Kshitij Anand Moneycontrol News
Indian market has seen steep fall in the past month. Both Sensex and Nifty suffered losses in low teens and the carnage was also visible in individual stocks, especially in the small & mid-cap space.
Stocks in the large-cap space corrected but the fall was not as steep as in the mid & small-cap stocks. After the recent correction, investors are out with their shopping bags as most stocks are now available at a steep discount.
But, are all stocks quality buys? Maybe not. Investors should use quality parameters in shortlisting stocks after the recent correction, suggest experts.
Elara Capital did an internal analysis of stocks from 2004 to 2018 and the short-term analysis of fundamental factors reveals that during periods of market uncertainty, quality stocks outperform significantly.
Investors got spooked by liquidity crunch in the debt market amid the challenging global and domestic macro environment such as depreciating rupee, spiraling crude prices and trade war.
“Changed macros was chiefly responsible for the D-Street mayhem. Higher input costs, rising cost of funds, higher fuel prices, depreciating INR will hurt margins and profitability of domestic-focused companies down the line,” Dharmesh Kant – Head Retail Research, IndiaNivesh Securities told Moneycontrol.
“Reduced spending by the government, deteriorating fiscal position and upcoming general elections do not augur well. It’s better to sit tight and observe events unfold till any semblance of INR/Crude price stability or reversal is seen,” it said.
In times of uncertainty and volatility, it makes sense for investors to stick to stocks which offer value or in other words are quality stocks and at the same time reduce their exposure to high beta stocks. So what are quality stocks?
Stocks with a combination of fundamental factors, such as high and consistent ROCE (return on capital employed), increasing or stable operating margin, positive free cash flow and low leverage, qualify as quality stocks.
Extending the analysis to BSE 200 (ex. Financials), Elara Capital highlights that the percentage of stocks with P/E of less than 15 has increased from 25.5 percent to 30.9 percent and stocks in PE band of 15-25 increased from 27.7 percent to 29.8 percent.
“Value in Quality” stocks
To identify value in the quality stock universe, Elara Capital has overlaid additional filters. The ‘value in quality’ stocks have FY18-20 earnings growth expectations in excess of their cost of equity, and also meet 3 or more of the criteria mentioned below:
a) Current forward PE is less than 5-year average PE
b) Current LTGV is less than 5-year average LTGV
c) The price correction is in excess of 15% and recent consensus FY20 EPS revisions are positive or flat (non-negative)
d) Current stock price is at the bottom half of the 5-year price range
e) Current LTGV is at the bottom half of 5-year LTGV range
Here is a list of 18 stocks which satisfy the above criteria. The list includes Maruti Suzuki, Eicher Motors, Sun TV, Endurance Tech, Whirlpool, Wabco, Solar Ind., SKF, Mahanagar Gas, Dr. Lal Pathlabs, Tata Elxsi, Bajaj Corp, Monsanto, Timken, VST Inds, ICRA, Jagran Prakashan, and CCL Products.
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