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'Invest in ROE-structured portfolio for returns beating the benchmark'

Return on equity measures the return that shareholders get from the company’s earnings

December 30, 2019 / 09:22 AM IST

Manali Bhatia

FY19 painted a pretty grim picture of the stock market. While Sensex rallied to an all-time high during the year, mid and smallcaps disheartened investors.

Weakness in global markets and subdued domestic macro numbers failed to lift the Indian economy.

Despite various issues that worried investors, ROE (Return on Equity)-based structured portfolio from BSE 500 having good corporate governance (“NIL” pledging shares) generated alpha returns. Investors are always looking for ways to earn higher returns, and why not? The ultimate goal of any investment is to generate better return.

To state, Return on Equity (ROE), measures the return that shareholders get from the company’s earnings. ROE is calculated as the Net Profit divided by Net Worth. This ratio helps investors to determine and compare profitability of companies and their financial efficiency. ROE greater than 15 percent is to be considered good.


Keeping this criterion, we filtered out the companies from S&P BSE 500, delivering ROE greater than 20 percent with “NIL” pledging of shares. Also, we calculated the YTD return they delivered over CY19 (from January 1-December 23, 2019). As a result, we got 93 companies, out of which 64 have given positive return while 29 have given lower negative return.

From this filter, most stocks that delivered ROE more than 20 percent has also performed well in this zig-zag market during entire CY19.

In the list, stocks such as HDFC AMC and Reliance Nippon have given more than 100 percent returns. While HDFC life, Abbott India, Berger, Bata, Astrazeneca Pharma and Balrampur Chini have given more than 50 percent returns.

However, it was also noted that stocks such as Page Industries and TVS Motor gave lower negative returns except Sterlite Tech and Eris Life science.

Thus, even if we find the average return of 93 filtered stocks it is around 17 percent while in the same period Nifty has given 12% return. Thus, through ROE structure portfolio we could generate alpha return and in short it is one of the best criteria of stock selection in portfolio.

Below is the list of companies having more than 20 percent ROE with Nil pledging of shares:

Note: Out of the selected list, HEG, Graphite India & India Bulls housing are excluded. The exceptional increase in demand and supply of graphite rods shot up the prices of HEG & Graphite India during early 2019 that was behold later. Similarly, in India bulls housing various corporate issues prevailed.

(The author is Senior Research Analyst at Rudra Shares & Stock Brokers Ltd.)

Disclaimer: The views and investment tips expressed by investment experts on moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
Moneycontrol Contributor
first published: Dec 30, 2019 09:22 am

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