In a recent report, brokerage house ICICI Securities pointed out that the bulk of the earnings upgrade over the past one year has been driven by stocks related to domestic cyclical demand from sectors including financials, consumer discretionary, auto, tobacco, industrials and internet stocks.
However, on the flip side, the bulk of downgrades was driven by stocks related to defensive sectors like IT, healthcare, staples; and commodities space including metals and cement.
Given the nature of the economic recovery in India which is led by growth in ‘gross fixed capital formation’ or capex cycle, the brokerage expects the earnings upgrade cycle to continue for domestic cyclicals.
Meanwhile, the global economic environment continues to be uncertain and could weigh on earnings revision of the stocks related to the global economy, cautioned the brokerage.
In the large caps segment, the brokerage informed that the highest consensus upgrade has been seen in Bank of Baroda, 43 percent and Varun Beverages, 40 percent. Meanwhile, Tube Investments, Zomato, ABB India, Canara Bank, Trent, Coal India, Bajaj Finserv and M&M also saw between 22 percent to 38 percent PAT (profit after tax) upgrades in this period, it added.
Both Bank of Baroda and Varun Beverages also gave multi-bagger returns in the last 1 year at 105 percent and 107 percent, respectively. Meanwhile, ABB jumped 95 percent, Canara advanced 87 percent, Tube rallied 73 percent and Trend gained 60 percent in this period. The remaining stocks also rose between 20-50 percent in the past 1 year.
Among midcap stocks, General Insurance saw a massive 111 percent consensus upgrade, the highest in the list followed by PB Fintech, Union Bank of India, Indian Hotels and Bank of India at 69 percent, 57 percent, 42 percent and 38 percent, respectively, as per the brokerage.
These stocks also rallied between 30-148 percent in the last 1 year with Union Bank as the best stock performer, then Bank of India, up 81 percent, Indian Hotels up 78 percent, General Insurance up 63 percent and PB Fintech up 30 percent.
Meanwhile, in the smallcap space, Apar Industries, Rainbow Children Medicare, and Ujjivan SFB witnessed over 100 percent rise in their consensus upgrades in the last 1 year, highlighted the brokerage. Safari Industries and Wonderla Holidays also saw upgrades of 71 percent and 70 percent, respectively, in this time.
Looking at the stock price trend of the smallcap stocks, all these 5 stocks, which saw the maximum upgrades in the last 1 year gave multibagger returns in that period. Apar surged 296 percent followed by Safari up 228 percent, Ujjivan up 181 percent, and Rainbow and Wonderla gaining 137 percent each.
Meanwhile, the brokerage observed that the downgrades were higher than the upgrades in this last one year. Vedanta, Tata Steel, Adani Wilmar, Divi's Labs, and Grasin industries were the largecap stocks that witnessed the maximum consensus downgrade in the last 1 year between 30-44 percent.
Among midcaps, Nykaa saw the biggest downgrade, 60 percent followed by Laurus Labs, Aarti Industries, AB Fashion and Gland Pharma between 48 percent to 54 percent, stated ICICI.
Now, in smallcaps, the brokerage mentioned that India Cements saw an 87 percent consensus downgrade in the last one year followed by V-Mart, Sagar Cement, Johnson Controls and Mahindra Logistics between 60-68 percent.
However, going ahead, the brokerage cautioned that favorable movement of drivers of equity valuations over the past year and recent stock rallies could extend itself into risky behaviour going ahead as investors become increasingly willing to accept lower returns for taking higher risks. The aforementioned behaviour is typical of a bull market environment and currently starting to manifest itself in terms of diminishing earnings yield spread of small and midcaps over large caps, it stated.
Also, the transition from an environment of abnormally low-interest rates to normal levels of interest rates may limit high returns from risk assets like equity, it added. ICICI continues to prefer beneficiaries of the investment and credit cycle in the economy along with high-end discretionary consumption – (banks, capital goods, utilities, telecom, real estate, building material and discretionary consumption).
Its top picks from the coverage universe include – SBI, Bharti Airtel, BHEL, NTPC, BPCL, M&M, Phoenix Mills, Brigade, Interglobe Aviation, Kalyan Jewellers, Jubilant Foodworks, Zomato, SBI Life, IGL, JK Cement, Century Plyboards, and Greenpanel.
