Cement stocks along with consumer discretionaries have attracted the attention of global brokerage and research firm Credit Suisse as it looks to bank on beneficiaries of input cost normalisation. In a note co-authored by Neelkanth Mishra, Abhay Khaitan, and Prateek Singh, Credit Suisse said that going forward, the normalisation of input costs would help sectors such as paints and cement with pricing power in their hands. “An extreme supply-chain bull-whip is likely driving chemicals too: inputs to adhesives, paints, cement, etc. As costs fall, firms with pricing power should benefit,” the report said. After having stayed overweight in metals for months, Credit Suisse recently trimmed weightage fo metal stocks, finding the risk-reward unfavourable and terming the commodity price surge, cyclical and not structural.
Paints and Cement to benefit
The note highlighted that chemicals that are used as raw materials in sectors such as paints, adhesives, and cement are now priced at unseasonally high levels owing to supply-chain inefficiencies. “As petrochemical price trends normalise and costs fall, firms with pricing power should benefit,” the report said. Credit Suisse has added Asian Paints, to its portfolio to benefit from the trend.
Further, the report adds that the cement sector would also benefit from lower costs of such materials. “We, therefore, go overweight on cement, adding UltraTech Cement despite the near-term concerns on adverse seasonality and a weak outlook for low income/rural discretionary consumption,” the report said. UltraTech Cement is also expected to benefit from capacity expansion and reduction of fixed costs in the near term. The sector currently trades at an 11% premium to the market. Historically, the sector has traded at a 14-year average premium of 25%.
Overweight on banks, rejig IT portfolio
In the financial sector, Credit Suisse has retained its overweight rating on private banks and State Bank of India. “We believe they are the best plays on our expectation that medium-term economic growth would be better than consensus,” the report said. The brokerage firm has ICICI Bank, Axis Bank, SBI, and HDFC Bank in its portfolio.
Seeing the resilience among Industrials during the second wave of covid-19 in India, analysts at Credit Suisse have retained their heavy overweight stance on the sector. Forward P/B of Industrials relative to the market remains below historical averages even though in absolute terms it is at five-year highs. In the Information Technology space, Credit Suisse remains underweight. The brokerage firm has removed HCL Technologies from the portfolio, adjusting the weight by increasing TCS.
Infosys, Dr. Reddy’s, Ambuja
HDFC, Coal India, HDFC Bank
Reliance Industries, Cholamandalam, Motherson Sumi
ICICI Bank, Indigo, SIEMENS
Maruti Suzuki, Ultratech, Asian Paints
TCS, Airtel, Eicher Motors
HUL, Mahindra, Aurobindo
Axis Bank, ITC, ABB
L&T, Hindalco, Godrej Consumer
SBI, Shriram, Marico
Eqwires Research Analyst
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