Nifty on Cloud Nine! 9 stocks with a high margin of safety

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26 Aug, 2025 12:21

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Madhuchanda DeyMoneycontrol ResearchWith Nifty a whisker away from its lifetime high and valuation touching 21X FY17P and 18X FY18P earnings, the Street looks cautious. Is it time to take money off the table? Or, is it time to be ready with the shopping list and wait patiently for buying opportunities as markets gyrate amid headwinds of state election results and US Fed’s interest rate action? Our analysis suggests that while Nifty may be on cloud 9, some stocks haven’t yet exhibited similar exuberance. They still possess sound long-term potential.1) Although Larsen & Toubro had given a downward revision for growth (for revenue and order inflows), we do see a few tailwinds for the engineering major over the coming two-three years driven by government-driven expenditure in areas like port-connectivity, railways, smart cities, metros and downstream oil etc. Stability in oil prices should augur well for the international business and the defence opportunity could turn out to be an icing on the cake. With an expected earnings CAGR (compounded annual growth rate) of 29 percent, the valuation at 19X FY18P earnings for the company deserves a closer look.2) ITC hasn’t disappointed investors in the past one year. While government is unlikely to show any sympathy to cigarette manufacturers, implementation of GST will lead to some medium-term clarity on taxation. The company continues to build a high quality franchise in other businesses beyond cigarettes. We are comforted by the relative value that the stock offers - 27X FY18 P earnings, at 25 percent discount to the FMCG (Fast Moving Consumer Goods) universe.3) Dr Reddy has significantly under-performed the market in the past one year, courtesy the warning letter by US FDA (Food & Drug Administration) for three of its facilities. A successful resolution (inspection is due shortly) should pave the way for approvals and earnings growth. Dr Reddy, in our opinion, is well suited to adapt to the transition from low-risk pure generics to an innovation-led model and valuation at 23X FY18 earnings provides the requisite margin of safety.4) Over the past five years, Aurobindo Pharma has transformed from an API (active pharmaceutical ingredient) maker to a formulation company, but its valuation hasn’t caught up yet. The company has lined up a strong launch pipeline in the US, sufficient to offset competitive pressures on existing portfolio. The acquisition of Actavis’ EU business has provided the company with the scale in the EU business and its biosimilar acquisition should help close the gap with competition. Finally, the stock is still available at 14.3X FY18P earnings.5) Delay in resolution at its key facility in Halol by US FDA and heightened price erosion in Taro (Sun’s US subsidiary) have resulted in significant under performance of Sun Pharma. While the management doesn’t foresee immediate resolution of US FDA issues, stabilization of India (highly profitable) and emerging market business, material progress in its speciality strategy (using part of the Ranbaxy synergies in investment for Specialty build out) points to earnings growth post a successful resolution. The transition from pure generics to speciality should deserve attention and the undemanding valuation (22X FY18P earnings) and near-term weakness could provide an entry opportunity.6) ICICI Bank has lagged its private sector peers on account of asset quality woes. While there hasn’t been any remarkable changes in the picture, in the latest quarter, slippages were primarily from the ‘below investment grade’ book. A couple of quarters of pain notwithstanding, we expect slippages to peak out. The bank’s strong retail franchise, multi-channel distribution network, wide product range, strong brand and avenues to raise resources through dilution in established subsidiaries make us positive at the current valuation of 1.8x FY18P adjusted book.7) State Bank of India has one of the best provision covers amongst public sector banks. With a gradual incremental decline in slippage, we feel the worst is behind with respect to asset quality woes. Through SBI, investors get to participate in a well-capitalised banking leader, highly geared to economic upcycle with a strong retail franchise at an undemanding valuation of 1.3X FY18P adjusted book.8) Amid structural issues and external risks, we still pin hopes on a few information technology stocks like Tech Mahindra that is showing traction in its key vertical telecom, reporting deal wins in its enterprise segment and quotes at an attractive valuation of 13X FY18P earnings.9) Finally, Mahindra & Mahindra hasn’t quite found favour with the bourses in the past one year, thanks to the hyper competition from rivals and its late entry into the compact SUV (sport utility vehicle) space alongside regulatory concerns pertaining to diesel vehicles. However, the more profitable farm equipment (tractor) business (44 percent market share) is showing decent traction and should maintain momentum given the encouraging reports of crop sowing so far. Valuation at 14.6X FY18P core earnings lends comfort.