Analyst Call Tracker: RIL topped the list with max upgrades; Divi’s Lab saw most downgrades in last year

Bajaj Finserv, Adani Ports and SEZ, and Titan got the maximum upgrades by brokerages in February, while Maruti Suzuki received the highest number of buy ratings at 39, up from 37 last month.

Strong quarterly performance which saw a 42 percent year-on-year growth in consolidated net profit at Rs 1,782 crore contributed to the high upgrades over the month for Bajaj Finserv.

Brokerage Sharekhan, has given the company a buy rating with an upside potential of 23 percent over yesterday's closing price, and believes the company’s digital initiatives will drive growth.

“For the general insurance business, the company is focusing on profitability and generating sustainable RoE (return on equity) while pursuing sustainable premium growth which is a key positive. The life insurance business is growing stronger due to its focus on a balanced product mix and new product launches. We believe strong growth in the lending business and an improving outlook for both the insurance businesses will likely act as a positive trigger for strong consolidated earnings going forward,” analysts at the firm said in a note.

Adani Ports, which saw a strong sell-off triggered by the negative report by US-based Hindenburg Research on the group, did not however lose favour among analysts, who gave buy recommendations on the basis of the company’s strong business outlook and positive cash flows.

Adani Ports may generate a cumulative operating cash flow of Rs 26,100 crore in FY24-25 with a capital expenditure of Rs 12,000 crore, resulting in Rs 14,000 crore of free cash flow, substantially higher than its debt-repayment obligations of Rs 11,000 crore, as per JM Financial. The brokerage sees a 35 percent upside at a target price of Rs 800 and expects Adani Ports to remain the market leader in India with volume growth of 16 percent, translating into revenue growth of 15 percent, EBITDA (earnings before interest, taxes, depreciation and amortisation) growth of 15 percent and PAT (profit after tax) growth of 13 percent, compounded annually over FY23-25E.

HDFC Life Insurance got the maximum downgrades in February, followed by Divi’s Laboratories and Grasim Industries.

The budget proposal to tax income from high-value insurance policies (excluding unit-linked products) having premiums of over Rs 5 lakh annually has weighed in on HDFC Life, with its share price tanking around 20 percent since. HDFC Life’s share of the business of non-unit-linked policies with an annual premium of above Rs 5 lakh is over 10 per cent.

According to Phillip Capital, “HDFC Life will be the most impacted, given a higher share of single-premium product (Sanchay Fixed Maturity Plan), which constitutes around 20-25 percent of NPAR (non-participating insurance plan) APE (annualised premium equivalent),” said analysts at Phillip Capital.

A single-premium product or policy carries a large-ticket premium as it is paid through a single, upfront lump sum payment while a non-participating insurance plan is one with a guaranteed payout at maturity.

“(HDFC Life has a) very high dependence on a product which may go out of fashion or may have to be revamped or relaunched based on the new budget proposals,” said Deepak Jasani, head of retail research, HDFC Securities. He added that the company was the most expensive insurance stock compared to peers, which could have also led to high downgrades.

While poor performance for the last couple of quarters has resulted in high downgrades for Divi’s, the mixed outlook towards the pharma sector, in general, has also led to the inclusion of names like Dr Reddy’s Laboratories and Sun Pharmaceutical Industries in the list of top 10 downgrades last month.

“There are multiple pressures, one is on non-branded generic exports which is the weakest segment of the market. There is absolutely no pricing power, in fact, just to get the volumes going, these companies are selling at either cost or even below cost. So till there is price recovery in non-branded generics, which is still a fair part of all these companies’ business, that pressure will continue. The second is that while there is a reduction in input prices, margin pressure still exists, so it’s not like they are going to benefit. So I think the non-branded generics business is what is going to keep pressures on these companies for a fair bit of time till we see price recovery there.” said Abhay Agarwal, Founder of Piper Serica Advisors, a portfolio management services firm.

Quarterly upgrades, downgrades

Bajaj Finance topped the list for the highest upgrades over the past quarter followed by Bajaj Finserv and Adani Ports.

