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Brokerages upgrade ratings of 10 stocks post Q1 results; do you own any?

But not all earnings are bad in June quarter, there are few stocks which brokerages upgraded their rating either on hope of further growth or worth seems to have priced in.

July 26, 2019 / 02:32 PM IST
 
 
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The earnings for the June quarter that have been announced so far showed mixed results, including elevated asset quality concerns, which was one of reasons for sharp fall in benchmark indices. Finance Minister Nirmala Sitharaman's denial to tweak the surcharge on the super-rich in Budget was also key cause for the sharp correction seen recently.

The Nifty50 corrected more than 5 percent since the announcement of Budget, but greater capitulation was seen in broader markets as the BSE Midcap and Smallcap indices were down 8-9 percent respectively in a short span of time.

"We expect the current quarter to be amongst the worst quarters of the past 3 years in terms of earnings. The early reports are indicating a slowing economy," Sunil Sharma, Chief Investment Officer, Sanctum Wealth Management told Moneycontrol.

Shailendra Kumar, CIO at Narnolia Financial Services also said what has changed during Q1 FY19 results is that smaller banks and NBFCs that were not impacted by NPL are now finding themselves in this mess.

Hence some of the factors that can turn market sentiments are the speedy resolution of some of the corporate stress cases and a sharp rate cut by RBI, he added.

But not all earnings are bad in June quarter, there are few stocks which brokerages upgraded their rating on hope of further growth or worth that seems to have priced in.

Here are stocks which got a upgrade rating from brokerages after June quarter earnings:

Brokerage: CLSA | Stock: Ambuja Cements

The global brokerage upgraded stock to buy from outperform and also raised price target to Rs 265 from Rs 250 per share as strong cement pricing drove EBITDA per tonne to a multi-quarter high despite an 8 percent decline in volumes.

It also raised CY19-21 EPS estimates by 1-4 percent to factor in strong results by Ambuja Cements.

Cost was broadly in-line with estimates, but power & fuel and freight costs were lower than estimates.

Regional mix should also help amid uncertainty in Andhra Pradesh.

Brokerage: ICICI Direct | Stock: Zee Entertainment

The signing of its binding term sheet for a stake sale with a bidder was positive. The company now expects another binding term sheet to be signed in a few days to zero-in on a final buyer. On the other hand, steep and aggressive spending on content (largely to enhance Zee5 offering) is also a necessary evil that is likely to keep free cash flow generation modest.

Given the certainty and proximity of deal, ICICI direct upgraded to buy from hold with target price of Rs 425 per share, and valued it at 20x FY21E P/E. However, it noted that it would prefer strategic investors to buy the stake, which could enhance the overall prospect of Zee5 expanding globally.

Brokerage: JM Financial | Stock: HDFC Life Insurance

HDFC Life reported a strong start to FY20 with NBV growth of 2X YoY in Q1FY20 and post over-run margins of 30 percent – the highest in the industry. The performance came on the back of spectacular APE growth of 62 percent YoY in Q1FY20 driven by protection, non-PAR savings and annuity products. While expense ratios remained stable YoY, persistency witnessed improvement with the 61st bucket at 56 percent in Q1FY20, up 6 percent YoY.

In line with the higher use of direct and agency, the share of proprietary channels increased to 24 percent of unweighted premiums in Q1FY20 in comparison to 20 percent last year.

The insurer reported a robust growth of 23 percent YoY in embedded value in Q1FY20 with operating return on embedded value (RoEV) improving to 20 percent.

Going forward, JM Financial expects HDFC Life to maintain stable margins, led by a higher share of protection products and better cost controls. Therefore, HDFC Life – with strong growth and better margins – would continue to generate superior operating RoEVs of 22 percent into FY21E.

It valued the stock at 4.1x FY21E embedded value, implying a target price of Rs 550. It likes the franchise, given a strong product portfolio and superior return ratios. Hence it upgraded to buy from hold.

Brokerage: Credit Suisse | Stock: TVS Motor Company

The brokerage upgraded its stock rating to neutral from underperform as its target now offered limited downside, but it cut TVS' price target to Rs 360 per share, down from Rs 390. It slashed earnings estimates by 10 percent for FY20/21 as it built in lower volumes.

On both scooters and motorcycles, TVS continued to outperform the industry. Higher interest costs impacted company's credit profit before tax in Q1.

