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02 Aug 2023

Five outperformers that beat expectations in Q1 | Stocks where promoters increased pledged shares

It's that time of the year, when promises that CEOs made in the previous quarter are checked against actual financial results.

And so far, it’s been a mixed bag for Q1FY24.

Sectors like banking and finance, auto ancillaries, capital goods and construction have continued to outperform, with impressive growth and a promising outlook. Uday Kotak, Managing Director at Kotak Mahindra Bank, said that the financial sector "is in its Goldilocks period. Clock striking midnight feels far away for Cinderella.”

In contrast, the IT sector and a few FMCG players have seen a growth slowdown so far. And textiles and chemicals players were hit by a YoY decline in their Q1 revenue and profits.

When we look beyond sectoral trends, an intriguing volume story has also emerged this quarter.

With inflation falling and demand bouncing back, several big companies reported a strong jump in their Q1 sales volumes. This is especially true for building material companies like UltraTech Cement, Supreme Industries and APL Apollo.

Similar signs of a volume rebound are visible in the pharma and FMCG spaces. But there are also bigwigs like HUL, who were left out and are still waiting for the volume recovery to come their way.

One group of companies in particular, managed to impress the street with their growth. This week, we bring you an exclusive report on these five players, which surpassed analyst expectations and sector performance to deliver outstanding Q1 results.

In this week’s Analyticks:

Q1FY24 outperformers: Companies that surprised investors with a strong Q1 showing
Screener: Stocks where promoters increased pledged shares QoQ

Let’s get into it.

Results special: Five companies that beat estimates in Q1

In this week’s edition, we look at five players that easily beat revenue and profit growth expectations in Q1FY24. Many of these companies are also reasonably valued relative to their future prospects.

L&T beats expectations with strong infra and energy execution

This engineering & construction major beat analysts' net profit expectations by 19% in Q1. Revenue for its core engineering business jumped nearly 50%, thanks to a pick up in project execution in infrastructure and energy.

Order wins were equally encouraging for L&T in Q1. The company received bookings across segments like railways, renewables, rural water supply, transmission & distribution, and commercial & residential buildings.

For the rest of FY24, L&T sees order prospects worth Rs 10.07 lakh crore, an increase of over 30% from the previous year. Prospects - meaning projects that L&T can bid for - have risen due to higher activity in the Middle East, especially Saudi Arabia, where the government is flush with budget surpluses.

R Shankar Raman, CFO at L&T, commented onthe Middle East growth,“Recently, there has been a shift in investment preference in the Middle East. They want to develop rail networks, invest in solar energy and green hydrogen. Fortunately, that plays to our strengths.”

Tata Motors: Jaguar Land Rover presses the accelerator

This auto major beat analyst expectations on net profit by 16% in Q1FY24. This was driven by a 40% surge in revenue and a seven percentage point rise in EBITDA margin. The highlight of the quarter was the JLR business.

Tata Motors’ JLR division sells high-margin luxury SUVs. It saw a strong jump in the wholesales of Range Rover, Range Rover Sport and Defender during the quarter. Sales were particularly strong in regions like North America, the Middle East and China.

The company expects the demand for the JLR division to rise in H2FY24, as it ramps up production. It also sees a recovery in demand for its commercial vehicles after the monsoons. The management acknowledged the especially strong growth in heavy commercial vehicles, which is expected to continue.

Tata Motors faced high net losses between FY19 and FY22, but it was back in the black in FY23. Analysts predict that the company’s profits will jump over 8X in the next two years, helped by a low base. Consequently, it has attractive valuations.

JSW Steel 'steals' the show with robust sales volume and lower costs

This metals company exceeded analyst profit estimates by a whopping 162% in Q1. Lower input and power costs drove a margin rise of over five percentage points.

A jump in steel sales volume boosted JSW Steel’s revenue growth. The infrastructure and construction space drove demand, as did its retail customer segment.

Going forward, the company has guided for steel sales of 25 million tonnes in FY24, which translates to 12% YoY growth. JSW Steel also plans to expand its production capacity by over 30% in the next two years. Analysts expect the company to benefit from rising government capex, and predict a rebound in net profits by FY25.

Cipla's American business helps it shine

This pharma major surpassed analyst net profit estimates by 11% in Q1. The top-line growth was driven by a strong performance of the US business, and a decent show in the India business.

Cipla saw robust volume growth for its basic generics business in the US. Commenting on this, Umang Vohra, CEO at Cipla, said, “The supply-demand equation in the US market is readjusting and competition is falling, due to companies going up for sale or facing bankruptcy. This is resulting in growth for Cipla's base families. Pricing pressures are also easing.”

Cipla’s branded prescription business in India also did well in Q1, beating the growth of the broader pharmaceutical market. The company’s growth has been especially strong in the respiratory and cardiac segments.

Going ahead, Cipla has a good launch pipeline for the US market. The company is reasonably valued and analysts foresee a profit growth of over 20% in the next two years.

Favourable demand for wires and cables is boosting Polycab India

This consumer durables player beat consensus net profit (net income) estimates by 46% in Q1FY24. The revenue growth in its flagship wires and cables division drove the bottom line, with a 50-60% YoY volume jump.

Infrastructure, electricity transmission & distribution, and the real estate segments drove domestic demand for wires and cables. Exports also saw strong momentum, thanks to healthy demand from the oil and gas, and renewables sectors.

Commenting on the growth trajectory, Gandharv Tongia, CFO at Polycab, said, “We should be able to get to a top line of Rs 20,000 crore by FY26, but it is also possible that we achieve it sooner.” The management's confidence here suggests growth beyond the target CAGR of over 12%.

Analysts expect that the company will achieve a revenue and net profit growth of over 18% in the next two years. But the stock is currently trading at expensive valuations relative to its prospects.

Screener: Stocks where promoters have increased pledged shares QoQ in Q1

As the latest shareholding data for companies comes out, we take a look at the stocks that saw a significant rise in promoter-pledged shares (which indicates higher loans taken out against stock). This screener shows stocks with increasing promoter pledges over the past quarter. This is typically a negative signal for a company.

The screener has 18 stocks from Nifty 500 and one stock from Nifty 50, representing sectors like banking, pharmaceuticals & biotechnology and utilities. Major stocks that appear in the screener are Hindustan Zinc, Eris Lifesciences, Max Financial Services, Ajanta Pharma, PVR Inox and Aurobindo Pharma.

Hindustan Zinc stands out with the highest rise of 11.8 percentage points QoQ in promoter-pledged shares. Its promoter, Vedanta, increased its pledged shares to 99.4% of its total holding. It pledged 4.4% of its holding on May 25 to Glencore International against a loan of $250 million and 3.3% of its holding to Axis Trustee Services for an undisclosed amount.

Max Financial’s promoters increased their pledge by 8.3 percentage points over the past quarter. This takes the promoter pledge to 93.3% of their total holding. The life insurance player struggled with declining net profits and profit margin in Q4FY23.

Eris Lifesciences’ promoters pledged 11.4% of their holding in Q1FY24. This is the first time the promoters have pledged shares. Share price performance dwindled as it posted declining net profit and revenue for the second consecutive quarter in Q4FY23.

You can find some popular screeners here.

The Baseline

01 Aug 2023

Five Construction and Metal Stock Picks from Analysts

By Satyam Kumar

This week we look at five analyst picks from the construction and metal sector:

Larsen & Toubro: HDFC Securities maintains its 'Buy' rating on this construction and engineering company, with a target price of Rs 3,002, implying an upside of 12.2%. Analysts Parikshit D Kandpal, Nikhil Kanodia, and Manoj Rawat are optimistic about its all-time high order book of Rs 4.1 lakh crore. In Q1FY24, the company's profit surged by 46.5% YoY to Rs 2,493 crore, while revenue saw a 33.5% YoY increase, surpassing Trendlyne Forecaster's estimates by 18% and 19%, respectively.

The analysts at HDFC Securities are confident in the company's consistent outperformance, driven by robust execution. They believe that infrastructure margins have reached the lowest point and are likely to improve in the future. Analysts also expect an improvement in the performance of its subsidiaries.

