At a time when the economy is at a six-year low and most of the macro indicators point towards a slowdown, finding stocks that can deliver higher growth is tough.
India Inc. recorded its worst performance in the June quarter in at least three year, and the September quarter is unlikely to surprise. The steps taken by the government will take a couple of quarters to get reflected in the economy and on balance sheets of India Inc.
“My own sense is for the next couple of months, the market will trade with positive bias. Corrections will be bought into. In the long run, growth is and will always remain a deciding factor,” Dharmesh Kant, Head-Retail Research, IndiaNivesh Securities Limited, told Moneycontrol.
“The Q2FY20 earnings update will be critical and any positive surprise, with respect to market expectation, will cement ensuing pullback rally.”
With the growth deciding the movement of markets, ICICI Securities in a note said they prefer stocks in a comparable or low-profit pool segments relative to global economies, while exhibiting higher than nominal GDP growth in sales and profitability along with management ability and balance sheet strength to scale up the business.
Some of the stocks that fit the criteria include Bandhan Bank, Indigo, Jubilant FoodWorks, HDFC Life, HDFC Bank, Avenue Supermarts, ICICI Lombard, Titan, Quess Corp, Dr. Lal Pathlabs and Dixon Technologies.
From the unrated space, ICICI Securities like HDFC AMC, PVR, Honeywell Auto, Bajaj Finance, United Breweries and Syngene International.
From the unrated space, ICICI Securities like HDFC AMC, PVR, Honeywell Auto, Bajaj Finance, United breweries, and Syngene International.
The domestic brokerage firm based its analysis on the Top 500 listed stocks using segment data, which indicated that the sales/EBIT of some segments grew at a much faster rate than the nominal GDP of 11 percent over the past five years along with robust ROCE/ROE and continues to do so.
As a qualifier, ICICI Securities used industry-level growth forecasts for five-10 years, which should be above the nominal GDP supported by structural themes.
“We strongly recommend market leaders gaining market share, thereby widening their moats and avoid relatively cheap weak players, as the mortality rate in new and fast-growing segments is high,” the note said.
Globally, valuations of growth segments have been getting richer, providing low ‘margin of safety’. What has mattered most is the length of the high-growth phase, which the brokerage firm terms as competitive advantage period, or CAP.
In a slowing growth environment (10-11% over the last five years), segments growing at a faster pace are driven by: disruption caused by value migration among players due to competitive pricing, demand shift, regulations and technology adoption (financials, retail, real estate etc.); and shift in financial savings from traditional avenues (capital market intermediaries).
Additionally, demand for insurance cover also increased, and new-age service lines and technology-driven businesses (staffing, OTT, IOT, etc.). There is an expanding demand for underpenetrated value-added consumption categories and entertainment and leisure.
Selectively manufacturing, including contract manufacturing, and infrastructure—driven by government capex—are also growing at a robust rate, though big-ticket private capex is missing.
It turns out that growth segments are consuming less capital, at 6.9 percent, of the overall capital employed while generating 10 percent of EBIT within the non-financial space, the note added.