Invest in companies that have the ability to generate above-average returns in the long run; 5 stocks with up to 17% upside potential
Despite stretched valuations, India’s key equity benchmark, Nifty 50, remains the bestperforming index among most of the major global indices, in 2024. While the Indian benchmark registered 16.9% return year-to-date, MSCI Emerging and MSCI World Market indices delivered 6.1% and 14.9%, respectively, during the same period. The returns are based on 17 September 2024 prices.#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;} The optimism is fuelled by buoyant fundamentals of the Indian economy. A pick-up in the investment and credit cycles, traction in real estate, tailwinds in manufacturing and industrial sectors, and favourable demographic dividend (steady increase in working population) are some of the long-term drivers of earnings in India, states a recent Tata Mutual Fund equity outlook report for September.
While strong liquidity flows, expectations of demand improvement during the festive season, and steady consumer inflation are likely to uplift the bullish sentiments, experts advise investing in segments with relatively modest valuations.
An India strategy report by Bernstein (released in the last week of August) states that broad returns can continue for some time, but the disparity within stocks is likely to increase as many fundamental challenges start to unravel. “This is the phase to look out for select, narrow pockets of relatively moderate valuations, strongly supportive themes that drive a re-rating, or non-linearity drivers among stocks,” adds the Bernstein report.
The upcoming US elections, ongoing geopolitical issues, volatile oil prices and the uncertainty about domestic demand/consumption are some of the factors that could influence the investors’ sentiments in the medium term.
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With the recent market run-up, stretched valuations, domestic demand worries and global uncertainties, it is advisable to bet on companies with stable fundamentals. Market share can help identify such companies, and is calculated by dividing a firm’s sales revenue with its industry aggregate sales revenue.
The improvement in market share is closely linked to business profitability as it helps improve profit margins through the benefits of scale of operations. A rising market share implies increased sales, which means higher production.
Such large-scale production reduces the per unit or variable costs, which in turn improves operating margins. In addition, improved pricing power, strong entry barriers for other competitors, widening of customer base and increased bargaining power with suppliers and distributors are some of the benefits enjoyed by companies with improved market share.
Some of the strategies that are aimed at increasing the market share include product differentiation, brand building, promotional campaigns, customer servicing, new product development and expansion of the target market by appealing to new demographics.
In terms of industry-wise share in the total aggregate revenue of India Inc., industries such as oil and gas, insurance, metals and mining, automobiles and IT constitute close to 53% of the total aggregate revenue of 2,395 listed companies (excluding banking stocks) in 2023-24. The data is compiled from the Reuters-Refinitiv database.
We have tried to identify companies that have improved their market share over a period of time. The total revenue data for 2,395 companies (with market cap of greater than Rs.100 crore) and the corresponding aggregate revenue of their respective industries have been extracted for the past five years. The latest data is for 2023-24. Bank stocks are excluded. The market share of each company has been worked out by dividing the company’s revenue by the respective industry’s revenue.
Only the revenue numbers of listed companies (with market cap greater than Rs.100 crore) were included for aggregating industry revenues. Unlisted companies were not considered.
The companies whose market share in 2023-24 was the highest in the past five years were filtered out. Only companies with a minimum of 5% market share in 2023-24 were included. There are 61 such companies.
In the last one, three and five years, the group of these 61 companies delivered an average return of 69.1%, 213.6% and 692%, respectively. Comparatively, the BSE 500 index delivered 35.7%, 59.5% and 170.7%, respectively, during the same period. All returns are absolute point-topoint (not annualised) and are based on 17 September closing values. Listed here are five such companies with decent analyst coverage and currently offering a doubledigit share price potential.
DELHIVERY (Air Freight & Logistics)
THE THIRD-PARTY LOGISTICS service provider’s revenue surpassed Reuters-Refinitiv estimates by1.6% in the June quarter. This was led by the decent performance of PTL (part truck load), SCS (supply chain services) and FTL (full truck load) segments. While the revenue grew by 13% y-o-y, both EBITDA and PAT turned profitable after reporting losses during the corresponding quarter of the previous year.
Analysts are optimistic about the growth of the company’s different segments. While the PTL segment will be supported by better integration of assets and entry in industries like batteries, chemicals and FMCG, the express parcel segment is expected to witness traction in the festive season. On the other hand, a robust pipeline in the B2B space will support the growth of the SCS segment.Moreover, its technology-enabled network and strategy of being a low-cost operator will bode well for the company. The management plans to diversify its revenue streams through the launch of dark stores to foray into the q-commerce market. An Emkay report, released after the June quarter results, states that Delhivery’s existing agile network can make it a partner of choice among existing operators. However, a Prabhudas Lilladher report has expressed concern due to the increased uncertainty amid the cannibalisation of traditional e-commerce by q-commerce.