The analysts estimate a robust prospects pipeline for 9MFY24, with an estimated value of Rs 10 lakh crore compared to Rs 7.5 lakh crore a year ago, indicating promising growth opportunities. Notably, they estimate a significant uptick in the hydrocarbon prospect pipeline, valued at Rs 3.5 lakh crore, suggesting potential opportunities in the energy sector.

Jindal Stainless: ICICI Securities maintains a ‘Buy’ call on this steel manufacturer with a target price of Rs 445. This indicates an upside of 13.1%. In Q1FY24, the company reported a 132.1% YoY growth in net profit to Rs 745.8 crore and an 86.3% increase in revenue. It beat Trendlyne Forecaster’s net profit estimate by 23.9%. The company’s EBITDA stands at Rs 1,120 crore, up 35% YoY (beating the brokerage’s estimate by 9%).

Analysts Amit Dixit, Mohit Lohia and Pritish Urumkar remain positive about Jindal Stainless as its shipments rose by 54% YoY to a record level. Its domestic subsidiaries have also performed well, while overseas subsidiaries faced challenges. The management foresees a 20-25% growth in volume in FY24 and FY25 each. They expect the acquisition of Jindal United Steel to eliminate related-party transactions and drive synergies across the full value chain.

The analysts say, “We perceive Jindal Steel to be in the pole position to capture domestic growth as it is the only domestic producer with spare capacity.” They have raised their EBITDA estimates for FY24 and FY25 to 16% and 12%, respectively, factoring in higher sales volume and lower power and fuel costs.

Dalmia Bharat: Geojit BNP Paribas upgrades its rating on this cement manufacturer to ‘Buy’ from ‘Hold’ and raises the target price to Rs 2,234 from Rs 2,200. This implies an upside of 14.3%. In Q1FY24, the firm’s net profit fell 33.7% YoY to Rs 130 crore but revenue grew by 9.8% YoY.

Despite the fall in net profit, analyst Vincent Andrews turns positive about the company’s prospects, given its healthy volume growth and a strong focus on capacity expansion. He is optimistic about its FY24 volume growth guidance of 15-17% and believes it is on track to achieve this target through organic expansion and acquisitions. He adds, “The demand outlook is positive, given the Centre’s focus on infrastructure & housing and pre-election spending.”

Although Dalmia Bharat’s EBITDA margin contracted despite volume growth in Q1, the analyst anticipates margins to improve in the coming quarters due to declining fuel costs. He expects the company’s net profit to grow at a CAGR of 38.3% over FY23-25.

Tata Steel: Bob Capital Markets maintains a ‘Buy’ call on this steel manufacturer with a target price of Rs 145, indicating an upside of 17.6%. In Q1FY24, the company’s profit fell by 91.8% YoY to Rs 634 crore, and revenue declined by 4.8% YoY. Its EBITDA was 6% ahead of consensus but 1% below BoB’s forecast.

Analysts Kirtan Mehta and Yash Thakur remain positive as Tata Steel is prioritizing capex plans over leverage targets. They say, “This is a positive decision as completion of ongoing capex will generate cash flows and help lower leverage over the medium term.” The company has maintained its capex plan of Rs 16,000 crore for FY24.

The analysts also remain optimistic about Europe operations turning EBITDA-positive, the potential resolution of the restructuring in UK operations, and the startup of the blast furnace at TSK. “We remain confident of Tata Steel’s ability to weather the downturn and deliver on earnings-accretive growth,” they conclude.

UltraTech Cement: KRChoksey keeps its ‘Buy’ rating on this cement maker and raises the target price to Rs 9,439 from Rs 9,105. This implies an upside of 13.5%. In Q1FY24, the company’s net profit rose by 6.6% YoY to Rs 1,688.5 crore and revenue grew by 17%. It beat Trendlyne Forecaster’s revenue and profit estimates by 2% and 0.8% respectively.

Analyst Abhishek Agarwal attributes the firm’s healthy Q1 performance to a 20% YoY growth in volume, led by robust demand. He also cites lower energy costs for margin expansion and profit growth. He believes that “the recent correction in energy prices will continue to ease margin pressures in the medium-term”.

With the demand environment remaining strong, Agarwal expects the company’s capacity expansion efforts to drive future growth and market share gains. “Given the ongoing capex, UltraTech Cement is poised to maintain its industry leadership,” he adds. The analyst anticipates the company’s revenue to grow at a CAGR of 16.4% over FY23-25.

Note: These recommendations are from various analysts and are not recommendations by Trendlyne.

(You can find all analyst picks here)

The Baseline

28 Jul 2023

Five Interesting Stocks Today

Tanla Platforms: This software and services company’s share price grew by 79.4% in the past quarter and hit its 52-week high of Rs 1,317.5 on Monday. In Q1FY24, the company’s profit improved by 12.6% QoQ, while the revenue increased by 9.3%, beating Trendlyne’s Forecaster estimates by 16.2% and 7.6%, respectively. The company also features in a screener for stocks with QoQ growth in net profit and increasing profit margin.

The revenue from the enterprise communications segment(90% of total revenue) has also risen by 9% QoQ, marking growth after four quarters in a seasonally weak period. It was driven by an increase in transactional app-to-customer messaging volume and a price hike in the international long-distance segment. The Chairman and Chief Executive Officer Uday Reddy said, “We are now in the phase of price expansion and expect further increases in Q2.” The firm anticipates price hikes in its domestic business to drive growth.

Tanla Platforms recently acquired ValueFirst Digital Media for $45.5 million, leading to a gain in market share of over 35% in India. Speaking about the acquisition, Reddy said, “We expect to achieve double-digit EBITDA in a couple of quarters.”

The digital platforms segment’s revenue also grew by 8% QoQ, driven by Wisely, a patented anti-phishing platform. Wisely has completed proof-of-concept with three leading banks and has a revenue potential of Rs 50-100 crore per year. “The focus in Q2 will be on accelerating the go-to-market strategy and commercial holders,” Reddy added.

HDFC Securities is optimistic about Tanla Platforms and expects a revenue CAGR of 24% over FY24-26, led by a revival in the enterprise business and new product launches in the platform business.

Cipla: This pharma company’s stock surged by 9.6% on Thursday, and hit a new all-time high of Rs 1,219.4 per share, as its net profit jumped by 45.1% YoY to Rs 995.7 crore in Q1FY24. This helped the company beat Trendlyne’s Forecaster estimates for net profit by 22.7%. Its revenue has also risen by 17.7% YoY to Rs 6,329 crore, helped by increased sales from India, the US, and South Africa, with improvements in the prescription, trade generic, and consumer health segments.

Cipla’s EBITDA margin also expanded by 230 bps YoY to 23.6%, owing to lower raw material costs and reduced price erosion in the US market due to declining competition. This helped the company appear in a screener of stocks with increasing net profit and profit margin (YoY).

Umang Vohra, Managing Director and Chief Executive Officer (CEO) of the company, said, “The company plans to launch 30 to 35 products in the Indian market, which will contribute to 2.5-3% of revenue. A large number of these products will be in the respiratory segment.” The management is optimistic about revenue growth in the US business.

Post results announcement, Motilal Oswal Financial Services maintains its ‘Neutral’ rating on the stock with a target price of Rs 1,130 owing to limited upside at the current price. This indicates a potential downside of 4.2%. However, the brokerage is optimistic about the company's profitability growth, as it expects a revival in the US market and strong performance in the branded generics segment in India and South Africa.

According to reports, the promoters of Cipla are considering selling a portion of their overall stake in the company. However, Cipla has issued a clarification stating that they are not aware of any specific event that requires disclosure under the listing regulations.

Nestle India: This FMCG stock declined by 3.3% in Thursday’s intra-day trade after announcing its Q2CY23 results. This is despite its net profit rising by 35.5% YoY and revenue growing by 15.4% YoY. However, this has not cheered investors as its revenue growth seems to be mostly led by price hikes, with underlying volume growth of 4-5%. According to reports, its volume growth is below the street’s estimates.

