Moneycontrol Research's 7 stock ideas to look at in market correction

Madhuchanda Dey
Moneycontrol Research

The post-budget correction in the market is being driven by factors such as levy of long term capital gains tax on shares and the unfolding scams at state-owned banks. Global factors like rising interest rates and trade wars are also to blame.

While benchmark indices have fallen 8 percent from their peak, some well-run large-cap companies have corrected much more. We present eight such stocks that have corrected steeply that are worth keeping on investors’ radar.

Arvind
Arvind’s proposed demerger should bring the focus back to textiles business. The cash flow from Arvind’s Textile business was earlier used to fund the growth in B&R (Brands & Retail) business. Post the demerger, textiles cash flow will be available for growth.

Arvind’s textiles business has been steadily shifting in favour of a less capital intensive and higher-ROCE garments division and a reduced focus on commodity denims. A new garment facility in Ethiopia would give Arvind duty-free access to European markets. Advanced Materials is a high-entry barriers and high-margin business and is likely to be the next growth driver for the company.

Adani Ports & SEZ
Adani Ports & SEZ is the largest port operator in India and has achieved significant advantages of location, first-mover and scale. It has ports across both the east and west coast of India and is diversified across commodities and customers.

The largest asset Mundra Port which handles 10% of India’s sea-borne cargo has a diversified cargo profile with ~45% of the cargo secured through long term/take-or-pay agreements. Mundra with its ~40km waterfront (7.7km utilized so far) and ample back-up area can add 1bn MT of cargo handling capacity.

The company has substantial unused capacity and as a result has significant leverage to any improvement in growth in trade in India. With capex coming down, the company will have a leaner Balance Sheet. Adani Logistics, 100% owned by the company is an integrated logistics player that also plans to become an independent pan-India logistics player with a presence across commodities.

Bharat Electronics (BEL)
In India, defence manufacturing is at an inflection point as it is central to Government of India’s ‘Make in India’ initiative; the FDI limit for the sector has been lifted to 49% from 26%; greater focus on procurement of local equipment and liberalization of licensing policies.

BEL, the market leader in India's defence electronics, has significant competitive advantages in technology, indigenization, tie-ups with global defence majors, and relationships with the DRDO, Army, Navy and Air Force. It should also continue to win certain projects on a nomination basis due to the strategic nature of defence equipment. While Q3 FY18 was a subdued quarter, the company expects the final quarter to be a decent one.

Emami
Emami has gone through a rough patch mainly led by poor scalability in Kesh King acquisition, severe hit to wholesale channel (52% of sales) post demonetization and impact of GST on Canteen Store Department channel (~5% of sales). Emami has mass positioning and its four core product segments (Navratna, Boroplus, Fair and Handsome and Zandu) that account for ~60% of sales for the company. Emami drives ~50% of sales from rural India and should benefit from expected uptick in rural demand led by better monsoon, waning impact of demonetisation and expected increase in farm incomes by way of higher MSP (minimum support price) and market interventions.

Indian Hotels
With occupancy levels at about 64%, Indian Hotels claims to have a 20% market share in the domestic hospitality industry. Indian Hotel’s thrust on future performances will be backed by asset light model and de-leveraging of the balance sheet. The company also plans to reduce its energy costs, payroll costs through optimized organization structure and shared services, admin and general expenses through reducing commissions.

Over the years, the company has built a vibrant portfolio catering to different categories including premium hotels, mid-market hotels and budget hotels. The market is beginning to witness an up cycle and supply of premium and midmarket hotel categories takes time which puts it in a vantage position.

Motherson Sumi
Motherson reported subdued Q3 FY18 earnings, as bottomlines in the standalone entity and arms like SMR, SMP, and PKC were under pressure. Barring SMR (where the miss was on the top line), the other segments saw strong revenue growth (15-27%), with disappointment in margins. Growth in FY18 was impacted by lack of growth at SMR, high start-up costs at SMP, and equity dilution for the PKC acquisition. Going forward, earnings growth drivers would be from new plants ramp up and as the results of PKC’s turnaround start flowing through. Motherson’s FY20 revenue target of USD18 bn entails acquisitions of USD 6 bn, which may result in earnings per share accretion and offer upside.

Tata Global BeveragesTata Global Beverages is a diversified beverage company. The focus of the top management of the Tata Group has been on turning around/selling loss-making entities, saving cost, and thrust on new growth opportunities. All these are beginning to show early result and the company has avenues to unlock more value going ahead.

The company has expressed intent to enter new categories (other than tea, coffee, and water) and has not ruled out pooling group resources across consumer businesses. Tata Starbucks, although loss making currently, is value accretive.

Petronet LNG
While the entry of Adani in the LNG terminal business (Gujarat State Petroleum Corporation Ltd (GSPC) and Adani Enterprises are co-developing a 5mt LNG terminal at Mundra) is perceived as a threat for Petronet, the correction in the stock, the seemingly attractive valuation and a stable business model still deserves attention.

Petronet has a stable business (100% capacity long term with take or pay clauses), lowest cost terminal, solid cash flow, high-quality balance sheet and high ROE (return on equity). Petronet’s volume trajectory would improve led by Dahej expansion from 15 mmt to 17.5 mmt and completion of Kochi Mangalore pipeline that would improve utilisation of Kochi terminal. While ramp up in domestic gas production remains a threat, we believe being an environmentally friendly fuel, gas usage will improve. Petronet is also looking at equity stakes in regas terminals in Bangladesh, Mundra, Sri Lanka and Ennore –Chennai terminals.