Pick stocks with strong performance track record: 5 stocks with up to 26% one-year upside
The unwinding of the yen carry trade spooked global and domestic markets in the first week of August. However, stability returned after the Bank of Japan (BoJ) calmed the markets by reassuring investors that there would be no further rate hikes in the near term. After losing over 4% from its all-time closing high of 25,010.9, the benchmark Nifty 50 index recovered 3.5% by the week ending 23 August 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;} Apart from the BoJ response, factors like a fall in the US CPI and India CPI inflation numbers, healthy retail sales data in the US, strong support from domestic institutions and retail investors, buoyant economic growth prospects of the Indian economy, and other favourable macros, such as reduced fiscal deficit and manageable current account deficit, have supported the domestic market recovery.
However, experts believe that there will be limited upside from the current levels due to lack of valuation comfort (in mid- and small-cap segments) and muted performance of corporate India in the June quarter. In terms of TTM (trailing twelve months) PE, the Nifty Midcap 100 index and the Nifty Smallcap 100 index are trading at a premium of 61.6% and 20.5%, respectively, compared to their previous three-year average, according to Trendlyne data.
A recent Nuvama report states that, statistically, valuations determine 70-80% of the next five-year returns. Based on historical data analysis, the current valuations imply extremely sub-par medium-term returns (less than 5% CAGR). The periods of high valuations have also seen long phases of consolidation and drawdowns, irrespective of decent earnings growth, adds the report.
The June quarter also marked a weak quarter in terms of profitability for corporate India. The Nifty 50 index stocks registered a 4% year-on-year PAT growth on an aggregate basis, which is the lowest since the June 2020 quarter, according to a recent Motilal Oswal report.
This weak performance is also visible at the broader level. An analysis by the Bank of Baroda research report, based on a sample of around 3,000 companies, shows an aggregate net profit growth of 3.5% year-on-year, compared to 37.1% in the corresponding quarter of the previous year. This is due to an increase in the expenditure of companies amid a rise in the cost of raw materials for some industries. Though the sales growth remained in single digits, there is an improvement from 2.3% in the June 2023 quarter to 7.7% in the June 2024 quarter.
After removing the sales growth of the BFSI sector, the aggregate sales growth moderates to 5.2%. “The continued drag on sales growth is alarming as it signals weak domestic demand. Notably, there is a decline in profit growth for this segment, which can be attributed to the pick-up in expenditure growth,” adds the Bank of Baroda report.
The CareEdge Foresights report for August 2024 also raised concerns amid weak earnings and high PE multiples. “The disparity between these low growth figures and high market valuations suggests increasing pressure on corporations to deliver significantly higher growth rates to meet investors’ elevated expectations,” states the report. It asserts that the current market optimism may be misplaced if companies cannot demonstrate substantial improvements in financial performance in the coming quarters.
In the backdrop of a slowdown in earnings and revenue growth, we have identified stocks that have displayed a strong performance track record. Over 2,000 non-financial companies (with market caps of more than `100 crore) have been considered for the analysis. The stocks that have delivered a double-digit growth in revenue and double-digit EBITDA margins in the past five quarters (June 2023 to June 2024) have been identified. A consistency in revenue growth indicates strong product demand and pricing power, whereas healthy EBITDA margins indicate cost efficiencies.
There are 124 such companies. The average one-year return of the group of these 124 companies was 107.6%. The Nifty 500 index has registered a 38% return in the past year. Nearly 117 of the 124 companies (or 94.3%) delivered positive returns during the period, whereas 90, or 72.6%, of these companies have outperformed the Nifty 500 index in the past year. The data is based on 20 August closing values. The following five companies (out of 124) are covered by a decent number of analysts and are currently offering a double-digit share price potential.
Chalet Hotels
THE HOTEL CHAIN COMPANY reported a 16.2% year-on-year growth in consolidated revenue in the June quarter, with 15.3% and 24.6% growth in hospitality and commercial segments, respectively. Headwinds in the form of elections, heatwave and weak demand for leisure impacted the hospitality segment. However, the management is confident of strong growth aided by rising demand from corporate clients, with expectations of demand outpacing supply.
The company is strengthening its leisure segment by foraying into NCR, Goa and Kerala, which is expected to boost earnings in the future. It has acquired 11 acres of land parcel in south Goa and aims to construct a 5-star hotel with 170 rooms. The operation of the hotel is expected to start in the next three years.
The expansion plans are on track and the company has planned a capex of Rs.1,500 crore for the next two years for new commercial towers, hospitality and repairs. In the commercial segment, the management expects 90% of the office portfolio to be leased by the end of the year, which will create a strong annuity income from 2025-26 onwards.
A recent report from Elara Capital lists factors such as a tie-up with global hospitality brands, presence in key metro cities, strong promoter pedigree and plans to construct new hotels in Goa and Kerala as key strongholds.
