Eight stocks that have now fallen out of favour and why

Indian software services firms are struggling as US visa woes, new technological developments such as artificial intelligence are weighing on their earnings performance. Photo: Reuters

Mumbai: While Indian markets have enjoyed a good run this year, here is a quick look at some stocks which have fallen out of investors’ favour, even though they were lucrative bets earlier.

The stocks have been selected largely on the basis of changes in analysts’ preferences.

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IT sector

Indian software services firms are struggling as US visa woes, new technological developments such as cloud computing, automation, artificial intelligence and the likes are weighing on their earnings performance. Separately, a strengthening rupee is also creating havoc for the export-focused sector.

Tata Consultancy Services Ltd (TCS): While TCS is still the largest IT exporter by market value, it has lost its charm of late, largely due to blues faced by the sector at large. TCS saw its margins drop to a 9-year low in the June quarter, largely impacted by wage hikes and a rising rupee. Currently, only 12 analysts rate it a buy, while 26 analysts recommend hold on the stock, and 14 have recommended a sell or reduce rating. Around four years ago, when the stock touched a record high in October 2014, as many as 41 analysts argued that the stock was a good bet.

Wipro Ltd: The problems faced by Wipro, the country’s third-largest software services company, are no different from that faced by its peers. Wipro’s June quarter net profit declined 8% in the preceding quarter, hurt by unfavourable currency movement and as the company recorded a $70 million gain from the sale of Wipro EcoEnergy in the earlier quarter. This also narrowed its operating margins. The results, however, were better than consensus estimates. The guidance, though, was muted and the management expects to grow at-best 1.5% in the current July-September period.

KPIT Technologies Ltd: KPIT was one of the preferred bets among the mid-sized IT firms. The stock touched a record high of Rs232.70 in January 2015, when as many as 21 brokerages rated it a buy. Things have now taken a turn, and the stock is down nearly 50% ever since. Lower margins, wage hikes and currency headwinds have spoilt the party for this stock, which currently has only eight brokerages rating it a buy.

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Pharmaceutical sector

Another export-focused sector, and a long-time favourite defensive bet of investors is largely out of their radar for now. For most leading Indian pharmaceutical companies, the US market accounts for nearly half of their revenues. The business environment in the US has become challenging as increased competition and consolidation in the distribution channel has enhanced pricing pressure for generic drugs.

Sun Pharmaceutical Industries Ltd: The country’s biggest drugmaker posted its first net loss in the June quarter results in at least 12 years. In a note on 13 August, CLSA cut its fiscal year 2018 and 2019 adjusted EPS (earnings per share) estimates by 30% and 44%, respectively, while maintaining a sell rating on the stock.

The brokerage said that the key things to track over the next few quarters are the Halol inspection outcome, progress in filings of specialty products like Tildrakizumab and Seceria and signs of a market share pick-up in the US. The stock currently has 19 buy ratings. This compared with 34 buy ratings the stock enjoyed when it touched a record high of Rs1,200.70 in April 2015. The stock has eroded 58.3% ever since.

Dr. Reddy’s Laboratories Ltd: The drug maker’s first quarter consolidated net profit in the June quarter declined 57% year-on-year basis, suggesting that though it has one of the strongest product pipelines for the US market among Indian generic drug makers, there are high risks involved in monetizing this pipeline. Two of the company’s plants have been under US Food and Drug Administration’s (USFDA) warning letter since November 2015 due to violation of good manufacturing practices and its Bachupally unit was issued a Form 483 in April this year.

Despite the remedial measures taken by Dr. Reddy’s, USFDA found quality lapses at Duvvada and Srikakulam units during a re-inspection earlier this year. During its hey days, when the stock price touched an all-time high in October 2015, the stock was rated a buy by 31 analysts. Currently, however, only nine have rated the stock a buy.

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FMCG and consumer discretionary sector

These were among sectors severely hit by the disruption caused by the implementation of the goods and services tax (GST), in the supply chain. De-stocking ahead of implementation of the new tax regime took a toll on the volume growth of companies. That apart, raw material prices too have been inching up, limiting margin expansion for many. Listed FMCG players also face cut-throat competition from new entrants like Patanjali Ayurved Ltd.

Colgate-Palmolive India Ltd: June was the third consecutive quarter of declining volumes for the company, this time due to destocking and rising competition. Under GST, Colgate was among the beneficiaries since it now attracts lower tax rate of 18%. Though it has cut prices in the toothpaste and toothbrush categories by 8-9% to pass on the benefit, its falling market share has got analysts worried. Given the stiff competition, the company is expected to spend heavily on marketing, resulting in low-margin expansion. The stock has run up quite significantly in this year and given these concerns, the upside looks limited, analysts cautioned.

Inox Leisure: The blockbuster performance of Baahubali 2: The Conclusion was a saviour for Inox Leisure. Had it not been for that, its June quarter earnings would have been disappointing. Operating margin was aided marginally by better revenue growth compared to PVR and slower pace of increase in employee costs. However, analysts aren’t too gung-ho about the movie pipeline as strong content performance is the key. Also, there will be some impact of GST on demand as ticket prices in Tier-I cities have increased.

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Capital goods sector

The order book for the sector remains subdued on the back of muted private sector capital expenditure. Government expenditure continues to be a key driver of capex. Order inflow in the road sector witnessed some slowdown due to land acquisition and disruption caused by GST. Also, companies highlighted that few ground execution challenges continue to remain in domestic execution.

Bharat Heavy Electricals Ltd: Higher wage provisioning weighed on the company’s operating performance resulting into loss at the Ebitda (earnings before interest, tax, depreciation and amortization) level in the June quarter.

The company’s management indicated of a similar provision to recur for the next three quarters as well. Declining order book along with slow moving orders could hamper the company’s revenue bookings, analysts fear. From no sell ratings in 2007, as many as 28 brokers are currently bearish on the stock. Clearly, the stock has fallen from its glory.

Source:-livemint.