Investors consider it auspicious to buy equity shares during Diwali— especially on Laxmi Pujan day. To meet this demand, stock exchanges organise Muhurat trading every year and this year’s event will take place on Sunday, 27 October, 2019. One may ask if it is safe to mix religion with investing. It is, provided you follow the principles of investing religiously. One such principle states that in order to make money from the stock market over the long term, investors should buy fundamentally sound stocks only. So, we look at a clutch of such stocks that you can consider buying this year.
How were the stocks chosen? First, we collected top picks from several research houses. It is easy to ‘manage’ the results of unlisted companies and it usually takes at least a year to start getting normalised results. So we selected only stocks that have completed a year of trading history. Since a minimum return is needed for a year’s holding, we also dropped the recommendations with less than 15% upside potential from current market price. Given below is the final list of stocks we finally arrived at. No special preference has been given to any particular stock.
- Axis Bank
Axis Bank, India’s third largest private bank, is witnessing steady normalisation of earnings. Despite its exposure to stressed assets that led to its gross NPA hitting 6.8% in 2017-18, its asset quality is now manageable and its gross NPA ratio is expected to be around 4% by 2020-21. In addition to taking strong measures to recover loans, Axis Bank’s focus on strengthening its loan portfolio of SMEs will also improve the asset quality matrix. Due to reduction in NPA write-off and reversal of bad loans written off earlier, Axis Bank is expected to report 50% plus annualised net profit growth between 2018-21. Its recent raising of capital shows it is keen on future growth with strong fundamentals.
- Berger Paints
The paints industry has been on a structural upswing the past few years. With the trend continuing, the industry is expected to outperform other building material and consumer goods segments in the coming years. In addition to penetration in smaller cities, reduction in gaps between repainting is also helping players like Berger. Due to new dealer additions and increase in sales force, Berger is equipped to capitalise on this emerging growth story. Research houses are getting bullish on the counter because technical factors are also in its favour. For example, recently the stock moved out of its 11 month consolidation and is on a sharp upswing now. Historically, Berger has generated good returns after breaking out of a consolidation range and the same is expected this time also.
- Deepak Nitrite
Deepak Nitrite enjoys a leading market position in basic chemicals, fine & speciality chemicals and performance products in the domestic and global markets. Due to supply side challenges, price of diamino stilbene sisulfonic acid (Dasda) is on an upswing now and this should help Deepak Nitrite report strong numbers by its performance products division in the coming quarters. Despite having a number of plants in several states, most are working at high capacity utilisations, helping Deepak Nitrite show improved profitability. Its integrated business model—Deepak Nitrite plans to use around 30% of its upcoming phenol and acetone capacity for captive consumption to produce derivatives—is another driver for better margins.
- Fairchem Specialty
It is a speciality oleochemicals manufacturing company and now has the combined strength of its former merged entities (Adi Finechem and Privi Organics). Among the 65 products it manufactures, its main products are mixed tocopherols, sterols, linoleic acid, monobasic acid and dimer acid for polyamides and printing ink industry. Though it is a small company working in a niche area, Fairchem is the largest aroma chemical manufacturer in India and the second largest pine tree fragrance manufacturer in the world (market share of 20-25%). Privi Organics has been supplying to the top 10 global fragrance companies for over 10 years and has direct relationships with global FMCG giants like P&G, Henkel etc. Though the demand for flavours and fragrances products is fairly mature in developed countries, there is potential for growth in emerging markets like China, India, Middle East, Latin America, etc. Since Fairchem has spare capacity in existing products lines, it should be able to manage its future growth without straining its balance sheet.
- HDFC Bank
Despite the recent share price rally and increased valuation ratios, research houses continue to bet on HDFC Bank due to its retail focus, strong positioning, large branch network, healthy balance sheet, superior asset quality and efficient management. Strong retail banks like HDFC Bank should be able to gain further market share, especially from the space vacated by NBFCs. To benefit from this situation and also increase loan book growth, HDFC Bank is focusing on deposit mobilisation, which is good for its long-term growth. One can expect HDFC Bank to continue to deliver consistent growth with margin leadership and robust return ratios.
- ICICI Bank
Among corporate based banks, maximum earnings turnaround are expected from State Bank of India, ICICI Bank and Axis Bank, mostly because of the aggressive recognition and write down of stressed loans. For example, ICICI Bank’s net stressed loan (excluding NPA) has declined to 2.9% now, while its provision coverage ratio (PCR) has improved to 74.1%. Asset quality improvement is also happening because of its aggressive loan recovery strategy and increasing share of its retail loan mix, which is placed above 60% now. Despite some actions by government and RBI, second rung NBFCs are still facing liquidity crunch and this is helping banks with wide branch networks like ICICI Bank to increase market share of retail loans. Wide branch networks also help banks to have high retail mix on their deposit side as well. For example, ICICI Bank’s share from current and savings accounts (CASA) is now placed comfortably around 43%. The overall fall in interest rate and credit cost moderation is good for banks and this should help strong players like ICICI Bank to improve their return on equity further.
- Pidilite Industries
Pidilite Industries, the manufacturer of Fevicol, is the largest adhesive company in India. Due to its well-accepted brands in the consumer space, Pidilite was able to show strong revenue growth in the past. Increasing dealer network and reaching out to smaller towns is the cornerstone of Pidilite’s growth strategy. This explains how Pidilite is able to maintain its revenue growth despite the ongoing construction slowdown. Pidilite has also been able to increase its operating margins by 700 bps during the past 10 years. Conscious management efforts like launching new products to leverage power brands, cost control measures, increasing manufacturing and marketing efficiency, etc helped Pidilite achieve this margin improvement. The recent reduction in corporate tax rates will also benefit companies like Pidilite.
- Larsen & Toubro
While smaller capital goods and infrastructure players are struggling now due to the ongoing macroeconomic slowdown, strong players like Larsen & Toubro are benefitting from it. In addition to the customer preference of staying with stronger players in an environment like this, Larsen & Toubro has also been able to corner market share from the space vacated by medium sized players. Continuing order inflow suggests that Larsen & Toubro should be able to achieve its order inflow guidance of 10-12% for 2019-20. Due to its strong order book and faster execution, there is clear visibility for earnings in coming years. Its return ratios are also expected to improve in coming years because of the focussed actions by the management on cost reduction and working capital management. For example, its ROE is expected to cross 18% by 2020-21. More importantly, this counter is now trading at a discount to historical valuation averages.
All index values normalised to a base of 100. Compiled by ETIG