A sharp decline in the equity market could be music for long-term
investors. This isbecause the offloading is due to market-specific
reasons and not due to company-specificfactors. The sweeping selling
could be a good time to pick quality stocks at reasonableprices. Thus,
such a market situation could be a buying opportunity.If
the market goes into panic mode, investors should be ready with a list
of goodquality stocks. Probably that is the crucial lesson investors
should learn from theoffloading that the market witnessed post Lehman
Brothers’ bankruptcy in September2008. During that period, several
companies were available at very low prices.
There is
no dearth of good quality stocks. There are over 2,000 stocks that
areactively traded on the BSE. Out of these, investors can narrow down
their favorites toform a watch-list. This portfolio of stock can be
referred to in case the market witnessespanic selling.Indeed,
for several stocks with strong financial track record, the current
gloom is aphase that will pass. Companies have withstood bad times in
the past and will survive suchsituations in future as well. This
optimism is not unrealistic at all. It is derived fromfacts and figures.
At GDP growth rate of 5-5.5%, India will still be among the
bestperforming economies in the world.
According to
estimates provided by the International Monetary Fund (IMF),
India’seconomy is likely to grow by 5.6% in FY 2013 and 6.3% in FY 2014.
Very few countries areexpected to outperform India. One of them is
China, with 7.8% growth projected in CY 2013and 7.7% in CY 2014.
Advanced economies, which include US, euro countries, Japan, the UK,and
Canada are estimated to grow at 1.2% in CY 2013 and 2.1% in CY 2014. The
emergingmarket and developing economies are forecasted to grow at 5% in
CY 2013 and 5.4% in CY2014. Essentially, India will be among the very
few to shine on the global economic map.Several
problems on the political, economic and social fronts are of grave
nature atthe moment. However, the simple analogy is if India can grow
at, say 5% and above, despitethese issues, it can accelerate its
economic growth substantially on the advent ofreforms.
To prepare a shortlist of quality stocks, Capital Market
picked 15 companiesfrom 15 sectors. These companies basically stand out
among their peers based on ratiossuch as return on equity (RoE) and
return on capital employed (RoCE). Also, track recordin terms of payment
of dividend has been looked at. Last, the growth in the top line
anddebt on the balance sheet was given due weightage. Financials of the
last 10 years werelooked at to ensure that the solid performance is not
an aberration. The attempt was notto pick industry leaders but well
managed companies within the industry.
Incorporated in 1948, Great Eastern Shipping Company (GE Shipping) is
thecountry’s largest private sector shipping company. It has total
capacity of 2.5million dead weight tonnes, with a fleet of 31 including
22 tankers. The average age ofits fleet is less than 10 years
Subsidiary
Greatship (India) is India’s largest offshore oilfield
servicesproviders by revenue. Offering offshore logistics and drilling
services, Greatshipoperates four platform supply vessels, nine anchor
handling tug-cum-supply vessels, twomultipurpose platform supply and
support vessels, six multipurpose platform supportvessels, and three
jack-up rigs.
At the consolidated level, shipping
contributes 59% and offshore 41% to GEShipping’s top line. However, it
is the offshore business that is more profitable andcontributed 65% to
the segment profit in FY 2013
Apart from a good
corporate governance record, consistency in profit makes GE Shippingthe
best pick within the shipping industry, which is highly sensitive to
internationaltrade and global economic health. Also, the firm is liberal
in dividend payouts. At thecurrent level, it offers a reasonably high
dividend yield of 3.1%.
EID Parry (India)
is among the best bets on the sugar industry on the parameter
ofconsistency in profit. The Murugappa group company is the largest
sugar producer in thesouthern market and also features among the top
five sugar makers in the country. Itmarkets its sugar under the brand
Parry’s. The nine sugar factories are spread acrossthe southern market
of Tamil Nadu, Puducherry, Andhra Pradesh, and Karnataka. It
hasthroughput sugarcane capacity of 32,500 tonnes of cane crushed per
day, co-generationcapacity to 146 MW, and distillery capacity to 230
kilo liters per day.