Although the firm saw healthy growth on a YoY basis, its net profit and revenue fell by 5.2% and 3.6% QoQ respectively. The stock shows up in a screener for companies with declining revenue, profit and operating profit margin on a QoQ basis.

The company’s top-line growth is driven by a 14.6% YoY increase in domestic sales, with healthy contributions from categories like milk products, beverages and nutrition, despite inflationary pressures. Suresh Narayanan, Chairman and MD of the firm, said, “Our RURBAN strategy was successful as we expanded our distribution footprint in key portfolios, leading to higher penetration. We witnessed strong growth across megacities and metros, robust performance in Tier 1 to 6 towns, and continued strength in rural markets.”

The company’s gross margins have expanded by 80 bps YoY to 54.6%, aided by stable fresh milk prices and declines in prices of edible oils, wheat, and packaging materials. However, its beverages segment saw inflationary pressures due to elevated robusta (coffee beans) prices, which are expected to remain volatile. ICICI Securities believes that a correction in milk prices will free up more resources for advertising spends and innovation to drive growth.

Mphasis Ltd: Thesoftware and services firm saw its stock price increase by 22.3% in the past month, according toTrendlyne’s Technicals. On July 20, the company announced its Q1FY24 earnings, reporting a decline of 3.2% QoQ on a constant currency basis. However, the stock rose 5.3% the next day. This rise was primarily driven by high deal wins in the quarter, which amounted to $707 million, almost twice the average of the past four quarters.

The decline in revenue was on account of a cut down in discretionary spending by clients in the banking and mortgage sector. The firm is trying to diversify itself by acquiring deals in the non-banking and financial services (BFS) sector. Nearly 60% of the deal wins are from non-BFS verticals in the quarter.

The firm has launched an AI business unit which bagged nearly one-third of the deal wins in Q1FY24. This includes one deal with a ticket size greater than $100 million. Its EBIT margins expanded by10 bps QoQ to 15.4%. The company plans to increase its margins to around 16% in the following quarters by improving the productivity of its offshore workforce. Its net profit declined by 2.2% QoQ. Mphasis shows up in ascreener for stocks with strong momentum, with prices above short, medium and long-term averages.

Commenting on the earnings, Mphasis CEONitin Rakesh said, “Revenue growth will pick up in FY24 as the firm currently has a good pipeline of deals. The mortgage industry will also ramp up from current levels.”

HoweverICICI Securities holds a less favourable view. It cites the global slowdown and banking crisis in the US and Europe, which have led to delayed decision-making around discretionary projects and spending cuts in banking and capital markets. This will lead to muted growth for Mphasis. The brokerage has downgraded its rating from ‘Hold’ to ‘Sell’.

Jyothy Labs: This personal products company has risen over 25% since Monday after reporting robust Q1FY24 results, beating consensus estimates. This recent surge has driven the company’s share price up by 84.2% in the past year. However, over five years, the share price has grown by only 36.2%.

During the quarter, Jyothy Labs’ revenue increased by 15.1% YoY to Rs 687.1 crore, beating Trendlyne’s Forecaster estimates by 4.7%. This was fueled by strong performance across the company’s major segments. Its net profit jumped by 101.7% YoY to Rs 96.3 crore, and beat estimates by 27.2%. This was due to moderating input costs and an increase in the disposable income of consumers.

The company’s fabric care segment (which markets Henko and Ujala, and contributes 43% of the total revenue) has seen an 18% YoY rise in revenue. Its dish wash segment (that houses brands like Exo Bar and Pril) also improved by 11% YoY.

Managing Director M R Jyothy said, “The company will deliver double-digit revenue growth, and EBITDA margin will be in the range of 15-16% in FY24.” She also highlighted the company’s plan to strengthen distribution, increase marketing investment, and optimize cost structures.

Following the company’s strong performance, ICICI Securities maintains its ‘Buy’ rating but raises its target price by 16.8% to Rs 340. The brokerage says the company remains its top pick in the consumer staples space and is positive about the management’s strategy of prioritising market share gains and volume growth. As a result, the company features in a screener of stocks where brokers have upgraded their recommendations or target prices in the past month.

Trendlyne's analysts identify stocks that are seeing interesting price movements, analyst calls, or new developments. These are not buy recommendations.

The Baseline

27 Jul 2023

Chart of the Week: Japan’s debt-to-GDP soars to 226.1%, while India sees marginal rise

By Akshat Singh

Most governments have some debt on their books. It helps fund the country’s public expenditure, capital investment, and crisis response. So a country’s debt-to-GDP ratio is key to measuring its fiscal health and economic stability. A high debt-to-GDP ratio means more money going into interest payments, making countries vulnerable in times of crisis and downturns.

In this edition of Chart of the Week, we take a look at the government debt-to-GDP ratios of various countries.

India’s debt to GDP improves from pandemic peak

India’s quarterly debt-to-GDP ratio stands at 55.7% as of March 2023, according to the latest estimates by the Ministry of Finance. During the COVID-19 pandemic in March 2021, the debt to GDP ratio reached 58.7% (an increase of 11.6 percentage points from the previous year) as the government borrowed more to cover additional expenses, amid declining revenues and a sharp fall in GDP. The quarterly ratio has fallen by 300 bps since the pandemic peak in March 2021. The country’s government debt levels have stabilized, with low risks of currency fluctuations and high interest rates.

India’s annual debt to GDP is estimated to fall from 84.5% in 2022 to 83.8% by 2025, driven by capex-led growth planned in the 2023 fiscal budget. For reference, the annual 10-year average ratio of the country hovers around 74.2%.

The United States made headlines recently for blowing past its debt limit. As of March 2023, its quarterly debt-to-GDP ratio stands at 121.3%, a significant jump from 108.1% in March 2020. The pandemic in the US played a starring role in this escalation, with the ratio surging by 25.7 percentage points to 133.8% in March 2021. This jump was due to the government's aggressive spending on stimulus measures and the public health crisis.

Japan, US and UK see soaring debt levels

As a result, US debt crossed $31 trillion for the first time, raising concerns that it would breach the $31.4 trillion debt ceiling. However, a fresh debt limit bill signed on June 3 raised the ceiling and averted a default.

The United Kingdom has rejoined “100% debt to GDP ratio club” after 60 years, with a quarterly ratio of 100.1% as of May 2023. Debt has been increasing since the pandemic due to rising costs post-Brexit, energy subsidy schemes, inflation-linked benefit payments, and interest payments on debt.

In contrast, France has shown a declining debt trend post-pandemic, despite increased social security payments and an ageing population. Finance Minister Bruno Le Maire expects the debt to GDP ratio to decline to 108.3% by 2027 on the back of plans to control spending and use 30 billion euros in savings from the relief fund for the energy crisis towards lowering the debt.

Let’s now focus on Asian countries. As of March 2023, Japan's quarterly debt-to-GDP ratio stands at 226.1%, the highest globally, and its debt has hit $9.2 trillion.

Over the past three years, its ratio has risen by 25.9 percentage points due to social welfare packages and the costs of an ageing population. As a result, last year, Japan allocated 22% of its annual budget to debt redemption and interest payments, which exceeded the combined 15% spending on public works, education, and defence.

China’s debt to GDP still the lowest, Brazil’s falls

Meanwhile, China’s debt ratio is at 21.4%, the lowest among the countries in focus. However, it has increased by 4 percentage points since the pandemic, driven by local authorities borrowing heavily to support the economy amid the central government's zero-COVID policy. As a result, credit to the nonfinancial sector reached $51.87 trillion, accounting for 295% of GDP in 2022. China’s debt as of April 2023 stands at $14.4 trillion.

Moving on to countries with relatively lower debt-to-GDP ratios, Brazil’s figure as of March 2023 stands at 72.8%, which is well under its general threshold limit of 77%. Crossing this threshold could result in a 1.7 bps decrease in annual real growth for each additional percentage point of debt. Despite higher government spending, Brazil has managed to reduce its debt to GDP ratio by approximately 15.8 percentage points since the pandemic. The Brazilian central bank says this was due to a higher-than-expected economic growth (3%) in 2022, the rise of the Brazilian currency against the US dollar, and net debt redemption. As of December 2022, total government debt stands at $36.6 billion, the lowest in five years.

