Stocks to buy: Look for stocks with improved earnings quality; 5 stocks with up to 28% upside potential However, as the score is based on a proprietary algorithm, it is not freely available. The objective is not to understand the functioning or basics of the algorithm but to use the result to identify stocks that have improved their earnings quality in 2023-2024. The following are five such stocks that are covered by a decent number of analysts and are currently offering a double-digit share price potential
A 50-basis points interest rate cut by the Federal Reserve boosted the global markets with the MSCI World Market index gaining over 2.5% between 18-26 September. The domestic market key benchmarks also continue to make new highs as the Fed signalled that inflation is under control and the US economy is unlikely to slip into recession. India’s buoyant economic growth prospects and other favourable macros such as reduced fiscal deficit and manageable current account deficit are also driving the current market rally.#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 improved liquidity (due to the Fed rate cut) also boosted the FPI inflows into equities that stood at Rs.48,822 crore in September, the highest net monthly inflows in the current financial year (April-September 2024). The total FPI inflows in 2024-2025 stood at Rs.80,815 crore. The FPI data is up to 26 September and compiled from the NSDL website. Experts believe that FPI buying could increase especially in the banking sector stocks.
“Banking stocks have turned attractive after news of a reduction in the credit-deposit gap. Since banking stocks are fairly valued in this otherwise overvalued market, the buying trend in banking stocks may continue thereby lifting the indexes, too,” says V.K. Vijayakumar, Chief Investment Strategist, Geojit Financial Services. However, there are concerns about the market getting overheated. Despite high valuations, foreign investors are looking at India constructively, according to a recent Emkay report. Moreover, investors are exploring sectors other than BFSI and are open to looking at SMIDs. “Growthadjusted valuations, management quality, and balance sheet strength are the key variables that come into play for SMIDs,” adds the Emkay report. Sector-wise, the rate-cut cycle will benefit companies in real estate, infrastructure, automotive and telecom. On the other hand, the weakness in the dollar index could impact the performance of companies in the IT and pharmaceutical sectors.
Despite the robust growth narrative of India, Amit Golia, Group CEO, MarketsMojo believes that the potential benefits of a rate cut have largely been priced in the current elevated valuations and therefore, expecting substantial returns from investments in rate-sensitive stocks may no longer be a viable strategy. He suggests that retail investors should focus on selecting promising companies in the right sectors.
To identify good companies, we considered the improvement in the earnings quality score on a year-on-year basis. Such earnings quality score is sourced from the Reuters-Refinitiv database, and is based on a model that is derived through a combination of multiple fundamental metrics. It ranks a company from a score of 1 to 100.
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A score of 100 indicates the highest-rated stock in the region; scores of 1 indicate the lowest-rated stocks in the region. The closer the rank to 100, the better the earnings quality of the stock. According to Refinitiv, the earnings quality score measures the degree to which past earnings are reliable and likely to persist. Companies with high earnings quality score have persistent earnings and strengthening fundamentals that will help them to outperform benchmarks.
The score is calculated by looking at accruals (current assets/liabilities), cash flows (including operating cash flows and capex) and the operating efficiency of a company. The first two variables are analysed in terms of their annual change with respect to the average net operating assets. Operating efficiency is analysed using operating profit margin and asset turnover ratio.
Such earnings quality score is extracted from the Reuters-Refinitiv database for 2022-23 and 2023-24 (the latest financial year) for 2,351 companies (excluding BSFI stocks) with a market cap of greater than Rs 100 crore. Out of these 53% of the companies saw a deterioration in their earnings quality score, 44% saw an improvement and 3% witnessed no change in the score in 2023-2024 (compared to 2022-2023).
We screened companies that have improved their earnings quality score by more than 50% year-on-year, and those with a minimum earnings quality score of over 50 in 2023-24 were considered.
However, as the score is based on a proprietary algorithm, it is not freely available. The objective is not to understand the functioning or basics of the algorithm but to use the result to identify stocks that have improved their earnings quality in 2023-2024. The following are five such stocks that are covered by a decent number of analysts and are currently offering a double-digit share price potential.
APL APOLLO TUBES
THE STRUCTURAL STEEL tubes manufacturer reported a muted performance in the June quarter despite healthy sales volume growth of 9% year-on-year. Higher operational expenses and dealer discounts dented EBITDA which declined over 2% year-on-year. It is expected to face headwinds in the September quarter also due to lower restocking of dealers amid falling steel prices.
However, a strong recovery is expected in the second half of the current financial year led by an increase in construction activities post-monsoon, cost rationalisation initiatives, operating leverage benefits, better product mix and improvement in export volumes. The company is expected to gain market share due to the narrowing of the price gap between the primary and secondary steel producers. Also, the ramp-up of the Raipur and Dubai plants will improve the VAP (value-added products) mix, which will support margins.
To penetrate the regional markets (and to lower freight costs), the management is planning three new plants in Siliguri, Gorakhpur and Ahmedabad. The new plants will help it to increase its capacity to 5 million tonnes by 2025-2026 and will contribut to the top line.
