Ten stocks that can reap excellent returns

The recently concluded results season for the three-month period ended September again highlights the stark weakness in the earnings of India Inc.

"The June-September period was another weak quarter for our coverage universe (excluding oil marketing companies), with revenue/ebitda/net profit contracting three per cent/four per cent/three per cent year-on-year (y-o-y)," said an Edelweiss report authored by Prateek Parekh.

The report adds the net profit of companies covered by Edelweiss (excluding OMCs) fell three per cent y-o-y, fourth quarter of profit contraction.

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In fact, yet again, analysts have lowered their earnings estimates for many companies, adding to the trend of earnings downgrade.

"Earnings downgrade momentum continues to remain high, with Edelweiss and consensus pruning FY16 earnings per share (EPS) estimates by two-three per cent," the report notes.

With respect to the 30 Sensex companies, the combined consensus earnings estimates have been lowered several times from Rs 1,866 (growth of 22 per cent over FY15) in November 2014 to Rs 1,488 (growth of 18 per cent) currently. Sensex earnings had grown only two per cent in 2014-15. Given the weak environment, expect consensus earnings for FY16 to be lowered further.

Most experts believe FY16 earnings will end up growing in single digits. Demand is weak, and profits are largely driven by savings due to lower input costs like commodities, a trend difficult to sustain on a longer-term basis.

But, investors shouldn't lose heart. In this backdrop of anaemic growth witnessed by the broader sector, there are companies, expected to report robust annual earnings growth of over 25 per cent during FY15-17.

While the external environment remains uncertain and poses a risk, the chances of these companies ending up with a decent increase in profits are reasonably high, as a majority of these have a good long-term record and strong management. ABB, Eicher Motors and Cadila, Cummins, are examples.

Most are leaders in their respective categories and earn healthy returns on capital employed in the business, a sign of capital efficiency.

More important, the cash flow from operations of the companies has been positive and has been inching up gradually in the past couple of years. Although some like United Spirits are turning the corner, the earnings prospects are bright. These are some reasons that set these apart and provide confidence over sustaining the growth.

Also why the Street is assigning higher valuations to their stocks. Needless to say, the biggest risk is if these companies fall way short of the estimates, which would then also have an impact on the valuation, which in some cases is high.

So far, the road ahead looks good. Here are 10 stocks, reasonably large and expected to post strong earnings growth in FY16, as well as in 2016-17.

Company write-ups by Ujjval Jauhari, Ram Prasad Sahu & Sheetal Agarwal

Image: Stockbrokers trade at their terminals during the Diwali special trading session. Photograph: Punit Paranjpe/Reuters