Stocks to buy: Pick stocks with high operational efficiency; 5 stocks with up to 17.3% upside Financial sector stocks have not been included. The cost-to-income ratio has been worked out for the last three financial years, with 2023-24 as the latest financial year. The companies that have maintained cost-to-income ratios lower than their respective industry medians in all of the last three financial years have been considered. Only those companies that have improved their cost-to-income ratios in 2023-24, compared to 2022-23, have been further screened
Indian equity markets continued to scale new peaks, supported by a healthy economic growth outlook, government’s sustained focus on capital expenditure and ongoing reforms. The benchmark Nifty 50 index delivered 14.3% year-to-date returns and outperformed the MSCI Emerging and MSCI World indices, which registered 5.2% and 11.3% returns, respectively, between 1 January and 30 July 2024.#sr_widget.onDemand p, #stock_pro.onDemand p{font-size: 14px;line-height: 1.28;} .onDemand .live_stock{left:17px;padding:1px 3px 1px 5px;font-size:12px;font-weight:600;line-height:18px;top:9px} #sr_widget.onDemand .sr_desc{margin:0 auto 0;} #sr_widget.onDemand .sr_desc{color: #024d99;margin-top:10px;} #sr_widget.onDemand .crypto .live_stock .lb-icon{8px 6px 5px 3px !important} #sr_widget.crypto.onDemand a.text{border-bottom:1px solid #ccc;padding-bottom:5px;display:block;width:100%} #sr_widget.onDemand .sr_desc .text p, #stock_pro.onDemand .sr_desc .text p{font-size:12px;font-weight:400;} However, the June quarter earnings performance of India Inc. could negatively influence the sentiments. Experts warn of profitability headwinds for India Inc. in 2024-25. A Bank of Baroda March quarter preview research report, released in June, states that companies might face profitability headwinds in 2024-25 as the benefits from lower input prices have largely been utilised, leading to a negative base effect. The higher WPI inflation in recent months indicates an upward trend in the input prices.
An Emkay report also indicates that the normalising base could dent the June quarter performance of corporate India. The PAT growth of 2023-24 was aided by a 275 basis point improvement in EBITDA margins (BSE 500, ex-financials), but that is now in the base. For financials, upward normalisation of credit costs could dampen the PAT growth. This is partly reflected in the 2024-25 Nifty EPS growth slowing to 16.5%, compared to 18.4% growth in 2023-24, states the Emkay report.
The concerns are reflected in the early trends for June quarter earnings. As per the Reuters-Refinitiv database, 407 companies have released their June quarter results. Of these, the net profit estimates for 172 companies are compiled by Reuters-Refinitiv. Ninety out of these 172 companies, or 52%, missed consensus estimates. This tepid performance may increase volatility in some stocks or segments.
Experts advise caution due to deceleration in corporate earnings and stretched valuations. “The disconnect between earnings and market prices in the broader market has been driven by the sustained fund flows in these segments and irrational, enthusiastic retail buying. Market history tells us that irrational exuberance can last longer than seasoned experts think, but it is always better to err on the side of caution,” says V.K. Vijayakumar, Chief Investment Strategist, Geojit Financial Services.
With earnings and valuation concerns creating high volatility risks, focusing on operationally efficient companies could be a better strategy. Such companies enjoy pricing power, or have the ability to control or reduce costs, which makes their share prices resilient to market downturns or uncertainty.
The operational efficiency can be measured using the cost-to-income ratio, which is the ratio of operating expenditure to revenue. If the ratio is rising over time, it could depict inefficiency in the company’s operations as the expenditure for generating every rupee of income is rising. On the other hand, if the ratio is falling over time, it implies operational efficiency, as the firm can reduce its expenditure for generating every rupee of revenue.
To identify operationally efficient companies, annual data for the last three years have been considered for companies with market caps greater than Rs.100 crore. Financial sector stocks have not been included. The cost-to-income ratio has been worked out for the last three financial years, with 2023-24 as the latest financial year. The companies that have maintained cost-to-income ratios lower than their respective industry medians in all of the last three financial years have been considered. Only those companies that have improved their costto-income ratios in 2023-24, compared to 2022-23, have been further screened.
There are 443 such companies. In the past one and three years, the group of such companies delivered average point-to-point (not annualised) returns of 90.3% and 359.1%, respectively. The Nifty 500 index delivered 38.3% and 71.6% returns, respectively, in the same period. The returns are based on 30 July 2024 closing values. The following five companies have been covered by a decent number of analysts and are currently offering a double-digit share price potential.
PNC Infratech
THE CONSTRUCTION ENGINEERING company is expected to report revenue and PAT growth of 5.3% and 34.5%, respectively, in the June quarter on a year-on-year basis, as per the consensus estimates of analysts compiled by Reuters-Refinitiv. Muted tendering activity by the Ministry of Road Transport and Highways amid general elections is likely to impact the performance during the quarter.
The company has a strong order book of Rs.20,500 crore (at the end of March quarter), which provides a strong revenue visibility. Moreover, the awarding activity is expected to improve gradually, and the management expects an order inflow of Rs.8,000-10,000 crore in 2024-25. Also, revenue of Rs.2,500 crore from Jal Jeevan Mission (JJM) orders in UP is expected in the current financial year.