EID also makes bio-pesticides and
nutraceuticals. With manufacturing base located inTamil Nadu, the
company exports nutraceuticals to 38 countries. Subsidiary
CoromandelInternational, a listed firm with market value of Rs 4800
crore, manufactures fertilisersand chemicals. On the flip side, like its
peer in the sugar industry, EID is indebted withdebt-to-equity ratio
1.4 times.
Axis Bank, the third largest
private sector bank in the country, is available at areasonable price-
to book value ratio among the set of new-age private sector
banks.Revenue jumped by almost four times and profit five times in the
last five years. With abalancesheet size of Rs 340561 crore end FY 2013,
the bank has achieved consistent growthwith a five-year CAGR of 26% in
assets, 24% in deposits and 27% in advances.
Axis is
jointly promoted by erstwhile Unit Trust of India along with Life
InsuranceCorporation, General Insurance Corporation, National Insurance
Company, New IndiaAssurance Company, Oriental Insurance Company, and
United India Insurance. Startingoperations in 1994, the bank offers
banking services to customer segments covering largeand mid companies,
small and medium enterprises, agriculture and retail businesses
With
2,021 branches including extension counters and 11,488 ATMs across the
country,Axis’s network is spread across 1,300 cities and towns. It has
overseas offices inthe UK, Singapore, Hong Kong, Shanghai, Colombo,
Dubai and Abu Dhabi.
With 63 tea estates and 62 processing factories in four countries, McLeod RusselIndia
is the world’s largest producer of tea in the private sector. It has
38,758hectares of land area under tea cultivation, with 48 tea estates
in Assam, five in WestBengal, three in Vietnam, six in Uganda, and one
in Rwanda. With output of 102 millionkilogram of tea in FY 2013,
production accounts for 8% of tea produced in the country and2% of the
world’s tea production.
McLeod is mainly into crushed,
torn and curled teas, which comprise 90% of production.The orthodox
variety contributes the remaining. The company has established a tea
blendingfacility at Nilpur, Assam, to cater to the increasing demand for
bespoke blends. It isamong the least leveraged in the industry, with a
debt-to-equity ratio of mere 0.20 times.
McLeod exports
to 23 countries and markets its tea under the Elephant Trademark
inoverseas market. Exports contributed 36% to its revenue in FY 2013. In
FY 2011, itestablished a subsidiary, McLeod Russel Middle East, in
Dubai to serve as a marketing hub.It acquired 60% equity stake in
Rwanda-based Gisovu Tea Company in February 2011.
Among tyre companies, Balkrishna Industries
scores on parameters of operatingprofit margin, net profit margin, and
RoE due to the focus on off-highway specialty tyres.Its tyres find
application in agriculture, manufacturing, material handling,
construction,earthmoving, forestry, garden equipment, and all terrain
vehicles.
The product portfolio consisting of over
2,000 stock keeping units can be categorizedas low-volume, high-price.
Manufacturing plants are located at Bhiwadi and Chopanki inRajasthan,
Aurangabad and Dombivli in Maharashtra, and Bhuj in Gujarat.
Balkrishna
exports to 120 countries and 90% of the revenue comes from exports to
the USand Europe. The present capacity of 1.66 lakh tonnes per annum
(tpa) is to be enhanced to2.76 lakh tpa by FY 2015. Capacity expansion
at the Bhuj plant is in progress. The revenuetarget is US$ 1 billion by
FY 2015. The guidance is sales of 1.45- 1.5 lakh tonnes in thecurrent
fiscal compared with 1.38 lakh tonnes in FY 2013 and 1.33 tonnes in FY
2012.
EIH reported a five-year low Rs 44
in August 2013. At the current market price ofRs 48.3, the stock is
trading close to its book value of Rs 41.5. The hotel industry
isstruggling due to economic slowdown and low business confidence. The
company stands outamong its peers with its low debt-to-equity ratio of
0.27 times in FY 2013.
