The stock market is soaring high with abundant liquidity keeping the market buoyant even as companies have struggled to put on a good show. Both foreign and domestic investors have pumped in truck-loads of money over the past one year. However, contrary to the past trends, this time, domestic investors have taken the lead in boosting the market. While foreign institutional investors (FIIs) have bought equities worth Rs 58,268 since July last year, domestic institutional investors (DIIs) have made a bigger splash in the market with net inflows of Rs 84,825 crore. In fact, DIIs have emerged net buyers in the equity market for each month since August last year.
For 196 of the 200 firms in the BSE200 Index, non-promoter foreign institutional ownership increased marginally from 19.18% in June last year to 19.56% at the end of June 2017. Meanwhile, DII holding in the same basket rose from 10.71% to 11.48% during this period.
More interestingly, both sets of investors have taken different paths while buying and selling stocks. Our study of the shareholding pattern of the BSE200 basket of companies shows that there is not a single company in which both DIIs and FIIs have simultaneously shored up holdings or cut their stake over the past four quarters.
Meanwhile, there are eight companies where the two have taken a sharply divergent view—where one set has increased stake consistently, the other has simultaneously pared down ownership. To clear the situation, we delve deeper and find out how analysts are placed on each of these stocks where the big investors have taken a contrasting stand.
Blue Dart Limited: Growth visibility
One of the largest courier players in India, Blue Dart has an extensive air and ground support network. It is expected to emerge a big beneficiary of the Goods and Services Tax regime (GST), as manufacturers are likely to outsource their entire supply chain logistics to third-party players. Although analysts had anticipated the firm’s revenue growth to moderate as it transitioned to the GST regime, the impact turned out to be much higher. Subdued revenue growth—7% year-on-year (y-o-y)— coupled with its fixed cost model led to a sharp 600 basis points decline in Blue Dart’s operating margins. However, this is expected to be a one-off event, attributable to the impact of the GST roll-out, and should not impact the entire financial year. Analysts note that the company’s earnings are depressed because of structural changes in its business-to-business segment because of the impact of GST and in the business-to-consumer segment because of the consolidation in the e-commerce industry. The stock’s premium valuation is also a concern. “Until growth visibility improves, the stock is likely to underperform the broader markets,” says Harshvardhan Dole, IIFL. However, any weakness in the stock price provides a good entry point, he adds.
CESC Earnings: Growth to continue
Power utility CESC will soon undergo restructuring, aimed at segregating the group’s power generation and distribution activities. The planned demerger into four independent businesses is expected to unlock value for the company, with the distribution business likely to get re-rated on reduced volatility in earnings. Analysts estimate that CESC’s Haldia plant generated core RoE of over 25% in 2016-17, among the highest in the industry. Subsidiary Dhariwal turned EBITDA-positive in 2016-17 owing to the commencement of power purchase agreements. Meanwhile, its retail subsidiary, Spencer, is on the verge of a turnaround. The supply chain optimisation under GST will reduce operating cost while independent management focus will drive growth, possibly leading to a re-rating. “Earnings growth momentum to continue. Have upgraded PAT estimates for 2018-20 by 13-15%, driven by Dhariwal and Spencer,” say analysts at Motilal Oswal.
Crompton Greaves: Valuations are expensive
Electrical appliance maker Crompton Greaves reported a weak set of numbers in the April-June quarter, owing to destocking in the transition to the GST regime. Analysts reckon Crompton would face challenges in scaling up its appliances business because of fragmented sub-categories and high dependence on aftersales service network. A chunk of the firm’s revenue comes from the fans segment, which is facing stagnation in growth, in addition to higher competition. The company has a weak presence in retail lighting and water heaters, where it has focused on standard products despite faster growth in the premium segment. Reports suggest the firm is looking to enhance its home appliances portfolio with Rs 1,500-crore acquisition of Kenstar. However, its valuation is not cheap, trading at just a 5% discount to Havells—a market leader with a presence in multiple categories. “We reiterate ‘Sell’, given Crompton is the most exposed to the increase in competitive intensity in the fans segment— a matured market, growing in mid-single digits. Expensive acquisition of Kenstar is also a risk—if it goes through,” says Bhargav Buddhadev, Analyst, Ambit Capital.
