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Business News/ Photos / TechM, HPCL, Asian Paints and more: Jefferies lists top 6 ‘underperform’ ideas

TechM, HPCL, Asian Paints and more: Jefferies lists top 6 ‘underperform’ ideas

6 Photos . Updated: 26 Feb 2024, 03:54 PM IST Pranati Deva

Markets are up 2% in Feb with Nifty hitting new highs earlier this month. While volatility is likely to continue, experts see strong returns in 2024. However, amid such a positive environment are there stocks you should avoid? Jefferies has come out with its top 6 'underperform' ideas. Let's see.

Tech Mahindra: TechM derives 37% of its revenues (as of 9MFY24) from the Communication vertical, which is witnessing a slowdown in the current macro environment, with near-term recovery looking unlikely. While it expects growth to pick up from FY26 onwards, it sees FY24-26 growth of 4.8% YoY cc — soft in comparison to peers. Despite a weak growth environment, the brokerage models a strong 480bps margin expansion for TechM over FY24-26E, however, its FY25/26 EPS estimates for TechM are 20-25% below consensus estimates, indicating risks of consensus downgrades. The stock is trading at 10-year peak valuations of 24x 1-yr fwd PE, driven by hopes of a turnaround post the leadership change. Jefferies believes consensus downgrades can drive significant PE derating, and thus recommend Unpf with PT of <span class='webrupee'>₹</span>1,080. (REUTERS)

1/6Tech Mahindra: TechM derives 37% of its revenues (as of 9MFY24) from the Communication vertical, which is witnessing a slowdown in the current macro environment, with near-term recovery looking unlikely. While it expects growth to pick up from FY26 onwards, it sees FY24-26 growth of 4.8% YoY cc — soft in comparison to peers. Despite a weak growth environment, the brokerage models a strong 480bps margin expansion for TechM over FY24-26E, however, its FY25/26 EPS estimates for TechM are 20-25% below consensus estimates, indicating risks of consensus downgrades. The stock is trading at 10-year peak valuations of 24x 1-yr fwd PE, driven by hopes of a turnaround post the leadership change. Jefferies believes consensus downgrades can drive significant PE derating, and thus recommend Unpf with PT of ₹1,080. (REUTERS)

Biocon: Jefferies see continued challenges for two of the three divisions of Biocon in 2024. For Biosimilars, ongoing compliance issues could further delay new launches, while existing products are expected to see more competition, resulting in margin pressure. For Syngene, funding revival for biotech companies in the next two quarters is crucial for achieving overall mid-teen growth, as Zoetis mfg contract is in the base and there is lack of visibility on other contracts. With weak FCF generation, high leverage will hurt Biocon unless it looks at fund-raise options, like stake sale in biosimilars and Syngene. Its earnings estimates are 17-19% below consensus for FY25-26 EPS, and it believes earnings downgrades will continue for Biocon.

2/6Biocon: Jefferies see continued challenges for two of the three divisions of Biocon in 2024. For Biosimilars, ongoing compliance issues could further delay new launches, while existing products are expected to see more competition, resulting in margin pressure. For Syngene, funding revival for biotech companies in the next two quarters is crucial for achieving overall mid-teen growth, as Zoetis mfg contract is in the base and there is lack of visibility on other contracts. With weak FCF generation, high leverage will hurt Biocon unless it looks at fund-raise options, like stake sale in biosimilars and Syngene. Its earnings estimates are 17-19% below consensus for FY25-26 EPS, and it believes earnings downgrades will continue for Biocon.

Laurus Labs: Laurus Labs has four business verticals: API, Finished Formulations, Synthesis (CDMO), and ingredients. The CDMO vertical has been witnessing a decline in revenue on a YoY basis, which has led to seven successive quarterly earnings misses, noted the brokerage. Laurus commenced operations at its Animal Health site in Nov-23, and capacity is still being ramped up. Laurus will be manufacturing 20 products from the plant and currently has validated and qualified for only 3 products, it said. Management expects all products to be qualified by Apr-26 and regulatory approvals to take 12 months' time post-qualification. The crop science project's intermediates manufacturing will also start only from late FY25, leading to a bleak near-term outlook for the division. This implies the ramp-up of the project will be much slower than anticipated, and the quantum of peak sales also remains unclear. Moreover, the stock trades at expensive valuations of 36x FY25E and 25x FY26E EPS, added Jefferies.

