Market changes course, but the Street’s best and worst top bets don’t

Analysts’ key choices of the best and worst among top stocks seem to have changed little between June and now


As of 30 June, Sensex stood at 26,999.72 points, and was trading at 17.45 times one-year forward price to earnings (P/E). Since then, it has eroded 2.24% and is currently at 26,394.01, trading at 18.05 times 1-year forward P/E ratio. Photo: Hemant Mishra/Mint
As of 30 June, Sensex stood at 26,999.72 points, and was trading at 17.45 times one-year forward price to earnings (P/E). Since then, it has eroded 2.24% and is currently at 26,394.01, trading at 18.05 times 1-year forward P/E ratio. Photo: Hemant Mishra/Mint

Mumbai: Even as market trajectory has changed from the half-year ended June to now—from optimism on consumption story driving the market up to doubts on the same buoyancy in the near term—the analysts’ key choices of the best and worst among top stocks seem to have changed little.

HDFC Bank Ltd, Power Grid Corp. of India Ltd, and Tata Motors Ltd, got the maximum number of “buy” or outperform” ratings from brokerages among the 30 Sensex stocks, data from Bloomberg showed, as of Tuesday.

Of the total analysts covering each of these stocks, 96.36%, 88.37% and 83.33% of them rate them a buy or outperform.

These same stocks were the most preferred as at 30 June, albeit the order was a bit changed, and a stock shared the third spot.

Power Grid Corp., which became a part of Sensex on 20 June, was the most-preferred stock in the pack then, followed by HDFC Bank. There was a tie for the third spot with 87.5% of the analysts covering this stock having a buy or outperform rating, for Tata Motors and Infosys Ltd.

Between June end and now, a lot has changed in the market.

At the end of June, investors were cheering the onset of a good monsoon, after two years of drought and this along with the recommendations of the Seventh Pay Commission was bound to revive the consumption story in Asia’s third-largest economy.

However, a surprise demonetisation of high-value currency notes by the government on 8 November, had pushed the revival of such story at least few quarters away. Also, the emerging markets have been shunned by foreign investors as a stronger dollar is creating havoc for riskier assets after Republican candidate Donald Trump’s shock win in the US presidential elections.

Also, analysts may have rated the stock before these events took place, but as of date, these ratings have not been changed in most cases.

The streets’ top and worst bets, however, are not really changed, as the long-term outlook of these businesses do not change and demonetisation is viewed as a near-term blip.

“The outlook of the businesses does not change over quarterly basis. The market is right in understanding and that is why the priority orders are continuing,” said Deven Choksey, group managing director of KRChoksey Investment Managers Pvt. Ltd.

“HDFC Bank has continued to grow on a larger base consistently and we expect the trends to continue,” J. M. Financial Institutional Securities Ltd. said in a note on 27 October, while maintaining its buy rating on the stock.

According to Choksey, there is value proposition in Tata Motors.

“Even though the Tata-Mistry spat is ongoing , the strong JLR portfolio attracts investors,” said Choksey.

In the case of Power Grid, Choksey pointed that the key positive was that the company does not require higher capital for now, but would still generate high Ebidta (earnings before interest, taxes, depreciation, and amortization )

Also, the stocks which were the least preferred, continued to be Wipro Ltd, Dr Reddy’s Laboratories Ltd and Tata Steel Ltd, where of the total analysts covering these individual stocks, only 25.65%, 26.53% and 33.33% had a buy or an outperform rating on these stocks.

As of 30 June, Sensex stood at 26,999.72 points, and was trading at 17.45 times one-year forward price to earnings (P/E). Since then, it has eroded 2.24% and is currently at 26,394.01, trading at 18.05 times 1-year forward P/E ratio.

The least preferred stocks also had their own issues to grapple with.

For pharmaceutical company, Dr. Reddy’s Laboratories, high valuations was a key overhang.

“We keep our earnings largely unchanged and reiterate reduce on the stock as visible near terms triggers are fully discounted in the current stock price,” Emkay Global Financial Services Ltd said in a 26 October note.

Wipro continued to be least-preferred stock in the software services space among Sensex stocks.

In a note on 22 October, HDFC Securities said that in view of inferior growth metrics, lack of near-term tailwinds and margin challenges, it maintained its neutral stance on Wipro.

Tata Steel, did not make it to the preferred list due to the impact on the balance sheet from UK operations, and the clout over Tata group currently, said Choksey.

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