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'Fall in valuation, opportunity for investment but be selective'

Early indication suggests 4-6 weeks of near-complete washout of corporate earnings. Household and business stress implies a very difficult situation even for Indian financials.

March 26, 2020 / 07:39 AM IST
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Vineeta Sharma

The stock market is seeing severe dislocation in terms of valuation. What has triggered this is the inability of market participants to quantify the impact of COVID-19-related economic damage.

While short term impact on companies’ earnings is obviously negative, there are fears that this pain would last longer as consumer confidence and supply chain disruption particularly global will take a lot of time to recoup.

Short term recovery is dependent on when we get over this lockdown phase, the medium-term recovery speed would depend on how much of policy push comes from monetary and fiscal authorities.

Overseas investors particularly those that are part of emerging market ETFs withdrew a net sum of Rs 55,599.91 crore from equities between March 2 and March 24 far ahead of domestic inflow that comes in this short span of time triggering over 30 percent fall in Indian equities.


Early indication suggests 4-6 weeks of near-complete washout of corporate earnings. Household and business stress implies a very difficult situation even for Indian financials. Though we believe once some quantitative clarity emerges in terms of the extent of the damage there would be coordinated efforts by the government and others.

But the sharp fall in valuation also is an opportunity for prudent long term equity investors. Idea is to identify businesses where long term competitive moat exists, the balance sheet is strong to tide short term pain and there is a secular business growth potential for the future. Some of the shares that can be accumulated are:


Over the last ten years, PSU banks have lost market share to more nimble and better managed private banks from 81 percent in 2009 to 66 percent in 2019. Private Bank Rural Market share is 15 percent while the Urban market share is 33 percent. We remain confident that there is more room for Large scale Private banks to take away PSU’s market share as the formalisation of the economy increases.

HDFC Bank has continued to gain market. Its deposit market share has reached to 7.3 percent in FY19 from 5.1 percent in FY15. However, its incremental deposit market share gain was 9.1 percent (highest in the industry) during the same period.

Currently the bank is focused to tap the rural opportunity offering retail products and banking services to the citizens across the country. At the price of Rs 800, the company presently trades at 2.6 times FY20 BV.


The Indian retail apparel industry is highly unorganised. Trent runs retail stores - Westside, Zudio, Star, Landmark, Zara and Massimo Dutti. The company has over 97 percent own brand portfolio for Westside which is the largest contributor to revenues.

Led by differentiated product offerings and store experience, Trent has accelerated the store expansion program in FY19 and operates more than 270 stores across 70 cities in India.

Trent revenues are expected to grow at 25 percent CAGR for the next 3 years. Trent’s strong balance sheet, strong business positioning and stores expansion plan makes it attractive for long term investment. The company presently trades at 4 times EV/Sales.

Apollo Hospitals

Apollo Hospitals is the largest hospital network in India with 70 hospitals with over 10,000 beds and doctors each. The healthcare services comprise 55 percent of the revenues. The pharmacy chain has 3,428 outlets across 20 states and 4 union territories and comprises 39 percent of the revenues.

The other business contributes 6 percent of the revenues. Apollo is highly competitive compared to other destinations for medical tourists while offering similar standards and quality care at a substantially lower cost (around 65-90 percent savings versus the US).

The company plans to bring down the debt to about Rs 2,500 crore (net debt/EBITDA <2.5x) post completion of the pharmacy restructuring exercise. We expect the healthcare business to grow at a CAGR of 12 percent and the pharmacy business to grow at a CAGR of 17 percent for the next 3 years leading to sustained margin expansion and ROCE improvement. The company presently trades at 1.78 times FY20 EV/Sales.

Tata Elxsi

Tata Elxsi offers electronic, software development and system design services to automotive and aerospace industries. The company works with leading car manufacturers and suppliers, in developing electronics and software for powertrain, infotainment, connectivity, active safety, and comfort and convenience.

The software which comprised 2 percent in the total value of the car in 2002 has reached 10 percent and is expected to reach 40 percent by 2030.

The company has also diversified into medical business which will be fastest-growing segment within Tata Elxsi. It now contributes 8 percent and growing at double-digit QoQ. We expect in the next two years, it will at least contribute 22 percent of overall revenue.

The company has cash balance of Rs 500 crores in the book and are planning to go for M&A. At the price of Rs 541 per share, the company trades at 15 times FY20 E EPS which is the lowest multiple in the last decade.


Penetration of mutual fund products in India is only a fraction of the global average. Mutual Fund industry is well-poised for strong growth due to rising awareness amongst investors. Also, rising penetration of the internet and smartphones is contributing to the ease and speed of financial services in India.

Promoted by Housing Development Finance Corporation Limited (HDFC) and Standard Life Investments Limited (“SLI”), HDFCAMC has strong corporate governance and is built on the trust of investors.

HDFCAMC is India’s largest and most profitable mutual fund manager with Rs 3.8 trillion in assets under management. The company has huge operating leverage as most of the costs are fixed.

At the price of Rs 2,155 the company is trading at 12 percent of the total current AUM. Secular business growth ahead and efficient operation makes it an investment candidate.

(The author is Head of Research at Narnolia Financial Advisors.)

Disclosure: Narnolia Financial Advisors/Analyst (s) does/do not have any holding in the stocks discussed but these stocks may have been recommended to clients in the past. Clients of Narnolia Financial Advisors Ltd. may be holding aforesaid stocks. The stocks recommended are based on our analysis which is based on information obtained from public sources and sources believed to be reliable, but no independent verification has been made nor is its accuracy or completeness guaranteed. The views expressed in this research report accurately reflect the personal views of the analyst(s) about the subject securities or issues, and no part of the compensation of the research analyst(s) was, is, or will be directly or indirectly related to the specific recommendations and views expressed by research analyst(s) in this report.

Disclaimer: The views and investment tips expressed by investment expert on are his own and not that of the website or its management. advises users to check with certified experts before taking any investment decisions.
Moneycontrol Contributor
first published: Mar 26, 2020 07:39 am

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