3/6Laurus Labs: Laurus Labs has four business verticals: API, Finished Formulations, Synthesis (CDMO), and ingredients. The CDMO vertical has been witnessing a decline in revenue on a YoY basis, which has led to seven successive quarterly earnings misses, noted the brokerage. Laurus commenced operations at its Animal Health site in Nov-23, and capacity is still being ramped up. Laurus will be manufacturing 20 products from the plant and currently has validated and qualified for only 3 products, it said. Management expects all products to be qualified by Apr-26 and regulatory approvals to take 12 months' time post-qualification. The crop science project's intermediates manufacturing will also start only from late FY25, leading to a bleak near-term outlook for the division. This implies the ramp-up of the project will be much slower than anticipated, and the quantum of peak sales also remains unclear. Moreover, the stock trades at expensive valuations of 36x FY25E and 25x FY26E EPS, added Jefferies.

Gujarat Gas: The firm has reported continued market share loss in Morbi as management prioritizes margin over volume, said Jefferies. Management is not lowering prices despite a large arbitrage compared to propane. It further noted that non-Morbi industrial volume has been flat over the past 2 years. The firm's FY25 volume growth guidance indicates limited market share gain in Morbi, contrary to the brokerage's expectation. Valuation at 28x fwd PE makes risk/reward adverse, it added.

4/6Gujarat Gas: The firm has reported continued market share loss in Morbi as management prioritizes margin over volume, said Jefferies. Management is not lowering prices despite a large arbitrage compared to propane. It further noted that non-Morbi industrial volume has been flat over the past 2 years. The firm's FY25 volume growth guidance indicates limited market share gain in Morbi, contrary to the brokerage's expectation. Valuation at 28x fwd PE makes risk/reward adverse, it added.

Asian Paints: The Indian paint industry has enjoyed an oligopolistic structure providing significant pricing power, with APNT enjoying strong leadership. However, incoming competition is investing significant capex, well above the gross block of APNT (historical capex), which raises concerns, said Jefferies. It noted that Mar’24 will likely see the national launch of the upcoming player whose progress needs to be monitored. While success is not guaranteed as there is no clarity on its plan for branding & distribution, given significant capex, competition may go for an aggressive strategy (pricing or otherwise) and disturb the market structure, which may have a greater impact on smaller players, but APNT may also be at risk. Indian Consumer stocks enjoy a premium that is partly attributed to high earning visibility, which is currently lacking in the case of Asian Paints. Valuations at 54x FY25E EPS do not factor in the overhang from Grasim, as per the brokerage. Risk/reward remains unfavorable, and Jefferies has an Underperform rating for the stock.

5/6Asian Paints: The Indian paint industry has enjoyed an oligopolistic structure providing significant pricing power, with APNT enjoying strong leadership. However, incoming competition is investing significant capex, well above the gross block of APNT (historical capex), which raises concerns, said Jefferies. It noted that Mar’24 will likely see the national launch of the upcoming player whose progress needs to be monitored. While success is not guaranteed as there is no clarity on its plan for branding & distribution, given significant capex, competition may go for an aggressive strategy (pricing or otherwise) and disturb the market structure, which may have a greater impact on smaller players, but APNT may also be at risk. Indian Consumer stocks enjoy a premium that is partly attributed to high earning visibility, which is currently lacking in the case of Asian Paints. Valuations at 54x FY25E EPS do not factor in the overhang from Grasim, as per the brokerage. Risk/reward remains unfavorable, and Jefferies has an Underperform rating for the stock.

HPCL: As per the brokerage, the company's, marketing margin on diesel has turned negative. With a refining-to-marketing ratio of 0.54x, losses in marketing will impact earnings highest among OMC peers, it said. Going by the experience of peers (Kochi and Bina refinery of BPCL, Paradip in IOCL), HPCL could take 2 years to stabilize the complexity increase in Vizag and greenfield refinery in Barmer, believes Jefferies and these could drag profitability in the interim. Valuation offers no margin of safety, with stock trading at historical peak multiple on P/B, it added. (Mint<br />)

6/6HPCL: As per the brokerage, the company's, marketing margin on diesel has turned negative. With a refining-to-marketing ratio of 0.54x, losses in marketing will impact earnings highest among OMC peers, it said. Going by the experience of peers (Kochi and Bina refinery of BPCL, Paradip in IOCL), HPCL could take 2 years to stabilize the complexity increase in Vizag and greenfield refinery in Barmer, believes Jefferies and these could drag profitability in the interim. Valuation offers no margin of safety, with stock trading at historical peak multiple on P/B, it added. (Mint
)

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