TEAMLEASE SERVICES(Professional services)
THE RECRUITMENT and human resource company reported an 18.8% y-o-y growth in revenue in the June quarter, aided by the decent performance of the staffing segment. The revenue surpassed the Reuters-Refinitiv estimates by 2.9%. The company partnered with over 55 GCCs (global capability centres) during the quarter. These were largely from non-tech verticals—BFSI, healthcare, automobiles—which contributed to increased hiring and revenue growth during the quarter.
However, the EBITDA margins declined due to seasonality and delayed university billing in the edtech business. The management expects margins to improve from the second quarter of 2024-25 (September quarter), led by operational efficiencies, expected profit in the degree apprenticeship (DA)segment and improvement in volumes.
Though the IT hiring has not picked up meaningfully, the management is seeing early green shoots (layoffs and low hirings are coming to an end), which will bode well for the company. Also, the DA segment will see increased hiring as the company has signed up with 20 universities for various programmes.
An Antique Stock Broking report, which was released after the June quarter results, states that Teamlease will sustain the strong growth momentum in the coming quarters, especially with the increasing formalisation of the economy, positive demand environment in general staffing, and an uptick in IT staffing along with stabilisation in the DA segment.
BAJAJ FINANCE(Consumer finance)
THE DIVERSIFIED NBFC or consumer finance company missed net profit estimates compiled by Reuters-Refinitiv by 2.9%, in the June quarter, due to higher credit costs. Muted collection efficiency and an increase in stage 2 assets (that have deteriorated in terms of credit quality) led to a jump in credit costs. However, the management expects the credit costs to normalise in the second half of the current financial year. Moreover, the AUM growth was robust at 31% y-o-y supported by broad-based growth across segments (except rural B2C).
In 2023-24, the company expanded its loan mix by foraying into new products, including new car financing, large and emerging corporate lending, microfinance, and tractor financing. An annual report analysis by Motilal Oswal lists the company’s omnichannel strategy, continuous innovation, expansion of customer base, product diversity and robust debt management strategies as key strongholds.
The recent listing of its housing finance subsidiary provides a catalyst for re-rating. The standalone entity benefits from a higher concentration of high yield consumer loans and increased fee income, giving it a competitive edge in terms of margins, states a recent Emkay report. However, Bajaj Finance has higher operating costs due to its larger employee base and extensive branch network.
KPIT TECHNOLOGIES(Software)
THE SOFTWARE COMPANY reported a strong performance in the June quarter with 4.7% sequential revenue growth in constant currency terms. The performance was led by traction in architecture and middleware consulting. The strong volume growth and favourable currency supported a 40-basis point expansion in the operating profit margins.
The deal wins were healthy at $202 million, and the management has reiterated its revenue guidance of 18-20% in constant currency terms for 2024-2025. The company is also diversifying its revenue base by expanding in Asia and the trucks and off-highway segments. It is ramping up the deal with Honda in Asia. The management is optimistic about gaining mediumterm demand momentum due to deals secured in the previous quarters and anticipates improvements in margins. Moreover, strong client engagement and a robust deal pipeline will ensure broad-based growth across verticals.
An Axis Securities report, which was released after the June quarter results, states that the company is positioned for encouraging growth, supported by multiple long-term contracts with leading global brands. Its improved revenue visibility enhances confidence in its business growth trajectory. “The strong client engagement and technical expertise underscore its potential to become one of the fastest growing companies in the Indian IT services sector,” adds the report.
JYOTHY LABS(Household products)
THE FMCG (or household products) company reported a strong volume growth of 11% y-o-y in the June quarter despite a challenging macro environment. Though the revenue missed the 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 y-o-y.
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 both main wash and post-wash categories. On the other hand, the household insecticides segment reported a weak performance due to the extended summer season in the key markets. The management expects the margin profile to improve in the medium term owing to the improved scale of operations and reduced losses from household insecticides. It focuses on driving volume-led double-digit revenue growth in 2024-25, with a specific focus on rural areas and distribution network expansion.
A recent Asian Markets Securities report states that the company has gained market share across most categories through brisk channel and market expansion, marketrelevant products, product-specific micro strategies and increased branding activities.
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This story originally appeared on: India Times - Author:Faqs of Insurances
