Five stocks that you can buy now despite current global crisis
Despite domestic & global issues that may impact earnings, Axis Bank, Yes Bank, Bajaj Fin, UBI & HSIL stand out in terms of potential growth.
Meanwhile, the weakening rupee is not only damaging the sentiment, but also causing inflation and, therefore, the RBI has not cut interest rates as fast as expected by the business community.
To make matters worse, it seems the Indian economy is set to endure a bad monsoon too this year. With the consumer price inflation already in double digits, a bad monsoon is the last thing it can afford.
Given the confluence of problems, it is inevitable that these are reflected in corporate profits. As is evident from the chart, the consensus Sensex EPS estimate for financial year 2012-13 is coming down continuously.
With 2011-12 behind us and brokerages’ focus shifting to the EPS estimates of 2012-13, the fall in its value is also accelerating. The current value of Rs 1,274 is significantly lower than Rs 1,300 three months ago, and Rs 1,500 two years ago.
If one compares the estimated EPS value of Rs 1,274 with that of the actual EPS value of Rs 1,170, the growth rate works out to a mere 9%. Since these downgrades are continuing, the growth rate may fall further in the coming weeks. “With the margin pressure staying in 2012-13, the earnings growth may also come down to 7%,” says Kishor P Ostwal, CMD, CNI Research. The only solace is that with most foreign and domestic brokerages cutting the earnings estimates, most of these negative factors have already been priced in.
Much like in the past few quarters, strong and defensive sectors are expected to do well this time as well. “Sectors like IT, consumer discretionary products, health care, etc, are expected to show decent earnings growth in 2012-13,” says Jigar Shah, senior vice-president and head of research, Kim Eng Securities. Export-oriented sectors, such as IT and Pharma, are also likely to benefit from the weak rupee.
The domestic consumption story should continue to help the consumer staples/discretionary companies. We decided to zero in on some stocks that are likely to ride the current crisis and emerge winners.
To cover all sectors while restricting the study to large and well-tracked companies, we started the screening with firms that comprise the BSE-500 index. From this universe, we shortlisted the stocks that are expected to show a net profit growth of at least 20% in 2012-13.
Of these stocks, several can post decent net profit growth in 2012-13 only because they witnessed a massive fall in net profit in the recent past. In other words, these will merely reflect a recovery and, therefore, can’t be considered as actual growth. So we have decided to keep only the stocks that have shown continuous growth in the past three financial years.
The valuations of most of the stocks from these sectors are already at high levels and this was the case with most stocks on our list. The next strategy then was to look for scrips that are reasonably priced, and with this in mind, we filtered out stocks whose historical price to earnings multiples were more than 15.
To make sure that the stocks we finally picked were investor friendly, a criterion of at least 1% dividend yield was also included.
The next level was qualitative, and to make sure that these stocks were well-tracked by analysts, we filtered out stocks that were covered by fewer than five analysts. Finally, we spoke to experts to handpick some stocks for you. Here are the shortlisted picks.
Stocks to buy now
“At the current valuation, Axis Bank provides a good opportunity for investors who have a two-year time frame,” says Sonam Udasi, head, research, IDBI Capital.
Some clarity is also emerging on investors’ concerns about its large SME loan book and exposure to the coal-based power generators. The management’s effort to prune the SME loan book based on internal credit rating is largely through, which is bringing the much-needed relief for investors.
Since Axis Bank’s exposure is limited to the companies that have either captive coal mines or coal linkages, they have not been affected by the volatility of international coal prices like the coastal projects that are based on imported coal.
Further, around 20% of its non-funded power exposure is backed by letters of comfort by other financial institutions, including infra NBFCs. Axis Bank is also aware of these investors’ concerns and is making a conscious effort to increase the retail asset portfolio from the current 22% to 30% in the next three years. In addition to reducing its risk, this retail focus will also help improve its capital efficiency.
Though promoted by the strong Bajaj Auto Group, its valuation is comparable with that of other NBFCs.
Bajaj Finance is also one of the finest players in the NBFC segment with diversified product mix across segments. Through its network of around 4,000 branches, Bajaj Finance caters to three broader segments—consumer finance (consumer durable finance, 2/3-wheeler finance, personal loans), SME segment (mortgage, small business loan, loan against securities) and commercial business (construction equipment financing). Of these, the consumer and SME segments are expected to show impressive growth in 2012-13 as well. More importantly, this growth is not affecting its asset quality or margins.
“With the net NPA (non-performing assets) at 0.12%, Bajaj Finance has no problems on the asset quality front,” says Daljeet S Kohli, head, research, India Nivesh Securities. Since nearly 50% of its liability is towards banks in the form of term loans, its cost of funds will come down once the interest rate structure reduces and banks start cutting lending rates. The falling cost of funds, along with the improved yield from consumer and SME segments, should help improve its margins in the coming year.
Its retail portfolio is bigger than the institutional one and, hence, the lower demand from developers is compensated by the retail demand, mostly from the renovation of houses. While the growth of nuclear families is one factor fuelling this demand, the other is the frequency at which the renovations are taking place. “With the rise in the standard of living, the time gap between refurbishing homes has came down to 3-5 years,” says Bhavini Shah, analyst, Sushil Finance.
Though the container glass division showed impressive growth in 2011-12, its margins may be under pressure in 2012-13 due to price volatility in soda ash, the raw material for glass business, and increased landed cost of other raw material due to rupee depreciation. With the price to earnings multiple already at 10.7%, these concerns are already priced in and, therefore, investors with a long-term holding power can consider this stock.
United Bank of India
With the broader banking sector still under stress and asset quality worries plaguing the public-sector banks, the market focus is on large-cap, private-sector banks, which is why their valuations are at high levels.
This explains why the market is ignoring the United Bank of India, a mid-cap, public-sector bank, and is giving it a meagre price to earnings multiple of 3.8 times. However, the United Bank of India has shown the ability to grow in the past few years and a similar trend is expected in the coming year as well. A high CASA ratio—which improved to 40.8% in March 2012 from 39.8% in Dec 2011—is its main strength.
“United Bank should be able to maintain the CASA ratio at around 40% due to its excellent presence in eastern and north-eastern states,” says Udasi. Though the asset quality remains a major concern (gross and net NPA values are at 3.4% and 1.8%, respectively) and is keeping the valuation at low levels, things should improve in the coming years due to two factors. First, the fall in interest rates will help reduce asset quality concerns on a system wide basis. Second, the effort by the prime minister to revive the power sector—increase in tariffs, plan to allow the state electricity boards to issue bonds backed by state governments and the request to provide SLR status to these bonds—should help the United Bank because it has exposure to SEBs in Rajasthan, Maharashtra and West Bengal.
In addition to the fall in interest rate structure, several other factors will contribute to this growth. First, it has lined up a vigorous branch expansion plan. Second, its plan to increase the CASA ratio by offering higher interest rates on savings account is also bearing fruit. The CASA ratio jumped to 15% in the fourth quarter of 2011-12 after lingering in the range of 10% for the past 10 years. “The CASA ratio is expected to improve to 20% in 2012-13 and 24% in 2013-14,” says Parmar.