocks:
Astha Jain, Senior Research Analyst, Hem Securities
The exclusion of Lupin from Nifty 50 stock will hardly impact the stock going forward as company's weightage is very minimal in Nifty 50 Index. We recommend Hold on Lupin with price target of Rs 1,080 for a year.
Inclusion of JSW Steel is positive for the company although present run-up which we have already seen in the company is due to strong growth posted by the company in its financial performance. For JSW Steel, our recommendation is Hold due to high valuations & our price target is Rs 450 in one year.
Vineeta Sharma, Head of Research, Narnolia Financial Advisors
Lupin exiting Nifty will reduce the weight of the pharma sector in Nifty by 0.51 percent weight. Healthcare weight in Nifty was 7.3 percent at the end of 2015 and has now come down to 2.8 percent.
At the same time, entry of JSW steel will cause metals weight to increase from 2.5 percent to around 3.2 percent though still lower from 4.4 percent weight in 2015. Comparing the two, JSW's FY18 sales is 4.4 times Lupin, profit is 3.3 times and free float Market Cap is 2.5 times.
In terms of recent performance, JSW steel sales grew 26 percent and PAT grew 76 percent against Lupin where sales de-grew by 9 percent and adjusted PAT de-grew by 33 percent.
Presently, we have a Hold rating on both the stocks. Our target price for JSW Steel is Rs 374 and target price for Lupin is Rs 942.
Anita Gandhi, Whole Time Director, Arihant Capital Markets
The company suffered underperformance in recent years. Most of the headwinds faced by the company have, however, been sectoral in nature. Pricing pressure in its key markets of US and Japan, delay in approvals of key products, the USFDA's clamp down on two key plants, led to stock losing 40 percent of its value over the last two years.
The management, in the latest quarterly earnings call, indicated a subdued performance in the current quarter, but an improved performance in the second half of this fiscal, aided by the launch of key products and ramping up in specialty business.
The company has optimised its R&D expenditure to about 10 percent of revenues. While warning letters to company's plants in Goa and Indore remain a concern, the management is hopeful of resolving the issues with the USFDA by the end of the fiscal.
The near-term underperformance provides a good opportunity for long-term investors to accumulate the stock of the generics company. It is currently trading at 28 times its estimated earnings of FY19 – lower than the valuations of Sun Pharma and Cipla and DRL.
JSW Steel is in acquisitions phase to increase capacities. The Chinese steel import to India fell in the first four months of this year when domestic demand has picked up. JSW looks to submit bids for Usha Martin's 1 MT steel unit. JSW bought Monnet Ispat and emerged as the lead bidder for 3.5 MT Bhushan Power & Steel. With the addition of 1.5MT Monnet, the capacity of JSW increased to 19.5 MT. In addition, JSW is planning for Greenfield capacity expansions.
Considering all the above-mentioned factors & India’s future steel requirements from the infrastructure growth perspective, earnings of JSW steel are expected to further improve going forward. The stock is currently trading at PE of 12 & offers long-term investment opportunity.
With the enhancement in the earnings of the company, with the same PE level price of the stock is expected to give move up by 12-15 percent in a year’s time.
Prashanth Tapse, AVP Research, Mehta Equities
We have been tracking JSW Steel, the world's best-performing steel stock, outperforming major steelmakers globally and locally the stock has risen 47 percent so far this year versus other steel stocks. In the recent quarter, the company has declared better-than-expected results with profit grow nearly fourfold on strong sales volume and realisation growth which has resulted in the counter performance.
On overall basis we are positive on the counter in near term to long term given the likely buying by index funds due to its inclusion in the benchmark Nifty from September 28. We see strong support near Rs 346 & Rs 327 (100-DMA) levels. Overall the trend is bullish. Buy & Hold.
We are optimistic on pharma counter which is in action in recent times and we don’t even expect any sharp sell-off in Lupin due to its exclusion from the index, as the Pharma company’s weightage in the index is a paltry 0.4 percent. After Lupin’s exit, the Nifty50 index still has companies like - Cipla, Dr Reddy’s & Sun Pharma together holding a weight of around 2.5 percent.
Technically, all indicators are giving a buy signal and crossed crucial resistance level of Rs 900. We expect this stock to move up taking resistance around Rs 970 & Rs 1,090 and support near Rs 860 & Rs 830 (100-DMA). Buy and trade as per levels mentioned.
AK Prabhakar, Head of Research, IDBI Capital Markets & Securities
Last 3 years have been best ever a time for JSW Steel which has gained from low of Rs 95-408 till now and still stock looks good but I would avoid.
Lupin can correct due to exclusion as ETF funds normally sell and that would be the best time to Buy this stock which has corrected more than 58 percent from high (Rs 2,129) made in November 2015, but that would be for long term investor.Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol are his own, and not that of the website or its management. Moneycontrol advises users to check with certified experts before taking any investment decisions.The Great Diwali Discount!
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