At a time when Indian benchmark indices Sensex and Nifty have soared to new highs, the outlook of some stocks has been underwhelming with brokerages retaining or initiating sell/reduce calls on them.
These stocks belong to various sectors such as pharma, aviation, steel, consumer discretionary, etc. Take a look.
Clean Science & Tech: Brokerage InCred Equities has a ‘reduce’ call on the stock and has cut its target price to ₹660 (from 847 earlier), indicating a massive downside of 52 percent from its current market price of ₹1,378.45 (as on July 5, 2023). The company is engaged in the manufacturing of organic chemicals.
The brokerage noted that hindered amine light stabiliser (HALS) is perceived as a panacea for Clean Science and Technology, however, entry barriers in this business are high. Also, the assumption that it will garner a 10 percent market share in a highly competitive market is misplaced, cautioned the brokerage. It further added that the company has no sustainable advantage over rivals as margins are falling and the foray into the competitive Tertiary Butyl Hydroquinone and Plastoquinone space shows growth avenues are lacking in its current portfolio. The upside risk is liquidity-driven P/E expansion, added the brokerage.
InterGlobe Aviation: InCred Equities has a ‘reduce’ call on the aviation stock IndiGo with a target price of ₹1,660, implying an over 37 percent downside from its current market price (CMP) of ₹2,654.60 (as on July 5, 2023).
As per the brokerage, business travel is likely to be muted as the Covid-19 pandemic has altered the entrenched habit of air travel for meetings. It estimates domestic/ international traffic for Indian carriers in FY24F to be 18 percent/3 percent higher, respectively, than the levels in FY20, and InterGlobe Aviation or IndiGo’s FY24F volume to be 25 percent higher than in FY20.
The insolvency filing by Go First (7 percent market share in Mar 2023) is likely to improve the profit margin of other players in the short term, however, the history of Indian aviation reveals that supernormal profits are short-lived, stated the brokerage. During the exit of Jet Airways and Kingfisher Airlines with a market share of 15 percent each (twice that of Go First), the supernormal profits for IndiGo were short-lived, it informed.
Tata Steel: InCred Equities has a ‘reduce’ call on the steel major with a target price of ₹70, implying a downside of 38 percent from its CMP of ₹112.95 (as on July 5, 2023).
The brokerage noted that in the foreseeable future, the steel market is likely to experience sustained downward pressure, resulting in no improvement in steel spreads. It says a global shortage of coking coal due to sub-par investment in Australia and Europe must rely on blast furnaces (BFs) as electric arc furnaces are unviable (even on gross profit or GP) due to higher scrap and electricity prices. Also, pollution fears are forcing China to become a voracious user of scrap, leading to a scarcity of old scrap (comes from scrapping of old steel items), it stated. An oversupplied steel market, rising costs, and slowing demand is a recipe to buy steel names at 0.5x book value. Tata Steel is away from that and its balance sheet will deteriorate (contrary to consensus estimate), it cautioned. Upside risk: Big quantitative easing or QE by the Western world, although it means that they are ready for hyperinflation.
Voltas: Ambit Capital has a 'sell' call on Voltas with a target price of ₹742, indicating a downside of 3 percent from its CMP of ₹766.65 (as on July 5, 2023).
As per the brokerage, Voltas is losing its market share as well as margins and easing seems unlikely as competitive intensity remains high. Despite a 20 percent stock price correction in the last one year, Ambit isn't ready to turn the SELL call yet as it believes that the current valuation of 34x FY25E EPS does not offer enough margin of safety. Although a market leader, Voltas has been continuously losing market share over the last few quarters despite strong revenue growth, it stated. Voltas' market share fell by almost 500bps over FY20-FY23, and the brokerage expects this trend to continue. Moreover, the company has also lost share in the air-cooler business, it added. With increasing competitive intensity, pressure on margins for Voltas seems to be long-lasting owing to a changed sourcing model that has reduced the pricing advantage for Voltas, said the brokerage.
Tatva Chintan Pharma: Brokerage Nirmal Bang has a ‘sell’ call on the stock with a target price of ₹1,600, implying an over 9 percent downside.
As per the brokerage, the company's ex-Structure Directing Agents (SDA) portfolio is facing demand headwinds across the key end-user industries as most customers are cutting down inventory levels. Also, prices of select key raw materials are back to 1998 levels, as per the management. Further, the management indicated that the commercialisation of Monogylme is getting delayed due to availability and quality issues, which is another negative.
Tata Elxsi: HDFC Securities has a ‘sell’ call on the stock with a target price of ₹6,480, which indicates a downside of over 14 percent from its CMP of ₹7,553.05 (as on July 5, 2023).
The brokerage said that it has increased Tata Elxsi's earnings estimates (3 percent for FY25E), factoring in a recovery in revenue growth, but valuations still remain expensive. The company's valuation premium over peers is still in part based on operating profile differential and superior return metrics, even if growth premium relative to peers has diminished, it noted. HDFC expects a 17 percent EPS CAGR over FY23-26 as compared to a prolific 40 percent CAGR over FY20-23. The risk-reward ratio remains unfavourable for Tata Elxsi as the current valuation implies 18 percent dollar revenue CAGR over FY23-33E, it noted.
Colgate Palmolive: Emkay Research has initiated coverage on Colgate Palmolive India with a ‘sell’ call and a target price of ₹1,560, indicating a downside of 13 percent from its CMP of ₹1,793.70 (as on July 5, 2023). This valuation demonstrates approximately a 15 percent discount to Colgate’s last 5-10 year average forward P/E, which accounts for the weaker revenue growth, said Emkay. It is also cautious about Colgate’s margin fixation and expects incremental efficiency benefits to be deployed to make its products more affordable for rural consumers. It also noted that the weak execution has kept the valuations around the 5-10-year mean of 38-40x. While the topline growth is expected to remain muted at around 6 percent (in line with category growth and stable market share), earnings growth is projected at around 9 percent, aided by improving margins from premiumisation efforts, said the brokerage. It sees limited development in the oral care segment.