Operating hotels and cruisers in
five countries under the brands Oberoi and Trident,EIH also undertakes
flight catering, and management of airport restaurants, travel andtour
services, car rentals, projects and corporate air charters.
Two
properties will be launched in the current year. One will be based in
Dubai (252keys) and another in Hyderabad (326 keys). Environmental
clearance is being sought for a55-acre beachfront site in Goa. Work on
the blueprint has started for three new propertiesin Bangalore (250
keys), at Pune (126 keys), and at Navi Mumbai (160 keys). Constructionis
expected to commence shortly at the Navi Mumbai site.
Oberoi Realty
stands out in the real estate sector, which is reeling under heftydebt,
with its clean balance sheet with zero debt. Cash and liquid
investments were ahealthy Rs 874 crore end June 2013. A portion of this
will be used to acquire land forfuture projects.
Headquartered
in Mumbai, Oberoi develops residential, office, retail and
hospitalityspace and social infrastructure. Total land bank consists of
20 million square feet, 90%of which is based in Mumbai and its suburbs
Till date, 36 projects have been completedacross Mumbai. Some of them
include Oberoi Garden City at Goregaon, Oberoi Splendor atAndheri East,
and Oberoi Exotica at Mulund. The Mulund project is stuck owing
toenvironmental clearance issues and a legal suit is pending in the
Supreme Court. OberoiMall, the rent-yielding asset, is nearly 100%
occupied. Since its listing in October 2010,the Oberoi stock reported an
all-time low of Rs 158.4 in August 2013.
Holcim group company ACC
has a strong balance sheet and steady RoE and RoCE.Indeed, it is a
zero-debt company considering the cash balance. Lately, work has
startedon the Jamul in Chhattisgarh expansion project, which will add
five million tpa (mtpa) ofcapacity. To be completed in a phased manner
by 2015, the Rs 3300-crore project will befunded through internal
accruals.
Established in 1936, ACC’s operations are
spread across India with 17 factories,40 ready mix concrete (RMC)
plants, 21 sales offices, and over 9,000 dealers. Productionwas 24.12 mt
in CY 2012 and 23.46 mt in CY 2011. Capacity utilisation was 79% in CY
2012.The RMC business declined 16% in volume in CY 2012 over CY 2011 due
to slowdown inconstruction activities. Wind power stations are located
in Rajasthan, Tamil Nadu, andMaharashtra.
Despite its market share under threat from erstwhile partner Honda of Japan, HeroMotoCorp
continues to post healthy numbers, reporting RoE of 40.7% and RoCE of
37.5%in FY 2013. Further, the debt-to-equity ratio remained low at 0.15
times and the dividendpayout ratio healthy at 62.5% last fiscal.
The
world’s largest two-wheeler motorcycle manufacturer by volume commands a
46%market share in the domestic market. The range of two wheelers
includes over 19 differentproducts in the bikes and scooter categories.
Manufacturing plants are one each at Gurgaonand Dharuhera in Haryana and
one at Haridwar, Uttarakhand. The combined installed capacityis around
6.9 million units.
With 5,800 touch points across the
country and access to over one lakh villages, Herois expanding capacity
at existing plants and is setting up a fourth plant at
Neemrana,Rajasthan, with capacity of 7.5 lakh units, and a fifth plant
at Halol, Gujarat, withcapacity of 1.8 million. The company is
aggressively looking at overseas market to jack uprevenue.
The Aditya Birla group company Grasim Industries
runs two business segments ofviscose staple fibre (VSF) and chemicals.
The VSF manufacturing capacity is 3.77 lakh tpa.Lately, expansion of
capacity of the Harihar plant in Karnataka was completed. The
AdityaBirla group is the world’s largest producer of VSF, with a market
share 21%, whileGrasim commands a share of 9%. VSF is used in apparels,
home textiles, dress material, andknitted wear.
