Analysts Call Tracker: Bajaj Finance, Infosys, and M&M top list of most downgraded companies in March

On the positive side, companies in the metals, pharma, and consumer space have received upgrades.

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In the face of geopolitical tensions and the Adani controversy, both of which have affected the Indian markets, as well as global central banks’ efforts to raise interest rates to combat inflation, the finance, IT, and auto sectors have experienced the downgrades in the past month. Meanwhile, the metal, pharma, and consumer sectors have received the upgrades.

In the previous month, several stocks in the IT, auto, and finance sectors were downgraded. Notably, Infosys, HCL Technologies, Tata Consultancy Services (TCS), and Wipro in the IT sector, Mahindra & Mahindra (M&M) and Tata Motors in the auto sector, and Bajaj Finance and HDFC Bank in the finance sector were downgraded. In contrast, Tech Mahindra, Bharti Airtel, Tata Steel, and JSW Steel received upgrades from brokerages. Sun Pharmaceutical Industries and Dr Reddy’s Laboratories also received upgrades. Among consumer stocks, Hindustan Unilever gained 33 ‘buy’ ratings, up from 32 the previous month, making it the most highly recommended stock in this sector.

Bajaj Finance got the maximum downgrades in March, followed by Infosys and M&M.

Bajaj Finance, known for its fast-growing asset book, has been a top-performing stock for investors due to its consistent growth in assets under management (AUM) and superior asset quality. Despite the pandemic leading to a decline in consumption spending and consumer loan growth, the company was still able to maintain decent growth in FY22.

However, with banks now gaining attention due to their strong earnings boost and robust outlook, Bajaj Finance’s valuation premium over banks like HDFC Bank, IndusInd Bank, and ICICI Bank has decreased. Additionally, the reduction in discretionary spending and the turn in the interest rate cycle in FY23 have also impacted Bajaj Finance’s growth.

Moreover, with the entry of large players such as Jio Financial Services and Reliance Industries in the financial services sector, competitive intensity in the space is set to increase, affecting the growth outlook of players like Bajaj Finance. The intense competition in the consumer B2B and B2C segments will put pressure on Bajaj Finance’s medium-term profitability. Private banks are focusing on ‘buy now, pay later’ (BNPL) financing, and their shift towards personal loans will keep pressure on yields in the B2C book as well, according to a recent Kotak Institutional Equities report.

Meanwhile, M&M has faced a correction in its stock price over the past few months due to concerns regarding the potential impact of El Nino on tractor demand in FY24, as well as a decrease in the waiting period for its UV portfolio. Historical data shows that in the past 15 years, tractor volumes decreased by approximately 12 percent on average during four instances of El Nino. Consequently, analysts have revised their projection for M&M’s tractor volume in FY24 from a previous estimate of 6 percent growth to a new estimate of 12 percent decline. Although the waiting period for the XUV700 SUV has decreased, dealer interactions conducted by ICICI Securities suggest that overall monthly retails for SUVs have remained largely unchanged over the past four to six months.

Despite the IT industry experiencing a deceleration in growth due to job cuts resulting from banking crises in regional banks in the US and Europe, which can lead to greater caution and an impact on overall technology spending by banking clients, Tech Mahindra has emerged as an exception to this trend and received numerous upgrades. Analysts and the IT industry have warmly welcomed the appointment of Mohit Joshi, the former president of Infosys, as Tech Mahindra’s new Managing Director and Chief Executive. Joshi, who specialises in the BFSI and healthcare sectors and has worked closely with Infosys CEO Salil Parekh, is expected to rejuvenate Tech Mahindra’s business.

Industry experts believe that Joshi’s experience of over 22 years with Infosys and his involvement in executing the company’s transformation as part of its leadership team will help him think strategically and win large deals for Tech Mahindra. Analysts point out that winning such deals is crucial for Tech Mahindra to compete with top companies such as TCS and Infosys.

According to Ray Wang, founder and principal analyst at Constellation Research, Joshi is one of the large deal architects at Infosys, who has helped make the company successful, along with others such as Ravi Kumar S. Joshi’s appointment is expected to bring fresh ideas and momentum to Tech Mahindra, but analysts caution that the company will still face challenges such as increasing competition and the impact of COVID-19. Nevertheless, with Joshi’s leadership and strategic thinking, Tech Mahindra is poised to compete for more significant deals and expand its market presence.

