10 Brazilian Companies to Watch In Second Half 2023

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Bloomberg Línea — As the first half of the year draws to a close, Brazil is expected to begin a cycle of interest rate cuts, probably in August or September, as a result of cooling inflationary pressures and the convergence of market expectations towards 2024 targets. Economic growth forecasts for 2023 are also starting to be reviewed upward.

In this environment, which involves uncertainties such as demand levels in relevant markets, especially in Brazil’s main trading partners — the United States and China - some companies continue to grow, leading to consolidation in their sectors and innovating with products and services that are expected to sustain the growth path in the coming years.

Methodology

Bloomberg Linea spoke to executives and investors and reviewed stock recommendation reports from banks and brokerages and research from consulting firms to come up with a list of 10 Brazilian companies to watch in the second half of the year. This list is not a ranking with financial indicator-based criteria, but a selection of companies with the potential to stand out in their respective segments in the coming quarters:

1. Localiza (RENT3)

One of the country’s largest car rental companies and fleet managers stands to benefit from the expected reduction in prices for “popular” cars (of up to US$24,350) following the federal government’s exemption announced in May, according to a report by Goldman Sachs (GS). With cheaper cars, the company will have less need for capital to expand its fleet. So far this year, Localiza shares are up 20%, compared to Ibovespa’s 1%. Another favorable factor is the recovery of domestic tourism, which favors the car rental segment. The uptake of synergies following the merger with Unidas, scheduled for 2023, should also accelerate growth.

2. Equatorial (EQTL3)

Despite posting a 72% profit drop year-on-year in the first quarter, the energy company remains one of the top picks in the industry, according to Itaú BBA. The main reasons noted by the bank include the company’s attractive valuation, strong track record in terms of capital allocation and good earnings momentum and near-term drivers for assets related to upcoming tariff reviews in 2023. Equatorial is also looking at acquisitions in the second half of the year and has hired a consultancy to study the assets of Light energy company.

3. Rede D’Or (RDOR3)

Rede D’Or is expected to reap new efficiency gains from the integration of SulAmérica’s health, dental, life insurance and pension businesses, in the wake of the acquisition closed at the end of 2022. The company already gained synergies worth almost 400 million reais (US$8.1 million), according to an estimate by BB Investimentos. Analysts gave a positive outlook for the country’s largest private hospital group, which has just announced the deceleration of its expansion plan, after a first quarter with consistency in operating performance and an improved average ticket, as a result of readjustments, lower claims and a higher occupancy rate in hospitals, mainly for the most complex procedures.

4. Sabesp (SBSP3)

Brazil’s largest water and sanitation company is due to be privatized in 2024 by São Paulo state government, its controlling entity. First-quarter net profit (747 million reais, or US$151.6 million), driven by higher cash generation (Ebitda), exceeded estimates, says a report by Itaú BBA. The bank also expects further improvements in the company’s revenues in the next quarter as a result of tariff adjustments. In early May, Sabesp also announced a voluntary leave program that could involve more than 2,000 employees (16% of its workforce). The market is still expecting the modeling of the possible sale of control of the company.

5. Armac (ARML3)

This platform for the lease of equipment, such as excavators, tractors and forklifts, to customers in the agribusiness, mining and infrastructure sectors, is showing solid demand for heavy machinery following positive bank reviews throughout May on expected GDP trends for the year. New contracts signed in the first quarter should add revenue of 80 million reais (US$ 16.2 million) in the coming quarters, according to a report by Itaú BBA, retaining its “outperform” recommendation for Armac’s stock, which accumulated a gain of 34.5% in the year to May 26 versus Ibovespa’s high of 1%.

6. Totvs (TOTS3)

Totvs posted a good result in the first quarter of 2023, with an adjusted net income of R$116.7 million (US$23.6 million), 12.7% higher than the same period last year —which, according to XP Investimentos and Bank of America (BAC), places the company’s shares as one of the best performers in the technology sector so far. Totvs recently announced the acquisition of Lexos Soluções em Tecnologia, a company focused on integration solutions for physical and virtual retail, marketplaces and e-commerce. It will also have a strategic partnership between RD Station and Shopify in Brazil, which should expand the brand’s presence in the SME segment. These initiatives should be consolidated in the second half of the year.

7. Ada

Startups in the education area (edtechs) already represent one out of every six startups in the country, according to Abstartups (Brazilian Startup Association). One of those that is standing out is Ada, formerly known as Let’s Code, renamed in honor of Ada Lovelace, the first computer programmer in history. The edtech founded by Felipe Paiva, a former Credit Suisse executive, offers biannual programming courses for individuals focusing on employability and companies in general, and aims to reach the mark of 20,000 graduates by 2025. It serves large companies in the country, mainly in the financial sector, and has already been valued at 100 million reais (US$20.3 million), according to market sources who spoke to Bloomberg Línea under the condition of confidentiality.

8. Plamev Pet

Brazil is the sixth largest pet market in the world, with revenues of 42 billion reais (US$8.524 billion) in 2022, according to Abinpet, the pet products industry association. Investors such as FIR Capital, Health Invest, Duxx Invest, CTC Participações and VS1 Capital were attracted to Plamev Pet, a platform that offers examinations and preventive care for dogs and cats. The company plans to list shares on BEE4, a tokenized exchange for startups. Based in Minas Gerais with a footprint in eight states, the company plans to quadruple its gross revenue from R$19.6 million (US$4 million) by 2024, following in the footsteps of industry leaders such as Petz (PETZ3), PetLove and Cobasi.

9. Nude

This company produces oat-based milk and was valued at 125 million reais (US$ 25.3 million) in an investment round in January 2022. Nude sells its product in large supermarket chains, in addition to partnerships with 500 coffee chains, such as The Coffee. The startup plans to expand the business to other Latin American countries. Demand for oat-based products has grown in recent years and is expected to reach a global value of almost 11 billion reais (US$2.232 billion) in 2026, according to estimates by Market Research Future.

10. Abstra

The popularity of Artificial Intelligence (AI) since the advent of ChatGPT draws the attention of investors to startups and companies that can create businesses and gain efficiency in their operations. This is the case of Abstra Cloud, a startup founded by Bruno Vieira Costa in March 2020 in Rio de Janeiro that offers a tool that enables developers to create apps without programming. In January 2022, the startup raised US$2.3 million in a round led by SoftBank Latin America Fund and subsequently became part of Upload Ventures’ portfolio. More recently, it has added an AI-powered assistance tool to the platform to generate insights for users.