India’s equity markets are on a roller-coaster ride, after delivering spectacular returns for two consecutive years — in 2020 and 2021.
The benchmark National Stock Exchange’s (NSE’s) Nifty50 is down 1.5 per cent in the first nine months of the current calendar year 2022 (CY22) as foreign portfolio investors sold Indian stocks due to rising bond yields in the US and across global markets, including India.
The sell-off in the Indian equity markets has, however, not been broad-based and largely limited to sectors facing earnings headwinds from rising interest rates, lower commodity and energy prices, and likely economic recession in advanced economies.
The biggest decline has been in the Nifty IT Index, down 30.3 per cent during the January-September period, followed by Nifty Realty (down 12.4 per cent) and Nifty Pharma (down 8.8 per cent).
Beyond these sectoral indices, other index stocks to show double-digit decline in the first nine months of CY22 include Bharat Petroleum Corporation (down 20.9 per cent), HDFC Life Insurance (down 17.9 per cent), Hindalco (down 17.9 per cent), UltraTech Cement (down 17.6 per cent), and Tata Steel (down 10.7 per cent).
The first nine months of CY22 also witnessed big rallies in quite a few sectors and largely compensated for the decline in others.
Five NSE sectoral indices delivered double-digit returns during the January-September period of 2022-23 (FY23) — the Nifty PSU Bank (up 18.4 per cent), followed by Nifty FMCG (up 18.2 per cent), Nifty Auto (up 16.1 per cent), Nifty Energy (up 13 per cent), and Nifty Private Bank (up 10.5 per cent).
The top performing stocks in these sectors did even better and delivered more than 50 per cent returns to investors.
Compellingly enough, brokerages see further upside in most of these stocks and have upgraded their price targets in view of faster earnings growth for these companies in FY23.
Investors also made big gains in Adani Group stocks, which have seen strong gains this year.
On the Nifty Energy Index, Adani Transmission is up 89 per cent in January-September of CY22, while Adani Green Energy is up 70 per cent.
Business Standard catalogues two stocks each from the five outperforming sectors expected to stay on Ferris wheel — and do well.
Public Sector Banks
Bank of Baroda
Bank of Baroda (BoB) is the top gainer, with 61 per cent returns in the first nine months of 2022 (year-to-date), against 1.4 per cent fall in Sensex and 1.5 per cent decline in Nifty50.
BoB stock’s strong showing has been underpinned by equally strong earnings by the bank in recent quarters
BoB’s net profit was up 79.4 per cent year-on-year (YoY) in first quarter of 2022-23, while gross interest income was up 11.1 per cent YoY - its best in three years.
Analysts attribute it to improvement in BoB’s asset quality and healthy credit growth, and expect the trend to persist.
Brokerages see further rise in its share price, given its attractive valuation with price-to-book value of 0.8x being the lowest in top banks.
Rising credit costs and a decline in the broader market are downside risks.
State Bank of India
The stock of the country’s largest lender is also an outperformer with year-to-date gains of 15.2 per cent.
The gains are led by faster growth of 12.9 per cent year-on-year (YoY) in net interest income and improvement in asset quality in the first quarter of 2022-23.
Net profit was down 6.7 per cent YoY, hit by mark-to-market losses of Rs 6,550 crore on its treasury book due to rise in bond yields.
Brokerages remain upbeat on the State Bank of India (SBI) stock, given management expectation of double-digit growth in loan book and stable asset quality.
Sequential rise in fresh slippages, decline in net interest margin, and recent rise in credit cost are other headwinds.
The SBI stock is currently trading at 1.7x its price-to-book value - higher than its historical average.
Private Sector Banks
IndusInd Bank is one of the top gainers among private sector banking stocks, with 33.4 per cent returns year-to-date, aided by surge in the bank’s earnings in the past few quarters.
Its net profit was up 64.4 per cent year-on-year (YoY) in the first quarter of 2022-23, driven by 16 per cent YoY rise in net interest income, expansion in net interest margin, and lower provisioning expenses.
Most brokerages expect the stock to continue its good run, on the back of growing loan book and steady recovery in its core commercial vehicle loan and microfinance segments.
The bank faces challenges from a possible sequential rise in its gross non-performing assets, led by higher slippages and rising credit costs.
Stock valuations are reasonable, with trailing price-to-earnings multiple of 17.1x and price-to-book value of 2x.
Federal Bank has been a big performer with 43 per cent year-to-date rise in its share price, underpinned by strong growth in the private sector lender’s earnings and improvement in asset quality.