Besides, asset monetisation is expected to strengthen its balance sheet. It has executed definitive agreements with the Highway Infrastructure Trust to divest 12 of its road assets, and proceeds from the same will help in bidding for larger projects. The asset monetisation will also help in balance sheet deleveraging and will provide significant growth capital. Analysts believe that factors like sound execution abilities, healthy return ratios, steady cash generation, recent orders from MSRDC (Maharashtra State Road Development Corporation) and likely awards from NHAI are the key strongholds.
Venus Pipes and Tubes
THE MANUFACTURER OF stainless steel pipes and tubes reported a strong 33.7% year-on-year growth in revenue in the June quarter, supported by a significant increase in exports. The EBITDA jumped sharply by 73.8% year-on-year, led by a better product mix and backward integration benefits. Exports contributed 25% to the revenue in the June quarter, compared to 12% for 2023-24, and jumped 690% year-on-year.
The robust demand in the domestic market from the oil & gas, power and engineering sectors, and strong exports (Europe, US and Middle East) are expected to drive performance in the future. The capacity expansion is on track and the management has announced a capex of Rs.175 crore for venturing into higher profitable fitting solutions, welded tubes and titanium tubes. In 2023-24, the company increased its capacity by 3.2 times.
A recent Ambit Capital report is bullish on the stock. It expects the company to be a key beneficiary of the heightened industrial capex and building of channel profiles to ensure growth longevity beyond its traditional base. It estimates revenue and EBITDA CAGR of 29% and 31%, respectively, over 2023-24 and 2026-27.
Another report from Antique Broking believes that the product mix improvement (fittings, value-added products like hygienic stainless steel pipes, titanium tubes), and operating leverage benefits through higher capacity are expected to support margins in the future.
Piramal Pharma
THE PHARMA COMPANY reported 11.6% year-onyear revenue growth in the June quarter, aided by the strong performance of the CDMO (contract development and manufacturing organisations) segment. On the other hand, EBITDA margins jumped by 290 basis points, helped by the improvement in product mix and decline in other expenses. Demand improvement in the API business and steady order inflows for commercial manufacturing of on-patent molecules have driven the CDMO segment’s growth. The segment is expected to be the key growth driver, led by differentiated offerings (high potency APIs, antibody drug conjugates and peptides), focus on margin-accretive services and operating leverage benefits.
Other segments like CHG (complex hospital generics) and ICH (India consumer healthcare) are showing strong growth potential. While the new launches and better volume uptake in Sevoflurane and Isoflurane in the US, Asia, Europe and other markets will support the former, the growth in power brands is expected to aid the latter. Also, the developmental pipeline remains strong with an addressable market of $2 billion. A recent ICICI Direct report believes that the company is at an inflection point with significant capabilities and capacities, and is poised to capitalise on incremental opportunities.
Jyothy Labs
THE FMCG COMPANY reported a strong volume growth of 11% year-on-year in the June quarter despite a challenging macro environment. Though the revenue missed Reuters-Refinitiv estimates by 0.8%, the EBITDA surpassed estimates by 2.9%. While the gross margin jumped by 342 basis points, EBITDA margins rose by 90 basis points year-on-year.
The personal care segment sustained its double-digit volume growth, supported by innovations and success of new variants, whereas the fabric care segment was supported by growth from main wash and post-wash categories. The household insecticides segment reported a weak performance due to an extended summer season in key markets. The management expects the margin profile to improve in the medium term owing to a better scale of operations and reduced losses from household insecticides. They aim for volume-led double-digit revenue growth in 2024-25, focusing on rural areas and expanding the distribution network.
A recent HDFC Securities report is bullish on the company as it is improving productivity and capturing market share by making its product portfolio comprehensive. The report lists the launch of low-unit packs, product superiority over competitors, value-for-money offerings and competent management as key positives. It estimates revenue and PAT CAGR of 12% and 17%, respectively, over 2023-24 and 2026-27.
CIE Automotive India
THE AUTOMOTIVE COMPONENT supplier missed Reuters-Refinitiv revenue estimates by 4.1% in the June quarter due to the weak performance of Europe business. However, net profit surpassed estimates by 3.7%, aided by higher other income. While the EU revenue declined by 11% year-on-year, India business registered a growth of 8%. The EU business is unlikely to see improvement in the second half of 2024 and the management is taking cost-cutting actions, such as eliminating temporary workers to manage costs. On the other hand, the performance of Metalcastello, a subsidiary, is likely to remain stable, with the recovery expected in 2025 after the US elections.
Conversely, the outlook for the India business is positive, aided by the rising demand for two-wheelers and tractors. Moreover, the management expects the second half of 2024 for the India business to be better than the first half, supported by festive season demand. It is planning to expand its plastic parts business through the inorganic route.
An ICICI Securities report, released after the June quarter results, expects India business to ramp up in the coming quarters, with new launches by target OEMs and new projects kickstarting for Bosch, Royal Enfield, and Stellantis. The report lists healthy, free cash flows, net debt status and strong margin profile as key positives.
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This story originally appeared on: India Times - Author:Faqs of Insurances