In the chemical segment, Grasim is the second largest producer of caustic soda in thecountry. Also, capacity of the Vilayat, Gujarat, chemical plant has been expanded. Causticsoda is used to produce VSF. Subsidiary UltraTech Cement, with capacity of 53.9 mtpa, isthe country’s largest cement manufacturer.
Going forward, Grasim will be
spending Rs 17951 crore on capital expenditure. Of this,UltraTech will
take up a large chunk of Rs 13728 crore, while the remaining will
beconsumed by the VSF and chemicals businesses. At the current market
price of Rs 2441.6crore, the Grasim stock is at a striking distance to
its BV of Rs 2136.5 crore.
Public sector Steel Authority of India
is available at 60% discount to BV. Thegovernment divested 5.8% of its
equity stake through offer for sale at Rs 63 per share inMarch 2013. At
present, the stock is available below this price as well.
After
completion of the ongoing expansion, annual capacity will increase from
12.4 mtpato 20.2 mtpa. Though scheduled for completion by end of FY
2014, the expansion is likelyto be delayed.
The integrated iron and steel maker with five plants and three special steel plants isthe second largest producer of iron ore in the domestic market and owns the second largestmine network. Iron ore is the key raw material for making basic and special steels forindustries such as construction, engineering, power, railway, automotive, and defence. Hotand cold rolled sheets and coils, galvanised sheets, electrical sheets, structurals,railway products, plates, bars and rods, stainless steel and other alloy steels are alsomanufactured. The sales network consists of 37 branch offices, 25 warehouses, 42consignment agents and 2,000 dealers along with 4.85 million retail outlets.
Incorporated in 1937, Colgate-Palmolive (India)
is the market leader in theoral-care segment, with a share of over 50%.
The debt-free firm reported RoE of over 100%during the last two years
and even higher in prior years.
Product range includes
toothpastes, toothpowder, toothbrushes and mouthwashes. Popularbrands
include Colgate Dental Cream, Colgate Active Salt, Colgate Total, and
Colgate MaxFresh. Personal-care products are sold under the Palmolive
brand. With 100 millionfamilies as users, fresh facility to manufacture
toothpaste is coming up in Gujarat andfor toothbrush in Andhra Pradesh.
United Phosphorus (UPL) is
the twelfth largest agrochemical company in theworld and the sixth
largest generic agrochemical company by sales. It makes
fungicides,insecticides, herbicides, rodenticides, fumigants, plant
growth regulators, agrochemicalsand chemicals including industrial and
specialty. Established in 1969, the world’slargest producer of
agrochemicals such as Mancozeb, Aluminium Phosphide,
Devrinol,Cypermethrin and Monocrotophos has manufacturing facilities in
23 international locations:nine in India, three in France, two in
Argentina, and one each in Vietnam, Colombia, TheNetherlands, Italy,
Spain and China.
Over the last decade, 17 companies were
acquired. Operating through 88 globalsubsidiaries in 41 countries with
marketing presence in 120 countries, UPL has witnessedan impressive rise
in turnover over the last five years. It has given guidance of
12-15%growth in revenue in the current fiscal, with improvement in the
margin.
A consistent and high dividend payout ratio and robust growth in turnover are the twokey features of Tamil Nadu Newsprint & Papers (TNPL). Conscious
aboutfuture growth, a plant to manufacture multilayer double coated
board plant with capacityof two lakh tpa at a cost of Rs 1200 crore is
coming up at Trichy, Tamil Nadu. Completionis to be by March 2016.
The
Tamil Nadu government-owned TNPL started production in 1984, with
capacity of90,000 tpa. Gradually, production was enhanced to four lakh
tpa. The largest bagasse-basedpaper mill in the world, consuming about
one million tpa of bagasse, exports around 20% ofits output. Power
generation capacity is 35 MW. A sharp rise in debt over the year is
amajor concern.
