Stable stocks to manage market volatility: 5 stocks with up to 23% upside potential
The domestic markets turned volatile in October amid heavy FPI selling. After four consecutive months of net buying in equities, FPIs sold Rs.70,398 crore worth of net equities in October (till 17 October), which is the highest-ever monthly net selling. The data is compiled from the NSDL website. The benchmark Nifty-50 index dropped over 5% by the week ending 18 October from its all-time closing high of 26,216.1 (on 26 September).#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 announcement of fiscal and monetary stimulus by the Chinese government, coupled with better valuations of the Chinese markets relative to India, has led to increased FPI flows to China. While the Nifty 50 index is trading at a TTM PE of 22.4 times, the Shanghai Composite and Hang Seng indices are trading at valuations of 12 and 11.9 times, respectively, according to data compiled from Reuters-Refinitiv.
According to V.K. Vijayakumar, Chief Investment Strategist, Geojit Financial Services, “India has better growth prospects compared to China and, therefore, India deserves premium valuations. But the valuation differential is too big now and this can sustain the FPI selling for some more time.”
Apart from the China effect, geopolitical issues, an increase in oil prices, a jump in US bond yields (due to a rise in core inflation) and Sebi’s recent revision of F&O norms (for index derivatives) have also contributed to the market volatility. The volatility is likely to continue in the short term amid the downgrade of 2024-25 earnings estimates by most analysts and uncertainty surrounding the US presidential elections. Moreover, India’s consumer inflation (or CPI-Combined) for September 2024 was 5.49%, the highest since December 2023.This will create pressure on the RBI and could delay the expected rate cuts. Despite near-term risks, analysts are optimistic about the performance of Indian markets in the long term amid an increase in the investment cycle, significant improvement in ROE, declining balance sheet leverage, tailwinds in the manufacturing and industrial sectors, and favourable demographic dividend.
A newsletter from Wodehouse Capital Advisors states that the recent correction in the Indian benchmark is a healthy adjustment, creating strategic buying opportunities. As long as key support levels, namely the lows of Budget day and election counting day, remain intact, the market outlook remains constructive. The report advocates the buy-on-dip strategy and SIP strategy, which allows investors to capitalise on market volatility while positioning for long-term growth.
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Given the near-term risks, identifying stocks with a low-risk profile can help navigate the volatility effectively. There are various measures to judge the risk profile of a stock, with standard deviation (or variance), correlation and beta among the most widely used methods. The standard deviation (or variance) measures the spread of returns (generated by a stock or index) relative to the average returns. Generally, the higher the spread, the higher the risk, and vice versa. On the other hand, beta measures the sensitivity of a stock relative to the market benchmark. Correlation helps in determining how assets (stocks) move in relation to each other and helps manage the risk of an investment portfolio. The stocks that have a low correlation to each other help to reduce the overall risk of a portfolio.
Reuters-Refinitiv provides a risk score that can be used to identify the risk profile of a stock. This risk score is derived by looking at long-term (fiveyear) and short-term (90-day) stock performance measures, such as magnitude of returns, volatility, beta, and correlation. The ratings are calculated on weekly returns and range from 1-10, with 10 awarded to the least risky stocks.
We extracted the risk profile score from the Reuters-Refinitiv database for companies with a market cap greater than Rs.100 crore. Only those companies with a score of 10 were considered. In addition to the risk profile, we also considered the alpha of stocks. Alpha measures the outperformance of a stock relative to the market benchmark. Generally, stocks with higher values of alpha are considered superior. Alpha is based on the past five-year monthly data (also calculated for stocks with at least 40 months of share price data). The stocks that scored the best in terms of risk score and had positive alpha were identified.
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.
MACROTECH DEVELOPERS
THE REAL ESTATE DEVELOPER reported a strong quarterly pre-sales growth of 21% year-on-year in the September quarter. With the festive season commencing, the company is likely to meet its full-year guidance of 20% pre-sales growth. It added four projects in Pune and Bengaluru with GDV (gross development value) of Rs.5,500 crore, and there is a strong pipeline of business development opportunities.
Looking at consensus analysts’ estimates (compiled by Reuters-Refinitiv) for the September quarter, the company is expected to report EBITDA and PAT growth of 87.1% and 133%, respectively. The company’s established position in MMR (Mumbai Metropolitan Region), progress in new markets (Pune and Bengaluru), and rising demand for residential properties, coupled with the company’s large land bank, are expected to sustain growth momentum in the future. Analysts expect operational performance to remain strong in the future, aided by consistent demand across segments, volume growth in existing geographies, improved contribution from new markets and emerging premiumisation trends. Though the debt levels have increased sequentially in the September quarter due to higher business development investments, the net debt to equity ratio remains below the ceiling of 0.5 times.
