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Pessimism grips metal, IT stocks most after recent spate of downgrades by analysts

Moneycontrol Analysts’ Call Tracker June 2022 reveals maximum sell calls in richly valued stocks

July 12, 2022 / 09:56 AM IST
With crude steel capacity of 27 million tonnes per annum (MTPA) and expansion going on, the company is one of the leading steelmakers in India. It exports 28 per cent of what it makes, and that is the key pain point in the near term. In May, India imposed 15 per cent export duty on steel to rein in inflation which is likely to hit its bottom line. Moreover, prices of steel have come down sharply in domestic and international markets led by lockdown in China and recession fears, which will also taper its growth outlook. On top of that, the stock is most richly valued among its peers with an EV/Ebitda of 5.3x, which many believe is not sustainable. No wonder, only 33 per cent of analysts tracking it have a ‘buy’ rating on the counter.
With crude steel capacity of 27 million tonnes per annum (MTPA) and expansion going on, the company is one of the leading steelmakers in India. It exports 28 per cent of what it makes, and that is the key pain point in the near term. In May, India imposed 15 per cent export duty on steel to rein in inflation which is likely to hit its bottom line. Moreover, prices of steel have come down sharply in domestic and international markets led by lockdown in China and recession fears, which will also taper its growth outlook. On top of that, the stock is most richly valued among its peers with an EV/Ebitda of 5.3x, which many believe is not sustainable. No wonder, only 33 per cent of analysts tracking it have a ‘buy’ rating on the counter.
Wipro is the fourth largest IT company in India, but is a distant cousin of its peers in terms of financial performance and growth. The company has the lowest return on equity (RoE) and return on capital employed (RoCE) among its peers. Its sales and profits have also grown at the slowest pace among peers in the last five years. Now, in its key markets – North America and Europe – there is a fear of recession especially when central banks are raising interest rates. This may also have an adverse impact on its future growth. Thus, it is a stock with the second most number of ‘sell’ calls despite a 42 per cent drop in share prices in 2022 so far.
Wipro is the fourth largest IT company in India, but is a distant cousin of its peers in terms of financial performance and growth. The company has the lowest return on equity (RoE) and return on capital employed (RoCE) among its peers. Its sales and profits have also grown at the slowest pace among peers in the last five years. Now, in its key markets – North America and Europe – there is a fear of recession especially when central banks are raising interest rates. This may also have an adverse impact on its future growth. Thus, it is a stock with the second most number of ‘sell’ calls despite a 42 per cent drop in share prices in 2022 so far.
The largest paint maker in the country is a proven wealth multiplier of the last couple of decades. However, lately analysts have become concerned over its high valuations and increasing competition. At 85x PE, it is the most expensive paint stock. In the short term, analysts are concerned that its margins may suffer as key raw materials which are largely crude-based have become expensive. Moreover, a number of deep-pocketed companies are venturing into the industry – Grasim and JSW – that will likely result in market share erosion.
The largest paint maker in the country is a proven wealth multiplier of the last couple of decades. However, lately analysts have become concerned over its high valuations and increasing competition. At 85x PE, it is the most expensive paint stock. In the short term, analysts are concerned that its margins may suffer as key raw materials which are largely crude-based have become expensive. Moreover, a number of deep-pocketed companies are venturing into the industry – Grasim and JSW – that will likely result in market share erosion.
The third largest cement maker in India has come a long way – from being a regional player in Western India, it has expanded into other parts as well. However, its geographical growth has not translated into high financial growth. Among its peers, in terms of sales and profit growth, it lies somewhere in the middle of the table. In terms of valuation though it is right at the top – at 30x PE compared to industry average of 18x. Apart from high valuation, high input cost prices in the near term and increasing competition given large expansion plans of other big players including UltraTech and Adanis are key concerns weighing on the stock.
The third largest cement maker in India has come a long way – from being a regional player in Western India, it has expanded into other parts as well. However, its geographical growth has not translated into high financial growth. Among its peers, in terms of sales and profit growth, it lies somewhere in the middle of the table. In terms of valuation though it is right at the top – at 30x PE compared to industry average of 18x. Apart from high valuation, high input cost prices in the near term and increasing competition given large expansion plans of other big players including UltraTech and Adanis are key concerns weighing on the stock.
Another stock that analysts are not very keen on is Nestle, and the reason is largely its rich valuation. Consumer stocks have historically commanded high valuation but Nestle trades at an outrageous 83x its price-to-earnings. In comparison HUL and Britannia trade at 66x and 58x price-earnings. Moreover, rising input costs and insufficient price hikes are other reasons that are keeping analysts skeptical about its growth in the short to mid term.
Another stock that analysts are not very keen on is Nestle, and the reason is largely its rich valuation. Consumer stocks have historically commanded high valuation but Nestle trades at an outrageous 83x its price-to-earnings. In comparison HUL and Britannia trade at 66x and 58x price-earnings. Moreover, rising input costs and insufficient price hikes are other reasons that are keeping analysts skeptical about its growth in the short to mid term.
