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6 stocks that make for good investment bets

August 24, 2016 09:46 IST

These have been selected based on the earnings growth prospects and favourable (buy) ratings by brokerages

India Inc’s earnings growth has disappointed investors over the past few quarters, as well as the past couple of years. However, the March  quarter was relatively better. Revenue growth came ahead of Street expectations, as well as over the preceding few quarters.

The trend in the June quarter numbers so far is mixed. Slowing economic growth, high debt and a virtual freeze on greenfield capex by private companies are among the factors that have hurt India Inc’s results.

Hence, it is no surprise that a large part of the companies in BSE 100 stocks universe have witnessed earnings downgrades for many quarters now.

However, there are six stocks that have seen increase in their one-year forward (FY17) earnings estimates for three quarters in a row now based on data till June 30, 2016. These six companies include Bharat Petroleum Corporation, Hindustan Petroleum Corporation, JSW Steel, Mahindra and Mahindra Financial Services, UPL and Vedanta.

Grasim and Tata Steel, too, figure in the list. But, given the recent development of the merger of Aditya Birla Nuvo with Grasim, investors may want to wait for more clarity. For Tata Steel, though, most analysts polled by Bloomberg have a ‘sell’ recommendation on the stock with their average target price of Rs 309, indicating a downside potential of 20 per cent from the current levels.

From the rest, here are some companies which investors can consider on declines given that their stocks are also close to analysts' target prices. These have been selected based on the earnings growth prospects and favourable (buy) ratings by brokerages.

BPCL/HPCL

Oil marketing companies HPCL and BPCL could witness flattish compounded annual growth in earnings over FY16-FY18, according to Bloomberg consensus estimates, but that isn't worrying the Street given the improvement in operational parameters and enhanced visibility.

These companies had witnessed a significant improvement in FY16 net profit on the back of diesel price deregulation and virtually nil under-recoveries, creating a high base in the last financial year.

Prior to this, their profits were highly volatile given the uncertain timing of government compensation towards the under recoveries. So, a flattish earnings trajectory isn't worrisome.

Going ahead, both these companies stand to gain from benign crude oil prices and reducing working capital and interest costs. While diesel price deregulation has been a major positive for these companies and will aid their marketing margins, the stock prices could rise further led by gradual increase in price of kerosene; a full de-regulation will provide a big boost.

In fact, both these companies can further gain from value unlocking in their investments in refineries such as Numaligarh Refinery and HPCL-Mittal Energy due to improving outlook of refining business.

Favourable developments in its exploration and production business will be another catalyst for BPCL, going forward. In this backdrop of structural improvement in business, most analysts are positive on both BPCL and HPCL.

JSW Steel

The company is likely to post strong double-digit volume growth going forward. JSW Steel has also been generating healthy free cash flows and has high efficiency and conversion cost parameters vis-a-vis other steel manufacturers.

“We believe JSW Steel will be able to recalibrate its costs in the current challenging steel market, better than peers given its track record,” analysts at JM Financial write in a recent note on the company. The government’s supportive stance against imports is another positive for JSW Steel, though any discontinuance on this front could impact the stock, and the domestic steel industry.

M&M Financial Services

M&M Financial Services stands to gain from a good monsoon given its strong presence in rural markets. Improving rural outlook will not only boost the company's loan growth but also rub-off favourably on its asset quality as the loan repayment ability of existing borrowers improves.

The falling cost of funds along with an uptick in loans to the high-yield segments of tractors, utility vehicles could push up the company’s net interest margins as well. However, as the company complies with Reserve Bank rule of recognising bad loans earlier (90 days versus 120 days currently), the non-performing assets ratios could trend slightly upwards.

UPL

UPL is among the key beneficiaries from a good monsoon. Continued traction in the Latin American market, which forms 20 per cent of UPL’s revenues will be another factor fuelling growth going forward.

Management expects revenues to grow 12-15 per cent this year and earnings before interest, taxes, depreciation and amortisation to improve by 60-100 basis points.

A well diversified portfolio along with continued focus on branding and new product launches are key positives. The company could also derive synergy benefits from merger of Advanta in FY18. Unfavourable movements in currency and sustained low crop prices are key downside risks.

Vedanta

Improving prospects and capacity expansion of its zinc, aluminium and power businesses will be key catalysts for Vedanta going forward, say analysts. Increased availability of cheaper coal will also drive cost efficiencies at the company.

“The merger of Cairn India will provide Vedanta the much-needed access to its rich cash flows and substantially improve tight liquidity at the Vedanta standalone entity level,” says Tarang Bhanushali, analyst, IIFL. Reducing the debt burden would also aid Vedanta's cash flows going forward.

Photograph: Reuters

Sheetal Agarwal in Mumbai
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