Analysts list the company’s strong brand positioning, robust distribution network, cash generation ability and industry-leading capacity as the key strongholds.
SOMANY CERAMICS
THE DECOR SOLUTIONS provider and tiles manufacturer reported a muted performance in the June quarter due to the impact of the heat wave and general elections. The consolidated revenue and EBITDA declined by 1.4% and 3.2% on a yearon-year basis. However, the performance is expected to improve in the second half of 2024-2025 led by an uptick in housing demand and exports.
The EBITDA margins are also expected to improve in the coming quarters led by a better product mix (higher share of Glazed Vitrified Tiles), operating leverage benefits, stable gas costs and increased capacity utilisation. The company is a beneficiary of the buoyant growth prospects of the tile and sanitaryware industries.
While the growth in real estate, retail and hospitality sectors and increasing desire for personalised ceramic goods are some of the factors driving the growth of the former, growing preference for feature-rich bathrooms and rising demand for interior decoration in residential and commercial spaces is driving the growth of the latter.
With no major capex plans (only maintenance capex in 2024-2025) and the absence of any significant debt repayment, the analysts expect cash generation to remain healthy in 2024-2025. The company’s diverse range of products, wide distribution network, strong brand value, technological advancements in the form of modernisation of machinery and geographical diversification of manufacturing facilities are some of the key strongholds.
HONASA CONSUMER
THE PERSONAL CARE product company reported a good performance in the June quarter with 19% year-on-year growth in revenues led by distribution expansion, scaling up of emerging brands and market share gains. On the other hand, lower overhead costs supported EBITDA, which grew by 57.3%. Mamaearth continues to perform well and increased its market share in the face wash and shampoo segments.
The management is expanding its offline distribution by gradually shifting to mainstream distributors from smaller distributors. The company has maintained secondary sales growth guidance of more than 20% for 2024-2025. Recent brokerage reports from Ambit Capital and Emkay are bullish on the company’s prospects.
Product innovation, newer brands, expanding digital and offline footprint, strengthening consumer engagement strategies and rapid pace of new product launches based on the understanding of emerging consumer interests are some of the factors listed by Ambit report that will help it to outperform FMCG peers in terms of revenue.
The Emkay report sees margins in double digits from 2025-2026 onwards aided by logistic cost optimisation and operating leverage benefits. It lists the company’s asset-light approach, focus on acquiring new brands, strengthening business efficiency and presence in multiple niche areas in Indian BPC as the key positives.
ACC
THE CEMENT PLAYER’S June quarter performance was impacted due to a fall in realisations. Despite an increase in volumes, the revenue fell 0.9% year-onyear. The benefits of the master supply agreement with parent Ambuja Cement and the increase in premium products supported a 9% year-on-year growth in the volumes during the quarter. The management is optimistic about cement demand growth in 2024-2025 led by increased infrastructure spending by the government and rising housing demand.
Moreover, the acquisition of Sanghi Industries and Penna Cement, the commissioning of the Ametha integrated unit in the last financial year and the acquisition of a stake in Asian Cement provide volume growth visibility. The company is increasing the share of WHRS (Waste Heat Recovery Systems) in its fuel mix. Also, the management aims to increase green power share by 60% by 2027-28.
Moreover, the company is expected to benefit from the cost-saving strategy of its parent Ambuja Cement that aims at optimisation across raw material sourcing, logistics and power and fuel costs. The stock is trading at a 12-month forward EV/EBITDA of 12.02 times, which is attractive and at par with the cement industry median multiple of 12 times, according to Reuters-Refintiv data.
MARUTI SUZUKI
THE AUTOMOBILE MANUFACTURER reported improved standalone revenue of 10% year-on-year in the June quarter led by improved volumes and higher UVs (utility vehicles) mix. On the other hand, operating leverage benefits and favourable commodity prices supported EBITDA which grew by 50.9% year-on-year.
The company is increasing UVs in its mix to overcome the slowdown in the entry-level or small cars segment. It is planning to increase its annual production capacity to 40 lakh units by 2030-2031 from the current 20 lakh units. To achieve this, it is planning a new greenfield facility in Gujarat while its new construction facility in Haryana is on track. Also, it is focusing on the diversification of the powertrain mix into battery electric vehicles, hybrid, CNG and biofuels to meet emission norms. Analysts list recent launches, brownfield expansion, benefits from SMG acquisition, increased CNG penetration, export opportunities, and recovery in demand during the festive season as the key growth drivers.
A recent Motilal Oswal report expects the company to outperform industry growth over 2023-2024 and 2025-2026 with a steady 15% earnings CAGR. Further, any GST cut or favourable policy for hybrids by the government may drive a re-rating, as Maruti Suzuki would be the key beneficiary.
Note:Current price as on 24 Sept 2024. Nifty 50 12M forward PE: 22.2. Source: Reuters Refinitiv.
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This story originally appeared on: India Times - Author:Faqs of Insurances
