The signs of stress in the equity markets are many. Most stocks across market capitalisations have delivered negative returns in the past year. Falling domestic economic growth outlook, slowdown in consumption and private investment, weak corporate earnings, new tax surcharge and likelihood of a global economic slowdown have all impacted the performance of the markets. Moreover, troubles in the NBFC space and high NPA of banks have spoiled the credit flow to the auto and real estate sectors, further dampening sentiments. So where should you invest now?

Direct equity investors are having a hard time finding good opportunities. A convenient way to identify stocks with reasonable investment potential is by observing the consensus analysts’ opinions. Analysts are strongly aware of the business outlook and are familiar with the strengths and weaknesses of companies.

FPI outflows have affected even fundamentally strong companies. The increased selling has reduced the price-earnings differential and lower prices are offering good entry point for investors. We tried to identify stocks available at compelling valuations relative to the broader index and have promising future price potential.

Eight hundred and fifty companies tracked by Bloomberg analysts were analysed on four forward valuation ratios—return on equity (%) (RoE), return on assets (%) (RoA), price earnings (PE) multiple and dividend yield (%). Similar ratios were also extracted for the BSE500 index. All ratios were estimated for the next one year and termed as 12-month blended forward.

To identify stocks available at decent valuations, we filtered out stocks whose forward PE multiple were at a minimum of 10% discount relative to that of the BSE500 index. In addition, stocks with forward RoE (%), RoA (%) and dividend yield (%) higher than corresponding forward ratios of the BSE500 index were considered. Only those covered by at least five Bloomberg analysts and with one year future price potential greater than 10% were extracted. Let us look at the five stocks that passed the valuation and price potential parameters:

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A government enterprise under the administrative control of the Ministry of Steel, it is involved in the exploration of minerals. Analysts are bullish on the stock due to its attractive dividend yield, improved operational performance, pricing power, low fixed costs and low regulatory intervention in domestic iron ore pricing. Any surge in government spending will increase the demand for steel, augmenting iron ore prices. In the June 2019 quarter, its consolidated adjusted EPS was 9.3% higher than Bloomberg’s consensus estimates.
The Navratna PSU is engaged in design, manufacture and supply of electronics products and systems for the defence sector. Quantum Securities is positive on the stock due to its strong order book which provides more than four years of strong revenue visibility. The cash position is likely to increase due to low capital expenditure and better working capital management. The brokerage believes the company will be the prime beneficiary of the government’s defence reforms push.

Investors should look for decent valuations

Opinion of analysts can act as a good indicators for investors looking to buy stocks.

5-stocks

Price as on 20 Aug 2019. Source: Bloomberg

This electrical and metallurgical engineering player is engaged in manufacturing specialty oils, power conductors, cables and wires. According to a research report by Nirmal Bang, the company offers high scalability potential and market leadership position in all its business segments. The outlook of the cable segment remains bright, driven by rising demand from the railways and defence sectors. Green energy corridors are likely to be a growth driver for elastomeric cables. The brokerage house expects a 30% earnings CAGR over 2018-19 and 2020-21. In the June quarter, its consolidated adjusted EPS was 23.9% higher than Bloomberg’s consensus estimates.
The city gas distribution company supplies CNG and PNG in Mumbai, Thane and adjoining municipalities. Stable volumes, improved margins, focus on network expansion and government’s push for the usage of cleaner fuels are significant growth catalysts for the company going forward. According to HDFC Securities, the company will continue to enjoy pricing power and there is unlikely to be any significant regulatory adversity in the city gas distribution business either. In the June 2019 quarter, its adjusted EPS was 18.5% higher than the Bloomberg’s consensus estimates.
The company operates LNG receiving and regasification terminals across India. KRChoksey remain positive on its longterm earnings visibility, given the country’s increasing demand for natural gas. The brokerage says the stock is trading at attractive valuation and expects its revenue and EBITDA to grow at 16.5% and 14% respectively over 2018-19 and 2020-21.





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