South Korea and Indonesia are the other two countries with low debt-to-GDP ratios, at 47.8% (December 2022) and 39.1% (March 2023) respectively. However, South Korea’s annual ratio has also increased since the pandemic and is estimated to reach 57.2% by 2026. The government has proposed spending cuts for the first time in 13 years to cope with the pandemic’s effects and inflationary pressure.

Indonesia has reduced its ratio by 120 bps in the past year, thanks to a 7.6% YoY fall in external debt as of December 2022. This declining trend is because of the government moving its bonds to local markets amid unstable global financial conditions. Currently, the country is facing loan default problems from various construction companies, including the $8.3 billion default by Waskita Karya. As of April 2023, the total government debt stands at $532.2 billion.

Recently hit by recession, Germany has a quarterly debt-to-GDP ratio of 65.9% as of March 2023. The country has maintained a stable ratio over the years, but the pandemic caused an abrupt increase of 9 percentage points. Currently going through an energy crisis, the government has allocated $800 billion to address the situation. To manage the situation better, the Finance Ministry is also planning to restore the borrowing cap known as the debt brake. As a result, the annual ratio is expected to fall by another 220 bps to 64.1% in 2024.

The Baseline

26 Jul 2023

Five Finance Stock Picks from Analysts

By Abhiraj Panchal

This week we look at analyst picks from the banking and finance sector with net profit and revenue growth in Q1FY24.

ICICI Bank: Edelweiss maintains its ‘Tactical Buy’ rating on this bank with a target price of Rs 1,195, indicating an upside of 20.3%. In Q1FY24, the bank’s net profit surged by 39.7% YoY to Rs 9,648.2 crore, while the revenue increased by 36.8% YoY. It beat Trendlyne Forecaster’s net profit estimates by 4.3%. Analyst Raj Jha is positive about the bank’s consistent return ratios and sound asset quality.

Overall advances and deposits have grown by 18% YoY each. “Growth remains broad-based,” says Jha. Even though net interest margins (NIM) expanded by 77 bps YoY, the analyst expects pressure due to the increased cost of funds in the coming quarters. But he says that despite this pressure, ICICI Bank will sustain its strong performance on most parameters. He concludes that the bank’s focus on a digital push, risk-calibrated operating returns, and a strong balance sheet will result in growth.

CreditAccess Grameen: Motilal Oswal reiterates its ‘Buy’ call on this bank with a target price of Rs 1,660. This indicates an upside of 19%. In Q1FY24, the bank's profit grew 161.2% YoY to Rs 346.3 crore, while revenue increased by 88.4%. It beat Trendlyne Forecaster’s net profit estimates by 20.1%. Analysts Abhijit Tibrewal, Nitin Aggarwal and Parth Desai note that “margin expansion and opex efficiencies led to a strong quarter.”

The analysts are optimistic about the bank’s focus on new customer acquisitions and the addition of 40 new branches. CreditAccess Grameen also plans to increase the proportion of its long-term borrowings. The analysts expect the firm to dominate on the back of lowest-cost organized financing, improved operational efficiency through technology, and integrated risk management in every process, leading to superior asset quality and lower credit costs. “With a strong capital position, the bank can navigate any potential future disruptions, and capitalise on the growth opportunity over the medium term,” they say.

Karur Vysya Bank: ICICI Securities maintains a 'Buy' rating on this bank with a target price of Rs 165, indicating a potential upside of 27.6%. In Q1FY24, the bank reported net profit growth of 56.8% YoY to Rs 358.6 crore, while revenue increased by 27.8% YoY. It beat Trendlyne Forecaster's net profit estimates by 4.8%. The analysts at ICICI Securities are optimistic about the bank's outlook due to its impressive loan book growth, leading to a healthy quarter.

One key reason for the analysts' optimism is the bank's lowest cost of deposits compared to its peers. The analysts project that the bank will achieve superior return ratios, possibly outperforming its competitors. The bank's presence in tier-1 cities, with 16% of its capital employed there, strengthens its position. Another factor adding to their bullish view is the bank's decision to aggressively hire new employees. This move is expected to enhance its franchise strength, which adds to its growth prospects.

IndusInd Bank: BoB Capital Markets maintains its ‘Buy’ rating on this bank and raises the target price to Rs 1,755 from Rs 1,550. This implies an upside of 24.1%. In Q1FY24, the bank’s standalone net profit rose by 32.5% YoY to Rs 2,123.6 crore and revenue increased by 31.1% YoY. It beat Trendlyne Forecaster’s net profit estimates by 0.2%.

Analyst Ajit Agrawal says the healthy growth in net profit is from rising net interest income and lower provisions. He expects loan growth to continue in FY24 on the back of traction in the vehicle finance and microfinance institution (MFI) segments. Agrawal adds, “Corporate loans did well, led by small businesses (+10% QoQ), and the bank aims to double this book to 20% of the corporate mix in 2-3 years.”

Overall, Agrawal believes that the bank’s strong growth momentum in vehicle finance and MFI loans, along with improving asset quality and a healthy loan mix, bodes well for its future growth. He anticipates the firm’s net profit to grow at a CAGR of 22.4% over FY23-25.

Can Fin Homes: Axis Direct keeps its ‘Buy’ rating on this housing finance company and raises the target price to Rs 930 from Rs 675, implying an upside of 16.5%. In Q1FY24, the company’s standalone net profit rose 13.1% YoY to Rs 183.5 crore and revenue increased by 34.8% YoY. It beat Trendlyne Forecaster’s net profit estimates by 14.3%.

Analysts Dnyanada Vaidya, Prathamesh Sawant and Bhavya Shah are positive about the housing finance company’s medium-term growth prospects on the back of improving demand trends, helped by a pause in rate hikes and easing supply-side constraints. They also like that the company keeps its assets under management (AUM) growth guidance at 18-20% over the medium term.

The analysts add, “Despite the sharp run-up in the stock (+ 45% in 3 months), it trades at valuations lower than its peers.” They believe the company shows robust growth while maintaining stable asset quality and improving profitability. The analysts expect the firm’s net profit to grow at a CAGR of 19% over FY23-25.

Note: These recommendations are from various analysts and are not recommendations by Trendlyne.

(You can find all analyst picks here)

The Baseline

26 Jul 2023

TCS, Infosys guidance cuts point to harder days ahead | Tech winners and losers screener

By Shreesh Biradar

The Indian investing community had high hopes for Nifty 50 reaching the 20,000 mark last week, but Infosys' results caused a pullback just before this milestone.

Indian IT 's earnings season began on a cautious note. TCS, a key player in the industry, noted that global macro headwinds "are affecting revenue and margins". Morgan Stanley had previously predicteda modest performance for Indian tech in Q1FY24, with improvement in the second half of FY24.

India’s software services has been a driving force in India's growth, contributing nearly 19% of overall exports and growing by 20% in FY23. However, the Q1FY24 earnings season has been underwhelming - the big four IT firms (TCS, Infosys, Wipro and HCL Technologies) reported tepid earnings and lower revenue guidance. The management is focusing on cost-cutting measures amid the slowdown.

Nifty IT rose by just 3% in the April-June 2023 quarter as investors re-evaluated what used to be a booming sector. The broader Nifty 50 rose by around 11% in the same period, so IT is now a clear laggard, as recessionary pressures, global financial turmoil, spending cuts, and the rise of technologies like AI raise questions about the growth outlook.

In this week’s Analyticks:

Losing Momentum?: Global headwinds slow IT sector growth
Winners and losers screener: IT stocks which outperformed and underperformed Trendlyne's Forecaster estimates in Q1FY24

Let’s get into it.

IT firms cut down their revenue guidance

The earnings season for the majority of Indian IT firms was not celebratory and was quite a mixed bag, with TCS and HCL recording a moderate performance, while Infosys' and Wipro's weak numbers underlined the slowdown. A major highlight of the season has been the cut in revenue guidance. For instance, Infosys revised its FY24 revenue guidancefrom its eariler estimate of 4-7% constant currency growth to 1-3.5%.

