Market fall takes shine off favourites

High valuations and short-term worries have resulted in stocks such as Maruti, Eicher, Avenue Supermarts and MindTree losing over 30% from their highs

High valuations and short-term worries have resulted in stocks such as Maruti, Eicher, Avenue Supermarts, and Mindtree losing over 30% from their highs. RAM PRASAD SAHU writes

In a market that has seen a sharp correction since its highs in August, there do not seem to be many safe bets. Even stocks, which are market leaders in their respective sectors or have been on top of investors' buy lists, have seen corrections at the slightest disappointment on financial or operational performance. Experts highlight a couple of reasons for the same. The first is the weak market sentiment, especially due to the crisis in the financial sector, while the other is valuations, which had clearly moved into the expensive zone.

“In an environment of fear, there is little appetite in the market and even a minor sell-off leads to a sharp correction, especially for stocks in the F&O (futures and options) segment. The other reason is overvaluation with some stocks trading in 70100 times one year forward estimates,” says G Chokkalingam, founder of Equinomics Research and Advisory.

Avenue Supermarts, the company that runs a chain of retail stores under the Dmart brand, is one such example as the stock trades at 71 times one year forward estimates even after the recent correction. The stock, which had gained 43 per cent over the last year to its highs in August, is down 26 per cent from its highs. This is on the back of the disappointing September quarter (Q2) results and high valuations. Given the margin compression in Q2, operating profit growth, which has been upwards of 35 per cent over the last four quarters, came down to just 23 per cent. Though revenue growth prospects continue to be strong, the Street has been particularly harsh due to the margin reset.

Mid-cap IT market favourite, MindTree, too, has been at the receiving end, losing more than 17 per cent on Friday, its highest single-day fall. Prior to the correction that started in September, the stock had more than doubled over the last year and was riding on huge expectations built up over the previous quarters. The company’s dollar revenue growth, which was at 6.8 per cent in the June quarter, fell to 2 per cent in the September quarter, way below analyst estimates of 4.7 per cent. While the company indicated a strong trend of digital deal wins and higher margin levels in the December quarter, high top-client concentration risk and volatile growth profile have worried the Street.

Investors have also not taken kindly to the multiple headwinds, especially on the volume front in the auto space, leading to a sharp de-rating for sector leaders. The sector at 21 times one year forward price-to-earnings (PE) ratio is trading at a 13.5 per cent premium to its 10-year average PE ratio of 18.4 times. What pegged back market leaders, such as Eicher Motors and Maruti Suzuki, have been delays in purchase decisions by customers on account of higher cost of ownership due to fuel inflation, increased cost of financing as well as insurance. Passenger vehicle maker Maruti, which controls half the car market in the country, reported flat volumes in September as compared to 10 per cent growth for the fiscal year-to- date period and unlike in the past, there is little waiting period for its vehicles, pushing the company to offer higher discounts to clear stocks. This has been compounded by rising commodity costs as well as currency volatility (weak rupee, stronger yen), which are expected to impact its margins. Most analysts have cut their operating profit estimates by 10 per cent for Maruti that has seen its share price correct over 32 per cent from its highs. The stock’s peak one year forward estimates were at 35 times as compared to current valuations of 24 times.

Eicher, which dominates the premium motorcycle segment, too, has had a weak September with volume growth of just 2 per cent as compared to fiscal yearto-date growth of 13 per cent as well as 46 per cent volume spurt over FY13-18. The Street punished the slip on the volume front with the stock correcting 27 per cent over the last month. The company is eyeing new launches and festival demand to improve sales volumes as well as the labour issues which had impacted sales in September.

While a growth in festive sales could lead to upsides for the two auto majors, the Street as of now is focussed more on the nearterm speed bumps.