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.