Commenting on the lower guidance, Infosys CEO Salil Parekh said, “In the short term, we see some clients reducing or even stopping work on transformational programs and projects. This is especially visible in financial services, mortgages, asset management, investment banking, payments, telecom, high-tech, and parts of retail.”

While Wipro hinted at -2% to 1% revenue guidance, HCL and TCS pegged their numbers at around 5% to 7%. A key driver for the lower revenue guidance has been the slowdown in the global BFSI (Banking, Financial Services and Insurance) sector. This vertical contributes nearly 30% of IT services revenue, and has seen a spending cut in discretionary tech services.

Except for HCL, all other firms have seen a drop in revenue from BFSI clients. Indian IT has in the meantime, diversified its exposure to retail, pharma, auto, and other sectors. The BFSI share has significantly decreased from the 40% it had three years ago.

The telecom sector has also seen its share of revenue drop. On the upside, the retail, energy and manufacturing sectors are moving towards technology adoption post-pandemic.

Slower decision-making clogs up deal pipeline for tech companies

As interest rates rose, the collapse of Silicon Valley Bank in the US and Credit Suisse in Europe spread cracks across the US and European banking sector. Banks and finance companies have decided to wait out the storm and delay new IT spending.

While large deals are still coming through, they are taking longer to finalize due to decision-making getting pushed all the way up to the CEOs and CTOs in client companies.

When interest rates were low and money was cheap, a lot of tech moonshot projects were getting funded by customers. Now that has changed. According to CEO of TCS, K Krithivasan, “Macro uncertainties have made clients more cautious. They are taking a month to month approach, and that means low visibility on their future spending. We will prioritize projects that are business-critical and offer faster ROI realization. Long-running discretionary projects are now coming back with reduced scope or pace.”

While the deal pipeline is holding steady, the conversion rate for new deals has decreased. So order inflow will likely slow down going forward.

The new deals already signed might see execution delays. However, regular spending on maintenance projects is expected to continue at the previous pace. It is discretionary spending, which involves smaller budgets and faster turnaround times, that is seeing the biggest cuts.

Retaining talent becomes key, as hiring slows down

The pressure on the sector's top-line growth has pushed the management to focus on margins. However, the margins of the IT pack have fallen since Q4FY23. The recent salary hikes have offset some of the gains from lower subcontractor costs and higher resource utilisation. According to TCS CFO Samir Seksaria, salary hikes have resulted in a 200 bps impact on the EBIT margins.

Lower attrition has controlled the decline in margins for the IT pack. However, the attrition rate continues to be above pre-pandemic levels of 10 -12%. Companies are responding by trying to retain and promote their new talent pool instead of hiring external replacements. This has led to a higher utilisation of the bench pool and lower net additions of employees.

If the attrition rate falls by another 300 bps, IT firms could see a margin expansion in the range of 75-100 bps. Currently, the net additions of employees for large IT firms have been negative or marginally positive.

The impact of the AI revolution is still undecided

With the rise of Chat GPT and Google Bard, generative AI has become the buzzword in IT circles.

But there are many uncertainties around AI right now - clients are unsure about how to use it. Client engagements for AI projects have revealed ever-changing requirements, and clarity is lacking on how to integrate AI into business processes. The high error rates, and the 'hallucinations' of chatbots, have made customers cautious about adoption. Indian IT firms are investing into in-house pilot projects to get a better understanding of AI's nuances and possibilities.

However, Infosys CEO Salil Parekh was clear on the promise, saying, “AI will not replace human jobs but complement them, and Infosys has seen a 10-30% productivity improvement using AI internally and with clients.”

Recognizing the significance of AI, Wipro has committed $1 billion to building AI technology, including acquiring established AI firms. Wipro CEO Thierry Delaporte believes that, “AI is a fast-moving field. Especially with the emergence of generative AI, we expect a shift in all industries. It’s meant to empower our talent pool and help clients”.

TCS is training 50,000 employees under its AI program, while Wipro has pledged to train its entire workforce of 2,50,000 employees in generative AI.

Overall, IT firms are focusing on steadying their revenue and margin growth amid the global slowdown. Deals are still happening, and there are no immediate threats from disruptive AI. The Indian IT sector is for now, well-equipped to handle the slowdown, so long as it's temporary.

Tech winners and losers screener: IT stocks which outperformed and underperformed Trendlyne's Forecaster estimates in Q1FY24

As the software & services sector releases its Q1FY24 results, we take a look at how these companies have performed compared to their revenue and net profit estimates.This screenershows tech stocks that have outperformed and underperformed analyst estimates.

Notable stocks in the screener are Infosys, Wipro, HCL Technologies, Tata Consultancy Services (TCS), LTIMindtree, Coforge, Tanla Platforms, IndiaMart InterMeshand One97 Communications.

Tanla Platforms’ net profit grew by 12.6% QoQ to Rs 135.4 crore inQ1FY24, beating Trendlyne’s Forecaster estimates by 16.2%. Its revenue also rose 9.3% YoY to Rs 911.1 crore, surpassing estimates by 7.6%. The company’s revenue grew on the back of the enterprise and platform segments, aided by a recovery in transaction volumes and an international long-distance (ILD) rate hike.

Tata Consultancy Services is the only big four tech giant to beat Forecaster estimates for net profit, despite a 2.8% QoQ fall to Rs 11,047 crore in Q1FY24. However, revenue remains flat at Rs 59,381 crore, in line with estimates. This was caused by muted growth in the BFSI and retail segments, combined with delays in non-critical projects.

HCL Technologies missed the Forecaster estimates for revenue and net profit by the largest margin among the big four in Q1FY24. Its net profit declined 11.3% QoQ to Rs 3,534 crore, missing Forecaster estimates by 8.3%. Similarly, revenue fell by 1.5% QoQ to Rs 26,640 crore, missing Forecaster estimates by 1.9%. This decline can be attributed to the slowdown in revenue from the technology and telecommunications segments due to a cut in discretionary spending and decision delays.

You can find more screeners here.

The Baseline

21 Jul 2023

Five Interesting Stocks Today

Polycab India: This consumer durables company has surged over 19% since Tuesday and touched a new all-time high of Rs 4,717.4 on Thursday. This comes after it reported strong Q1FY24 results, beating analyst estimates.

During the quarter, Polycab’s revenue increased 42% YoY to Rs 3,889.4 crore, led by the wires & cables and international businesses. The company’s net profit also grew by 81% YoY to Rs 399.3 crore. Both revenue and net profit beat Trendlyne’s Forecaster estimates by 24.8% and 45.9% respectively. EBITDA margins also improved by 270 bps YoY due to a fall in commodity prices, and price hikes by the firm.

Polycab’s cables & wires segment, which contributes 89% of its total revenue pie, has clocked a 47% rise in revenue on the back of strong volume growth in both domestic and international markets. The FMEG (fast-moving electrical goods) segment saw a 2% increase due to subdued demand. Commenting on the company’s performance, Inder T Jaisinghani, Chairman and MD, said: “The company registered its best-ever first quarterly revenues and profitability. Centre’s focus on infrastructure development and structural reforms, improving private capex and continued momentum in real estate has given us favourable results.”

Several analysts are bullish following the company’s strong performance and expect a recovery in the FMEG segment in the near future. BoB Capital maintains its ‘Buy’ rating but raises the target price to Rs 5,000. The brokerage believes that Polycab will achieve its revenue target of Rs 20,000 crore before FY26, as guided in FY21 under Project Leap. As a result, the company features in a screener of stocks where brokers have upgraded recommendations or target prices in the past month.

CIE Automotive India Ltd: Thisauto part and equipment manufacturer has risen by 33% in the past quarter, while the broader benchmarkNifty Auto increased by 19.6%. The stock is trading at a 52-week high, according toTrendlyne’s Technicals. The firm’s Q2CY23 earnings released on Tuesday, showed its revenue and profits increasing by 5% and 16% YoY respectively. The boost in net profit was aided by a margin expansion of 260 bps. The revenue slump was due to a slowdown in the EU business, while in India the company was impacted by lower demand from 2- wheelers and commercial vehicles.

