Wipro To Asian Paints, Jefferies Lists 'Bottom-Up' Stocks As Sensex, Nifty Decline

Jefferies has listed certain Indian stocks that it expects to 'underperform' amid volatility in equity markets.

Mahesh Nandurkar and Abhinav Sinha, equity analysts at the research house, named as many as nine "bottom-up" stocks that are expected to 'underperform' in the next 12 months, according to a note dated Aug. 26.

That apart, Jefferies has also listed its top 20 'buy-rated' Indian stocks.

India's benchmark indices have opened more than 2% lower in early trade on Monday. The rupee also slid to a record low of 80.13 against the U.S. dollar.

Wipro

• Rated 'underperform' with a target price of Rs 360, implying a potential downside of 13%.

• Over FY20-22, while Wipro has been able to grow its revenues by 11% cc CAGR, this growth has been led by acquisitions and the organic growth at 4.6% cc CAGR still remains weak.

• Expects a slowdown in I.T. services revenue in FY24, given expectations of a recession in the U.S. In this context, Wipro, with its higher exposure to consulting services through acquisitions of Capco and Rizing, is at a greater risk of growth moderation in FY24.

• Over FY22-25E, we expect Wipro to deliver a 6% EPS CAGR- lowest among Tier-1 IT firms. Wipro's excessive reliance on acquisitions to grow is affecting not only its margins but also its cash payouts, which warrants a structural derating.

Bharat Forge

• Rated 'underperform' with a target price of Rs 540, implying a potential downside of 26%.

• Bharat Forge derives 25-30% of its standalone revenues from exports of truck components. U.S. truck orders have declined about 50% YoY with OEMs limiting orders on supply constraints. However, lower freight spot rates, rising interest rates and high inflation are likely to impact demand when books open up.

• Weakening global macro outlook also poses risk to industrial exports (20-25% of revenues). On the positive side, passenger vehicle exports and aerospace are ramping up, and Bharat Forge sounded sanguine on further growth in these segments.

• Expects Bharat Forge's domestic revenues to grow 18%/12% YoY in FY23/FY24 led by strong outlook for trucks and passenger vehicles.

• Final trials for its artillery gun have finished although visibility on government orders remains low. Near-term outlook is still good, but we see a falling earnings growth trajectory.

• Stock peaked 5-10 months before the peak of consensus earning estimates in the last two upturns as the market starts fearing an impending downturn in late upcycles.

JSW Steel

• Rated 'underperform' with a target price of Rs 385, implying a potential downside of 41%.

• Global metal demand outlook has weakened in the last six months amid the Covid lockdown in China and the tightening interest rate cycle elsewhere.

• Indian hot rolled coil (flat) steel prices have declined by Rs 12,000 per tonne (17%) to Rs 57,000 since the imposition of an export duty in May. South East Asia prices, in the meantime, are also down. India steel prices are at a meaningful 16% premium to landed imports from FTA nations. Indian prices have room to fall further given an export duty in an oversupplied market.

• The stock is trading at 10.3x/8.9x FY23E/FY24E EV/EBITDA versus long-term average of 6.1x despite a weakening margin outlook. Its 2.1x FY23E PB for 9% ROE leave little room for disappointment.

Mahindra Finance

• Rated 'underperform' with a target price of Rs 155, implying a potential downside of 22%.

• While there has been optimism around rural demand, Jefferies believes deficit rainfall in East/North East of India could impact tractor/rural demand in those regions and thus weigh on loan growth.

• Credit costs could stay elevated as write offs could stay high as MMFS tries to manage GNPA; shift to tighter NPL norms could increase credit costs structurally given strong seasonality in borrower cash flows and their inability to pay multiple EMIs together.

• While earnings should rebound from low FY22 levels, ROE should stay muted at 11-13% over FY22-25 which would continue to drag valuation multiples.

Asian Paints

• Rated 'underperform' with a target price of Rs 2,530, implying a potential downside of 25%.

• Grasim’s plan to invest Rs100bn in paint capex by FY25, well above the gross block of Asian Paints (historical capex) raises concerns.

• Grasim may go for an aggressive strategy (pricing or otherwise) and disturb the market structure which may have a greater impact on smaller players but Asian Paints may also be at risk.

• The paint industry has seen a slew of new entrants in the recent past. For example Astral and JK Cement.

• Indian consumer stocks enjoy a premium which is partly attributed to high earning visibility, which is currently lacking in the case of Asian Paints. Valuation at 67 times June 2024 earnings-per-share doesn’t factor-in the overhang from Grasim. Risk-reward remain unfavourable.

Cummins

• Rated 'underperform' with a target price of Rs 970, implying a potential downside of 19%.

• Cummins is not the company of 2008 as it is facing aggressive competition particularly from global major Perkins which set up its India factory in 2015-16.

• Gross block rose 4x in FY09-19, while sales is up only 1.7x. The expansion plans factored stronger domestic and export growth vs the reality that panned out.

• Return ratios will bear the brunt of the demand overestimation, capping ROE to 18-20% levels despite recovery in FY23.

Tata Power

• Rated 'underperform' with a target price of Rs 180, implying a potential downside of 22%.

• Our concern remains that a competitive landscape and capex will keep ROE below 14% in the medium term.

• Peak positive newsflow behind as asset monetization has disappointed the market expectations.

• Mundra tariff hike resolution is not seeing a favorable stance from state electricity boards yet.

Lupin

• Rated 'underperform' with a target price of Rs 563, implying a potential downside of 15%.

• Lupin has three U.S. FDA non-compliant facilities that are not generating reasonable asset turns.

• Albuterol (asthma) revenue has peaked out and U.S. portfolio suffers high competition resulting in double digit price erosion.

• A large chunk of Lupin’s U.S. and India portfolio consists of licensed products that are low margin products with low growth potential.

• High raw material costs, operating and royalty expenses continue to pose challenges for the company.

Hindustan Petroleum Corporation

• Rated 'underperform' with a target price that implies a potential downside of 13%.

• Government induced freeze on diesel and gasoline retail prices is leading to Rs 10 per litre under-recovery on diesel per calculations.

• Refining margins have corrected sharply from mid-$20s to $10 hurting overall profitability.

• HPCL has the least refining to marketing ratio among OMCs indicating it is disproportionately hurt from marketing losses.

• Sees the return of under-recoveries as a structural derating event.