Why rebalancing of investment portfolio is need of the hour; how to do it

The broader market may remain strong for a while due to the continued money flow. Some sectors, including telecom, IT and pharma which benefited from the pandemic may continue reaping rewards. Chemicals sector is benefitting due to the structural change of manufacturing base from China to home-ground, I.e. India. However, the market has started over-discounting these positives and thus caused rather high valuations. The healthcare sector is a mixed bag—some, while stocks are overpriced, others are quoting at reasonable valuations. Chasing all stocks, without considering their underlying value, is common investor behavior in a bull market. Here are 4 stocks that you should in fact be selling now.

Healthcare stocks continue finding fancy with the markets and are also reporting good numbers, owing to the pandemic. Dr Lal PathLabs has reported bumper revenues in the first quarter of 2021-22 and the market has rewarded it with above-historical valuations. However, analysts point out that 36% of its first quarter revenue was contributed by covid tests and the normalised revenues from core portfolio of tests grew only 15% yo-y. But how much can one keep getting tested, especially after a point when all of us are vaccinated doubly? Simply put, such extreme valuations for Dr Lal PathLabs are unreasonable, because they find roots in short-term opportunities arising out of a pandemic.

Expert take: “We believe Dr Lal PathLabs valuation post pandemic reflects irrational exuberance as there is opaque visibility on additional flow of volumes and revenues after the pandemic,” says a recent Prabhudas Lilladher report.

Its strong Fevicol brand and the recent investor rush towards successful chemical companies have pushed valuations of Pidilite to very high levels now. Despite good management quality and free cash flows generated by it, Pidilte is still an Indian adhesives manufacturing company and the industry overall is not yet out of the woods. For instance, Pidilite’s 120% y-o-y sales jump in the first quarter of 2021-22 was only because of the low base effect and its sales contracted by 4% if compared on 2-year CAGR basis. Cost inflation pressures also persist, though the recent correction in VAM prices has reduced its impact a bit.

Expert take: “Margin pressure and high comparables are likely to restrict earnings growth of Pidilite in the near term. We maintain sell because its current high valuation makes it unattractive,” says a recent Emkay report.

Decorative paints manufacturers have faced a double whammy during the first quarter of 2021-22. While raw material costs soared due to jump in oil prices, covid induced restrictions reduced demand and thereby the ability to pass on the cost increase to consumers. For instance, they could only do small price increases of 5-6% in the first half of 2021, compared to raw material inflation of 20-25%. Analysts are not attracted to Berger Paints because of its revenue underperformance and overvaluation compared to market leader Asian Paints. Berger Paints’ two-year topline CAGR is only 2.4% compared to 4.6% of Asian Paints.

Expert take: “While Berger Paints continues to execute well, its topline variance vis-à-vis Asian Paints hasn’t been meaningful and therefore, the premium it enjoys over Asian Paints is unjustified,” says Deepak Jasani, Head of Retail Research, HDFC Securities.

A steadily growing CPVC pipe manufacturing company with only low exposure to the price-sensitive agriculture segment, Astral also underwent the pain caused by the second wave during the first quarter of 2021-22. However, pent up demand is helping Astral to bounce back fast and its pipes and adhesive revenues were up by 65% and 36% y-o-y respectively in July. Despite this, majority of analysts are maintaining ‘sell’ recommendation on this counter due to its high valuations.

Expert take: “While we like Astral for its robust growth and margin along with free cash flow (FCF) acceleration, its valuation (EV/EBITDA) has soared by around 50% on its five-year mean,” says Jasani.