GSK Pharma Industry: Leading return ratios
The pharma major suffered in the April-June quarter, with net profit falling 63.4% from a year ago. Sales fell 14.4% to Rs 587 crore y-o-y. The firm has been unable to grow profits meaningfully over the past few years owing to price control on 30% of its drugs portfolio and supply bottlenecks. The company plans to counter this by assessing new products from its global respiratory and vaccines pipeline for launch in India. GSK also plans to increase its presence in the chronic drugs space, which provides more sustainable revenues. Besides, its upcoming state-of-the-art facility in Karnataka—entailing investment of Rs 1,000 crore— is expected to start operations in the fourth quarter of 2018. The management has indicated that it is likely to seal the deal on selling its 60-acre land parcel in Thane by the end of this year, which could unlock Rs 500-600 crore. The sharp cut in its share price provides a good entry point, reckon some analysts. “We believe GSK Pharma has a strong parent support, superior brand portfolio (competitive advantage), high payout ratio ( more than 100%) and industry-leading return ratios,” say analysts at Motilal Oswal.
Reliance Industries: Expected to rise further
The company put in a blockbuster show in the April-June quarter, clocking robust operating performance in both its core segments—refining and petrochemicals. Gross refining margin at $11.9 (Rs 758) per barrel was the highest since September 2009 while petrochem EBIT (earnings before income and taxes) margin at 16.5% was the highest since September 2010. However, the oil and gas segment continued to bleed due to the fall in production because of the natural decline in output from fields and weak domestic gas realisations. With capital expenditure on its core business bottoming out, RIL’s earnings profile should improve substantially. Positive sentiment on the stock has been further boosted by the strong traction in its telecom business. Jio active subscriber base by May-end was around 89 million, with a large chunk opting for the higher tariff plan. This is likely to get a further boost with the launch of the 4G-enabled JioPhone which opens up a large market, but at lower average revenue per user. Analysts remain positive about a further upside in the stock. “Against the backdrop of a strong performance, along with scaling-up new projects in the core business and tremendous value creation potential of its telecom business, we maintain our ‘buy’ rating with an upward revision in estimates and target,” says Prayesh Jain, Analyst, IIFL Wealth Management.
Gujarat Pipavav: Port Possibility of a turnaround
The port operator has been losing business to peers over the last few years. Also, a weak container shipping market and the appreciating rupee dented the company’s performance last year. Reportedly, the promoter, APM Terminals, is looking to exit its 12-year investment. However, positives are emerging for the company with improving container volumes on the west coast, while diversification to the crude and car segment and the cargo division should produce results. The company may also benefit from the upcoming Dedicated Freight Corridor (DFC) with Pipavav Rail Corporation preparing to connect the port with the DFC. Amit Agrawal, Kotak Securities, expects the next few years to be the turnaround years for the company: “With the high operating leverage nature of the business and an expected container volume CAGR of 7.5 % over 2017-19, operating margins likely to remain healthy, improving the return ratios.”
Tata Communications: Margins to remain under pressure
For Tata Communications, the higher margin data segment has been playing a larger role in business growth for the past few years. Revenue contribution of the data business has increased from 40% in 2013-14 to 58.7% in 2016-17. However, data revenue growth remained in single digits for a third consecutive quarter in April-June 2017. Also, the voice business continues to remain under pressure from heightened competition and irrational pricing but, with its capex over, it will generate stable free cash flows now. The company plans to go for a major digital transformation, eyeing the internet of things, managed security, cloud and artificial intelligence domains. Investment in these newer services along with ongoing transformation of internal processes would involve substantial capital and operating expenditure, and keep margins under pressure. “We have lowered margin expansion estimates as investments in new services and digital transformation may restrict the margins in the medium term,” says Bhupendra Tiwary, Analyst, ICICI Direct. Meanwhile, any progress on demerger of its land parcel will boost the stock’s performance.
TVS Motor: Margins expected to rise gradually
The GST regime has reduced the effective rate of taxation on two-wheelers, and the company has passed on the entire benefit of tax cuts to its customers. It has slashed prices by an average 1.5-2%. While TVS Motor has successful brands, their market share is significantly lower than that of the market leader in the respective segments. While the company surpassed Hero Motocorp in scooter sales in the June quarter, Honda Motor still rules the scooter market. The company intends to prioritise market share gains over near-term margins, by ramping up its flagship brands Jupiter (scooter) and Apache (motorcycle) through focused marketing and regular product interventions. It plans to launch a scooter and a motorcycle in the 125cc segment this year. This would keep marketing spends higher in the near term, and margins muted. The company will also invest Rs 500 crore this year to ramp up production capacity towards the new products and development of new engines. “While the company’s margins are likely to rise gradually, double-digit margins should be achievable only during 2018-19,” says Chirag Jain, Analyst, SBICap Securities.
