Worth your money? 3 stocks that bucked recent correction
Investors should examine the reasons behind the positive show. Investors should get in only if the outperformance is because of the company’s strength.
For instance, 18 out of the BSE 100 companies were able to generate positive returns during this period. What should investors do with these stocks? For one, they should not go on a buying spree in these counters just because a stock was able to duck the downturn in the short term.
Instead, they should examine the reasons behind the positive show. Investors should get in only if the outperformance is because of the company’s inherent strength.
This is why companies like UPL could report a massive gain of 44% since 29 January (we featured UPL in the last issue as one of the 'fast-growing companies'). Change in perception about future growth or the belief that the worst is already behind them can be the other reasons for outperformance. Investors also need to make sure that these stocks are reasonably priced after the recent spurt. We have shortlisted three of the outperformers for you.
BPCL Bharat Petroleum Corporation (BPCL) surprised the street in the fourth quarter of 2014-15 with a net profit growth of 30% compared to the same period last year (y-o-y) and 418% compared to the preceding quarter (q-o-q).
Though the third quarter refining margins took a hit due to the sudden fall in crude prices, it bounced back in the fourth quarter. With regular price changes offsetting commodity price changes, its marketing margin also improved in the fourth quarter. The quantity of crude processed increased by 5% qo-q due to better output from its Kochi refinery.
With oil reforms going smoothly, BPCL should be able to improve margins further. And this will be the short-term trigger for this counter. What separates BPCL from other OMCs in India is its investments in global oil and gas exploration fields (25 blocks in 16 countries). Some have started yielding results. The blocks in Mozambique and Brazil partnering Anadarko and Petrobras have significant potential. These are long-term triggers, so investors should not bet on it in the short term.
Coal India After a lull, Coal India is reporting double digit volume growth, well above expectations. The recent coal block auction norm indicates that Coal India could fetch higher prices for its products in future.
Analysts say Coal India remains a good long-term bet despite the recent outperformance. Though production is increasing, the offtake by regular customers is not happening because of logistic bottlenecks. Increased volume is getting diverted to the e-auction route. Since the eauction price is linked to landed cost of coal, Coal India is fetching better price at these e-auctions, a win-win situation.
However, investors need to moderate their expectations from this counter because it may not be able to increase price for the regulated sectors in a big way in coming years. “Coal India may be able to increase price, but not aggressively. However, Coal India should be able to maintain its margins by increasing productivity,” says Piyush Jain, Equity Research Analyst, Morningstar India. However, don’t underestimate the short-term risk in this counter. At present, the government holding is around 80% and therefore, it has to dilute 5% more to bring it down to the Sebi mandated 75%.
HCL Tech HCL Tech is one on the most consistent performers in terms of revenue growth. It stood out in the fourth quarter of 2014-15 as well by reporting good growth compared to the preceding quarter. That explains why the counter was able to move up against a weak broader market despite a fall in operating margins in the fourth quarter.
The market now is concerned more about the muted growth of IT services companies rather than the margin. With the winning of new clients in the infrastructure space, the margin downgrades for HCL Tech may be a thing of the past. More importantly, HCL Tech is expected to increase the topline growth in coming years as well.
"HCL Tech is one of the two large-cap IT services firms where we see revenue growth accelerating in 2015-16 (from 11% in 2014-15 to 14% in 2015-16),"states the recent IIFL report. At a P/E of 17.60, it is also one of the cheapest among large-cap IT services companies, so long-term investors can continue to bet on it.