According to recent TRAI data, Bharti Airtel‘s gross subscriber additions and net subscriber additions have improved, indicating that the company is performing well. Despite intense competition in the Indian telecom market, Bharti Airtel has been able to maintain its position as one of the leading players. The company’s ability to retain subscribers and attract new ones is a testament to its focus on providing quality services and innovative products.

ICICI Securities’ recent report indicates that Bharti Airtel has been investing in expanding its network infrastructure and improving its digital capabilities. The company’s efforts in these areas are expected to enhance the customer experience and drive growth in the coming years, it adds.

Quarterly upgrades, downgrades

Bajaj Finserv topped the list of highest upgrades over the past quarter, followed by PowerGrid Corp of India and Adani Ports & SEZ.

Bajaj Finserv is a financial conglomerate that holds stakes in the financing business (Bajaj Finance), as well as in the life insurance (Bajaj Life Insurance) and general insurance (Bajaj General Insurance) businesses. In terms of its general insurance business, Bajaj Finserv is prioritising profitability and sustainable Return on Equity (RoE), while also pursuing sustainable premium growth, which is a positive development. The company’s life insurance business is growing stronger due to its focus on a balanced product mix and new product launches. Analysts believe that the strong growth in the lending business, combined with an improving outlook for both insurance businesses, will likely act as a positive trigger for strong consolidated earnings in the future.

The management has introduced a long-range strategy (LRS) spanning over five years, with the objective of achieving a 3-4 percent share in total credit and a 4-5 percent share in retail credit. The company plans to increase profitability through digital transformation, client acquisition, and ambitious targets on growth in AUM, aiming for a compounded annual growth rate (CAGR) of 25-27 percent. Additionally, the company intends to promote premium growth by launching new products and selecting a strategic product mix, while focusing on claims and operating expenses to enhance earnings in its life and general insurance business.

Recently, Bajaj Finserv received Securities and Exchange Board of India (SEBI) licence for its mutual fund foray. Analysts say Bajaj Finserv MF is capable of competing in the top league, thanks to its strong capabilities. Bajaj Finserv MF has been able to maintain consistent growth and profitability, while also delivering strong investment performance. The company’s robust investment framework, supported by experienced fund managers, has enabled it to provide investors with attractive returns over the long term.

Furthermore, Bajaj Finserv MF’s distribution network is extensive, allowing it to reach a large and diverse customer base. This, coupled with its focus on customer-centricity, has helped the company build a loyal customer base. Overall, analysts believe that Bajaj Finserv MF is well-positioned to compete in the top league of mutual fund companies and continue to deliver strong results for its investors.

Power Grid has had a successful Q4FY23, winning eight tariff-based competitive bidding (TBCB) projects and a total of 12 projects so far in FY23. The company has also seen a 124 percent year-on-year (YoY) increase in investment approval, amounting to Rs 10,393 crore so far in FY23. According to a Sharekhan research report, the large addressable power transmission market opportunity of Rs 2.44 lakh crore by FY30 in renewable energy projects provides a significant opportunity for Power Grid’s capex / asset capitalisation and could drive re-rating. Additionally, the company’s robust projects pipeline of Rs 25,600 crore (excluding the Leh-Kaithal project worth Rs 22,000 crore), recent new TBCB project wins, and regulated RoE model provide earnings visibility, with an expected 10 percent PAT CAGR over FY22-25E. With RoE of 18 percent and a healthy dividend yield of 5-6 percent, the stock is attractive with a valuation of 1.7x/1.5x FY24E/FY25E P/BV. The ‘buy’ rating on Power Grid is maintained with an unchanged price target of Rs 265, the Sharekhan report added.

Despite the negative report by US-based Hindenburg Research on the Adani Group, Adani Ports did not lose its appeal among analysts who continued to recommend buying the stock due to the company’s positive cash flows and strong business outlook. Over the past decade, Adani Ports has achieved significant market share gains in India, with a total share increase of at least 10 percentage points, reaching 24 percent. In addition, the company has recorded a gain of over 16 percentage points in container cargo, leading to a market share of 43 percent. The company is expected to maintain this growth trend in the future, with a focus on both organic and inorganic growth strategies.