InterGlobe Aviation
THE AIRLINE COMPANY reported a decent performance in the June quarter, with 17% year-on-year growth in revenue. Compared to Reuters-Refinitiv estimates, the revenue was 5.1% higher. The compensation benefit received from Pratt & Whitney due to the Aircraft on Ground issue aided performance. While the passenger revenue grew by 10% year-on-year, ancillary revenue jumped by 13.9%.
The company will be a beneficiary of the strong growth opportunities in the Indian aviation sector, aided by low penetration, infrastructure expansion (increase in number of airports) and capacity expansion by domestic players. Moreover, IndiGo is striving to exploit opportunities in international operations through strategic partnerships and loyalty programs. It has codeshare agreements with several airlines and has recently entered a codeshare tie-up with Japan, where passengers of Japan Airlines will be able to fly to 14 destinations from Delhi and Bengaluru. The management announced new plans at its recent 18th anniversary event, which will support IndiGo’s next phase of growth. The plans include tailormade business class product (IndiGo Stretch), revamping of digital channels (mobile, website) for enhancing user experience, and a new loyalty program, IndiGo Bluechip. Brokerage reports from ICICI Securities and Emkay are optimistic about the company’s growth prospects.
RateGain Travel Technologies
THE TRAVEL AND HOTEL software company reported decent numbers in the June quarter, with 19% year-onyear growth in revenue and a 150 basis point jump in the EBITDA margins. The performance was supported by DaaS (data as a service) and MarTech (marketing technology) segments, which grew by 17.7% and 33%, respectively, on a year-on-year basis. While the new client additions supported the former, brand management and paid digital marketing supported the latter. The distribution segment reported muted growth.
It has a strong deals pipeline across segments and the management has guided 20% organic growth and 150-200 basis margin expansion for 2024-25. Healthy traction in business segments and operating leverage is expected to support the guidance.
Brokerage reports from PhillipCapital and DAM Capital are bullish on the company. The former lists positive travel demand, a wide set of offerings, marquee clientele (OTAs, hotels, car rentals, airlines, DMOs) and attractive valuations as key strongholds. On the other hand, the latter sees potential upsell and crosssell avenues after the Adara acquisition, impressive customer retention rate close to 90%, improved scale and strong LTV/CAC (lifetime value/customer acquisition cost) as key positives.
Healthcare Global Enterprises
THE HEALTHCARE COMPANY reported good performance in the June quarter, with 14% and 22% year-onyear growth in revenue and EBITDA, respectively. Compared to Reuters-Refinitiv estimates, the numbers were 3.6% and 2.6% higher, respectively. The performance was supported by established and emerging centres that grew by 14% and 33%, respectively. The net profit missed estimates by 10.5% due to higher interest costs.
The company is aiming to increase its bed capacity over the next two-three years through acquisitions and brownfield expansions. It has acquired cancer hospitals in Indore and Vizag in the recent past. The MG hospital (Vizag) holds a strong market share in cancer treatment and has a strong medical infrastructure. Analysts expect operational efficiencies, advancement in emerging centres and stable ARPOB (average revenue per occupied bed) to bode well for the company.
The management expects EBITDA margins to grow at a faster pace in the near term, aided by a better case mix, improving occupancies and enhanced payee mix. A recent ICICI Direct report is bullish on the company and states that the company is well poised to tap the incremental opportunities amid growing cancer instances and better diagnosis mechanisms.
Another report from Prabhudas Lilladher states that the company’s asset-light approach, with a focus on partnering, has made its business model more capitalefficient and scalable. It expects a 26% EBITDA CAGR over 2023-24 and 2025-26.
Varun Beverages
THE BEVERAGE INDUSTRY player’s revenue and EBITDA surpassed Reuters-Refinitiv estimates by 0.7% and 2.1%, respectively, in the June quarter. Strong volume growth in the domestic market and lower raw material costs supported the performance. While extreme summers, enhanced distribution network and capacity expansion boosted the performance of the domestic segment, the international segment registered a flat growth due to the transitioning of the portfolio to low/no sugar products in Zimbabwe.
The EBITDA margins expanded by 74 basis points year-on-year, aided by timely procurement of PET chips and lightweight packaging. The management has guided a double-digit volume growth in the domestic market, whereas the Zimbabwe market is expected to rebound from the third quarter of the current financial year. The likely performance improvement of the newly acquired BevCo, backward integration in South Africa, a new beverage plant in the Democratic Republic of Congo, and a franchising agreement for snacks in Morocco, Zambia, and Zimbabwe are the key drivers of international business.
A recent Motilal Oswal report is bullish on the stock and expects it to maintain earnings momentum, aided by increased penetration in newly acquired territories in Africa, higher acceptance of newly launched products, and continued expansion in capacity and distribution reach.
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This story originally appeared on: India Times - Author:Faqs of Insurances