The firm is adding new orders from EV manufacturers under its aluminum and steel forging segment. It received a new EV transmission system order worth $20 million (apart from the existing $80 million order) from US-based gear manufacturer Metalcastello. CAIL has also won orders from Bosch, Royal Enfield, Stellantis, and Tata Motors.

The firm is focusing on profitability rather than scaling up low-margin businesses. It expects 50% of its new business to come from EVs (currently 30%) in the next two years. It shows up in ascreener of stocks with growth in net profit and profit margin

Mahindra & Mahindra recently exited from CIE Automotive and is no longer considered a promoter of the firm. This has positioned CIE as a pure-play MNC with no conflict of interest. As a result, CIE India now directly operates under CIE Spain, granting it access to the European market and technology.

According toICICI Securities, the firm’s growth will be driven by its EV portfolio expansion, new order execution, 2-wheeler revival, and new passenger vehicle launches. It is expected to expand its margin to 18-19% from the current 17.7%. The brokerage maintains a ‘Buy’ rating on the firm.

LTIMindtree: This IT consulting & software stock fell 2.6% on Tuesday despite its net profit growing 3.4% QoQ to Rs 1,151.5 crore in Q1FY24, as it missed Trendlyne’s Forecaster estimates by 3.1%. Revenue was flat, while also missing Forecaster estimates marginally by 0.7%.

The rise in net profit has helped the company appear in a screener of stocks with increasing net profit over the past two quarters. Muted growth in the banking, financial services & insurance segment, which constitutes 38% of the company’s revenue, hit revenue growth.

The company’s EBITDA margin expanded by 90 bps QoQ to 20% in Q1, owing to reduced subcontracting expenses. It also booked new orders worth $1.4 billion during the quarter, reflecting a rise of 4.9% QoQ. The management remains confident of regaining demand momentum and profit margin in the medium to long term, driven by previously won orders. Citing these reasons, the management has given a revenue guidance of single-digit to low double-digit growth for FY24.

However, ICICI Securities believes that the company is unlikely to achieve its double-digit guidance in FY24 owing to the Q1 estimates miss and the muted demand outlook for the BFSI segment in Q2 as well. But it maintains its ‘Add’ rating on the stock post results and lowers the target price to Rs 5,325 from Rs 5,582 per share. This indicates a potential upside of 8.2%. It expects some revenue pick up in H2FY24, from a strong order book, healthy deal pipeline, and revival in broader tech demand. The broker expects the company’s revenue to grow at a CAGR of 10.3% over FY23-26.

Kajaria Ceramics: This tiles & ceramics manufacturer has risen 10.2% over the past week till Friday, ahead of its Q1FY24 results on July 26. The firm is expected to benefit from the decline in commodity prices like oil and natural gas amid rising domestic demand. The company’s profitability and margins are likely to increase due to the correction in natural gas prices, which account for roughly 20-25% of its costs. The management expects to save Rs 130-140 crore in power and fuel costs in FY24 and has guided for EBITDA margins in the range of 14-16%, compared to 13.5% in FY23.

In Kajaria’s Q4FY23 earnings call, it provided volume growth guidance of 13-15% for FY24. This growth is expected to be led by demand from tier-2 and tier-3 cities, an enhanced distribution network, and strong brand recall. Moreover, there is a steady shift in demand towards the organised sector, which is favourable for large organised players like Kajaria Ceramics, according to reports. The management has given a revenue growth guidance of 14-16% for FY24.

According to Trendlyne’s Forecaster, the ceramic maker’s revenue and net profit are expected to rise by 14.4% YoY and 42.5% YoY respectively. The stock also shows up in a screener for companies with low debt.

ICICI Direct believes the company will be a major beneficiary of these industry tailwinds, given its healthy balance sheet, superior brand, and its expanding reach. The consensus recommendation from 27 analysts on the company is ‘Buy’.

CCL Products India: This coffee products manufacturer’s stock price fell by 15.1% in the past week despite a 15.1% YoY rise in Q1FY24 net profit to Rs 60.7 crore. Its revenue also increased by 28.6% YoY. The drop in price was likely due to a decline of 551 basis points in EBITDA margins, which now stands at 16.2%. The company also missed Trendlyne’s Forecaster’s net profit estimate by 20%.

The fall in price can also be attributed to the management's decision to increase the debt guidance to Rs 2,000 crore for FY25, due to rising capex. It plans to expand the capacity to approx 77,000 metric tonnes (MT) by FY25 in Vietnam and India. This includes a 16,500 MT facility in Tirupati and capacity expansion in the Vietnam plant by FY24.

CCL Products aims to double its market share to 15% and targets substantial volume growth. Speaking about this, Managing Director Praveen Jaipuriar says, “We are looking to end the year at somewhere between 20 to 25% volume growth.” The company also plans to increase outlets in the domestic market by 30-40%. It is also trying to expand its footprint in the United Kingdom by acquiring Lofbergs Group’s six coffee brands.

IDBI Capital maintains a ‘Buy’ call on CCL Products India due to its aggressive capacity expansion and strong growth visibility. The brokerage expects sales and net profit to grow at a CAGR of 19% and 27%, respectively, over FY24-25. The company also features in a screener for stocks with broker target price or recommendation upgrades in the past month. According to Trendlyne’s Forecaster, it has a consensus recommendation of ‘Buy’ from 10 analysts.

Trendlyne's analysts identify stocks that are seeing interesting price movements, analyst calls, or new developments. These are not buy recommendations.

The Baseline

20 Jul 2023

Bajaj, Hero come for Royal Enfield | Stocks gaining momentum ahead of results

By Tejas MD

Michael Burry deletes his tweets, because he hates being wrong. But the investor, who became famous for predicting the 2008 financial crisis, is closely followed, and the media documented him in June 2022 warning investors about the coming stock market crash, which he had called “the mother of all crashes”. In March this year, Burry admitted he was wrong to tell investors to sell their stocks.

In the ever-changing world of stock markets, narratives can quickly shift. US indices are currently at their 52-week highs and Nifty 50 is hovering around its all-time high.

Last year at this time, it wasn’t just Burry who was worried. Analysts believed a recession was about to hit the global economy, as central banks raised interest rates to combat inflation.

But the tide turned. As inflation continues to fall, economists say a ‘soft landing’ is likely. Goldman’s Sach has increased its odds of the US avoiding a recession in the next 12 months, to 80%, and India is expected to be the world’s fastest growing economy in FY24.

One sector that has benefited from the changing conditions is the auto sector, which tracks the broader economy - when GDP grows, cars, bikes and tractors start selling. The positive outlook for Indian auto has prompted foreign investors to raise their portfolio allocation to the sector to a record high of 6.5% in June 2023 from 5.2% in June 2022. Domestic investors’ allocation also increased to a multi-month high of 8.2% in June, as they expect strong Q1FY24 earnings for auto companies.

Within India's auto industry, the two-wheeler premium segment has been a hotbed of activity, offering higher margins and a better growth outlook. Top two-wheeler manufacturers are going after this segment with guns blazing.

Amid the fierce competition, can the undisputed king of premium bikes, Royal Enfield, dodge the ‘bullet’ and remain at the top? Let’s find out.

In this week’s Analyticks,

Ready to rumble: Bajaj and Hero partner with foreign players to take on Royal Enfield
Screener: Nifty 500 outperformers ahead of results with rising Trendlyne momentum score and high durability

Bajaj and Hero go after Royal Enfield to win buyers of premium bikes

Shares of Eicher Motors, which makes Royal Enfield motorcycles, plunged 5% on July 4 after Bajaj Auto and Hero Motocorp announced new motorcycle launches. These were no ordinary launches - Bajaj and Hero have partnered with foreign players Triumph and Harley Davidson to challenge Royal Enfield, the dominant player in the premium motorcycle segment (> 250 cc) with an 86% market share.

