Five sector leaders that are lagging on D-Street

Mumbai: The stock market in the past three years has rewarded companies that are leaders in their space with premium valuations. But there are a handful of companies that are struggling to find favour among a large section of investors despite having strong positions in their sectors. Some of the prominent ones are SBI, ITC, L&T, NMDC and Coal India. Most of them are market leaders with a strong dividend-paying record but they fail to find favour with investors. ET explores why, and the road ahead for them.State Bank of IndiaSBI’s dominance in India’s banking sector has been absolute. Still its stock is down 27% in the last five years and down 6% for the last decade. Though most big foreign brokers such as CLSA, Goldman Sachs, UBS and HSBC are pushing the stock citing attractive valuation, strong June quarter show and higher resilience to the current disruption, the demand for the stock among foreign funds is modest. “They believe SBI is into national service, there is a belief Yes Bank type of episode can happen and SBI can be asked to step in, or it could be asked to lend to unproductive sectors because of weakness in the economy,” said Suresh Ganapathy, head of financial services research at Macquarie. If SBI manages to revive growth in its core business and show lower slippages on account of moratorium, investors would start looking at the stock again.ITCFew stocks have divided the market like ITC has done. While traders see little scope for further up-move in the stock, which has been an underperformer in recent years, several value investors are betting on it because of cheap valuations and high dividend yield. Analysts said the stock’s underperformance is because cigarettes form a bulk of its revenue. “Stock hasn’t done well in the past few years because of the ESG angle and high taxation. Because of ESG issues, many funds cannot buy tobacco stocks. Second issue is taxation. Because of GST shortfall there is taxation overhang. There was a big increase in taxes in February, but we don’t expect a hike in the near term,” said Abneesh Roy, senior VP — institutional equities at Edelweiss. Roy thinks demerger of the businesses, particularly FMCG, which is showing promise, could revive interest in the stock.L&TNo investor betting on India’s infrastructure sector can ignore L&T. Yet, the stock has been an underperformer for the past 13 years because the contribution of infrastructure investments to India’s growth has been negligible. L&T shares are up just 12% in the last five years and have fallen 7% in the past 10 years. The company has an order book of ₹3 lakh crore but execution and monetisation are a problem, said Abhimanyu Sofat, head of research at IIFL. “They got into different businesses, for example finance, Hyderabad metro project, etc. It needs to become more asset light and execution of order book needs to improve,” said Sofat. “Valuation is not a concern, it more of a growth issue,” Sofat added.Coal IndiaSince its listing in November 2010, Coal India shares have fallen 61%. Despite cheap valuations and strong dividends, the stock has been ignored partly because of the growing focus on renewables. “The stock is trading at a P/E of 5 as against its peak P/E of 12 due to the government’s focus on renewables, mining reforms and low industrial growth, which is unwarranted,” said Ravi Muthukrishnan, head of institutional equity research at Elara Securities. “Despite the headwinds, the stock should be trading at least a P/E of 8, in our view,” said Muthukrishnan. 78025973NMDCPankaj Pandey, head of research at ICICIdirect, said the core challenge with most of the stocks which have not performed in line with the market over the years is the capital allocation issue. “NMDC, for instance, was a pure iron ore company. The problem started the moment it went for the capex in a steel plant. They allocated capital for a business they did not understand so well; and as a result, the stock price also suffered,” said Pandey. ICICIdirect has a ‘hold’ rating on the stock with a target price of ₹100. Antique Stock Broking said commissioning of the steel plant in FY22 and progress on de-merger would improve return ratios.

from Economic Times https://bit.ly/3bFGJyo
via IFTTT