According to JM Financial, Adani Ports is expected to maintain its strong market share gains in India in the future through both organic and inorganic growth. They estimate that Adani Port will post a 16 percent CAGR in volume, resulting in a revenue/EBITDA/PAT CAGR of 18 percent/15 percent/13 percent, respectively in FY23-25. However, key risks to this growth include any significant slowdown in India and adverse developments in group companies. Despite this, analysts estimate that Adani Ports will generate a cumulative operating cash flow of Rs 26,100 crore in FY24-25 and have a capex of Rs 12,000 crore, resulting in Rs 14,000 crore of free cash flow, which is substantially higher than its debt-repayment obligations.

HDFC Life Insurance received the maximum downgrades over one quarter, followed by Divi’s Laboratories and Grasim Industries.

The recent proposal of Union Budget 2023 by Finance Minister Niramala Sitharaman, which limits tax exemptions from high-value insurance policy proceeds, has put tremendous pressure on the insurance sector.
HDFC Life, which has a higher share of single-premium products, such as the Sanchay Fixed Maturity Plan, making up around 20-25 percent of NPAR (non-participating insurance plan) annualised premium equivalent (APE), will be the most affected. The company estimates that the business at risk could be around 10-12 percent of the total APE post announcement of Budget.

The impact of the topline by 10-12 percent mentioned by the company translates to a bottomline impact of 5 percent if other things remain constant. To mitigate the risks, HDFC Life plans to diversify its product portfolio and accelerate penetration into tier-II and III cities to attract more customers with different ticket sizes.

Maximum upgrades, downgrades over past year

Reliance Industries Ltd had the maximum upgrades over last year, with 32 ‘buy’ calls compared to 23 a year ago. The ‘hold’ and ‘sell’ calls on the company’s stock have also shrunk to three from 11 and to two from four, respectively. ITC is the second firm which has maximum upgrades, followed by Titan Co.

According to analysts, the recent drop in Reliance Industries’ stock price, which hit a near 52-week low, was not due to earnings. Rather, the stock was caught in a broader sell-off across India. Analysts have observed that the market is not currently assigning any value to the company’s new ventures and is anticipating increased capital expenditure in the near future. While some short-term concerns remain, a few brokerages remain optimistic about the stock, with price target as high as Rs 3,100.

Kotak Institutional Equities is puzzled by the recent lacklustre performance of Reliance Industries, given its optimistic outlook for key sectors. Despite recent declines in the company’s share price, Kotak suggests that the market is neglecting to recognise the potential value of Reliance’s forays into new commerce, FMCG, and new energy, as well as the benefits of Reliance Jio’s duopoly status. According to this brokerage, the stock price appears to be considering a significantly lower multiple for retail (25 times EV/Ebitda) compared to the base case valuation of 32.5 times, as well as Rs 50,000 crore in additional net debt.

ITC’s impressive performance across all its business segments, including FMCG, paper, and hotels, has made it an attractive choice for investors, especially given the current market challenges caused by the Adani controversy and the anticipated rise in interest rates globally. Investors see ITC as a defensive option due to its stable cash flow and dividends. Moreover, the company’s strong operational performance, backed by double-digit growth in cigarette volume and a robust recovery in its hotels business, has further enhanced its appeal from a fundamental standpoint.

Analysts say ITC’s non-cigarette businesses are expected to maintain and improve their current performance, but there are concerns about the growth of its cigarette segment due to limited volume growth and stagnant pricing. They anticipate a 6 percent growth in cigarette volume, which will require price hikes to achieve higher sales growth. The recent moderate duty hike in the Union Budget is expected to facilitate price hikes in FY24, analysts say.

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 18.

Divi’s Labs reported weaker earnings in the December quarter. According to analysts, the revenue collapse due to COVID products and other adverse events have caused the major upside from molnupiravir supply to Merck during the pandemic to fade out. It would have been wise for the management of Divi’s Laboratories to provide timely guidance to the markets. The weak numbers for the quarter indicate a substantial erosion of the company’s pricing power in the generic active pharmaceutical ingredient (API) business and cost pressures, even worse than pre-COVID times.

However, there is no visibility of a significant recovery in growth or profitability in the near term, and new projects in novel chemistry technologies and imaging contrast areas may take time to ramp up, contributing only incrementally to the growth rate. The company’s revenue CAGR from FY17-20 was only 9.4 percent, and it may be even lower in constant currency (CC) terms. Therefore, there is a high probability of the growth rate trending towards it in the medium term, with a sustainable growth rate of a similar range, but margins are expected to recover from the absolute low touched in 3QFY23, analysts said.