These parnerships present the first big threat to Royal Enfield's India dominance - Triumph and Harley are iconic, global bike brands. Who can forget the Terminator riding in on a Harley Davidson FatBoy?

Under threat, Eicher Motors has underperformed both Nifty 50 and Nifty Auto in the past quarter.

While Hero unveiled the Harley-Davidson X 440, Bajaj Auto launched its Triumph Speed 400 in the first week of July. The pricing of both motorcycles came in lower than expected, at around Rs 2.3 lakh ex-showroom. These two bikes will directly compete with Royal Enfield’s top-selling models - Classic 350 (Rs 1.93 lakh), Himalayan, and Meteor 350.

The strategic pricing of these new bikes shows how badly Bajaj and Hero’s want to capture market share from Royal Enfield. During the post-launch meeting, Rajiv Bajaj, the CEO of Bajaj Auto, did not hold back. He compared his approach to the infamous American bank robber William Sutton. He said, “When asked, why do you rob banks, he (William Sutton) said, that's where the money is. So if Royal Enfield is where the money is, then we have no choice but to rob that bank."

Niranjan Gupta, Hero’s CEO, said, “We are here to win in the premium segment, whatever it takes.”

It is obvious that the CEOs of these two-wheeler manufacturers are now laser-focused on a segment that was left to Royal Enfield for the past decade. Why the change of heart?

Premium two-wheelers beat industry’s volume growth, with higher margins

Domestic two-wheeler volumes grew 17% in FY23 after falling for three consecutive years. However, the numbers are still below FY15. During the three years of declining volumes, the premium motorcycle segment fell more slowly, compared to the overall numbers.

In FY23, premium motorbikes made a strong comeback, rising 37% compared to industry volume growth of 17%. This segment is projected to keep growing faster than the industry.

Analysts see rising purchasing power and growing incomes driving these sales. India is getting richer, and people's tastes are changing. During 2018-22, India is estimated to have produced 70 new millionaires every day.

A People Research on India’s Consumer Economy (PRICE) report suggests that by 2030, the country's demographics could change from the current inverted pyramid - with a small rich class and a large low-income class - to a rudimentary diamond, where a big part of the low-income group moves up to become middle class.

These shifts explain the premiumization trend that is gaining momentum across consumer sectors like FMCG and hotels. The auto industry is no different.

Royal Enfield, which focuses only on the premium segment, is the established leader in this space with a market share of 86%, followed by Jawa (5%), Honda (5%), and Bajaj (3%). Bajaj and Hero are now hoping to put a serious dent in RE’s market share.

Can Harley and Triumph break Royal Enfield's dominance?

Barring Hero, the other companies below saw rising domestic sales volumes YoY in Q1FY24, indicating robust Indian demand. However, exports for all four two-wheeler manufacturers has been disappointing, falling YoY. Analysts expect muted export growth in FY24.

Following the new vehicle launches, Prabhudas Lilladher saidin its report that the competition will disrupt the market for Royal Enfield, and that the company will need to move fast to maintain its dominance. The brokerage reduced its target price on Eicher Motors by 14% to Rs 3,460. HDFC Securities also reduced its target price as it believes aggressive competition could hurt growth.

However, ICICI Securities is asking everyone to calm down, and believes that the steep reaction in Eicher Motors’ share price is unwarranted. It expects that the premium 2W market in India will increase in size as consumers have new choices.

The brokerage also predicts that the introductory promotional pricing for Triumph and Harley bikes will end after selling a pre-specified number of units. Notably, only 10% of RE’s domestic sales come from bike models priced at Rs 2.6 lakh on-road. As Bajaj and Hero raise the prices of their new premium bikes from the current Rs 2.3 lakh, the price gap with RE could widen, allowing the company to recapture its market.

Royal Enfield is fighting back with a plan to roll out two to three motorcycles in the next five months. Right now, RE stands out from the competition with its cult following and the history it brings to the table. Originally a British company, it was acquired by Eicher Motors in 1995, but reached new heights only in the past decade. RE’s units sold rose from 25,000 in 2005 to 8,34,895 in FY23.

Even though Honda and Jawa tried to compete with Royal Enfield in recent years, they were unable to match its scale and popularity. But Triumph and Harley have arrived in India with their own history and fanbase. The new players have the real potential to accelerate the competition in the premium 2W segment.

Screener: Nifty 500 outperformers ahead of results, with rising Trendlyne momentum score and high durability

As the Q1 results season takes off, we look at stocks that are rising ahead of their upcoming earnings announcements. The stocks in this screener have outperformed the Nifty 500 over the past week ahead of their results, with increasing Trendlyne momentum scores and high durability.

The screener shows 28 stocks from the Nifty 500 index and four from the Nifty 50 index. It features stocks from the banking & finance, automobile & auto components and software & services sectors. Major stocks that appear in the screener are Zensar Technologies, Mahindra Holidays & Resorts India, RBL Bank, MphasiS, Aarti Drugs and Craftsman Automation.

Zensar Technologies has risen 12.7% over the past week, with its Trendlyne momentum score improving by 8.7 points over the past month, in anticipation of the company’s result on Thursday. Axis Securities expects the company’s revenue to grow by 1.8%, owing to increased revenue from the hi-tech segment. The brokerage also expects a recovery in the digital business, driven by the banking, financial services and insurance (BFSI) segment.

MphasiS has gained 12.2% over the past week, ahead of its result on Thursday. It has also seen a 17-point rise in its Trendlyne momentum score to 51.6 over the past month. Investors expect the company to beat the modest revenue and net profit projections given by analysts, after bellwether TCS easily beat its estimates.

Craftsman Automation comes in with a 9.9% surge in the past week, leading up to its results on July 24. It has a high Trendlyne momentum score of 66.9. Motilal Oswal expects the company’s revenue to jump 10% YoY due to the realisation of revenue from DR Axion India’s acquisition, and growth in the storage segment. The brokerage also estimates its EBITDA margin to remain flat, despite the softening of aluminium costs due to a weak product mix.

You can find some popular screeners here.

Signing off this week,

The Trendlyne Team

The Baseline

18 Jul 2023

Five analyst picks with high upsides

By Suhas Reddy

This week we take a look at five analyst picks with high upsides

Piramal Pharma: Edelweiss initiates a ‘Buy’ call on this pharma company with a target price of Rs 130, indicating an upside of 29.9%. The brokerage recommends the company as a long-term investment. Analysts Thakur Ranvir Singh and Harsh Shah say, “Piramal Pharma recorded a revenue CAGR of 15% over the past 10 years, with multiple acquisitions and spin-offs. However, the past few quarters were challenging.” But the analysts expect a strong recovery in the overall business in the coming years.

Singh and Shah are positive about the company due to a strong product pipeline and increased order inflows as the manufacturing base returns to normal after facing higher attrition during the pandemic. According to analysts, Piramal Pharma faced multiple headwinds over the past couple of years, which hit its valuation. But with the improving performance, they expect the valuation to gradually catch up.

The analysts expect the macro-environment to improve over the next year and,a significant recovery in Piramal Pharma’s return ratios as the company executes major capex projects.

Kajaria Ceramics: ICICI Direct maintains a ‘Buy’ call on this ceramic and tiles manufacturer with a target price of Rs 1,680, indicating an upside of 24.1%. Analyst Bhupendra Tiwary says that “Kajaria, with a net cash balance sheet and superior brand, is well positioned in the tiles sector with expanding reach to tier-2 and 3 cities.” The management has guided for a 13-15% YoY volume growth in the tiles segment during FY24, driven by increased demand, capacity utilization, and an enhanced distribution network. They expect exports to grow by 25% in FY24.

The analyst is also optimistic about the company due to the significant decline in gas prices over the past two quarters. With lower fuel costs, he expects the company to achieve net gains of Rs 130-140 crore in power and fuel expenses in FY24, and pass on net benefits of Rs 50 crore to dealers through trade discounts. Tiwary remains positive as Kajaria is a net cash company (Rs 236 crore in FY23) with a healthy balance sheet.

