Stay Away! Nuvama lists 5 stocks likely to underperform in 2023

Avenue Supermarts: As per the brokerage, Avenue Supermarts (DMart) has been an exceptional and potentially the only profitable grocery retailer in India, however, emerging headwinds – increasing online grocery share, especially in its key target cities – will dent its long-term growth. With DMart still being cautious, this will not be compensated via DMart Ready, it stated. DMart, while still a value retailer, is partially losing its EDLP (everyday low price) moat, it added. With current valuations at 71x FY25E PE, versus the pre-covid average of 74x, there could be some further adjustment given the lower LFL (like for like) profile. We thus maintain ‘HOLD’ with a TP of ₹4,311.

Tech Mahindra: TechM’s portfolio is relatively weaker versus peers, going into a year with the possible impact of recession/downturn in its key geographies – US and Europe, said the brokerage. According to Nuvama, the client spends in the telecom segment (40% of revenue) are expected to be muted under a recessionary environment, while enterprise business will likely grow, at best, in line with peers. TechM’s ability to win the cost-take-out deal, which is expected to replace large transformational deals in FY24, also remains uncertain, it pointed out, adding that its margins are also expected to remain volatile and not expand significantly, due to a lack of margin levers. Overall, TechM is likely to underperform its peers, in earnings growth, and hence the brokerage expects the stock to underperform as well.

Bandhan Bank: As per the brokerage, Bandhan’s business transformation would yield results, but very gradually. Meanwhile, peers would continue to gain market share and maintain their digital lead, it added. Bandhan’s new strategy involves diversifying out of Emerging Entrepreneurs Business (EEB) towards housing, retail and commercial, expanding geography and upgrading its IT framework, Nuvama pointed out. It maintains a ‘hold’ call as it finds risk-reward more attractive in other BFSI stocks that are likely to report stronger earnings. However, the brokerage does expect profitability to improve from its all-time low in Q2FY23; however, steady state returns would settle at lower-than-normalized levels. Management has guided for a steady-state RoA of 3%, higher than 0.6% currently, but lower than the normalised 4%, added the brokerage.

SAIL: The brokerage sees the possibility of downside to SAIL’s earnings owing to: i) the fear of recession in developed economies potentially keeping steel gross margins under pressure; ii) steep fixed costs amid higher employee and other opex that make SAIL susceptible to lower steel gross margins; iii) surge in debt to ₹31,500 crore in Q2FY23 (FY22: ₹17,300 crore) owing to high working capital; and iv) new capex on further expansion, which may keep debt elevated. Though Nuvama expects an improvement in FY24E EBITDA/t to ₹6,800 versus ₹1,740 in Q2FY23 due to the benefit from lower coking coal price, it is at risk amid low margins. It has maintained a ‘hold’ call with a TP of ₹92, valuing the stock at 5x FY24E EV/EBITDA.

Dr Lal Pathlabs: Dr. Lal has a strong franchise underpinned by the largest network of collection centers, a strong balance sheet and steady margins. However, the brokerage is cautious on its medium-term prospects in light of i) massive network expansion by e-pharmacies; ii) aggressive pricing with several tests priced 70–80% lower, which not only inhibit prospects of price hikes but also volume growth; and iii) tough competition from regional players. It believes the growth rate of national diagnostics players could moderate to 9–10% (from 13–14% historically) due to the aforementioned issues and persistent aggressive prices could dent margins. The stock is trading at 58x FY24E earnings with a potential for de-rating.