Channel inventory remained about five weeks due to a slowdown in demand.

Brokerage: Citi | Stock: Infosys

The global investment firm upgraded Infosys' stock to buy, and raised its price target to Rs 820, down from Rs 785 per share as risk-reward turned favourable.

While EBIT in Q1 was in-line, deal wins and revenue guidance being raised are positives. The company's attrition rates, which remained elevated, will be observed closely by the brokerage.

The stock will likely re-rate, and the discount to TCS will narrow. EPS numbers are unchanged, but the brokerage has raised its multiple to 21x from 20x.

Brokerage: Credit Suisse | Stock: Avenue Supermarts

The global research house upgraded Avenue to neutral from underperform and raised its target to Rs 1,330, up from Rs 1,175 per share.

The stock underperformed in past year as concerns on margin dilution played out. With focus back to core states, Credit Suisse sees the margin concern abating and lifted its FY20/FY21 earnings estimates on the company by 2-4 percent.

Brokerage: Prabhudas Lilladher | Stock: Hindustan Unilever

Prabhudas Lilladher upgraded its stock from hold to accumulate with a target price at Rs 1,816, given that company should emerge as one of the biggest gainers from government's social push aimed at bottom end of pyramid to increase purchasing power in rural amid improved monsoons and food inflation.

Although Q2 outlook remains uncertain, it remained structurally positive on HUL led by 1) expansion in categories of future by launching liquid detergent in Sunlight 2) increased thrust on naturals with launch of Lux botanicals and Pears Naturale, two variants in Sunsilk and FAL Ayurveda facewash and facial kits 3) Sustained Premiumisation in Home Care 4) synergy gains from acquisition of Glaxo Consumer healthcare and 5) sustained gains (70bps in Q1FY20) from cost efficiencies in supply chain, data analytics and inventory management.

Brokerage: Prabhudas Lilladher | Stock: Yes Bank

Yes Bank recognized Rs 6,230 crore of slippages, with a large part coming from the watchlist and partly from BB and its below book (non-watchlist) impacting the overall asset quality sharply. The bank also saw its BB and below book loans assets increase on a net basis to 9.4 percent from 8.3 percent in Q4FY19, which puts asset quality under high risk as these are extremely lumpy exposures.

The brokerage believes that only a certain part of exposure can be resolved quickly, while large part of exposure slipping into NPAs remains a high chance which it has factored in the same over FY20 and FY21.

Although the brokerage took comfort from an imminent capital raise, operating profit would help mitigate large provisioning requirements and should not see capital deterioration. It upgraded stock to hold (from reduce) with revised target price of Rs 101 (from Rs 190) based on 1.0x (from 1.5x) Mar-21 ABV.

Brokerage: HDFC Securities | Stock: Federal Bank

Inconsistent performance across parameters (spanning asset quality and C-I) capped valuations for FB over several quarters. The brokerage senses increasing stability over the last two quarters.

Despite factoring higher slippages and provisions towards stressed exposures, Federal Bank can deliver earnings CAGR of around 28 percent led by operating leverage and better core performance, especially asset quality.

To be sure, Federal Bank has stumbled in the past, but several corrective initiatives are probably paying off, finally. It upgraded its stock to a buy, with a target price of Rs 117 after a better-than-expected show across parameters, in a seasonally weak quarter. Further consistency can lead on to significantly better outcomes.

Brokerage: HDFC Securities | Stock: ICICI Prudential Life Insurance

While ICICI Prudential reported an APE growth of a mere 5.3 percent YoY, its protection share grew to 14.6 percent (+530bps versus FY19). This boosted value of new business margin (VNBM) to an unexpected 21 percent (up 400bps versus FY19) and absolute VNB to Rs 3.1 (up 29.9 percent YoY).

The brokerage revised the company's price to a buy with a target price of Rs 445, as the company re-engineered its business model, which focused on a more diversified product mix and an increasing protection mix. A sharp increase in VNB margin (to 21 percent) drive up its FY20/21E VNB estimates by 18.8/16.1 percent, though lower than expected growth and lower protection share remain key risks.

Disclaimer: The views and investment tips expressed by brokerages on moneycontrol.com are their own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

Sunil Shankar Matkar
first published: Jul 26, 2019 01:46 pm

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