Federal Bank: Sharekhan maintains its ‘Buy’ rating on this bank with a target price of Rs 170, implying an upside of 26%. In Q1FY24, its standalone net profit rose 42.1% YoY to Rs 853.7 crore and revenue grew by 38.5% YoY.

Analysts at Sharekhan maintain their positive outlook due to its sustained loan growth momentum and healthy core fee income. They believe the company will maintain its healthy return ratios despite margin headwinds, thanks to its asset quality and lower credit costs.

Although the bank’s net interest margin fell in Q1, the analysts are confident that the NIM will rise from H2FY24, supported by higher incremental yields. They added, “We believe the bank still has potential for positive surprises, led by operating leverage and higher core fee income.” The analysts expect the company’s net profit to grow at a CAGR of 17.5% over FY23-25.

Lemon Tree Hotels: Motilal Oswal keeps its ‘Buy’ rating on this hotel chain with a target price of Rs 115, implying an upside of 25.3%. Analysts Suman Kumar, Meet Jain and Omkar Shintre believe the addition of Aurika MIAL (its largest hotel with 699 rooms) through a management contract will be a game changer for the company. “The addition will improve average room rates (ARR), brand mix and margins at the consolidated level, paving the way for management contracts and exponential growth of management fees,” the analysts add.

They also believe that the company’s restructuring plan will accelerate its debt repayment process. They expect the growth momentum from FY23 to continue in FY24. The analysts anticipate the firm’s revenue to grow at a CAGR of 28.2% over FY23-25.

Central Depository Services (India) (CDSL): HDFC Securities upgrades its rating on this investment company to 'Buy', with a target price of Rs 1,470, indicating a 22% upside. Analysts Amit Chandra and Vivek Sethia express optimism and expect a recovery akin to the company’s robust performance one year ago in FY21-22.

Despite a slump in growth in FY23 due to decreased market-linked revenues such as transaction, IPO, and KYC fees, a 30% YoY increase in annuity streams offset this decline.

Chandra and Sethia predict a rebound in FY24, driven by increased Beneficiary Owner (BO) account additions, higher transaction revenues due to delivery volume growth, and a continuous surge in annuity revenue streams. With the company adding 20 lakh accounts monthly, they anticipate CDSL to dominate the BO account market with a 73% share and an 85% incremental share. Currently, only 2% of policies are in demat form. The analysts foresee a recurring opportunity of Rs 152 crore for repositories. Assuming CDSL's 25% market share, they predict an additional income of Rs 38 crore, representing 7% of FY23's revenue.

Note: These recommendations are from various analysts and are not recommendations by Trendlyne.

(You can find all analyst picks here)

The Baseline

18 Jul 2023

Chart of the Week: The biggest hits and misses by analysts over the past year

By Akshat Singh

The stock market is a fast-changing environment, where winners and losers can shift rapidly. Analysts closely monitor stocks to identify potential investment opportunities, and provide target prices that reflect their expectations for a stock's future performance. These target prices and recommendations can have a significant impact on the stock price as well.

But we all know how difficult it is, trying to predict the stock market. Picking future stock winners often feels like looking for a black cat in a dark room. In this edition of Chart of the Week, we look at a few Nifty500 stocks over the past year, comparing their actual stock performance to the analyst target upsides in June 2022.

This analysis is based on a Trendlyne screener that tracks broker calls with the rewind feature.

Sonata Software, Varun Beverages outperform analyst targets

Sonata Software, an IT consulting & software firm, has seen a 98% rally in its stock price over the past year, surpassing the average target upside of 34.1%. It has also exceeded KRChoksey’s expectations of an upside of 74.1% over its June ‘22 share price, beating it by 23.9 percentage points. The brokerage gave Sonata Software a target price of Rs 931 due to supply chain disruptions and a marginal increase in its international IT service segment income in Q4FY22.

However, Sonata Software surprised analysts with an overall 20% growth in net profit in FY23. The majority of analysts including KRChoksey had projected a net profit decline of -1% to 7% in FY23. But the company benefited from lower finance and inventory expenses, and robust growth in the recently incubated healthcare and BFSI segments.

In addition, Sonata Software acquired US-based IT firm Quant Systems and received an order worth $160 million in March 2023. The company also formed multiple domestic and international partnerships.

Now let’s consider ABB India, a heavy electricals major. It has exceeded the average target upside of 1.8% given by analysts a year ago by 73.9 percentage points. It also outperformed ICICI Direct's target upside of 16.4% by a staggering 58.6 percentage points in the past year.

The company’s estimated net profit growth fell from 27% to 24% from May to November 2022, while the forward PE valuation stood at 65-67x during the same period. HDFC Securities believed that such high valuations would limit the upside from cyclical recovery. However, the firm surpassed analysts' average growth estimates of 24% by achieving a 95% increase in net profit, reaching Rs 1,016 crore in CY22.

Multiple large-scale orders from companies like ArcelorMittal Nippon Steel and Kanpur Metro helped ABB record order inflows of Rs 3,125 crore, an increase of 36.4% YoY in Q1CY23. The recovery prompted UBS to upgrade the stock to ‘buy’ with a target of Rs 5,000 in June 2023. This upgrade represents an upside of 14% from the price on July 14.

The other two outperformers in our list are tyre manufacturer, Apollo Tyres and Pepsico franchisee Varun Beverages. Apollo Tyres surpassed the average broker target upside of 31.3% last year by 74.7 percentage points and the target upside of 73.6% set by ICICI Securities by 32.3 percentage points. Apollo Tyres delivered sales growth of 17.3% YoY in FY23, as compared to estimates of 11-12%.

The stock that surpassed broker targets the most, Varun Beverages went above the average broker target upside of 17.5% by 75.9 percentage points, also easily beating among the more optimistic calls, such as the target upside of 23% projected by Bonanza India Research.

It has seen its stock price surge by 93.4% in the past year. Despite the impact of rising raw material prices on the industry, Varun Beverages remained resilient. It managed rising inflation in raw material costs, while benefiting from post-pandemic demand and expansion into other PepsiCo verticals. Along with strong revenue and net profit growth of 48% and 115.8% in 2022, the company's new ventures like the indigenous energy drink ‘Sting’ and additional PepsiCo factories contributed to the stock's rally.

Aarti Industries, Adani Ports disappoint

From outperformers, let’s move on to the underperformers. Aarti Industries had an average analyst upside of 42.5% one year ago, but its stock price fell by 38.8% in the past year. This specialty chemicals company fell short of the optimistic upside of 66.5% given by HDFC Securities.

The company demerged its pharma business, Aarti Pharmalabs, which contributed around 18% to the revenue. As a result, there was an 82.3% YoY decline in net profit in Q3FY23. The net profit fell by 58.3% in FY23, contradicting analyst expectations of 20-24% growth.

Similarly, Amara Raja Batteries, an auto industry underperformer, saw its stock price fall by 10.3% over the year, far below the average broker target upside of 57.9%, and a target upside of 41.5% by Chola Wealth Direct in June 2022. The company’s net profit growth dropped from 52.4% QoQ in Q2 to -37.2% QoQ in Q4FY23. The rising raw material prices due to the Russia-Ukraine war, led to shrinking margins. This downward trend in profitability has persisted from FY21 to FY23.

Adani Ports & SEZ, an Adani Group stock, has fallen by 2% in the past year, but a year ago had an average broker target upside of 62.3% and a target upside of 26.4% by ICICI Direct. This drop was due to the shock Hindenburg report release in January 2023, which alleged accounting fraud and stock manipulation within the conglomerate. This led to an average fall in share price of 23% across the group’s stocks over the year.

In the software & services sector, MPhasis had an average analyst upside of 52% a year ago, and a target upside of 52.6% by Anand Rathi. But it fell 10.8% in the past year with the decline in the broader IT sector. The company’s insurance and banking & financial services segments, which form around 60% of its revenue, have been sequentially declining from Q2FY22. Following the collapse of Silicon Valley Bank on March 10, the stock saw a correction of around 18.1% in the subsequent 12 trading sessions. The fall was driven by concerns regarding the company's exposure to the bank.