Tata Consultancy Services (TCS), one of the most profitable companies in India, is another name that has a high number of ‘sell’ calls. The company’s performance has degraded over last couple of years compared to its peers especially Infosys, which has grown a relatively faster rate. Moreover, there has been some nervousness over management’s expectations on margins, which is likely to be volatile. The company has also been non-committal on by when it can see peak 26-28 per cent growth rate. Possibility of recession in its key markets – particularly the US – is also a near term headwind for the stock as analysts believe this may lead to lesser tech spending.
Tata Consultancy Services (TCS), one of the most profitable companies in India, is another name that has a high number of ‘sell’ calls. The company’s performance has degraded over last couple of years compared to its peers especially Infosys, which has grown a relatively faster rate. Moreover, there has been some nervousness over management’s expectations on margins, which is likely to be volatile. The company has also been non-committal on by when it can see peak 26-28 per cent growth rate. Possibility of recession in its key markets – particularly the US – is also a near term headwind for the stock as analysts believe this may lead to lesser tech spending.
The pandemic’s breakout star that gave 3x returns during Jan’20 to Oct’21 period seems to have fallen out of analysts’ favour as well. The reason seems to be the deteriorating outlook of its business. For instance, ICICI Securities says it is cautious on near-term outlook due to elevated costs and pricing pressures in the API segment. Many analysts agree that Covid-led growth surge looks unsustainable as the pandemic has ebbed. The stock is also among the most expensive ones in the sector, quoting at 32.87x its earnings, compared to industry PE of 21.64x.
The pandemic’s breakout star that gave 3x returns during Jan’20 to Oct’21 period seems to have fallen out of analysts’ favour as well. The reason seems to be the deteriorating outlook of its business. For instance, ICICI Securities says it is cautious on near-term outlook due to elevated costs and pricing pressures in the API segment. Many analysts agree that Covid-led growth surge looks unsustainable as the pandemic has ebbed. The stock is also among the most expensive ones in the sector, quoting at 32.87x its earnings, compared to industry PE of 21.64x.
The Uday Kotak led lender is the third largest private bank in the country. Analysts don’t find many chinks in Kotak Bank’s armour, but some cite the high valuations behind their hesitation to recommend buying the stock. ICICI Bank, which is now poised to grow fast, is available at around 3x PB while Kotak Bank is trading at 4.5x times its book value. Analysts, for instance those at JM Financial, have also pointed out that its margins may see some tapering as the bank chases growth. HDFC Securities said the increasing interest rate cycle, and strong loan growth is likely to drive cost of funds higher for the bank as well.
The Uday Kotak led lender is the third largest private bank in the country. Analysts don’t find many chinks in Kotak Bank’s armour, but some cite the high valuations behind their hesitation to recommend buying the stock. ICICI Bank, which is now poised to grow fast, is available at around 3x PB while Kotak Bank is trading at 4.5x times its book value. Analysts, for instance those at JM Financial, have also pointed out that its margins may see some tapering as the bank chases growth. HDFC Securities said the increasing interest rate cycle, and strong loan growth is likely to drive cost of funds higher for the bank as well.
The largest shadow lender in the country is another victim of rich valuations that many analysts believe is unsustainable. No one denies that the company deserves a premium for its leadership position and years of steady, extraordinary growth, however, massive buying in the stock post March 2020 crash has made it one of the most expensive among its peers. Bajaj Finance trades at over 8x times book value, more than double the multiples commended by the best big banks.
The largest shadow lender in the country is another victim of rich valuations that many analysts believe is unsustainable. No one denies that the company deserves a premium for its leadership position and years of steady, extraordinary growth, however, massive buying in the stock post March 2020 crash has made it one of the most expensive among its peers. Bajaj Finance trades at over 8x times book value, more than double the multiples commended by the best big banks.
It is another consumer company in the list that’s richly valued. With a PE multiple of 58, it is one of the most expensive stocks in the sector. Operationally, raw material costs have been increasing especially led by rising food grain prices but the pace of product price hikes have been insufficient to hold up margins, say analysts. They believe headwinds continue both on revenue and margin front, making them apprehensive to recommend the stock at the prevailing multiple.
It is another consumer company in the list that’s richly valued. With a PE multiple of 58, it is one of the most expensive stocks in the sector. Operationally, raw material costs have been increasing especially led by rising food grain prices but the pace of product price hikes have been insufficient to hold up margins, say analysts. They believe headwinds continue both on revenue and margin front, making them apprehensive to recommend the stock at the prevailing multiple.
Shubham Raj is a journalist with over five years of experience covering capital markets. His last stint was with The Economic Times where he wrote on daily happenings in stock markets and led IPO reportage. He also wrote on mutual funds and cryptocurrencies.
first published: Jul 11, 2022 03:45 pm
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