The bank’s net profit was up 63.5 per cent year-on-year (YoY), while net interest income was up 13.3 per cent YoY in the first quarter (Q1) of 2022-23 (FY23), driven by loan growth and sluggish growth in interest costs.
On the downside, the bank reported a rise in slippages (bad loans) on a sequential basis in Q1FY23.
Brokerages see further upside in the stock.
The stock faces challenges from a rise in the bank’s credit cost, growing competition in the retail loan segment, and sequential rise in fresh slippages.
Like other Adani Group stocks, Adani Transmission continues to defy the broader market.
The power transmission player’s share price is up 91 per cent year-to-date.
It has emerged as the most valuable power utility stock with a market capitalisation of Rs 3.5 trillion.
The stock rally has not been matched by similar growth in revenue and profit.
It is led by investor expectation of the company clocking quicker revenue and profit growth in the years to come
In the first quarter of 2022-23, the firm’s consolidated net sales grew a modest 9.4 per cent year-on-year (YoY), while its net profit was down 57.3 per cent YoY.
Its stock valuation, with a price-to-earnings multiple of 364.5x and a price-to-book value of 32.5x, is one of the most expensive on the bourses.
Adani Green Energy
Another chartbuster from Adani Group, Adani Green Energy’s share price is up 72 per cent year-to-date, beating benchmark indices and peers by a wide margin.
The strong rally is driven by investor expectation of a rapid scale-up in the company’s integrated solar power business in the years to come.
In the first quarter, Adani Green’s consolidated net sales was up 50 per cent year-on-year (YoY) and net profit 257 per cent YoY.
Earnings headwinds from high indebtedness and weak profitability are potential downside risks for the stock, which is trading at record-high valuations.
A trailing price-to-earnings of 667 and price-to-book value of 61.3x makes it one of the most richly-valued stocks in the market.
The two-wheeler maker has outdriven peers and gained share in an environment of high fuel costs, weak rural economy, and price rises.
TVS has improved its competitive positioning through multiple successful product launches, expansion in exports, robust profitability, and a sound electric vehicle (EV) strategy, says Systematix Institutional Equities.
Some of the gains were visible in Q1FY23.
The company reported its highest standalone quarterly sales, aided by strong volume growth, with incremental gains from a better product mix, healthy exports, and price hikes.
Given the pricing and cost control measures, margins are expected to be resilient and above 10 per cent.
Success and product scale-up, especially in the EV segment, will be a crucial driver of growth.
Mahindra & Mahindra
Investors will be pleased that the country’s largest tractor maker and utility vehicle major has enriched them with year-to-date returns of over 50 per cent.
Two successful launches, with the latest being the ScorpioN, is reflected in M&M’s robust order book.
While demand remains resilient, likely improvement in margins in the second half of 2022-23 due to declining raw material costs could sustain margins.
Entry into the electric SUV space with XUV400, and gain in market share, could be fresh triggers for M&M’s stock.
Edelweiss Research believes that as the drags on return ratios get addressed, the true franchise value of the tractor and light commercial vehicle will be recognised.
Varun Beverages is the best performer on the returns parameter within the Nifty FMCG pack by a distance, with a lead of 24 percentage points over the next player
Even as peers have been struggling with demand and margin pressures, the firm delivered yet another strong showing - its fourth such performance on the trot - in the first quarter (Q1) of 2022-23.
While most gains in Q1 came on the back of higher volumes, increased realisations due to price hikes, product mix change, and lower discounts also helped boost sales.
Edelweiss Research has increased its target price-to-earnings multiple to 50x 2023 (calendar year) estimates and narrowed the valuation discount to 10 per cent, compared to FMCG peers.
The higher multiple is due to the firm’s deleverage playing out and volume growth sustaining better than expected.
A perennial underperformer in the past vis-à-vis peers, ITC has been a show-stopper in returns this year.
A key driver has been steady volumes and improving prospects of its cigarette business, where benign tax regime and price hikes are expected to help it log double-digit growth at the operating level in 2022-23.
Scaling up the FMCG business - both on the distribution and product innovation/launch fronts - is a key positive.
An improving outlook and potential demerger of the hospitality business are other triggers, observes Centrum Research. The brokerage expects improved occupancy and 20 per cent growth in room rents.
Axis Securities has a ‘buy’ call on the stock, given the benign tax regime, inexpensive valuations, and 5 per cent dividend yield.