 "Dealing room")
China, crude oil and other global events have been impacting Indian markets since early 2015. Nearly half of the broad based Nifty index stocks are trading at their 52 week lows. Shankar Sharma of First Global in an interview with CNBC TV18 said that the state of global stock markets in January 2016 eerily resembles the one witnessed in January 2008 – when equity markets topped out after a multi-year bull run.
However, Indian markets have been falling since its peak in early March 2015, down nearly 17 per cent from their peak value and close to their 52 week lows. Along with the broad market, some of the leading bluechip stocks are also trading at their 52 week lows. While predicting the broad market is a difficult task, we shall look at how some of the bigger names in the index are placed, both in terms of valuations and future prospects.
L&T
The largest capital goods manufacturer in the country has been hit by a slowdown in order flow. Despite the ‘Make in India’ story propelled by the government, India’s largest capital goods manufacturer is yet to see any benefit.
The company has announced an order inflow of Rs 6,200 crore for December 2015 quarter. According to Kotak Securities, this looks weak when compared to last year same quarter which saw an announced order book of Rs 14,000 crore and an actual inflow of Rs 30,001 crore. L&T typically announces an order if a customer has given an LOI in the quarter or the necessary approval to announce the order (several strategic orders are not announced) are in place, says the Kotak report.
Kotak has revised the company’s earnings per share to Rs 44 and Rs 57 from Rs 46 and Rs 62 for FY16 and FY17 respectively. On account of lower estimates, price target has also been revised lower to Rs 1,450 from Rs 1,600 earlier. The stock closed at Rs 1,174.80 on Tuesday.
SBI
Share price of the largest bank in the country, SBI reflects all that is wrong with the Indian economy. The bank is saddled with high levels of NPAs at 4.2 per cent (gross) and exposure to sectors which are under stress. Further, tightening of central bank disclosure norms and changes in base rate is expected to hit SBI.
HDFC Securities says that the bank in the December 2015 quarter will see a negative profit growth of 17 per cent as compared to the previous quarter. Base rate cut will impact its core earnings. Loan growth at only 10 per cent will be much lower than private sector players, though better than other public sector banks. Higher provisioning and decline in non-interest income will drag the banks’ profit. However, HDFC Securities feels that SBI is the best play among public sector banks. Consensus target for SBI is around Rs 320.
Axis Bank
Apart from the general weakness in banking counters, Axis Bank has come under focus after the government decided to dilute its stake in the bank which it holds through Specified Undertaking of the Unit Trust of India (SUUTI).
Banking sector’s performance is expected to be hit in the present quarter on account of changes in base rates, reduction in interest rates and likely higher non-performing loan provision on account of stricter RBI guidelines.
HDFC Securities feels that lower base rate will impact Axis Bank’s net interest income by 13 per cent despite a 19 per cent growth in loan book. Higher provisioning and operating cost is likely to result in the bank showing a 13 per cent growth in its profit.
However, Axis Bank remains among HDFC Securities' preferred bets in the banking space with a consensus target of Rs 510.
BHEL
BHEL trades near its 52 week low of Rs 149.45 on account of many reasons. The company has been hit on account of lower order inflows. Further its existing order book results in lower margin revenues.
Nomura in a report on the company pointed out that though sales of the company have increased, its margins have been under pressure because majority of its bids were placed for state/centre orders. BHEL has to implement a JDU (Joint Deed of Undertaking) so that its technology partner also provides a warranty for the equipment. In return, BHEL has to source a certain proportion of equipment from its technology partner, thus leading to low gross margins. This is likely to continue until the government scraps this requirement for state/centre orders.
Nomura sees further risk to margins as share of super-critical contracts from state/centre customers will continue to increase over the next few years. Super-critical boilers now constitute around 65 per cent of the order book, while orders under execution have only 45 per cent super-critical.
Further, order inflows have fallen by 80 per cent to Rs 2,300 crore and its order book stands at Rs 1.12 trillion. Within the order book, management identified Rs 37,000 crore as slow moving, stranded or yet-to-start projects. Nomura has a price target of Rs 123 for the company.
ICICI Bank
Regulatory tightening by RBI is having an impact on investor sentiment on ICICI Bank. The bank currently has among the highest non-performing assets in the large private banking space. Gross NPAs has been hovering around 3.8 per cent mark for the last three quarters as per data collected by Emkay Research.
HDFC Securities says that ICICI Bank will post a 13 per cent loan growth led by retail segment but its profit growth is expected to be muted at 5 per cent on account of higher provisioning and lower core earnings growth.
Fall in the bank’s share price reflects the pessimism. The stock trades near its 52 week low price of Rs 239. But despite the pessimism, consensus target for the bank is around Rs 350.
Idea Cellular
Likely launch of Reliance Jio’s 4G services has impacted stock perception of telecom majors. Idea Cellular trades close to its 52 week low price at Rs 130. Though the company has launched its own 4G service, expectation of predatory pricing by Reliance in order to grab market share has hit telecom companies.
A report by Religare says that to accelerate 4G adoption, Idea is offering 1GB of 4G data at Rs 149 (trial pack) and will offer 1GB of 4G data at 3G prices. The aggressive pricing strategy – similar to that adopted by other players – appears to be compensating subscribers for lower coverage versus 3G but is unlikely to translate into market share gains.
Religare feel that while Idea’s 4G launch will strengthen its high-speed data offering, the coverage is not only thin (merely 75 cities) but also in circles where 4G device penetration is low. Religare says it is better to wait to see the company’s pricing strategy for major cities where device penetration is better and has advised caution.