Started in 1967 in collaboration with erstwhile Great Lakes Carbon Corporation, US, GraphiteIndia,
has six manufacturing facilities in India, with an aggregate
electrodemanufacturing capacity of 80,000 tpa. The 100%-owned Graphite
COVA GmbH at Nuremberg,Germany, houses electrode and specialty
manufacturing facilities, with electrode capacityof 18,000 tpa. Graphite
is among the top electrode producers in the world.
Apart
from graphite electrodes, other products include specialty carbon and
graphiteand impervious graphite equipments, calcined petroleum coke and
carbon electrode paste,and glass reinforced plastic pipes. Also, there
is captive power generation capacity of 33MW. With price to book value
(BV) ratio of 0.66, the Graphite India stock is available ata
significant discount.
Conclusion
Though
several parameters have been looked at, the companies that have emerged
are nota result of application of uniform filters to the database.
Thus, there is some amount ofdiscretion used in picking these stocks.
Invariably, there could be more than one companyin a particular industry
that can be explored for investment. These firms are among thebest in
their industries and, thus, could be the first to bounce back when the
tide turnsfor the better.
Broadly, these companies can
be classified into two categories. The first group hasalready witnessed a
correction. The second bunch has remained firm and the correction
seenso far is limited. Investors may monitor the second category of
stocks. EIH, OberoiRealty, EID Parry and Grasim have reported correction
in recent past. Thus, there could bevalue-buying opportunities. For
instance, EID Parry has plunged below its book value (BV).Similarly,
there are other stocks that are trading close to their BVs.
The
nature of business and the business model has also been given
importance whilepicking these stocks. McLeod is the world’s largest
producer of tea and haswell-established businesses world over that are
not easy to replicate. Similarly,UltraTech is the country’s largest
cement maker. What’s more, parent Grasim is adominant player in VSF.
Thus,
each of these companies has some special attributes. Axis Bank is on a
seculargrowth path and the trend of the past is likely to continue, with
hiccups such as thecurrent economic slowdown. A few companies like
Grasim, GE Shipping, ACC, EIH andBalkrishna are in the business for
decades. Their expertise and experience are invaluable.Moreover, these
companies can easily overcome industry- and economy-specific
challenges.This is not the first time these companies have been put to
test.
Companies such as Grasim, EID and GE Shipping
have embedded businesses that arevaluable and also provide protection
from downside. These divisions are seldom fullydiscounted in the
valuation of the parent company. Though a negative factor, the good
partis these strategic investments can be a bonanza whenever unlocked.
Last, and important, several of these firms are optimistic about future. Grasim wouldbe investing almost Rs 18000 crore in expansion and new facilities. Hero MotoCorp isramping up capacity 37%. ACC and Balkrishna, too, are enlarging production facilities.Despite industry headwinds, EIH is spreading. These actions indicate that the presentgloom is a temporary phenomenon. Investors could base their investment decisions on thisoptimism. The present bear season, thus, presents an opportune time to pick stocks atbargain prices.