A recent Nuvama report lists a revival in housing demand, ready inventory liquidation, faster land monetisation at Palava, portfolio growth and geographical diversification as key strongholds.
BHARAT ELECTRONICS
THE AEROSPACE AND DEFENCE electronics company is expected to report revenue and PAT growth of 13.3% and 19.5%, respectively, in the September quarter, according to the consensus of analysts compiled by Reuters-Refinitiv. The performance will be supported by better execution and robust ordering activity in the defence sector. The company’s order intake stood at Rs.7,080 crore in September 2024.
The company is a beneficiary of the growing prospects of defence and space electronics amid the government’s focus on increasing capital outlay for indigenised systems. It has strong capabilities in designing, developing and manufacturing strategic electronic products and systems. It has recently entered into an agreement with Reliasat Inc. Canada to leverage opportunities in the space segment. The strategic partnership is a significant step for the company to foray into the space segment, augmenting its offerings in line with the ‘Make in India’ initiatives, states a research note from Prabhudas Lilladher. It has also secured orders for navigational complex systems for ships, thermal imagers, communication equipment, fire control systems and gun control systems. An ICICI Direct report, released after the June quarter results, lists a healthy order backlog, strong balance sheet and healthy return ratios as key strongholds.
POWER FINANCE CORPORATION
THE INFRASTRUCTURE FINANCE COMPANY (and state-owned NBFC) is expected to benefit from growing power demand, its presence across the value chain, and government’s focus on renewable energy. Looking at the September quarter’s Reuters-Refinitiv estimates, the company is expected to report a net profit growth of 10.2% year-on-year.
The company is diversifying its portfolio and exploring financing opportunities in segments other than power projects, like electric vehicles and charging infrastructure, bio-refinery projects, ethanol blending, solar panels, etc. Such diversification will act as a driver for sustained loan growth in the future. Moreover, the asset quality risks are receding, and the company has made significant progress on stressed asset resolutions.
Recent reports from Motilal Oswal and Elara Capital are bullish on the company’s prospects. Motilal Oswal’s report states that the company will be able to leverage its lending opportunities across conventional generation, renewables and logistics to deliver a healthy 11% disbursement CAGR over 2023-24 and 2026-27. Moreover, it will remain an implementation agency for all incentives and schemes rolled out by the government to influence every power sector reform.
The Elara Capital report expects a steady-state 14-15% loan CAGR, 16% NII CAGR, and a two-year NPA downcycle with a positive bearing on credit cost. It also lists high dividend, expectations of strong return ratios and attractive valuations as key positives.
CROMPTON GREAVES CONSUMER ELECTRICALS
THE ELECTRICAL EQUIPMENT COMPANY is expected to report a soft performance in the September quarter due to muted demand during Onam and the inflation effect. It is expected to report a revenue growth of 6.5% year-on-year, according to Reuters-Refinitiv estimates. However, the mediumterm demand is expected to remain strong, led by premiumisation, distribution expansion, growth in alternative and modern trade channels, and market-share gains across product categories.
The demand is expected to pick up in the second half of 2024-25, led by the festive season and restocking by the primary channel for summer products (likely in the fourth quarter). Moreover, the restructuring of Butterfly Gandhimathi Appliances will support performance in the second half by improving margins. It will also provide logistics and manpower synergies and will enhance manufacturing capabilities for mixer grinders and cooktops.
A recent report from Ambit Capital believes that decadal-low industry margins and real estate growth will drive the industry revival. It expects that Crompton will reinvest profits and leverage its brand to expand new categories (wires & cables, switches & switchgears) over the next decade.
Another recent report from HDFC Securities report lists traction in solar pumps, focus on lighting segment turnaround, increasing market share in under-penetrated regions for the fans segment, and benefits from Cromption 2.0 strategy as key positives.
STATE BANK OF INDIA
THE PUBLIC SECTOR BANK is expected to report a strong loan growth of 15% year-onyear in the September quarter, led by traction in retail and SME segments, according to a recent banking and financial sector quarterly preview report by Elara Securities. The stock has underperformed the Nifty 50 and Nifty Bank indices in the past three months despite expectations of delivering better ROE than many private sector banks in 2024-25 and 2025-26. Investor concerns regarding higher asset quality pressure compared to private sector banks have led to the stock price underperformance. However, a recent Ambit Capital report states that these fears are not backed by data. Over the past five years, whenever there has been some pressure on retail asset quality of Indian lenders due to Covid-19, SBI’s asset quality perforperformance has been better than private sector peers.
The bank is better positioned on NIM due to its low CD ratio, high LCR ratio and higher share of MCLR loans compared to private banks. The Ambit report lists factors like maintenance of market share, twice the ROE compared to other PSBs, and marketleading non-banking businesses as key positives.
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This story originally appeared on: India Times - Author:Faqs of Insurances
