Sharp recovery ahead for leaders of four sectors
FY19 could be a turnaround year for Apollo Hospitals, SBI, Sun Pharma and Tata Motors
In a year when the S&P BSE Sensex has gained 13 per cent, four sector leaders have underperformed the markets as well as their peer indices. In fact, barring the State Bank of India (SBI), which has been a laggard in recent times, all other sector leaders such as Sun Pharma, Apollo Hospitals, and Tata Motors have been wealth destroyers every year over the last five years. However, things could change in FY19 for shareholders as these companies have chalked out strategies to improve their performance. If things go as per plan, expect these sector leaders to post robust growth in revenues, margins and net profit in the current fiscal. The other positive from the investing point of view is that these stocks are trading at attractive valuations as the street is yet to factor in the expected improvements. Given the sharp correction in small and mid-cap stocks last week and brokerages looking at large caps as a better bet in a correcting market, the downside (in case of global sell-off) for these stocks is expected to be limited. Apollo Hospitals
The country’s largest healthcare chain, operating over 12,000 beds, has not been on the investors’ radar in the last few years and has shed 28 per cent of its value since 2016. Pricing caps on medical devices such as stents and knee caps, and worries of further regulatory action on healthcare services, diagnostics and pharmacies have been the key overhangs. What compounded matters was the revenue impact due to the implementation of goods and services tax (GST) and note ban. With majority of the capex done, new hospitals making money, retail healthcare and pharmacies scaling up, analysts expect operating profit to grow by 20 per cent each in FY19 and FY20 with a 150 basis point margin improvement by FY20. State Bank of India
India’s largest lender by assets has been a relatively better performer on the bourses than others on sector leaders’ list. That is little consolation for investors in the financial services space, which have seen peers especially in the private sector multiply their money over the last few years. Though the March quarter performance was also impacted by bad loans, if the management commentary is anything to go by, the worst could be over with recognition cycle for non-performing loans, its biggest overhang behind it. The bank is looking to control its credit costs and streamline operating processes to achieve a 10-12 per cent credit growth and about a per cent return on assets by FY20 (from a negative figure in FY18).
Sun Pharmaceutical
India’s largest pharmaceutical company has been one of the key under performers in this list, losing 42 per cent of its value over the last three years. Given the pricing pressures in the US market, its revenues, which have grown in single digits in FY16 and FY17, fell 14 per cent in the last fiscal. On the other hand, operating profit margins have shrunk by 600 basis points since FY16. The flat revenue trajectory looks like a thing of the past with the company guiding for a low double-digit revenue growth in FY19. The launch of limited-competition and Halol facility approval by US FDA are key triggers, and are expected to boost margins by 400 basis points this fiscal.
Tata Motors
The medium and heavy commercial vehicles (M&HCV) leader has not had a good run on the bourses over the last few years losing 30 per cent of its value every year since 2016. The company’s two growth engines, the India business as well as Jaguar Land Rover (JLR) are, however expected to fire as a revamped product portfolio, cost cutting initiatives and a demand up-cycle is expected to improve volumes offering the crucial operating leverage that was missing all these years. The company has guided for an improvement in FY19 and this should reflect well on the operating profit level as well as net profit growth. However, significant investments by JLR into new products may weigh on its cash flow and possibly lead to some increase in debt. The success of JLR’s new launches will also be key to watch, given that they are crucial for ramping up volumes. Analysts, however are hopeful and expect Tata Motors’ earnings to grow by over 25 per cent on an average in the next two fiscals.