|
Season’s sale
|
||||||||||||||||
|
Companies standing out based on
RoE and RoCE and track record of payment of dividend over the last decade
|
||||||||||||||||
|
Company
|
CMP
|
M-Cap
|
52-Week
|
Year
|
Net
|
ROCE
|
RONW
|
Total
|
Debt-
|
TTM
|
Chg in
|
BVPS
|
P/BV
|
DY
|
P/E
|
|
|
(Rs)
|
(Rs cr)
|
High
|
Low
|
End
|
worth
|
(%)
|
(%)
|
Debt
|
Equity
|
Ended
|
TTM
|
(Rs)
|
(%)
|
|||
|
(Rs)
|
(Rs)
|
(Rs cr)
|
(Rs cr)
|
Ratio
|
PAT (%)
|
|||||||||||
|
ACC
|
1160.6
|
21790.3
|
1515
|
1106.8
|
201212
|
7372.4
|
22.4
|
17
|
163.1
|
0.05
|
201306
|
0.39
|
392.7
|
2.96
|
2.6
|
18.3
|
|
Axis Bank
|
1144.1
|
53658.2
|
1549
|
926.9
|
201303
|
33158
|
0
|
18.7
|
296254
|
0
|
201306
|
22.04
|
707
|
1.62
|
1.6
|
9.9
|
|
Balkrishna Industries
|
215
|
2077.5
|
317.9
|
199
|
201203
|
1110.1
|
17.8
|
27.3
|
1709.2
|
1.18
|
201306
|
34.92
|
149.3
|
1.44
|
0.7
|
5.4
|
|
Colgate-Palmolive
|
1352.8
|
18397.4
|
1580.4
|
1160
|
201303
|
489.6
|
133.7
|
107.4
|
0
|
0
|
201306
|
21.81
|
36
|
37.58
|
2.1
|
32.6
|
|
EID Parry
|
112.8
|
1983
|
256.9
|
103
|
201303
|
2427.6
|
11
|
10.8
|
5198.5
|
1.46
|
201306
|
-29.22
|
138.1
|
0.82
|
5.3
|
8.4
|
|
EIH
|
48.5
|
2772
|
83.3
|
43.3
|
201303
|
2369.1
|
5.3
|
2.5
|
744
|
0.27
|
201306
|
-55.28
|
41.5
|
1.17
|
2
|
53.2
|
|
Graphite India
|
69.8
|
1363.9
|
96.9
|
57.6
|
201303
|
1711.9
|
10.5
|
8
|
743.3
|
0.4
|
201306
|
-33
|
87.6
|
0.8
|
5
|
8.4
|
|
Grasim Industries
|
2441.6
|
22413.4
|
3511
|
2343
|
201303
|
19614
|
15
|
13.6
|
9561.4
|
0.34
|
201306
|
-0.67
|
2136.6
|
1.14
|
0.9
|
8.6
|
|
Great Eastern Shipping
|
244.5
|
3724.2
|
291.5
|
199.3
|
201303
|
6341.8
|
6
|
6.3
|
6739.3
|
1.06
|
201306
|
79.65
|
416.3
|
0.59
|
3.1
|
6.2
|
|
Hero MotoCorp
|
1941.6
|
38773.8
|
1963
|
1434.1
|
201303
|
5006.2
|
37.5
|
40.7
|
641.6
|
0.15
|
201306
|
-15.78
|
250.7
|
7.75
|
3.1
|
18.9
|
|
Mcleod Russel India
|
279.8
|
3062.1
|
387
|
258.2
|
201303
|
1392.5
|
23.1
|
21.7
|
248.7
|
0.2
|
201306
|
15
|
127.2
|
2.2
|
2.5
|
13.2
|
|
Oberoi Realty
|
191.5
|
6284
|
327.7
|
158.4
|
201303
|
4162.1
|
17.1
|
12.8
|
0
|
0
|
201306
|
10.46
|
126.8
|
1.51
|
1
|
12.4
|
|
Steel Authority of India
|
44.4
|
18318.9
|
101.6
|
37.7
|
201203
|
40273
|
10.2
|
9.2
|
17361
|
0.49
|
201303
|
-38.74
|
99.5
|
0.45
|
4.5
|
8.4
|
|
Tamil Nadu Newsprint
|
89.9
|
621.9
|
121.8
|
86
|
201203
|
970.7
|
6.4
|
4.8
|
1733.8
|
1.71
|
201306
|
4.85
|
149.6
|
0.6
|
5.6
|
5.5
|
|
United Phosphorus
|
148
|
6734.7
|
167.5
|
107
|
201303
|
4645.2
|
15.5
|
15.9
|
4203.3
|
0.82
|
201306
|
36.61
|
102.1
|
1.45
|
1.7
|
8.6
|
source: capital market
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