Bajaj Finance’s move towards digital transformation to increase growth in client acquisition as well as assets under management has made analysts more confident about its business model.

“Omnipresence strategy and organic momentum building up offer comfort on growth sustainability. We revise target price to Rs 7,250 from Rs 8,650 keeping multiple at ~5.7x FY25E ABV,” said ICICI Direct analysts.

Brokerage firm IIFL believes that Bajaj Finance is building an ecosystem to preserve customer cohorts across various businesses. With its fintech platform and health-tech platform, customers may not have to look around for products that Bajaj Finance doesn’t offer directly, it said.

With all its offerings under one digital umbrella, Bajaj finance is better positioned in terms of customer acquisition, engagement as well opportunities to cross-sell.

Among the top 10 companies with the maximum upgrades over a quarter, Bajaj Auto saw the highest number of buy ratings, rising to 34 versus 31 a quarter ago. The general uptrend in the auto sector along with its resilient performance in the face of global macro challenges had analysts upbeat on the stock.

Tech Mahindra, Divi’s Labs and HDFC Life were among the companies with the highest number of downgrades over the past quarter.

The number of hold ratings on Tech Mahindra’s stock increased to 15 this quarter from 11 a quarter ago, while buy ratings dropped to 21 from 29. Motilal Oswal, which has a neutral rating on the stock, said that near-term growth remains weak and they are waiting for more comfort in margins.

“Although its current performance remains muted, the company's high exposure to the communications vertical offers a potential opportunity, as a broader 5G rollout can result in a new spending cycle in this space,” it added.

Maximum upgrades, downgrades over past year

Reliance Industries Ltd (RIL) had the maximum upgrades over last year, with 32 buy calls compared to 23 a year ago. The hold calls on the company’s stock have also shrunk from 11 to 2.

The company is firing on all cylinders, said research firm Antique Stock Broking in its initiating coverage on RIL.

“While O2C (oil-to-chemicals) will benefit from the ‘platinum age of refining’, telecom is set to ride the 5G transition with significant tariff increase tailwind, robust growth in retail from aggressive investments so far, and the gas production growth driving earnings of oil and gas segment,” the brokerage said, adding that it saw an upside of 25 percent at a target price of Rs 2,900 apiece.

The O2C business stoked optimism in the light of earnings growth as well as refining margin recovery. The sector is further expected to do well with the International Energy Agency saying that oil demand will hit a record in CY23 and grow by 2 million barrels per day year-on-year.

ITC, Titan and Bajaj Finance followed RIL in terms of the most upgrades over the past year.

ITC’s stock witnessed its buy ratings increase to 35 compared to 27 a year ago on the back of consistently improving financial performance reported in the last few quarters. In its latest quarter, ITC reported a 21 percent annualized increase in consolidated net profit at Rs 5,031 crore.

“We expect the strong business growth momentum to continue across divisions. In cigarettes, we believe a pragmatic tax regime not only acts as fodder for illicit volume growth but also increases its predictability premium. We expect FMCG, hotels and paperboard to continue to witness improvement in business and margins supported by new launches and reach expansion. We increase FY23F-25F EPS by +2-3 percent to factor in the 3Q23 beat,” Nomura said in its research note.

Analysts at Motilal Oswal believe that ITC is still trading at a 15 percent discount to its January 2019 valuations of 25.4 times one-year forward earnings per share, even though valuations of ITC’s global tobacco peers have been restored to their pre-Covid levels.

“The stock has gained 45 percent since our upgrade to Buy call in Jun 2022 and we believe there is further scope for upside based on its healthy earnings outlook,” they said.

Divi’s Laboratories got the maximum downgrades in the last year followed by JSW Steel and Tech Mahindra, while Wipro saw the highest number of hold ratings at 17.

For JSW Steel the high debt had analysts doubting its steep valuation with many not seeing any upside in the stock price.

Tech Mahindra and Wipro seem to have borne the brunt of the slowdown in the IT sector in the last year of Tech Mahindra and Wipro have declined 22 percent and 32 percent, respectively, in the last year.