The Q2 conundrum: 4 stocks rally up to 95% despite sales drop in Sept quarter

New Delhi: September 2022 quarter turned out to be a strong period for India Inc where the listed Indian corporates put up a decent earnings show.

There are some companies, which reported a decline in sales, but their net profit grew sharply in the second quarter of the ongoing fiscal in comparison to the previous one. Three of them are public sector players.

The fall in the toplines of these companies was in the single digits, but the bottomlines zoomed up to more than double during Q2FY22. Following this, stocks of these companies have rallied up to 95% in the last one year till November 23.

The list includes four companies - Hindustan Aeronautics, SJVN, IRB Infrastructure Developers and Gujarat State Fertilizers and Chemical - whose bottomlines increased in September quarter despite the fall in the revenue, the Ace Equity data suggests.

Most brokerage firms remain positive on these counters and have made ‘buy’ recommendations on them for more upside. However, not all four stocks are actively tracked by analysts.

State-owned defence major Hindustan Aeronautics (HAL) revenue dropped a little more than 7% to Rs 5,145 crore, but its net profit rallied 44% to Rs 1,221 crore. The stock zoomed about 94% in the last one year, till November 23.

Global brokerage firm Morgan Stanley has maintained its overweight rating on HAL with a target price of Rs 3,216 on the stock as the management has manufacturing order visibility of Rs 1.2 lakh crore over next 3-5 years and valuations are compelling.

Domestic brokerage Elara Capital upgraded HAL to 'buy' from 'accumulate' with a higher target price of Rs 3,550 following the quantum leap in inflows, stable margin, and consistent double-digit earnings growth are tailwinds.

"Rising indigenisation share and unexplored export opportunity in the aircraft and helicopter industry warrant a re-rating from the earlier ascribed 18x," it added. Expect FY22-25E earnings CAGR of 16%, with FY22-25E ROE of 21%."

ICICI Securities has a ‘buy’ tag on Hindustan Aeronautics with a target price of Rs 3,170, whereas ICICIDirect Research pegs the counter at Rs 3,300 in the next 12 months, with a ‘buy’ call.

This is followed by another state owned player SJVN, the hydroelectric power generation player, whose revenue maringally dropped to Rs 878.5 crore by profit increase 10% to Rs 445 crore. The stock has gained 28% in one year.

In its report, released in October, global brokerage firm CLSA maintained a ‘buy’ rating on SJVN with a target price of Rs 42. However, then the stock was around Rs 32 and its currently priced at Rs 38, suggesting another 11% upside.

SJVN has increased execution in H1, with its ambition to double the capacity by 2023, said CLSA. "It saw many strategic wins in the first half to move towards its 50GW mission," it added. "EPS is likely to increase by 45%."

IRB Infrastructure Developers is the third player in the list, whose sales dropped over 8% to Rs 1,343 crore in the Q2FY23, but profit zoomed 102% to Rs 85.31 crore. Though the stock posted a modest gain of 12% in the last 12 months.

IRB’s 2QFY23 results were a mixed bag with revenues missing estimates due to lower construction revenues owing to the monsoon, while margins surprised positively, said Yes Securities in its post Q2 results review note released in October.

Another brokerage Ventura said that NHAI has upped its ante in terms of ordering contracts should now lead to removal of any fear from investor’s minds and hence, should lead to re-rating of the stock, given the current lucrative valuation.

It is to be noted that IRB is net debt zero at the holding company level, it added further. "We believe that IRB is at the threshold of accelerated growth given its expanding footprint and improved balance sheet."

IRB Infrastructure is one of the largest BOT toll operators in the country having a market share of 20% in the total Golden Quadrilateral projects, with over 13,700 km of total projects successfully executed, it said.

Yes Securities has a target price of Rs 328 on the stock, while the stock currently is around Rs 250, suggesting a more than 30% rise in the stock. Ventura initiated coverage on the stock with a target of Rs 729.2 in the next 30 months.

Gujarat State Fertilizers & Chemicals (GSFC) is the last player in the list, whose sales dropped about 2% to Rs 2,488 crore with a 23% rise in profit at Rs 285 crore. The stock gained over 11% in the last one year.

However, the stock is not very much actively tracked by the brokerage firms but Systematix Institutional Equities equities remains positive on the sector. However, it has kept the counter unrated in its report.

The central government has announced the Nutrient Based Subsidy (NBS) rates for the rabi season, wherein it has slightly reduced the subsidy rates for Phosphorus (P), Potash (K) and Sulphur (S) nutrients, said the brokerage firm.

We believe the government's decision to refrain from making drastic cuts in subsidy rates and merely realigning it to factor in raw material price changes is a move in the right direction, it added.

There are some more companies whose profit increased despite lower sales in September 2022. However, these stocks delivered negative returns in the last one year.

This list includes players like Oberoi Realty, REC, GIC of India, ITI, DLF, Sun TV, JM Financial, KIOCL, Aditya Birla Sun Life AMC, Alok Industries, Max Financial, SW Solar Indiabulls Housing Finance and Indiabulls Real Estate.

(Data Inputs: Ritesh Presswala)

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