The markets witnessed increased volatility last week, with the Sensex declining over 4.8%. Rising tensions in the Middle East and a surge in oil prices have spooked investors. Even so, the Nifty 50 and BSE Sensex are among the best performing global indices in the first nine months of 2024. The performance of domestic markets has been broad-based, with 77% of 2,792 listed stocks (or 2,147 stocks) delivering positive returns between January and September. Out of these, 1,416 stocks, or 51%, have beaten the Nifty 500 index. The returns are based on 30 September closing.
India’s strong macroeconomic fundamentals, huge liquidity inflows from domestic institutional investors (DIIs), and recovery in foreign portfolio investor (FPI) inflows in the past few months have supported the growth of domestic equity markets. Hopes that the RBI will cut interest rates have also boosted the sentiments.
Domestic mutual funds have invested over Rs.2.6 lakh crore in equities (net investment) between January and September 2024, according to ACE MF data. On the other hand, FPIs have pumped over Rs.1 lakh crore in equities in the first nine months of 2024, according to the NSDL data. In the corresponding period of the previous year, the net inflows in equities by mutual funds were Rs.1.1 lakh crore, whereas FPI inflows were Rs.1.2 lakh crore.
In terms of economic fundamentals, the markets are expecting a strong pick-up in government spending over the next few months, as well as a revival in urban consumption aided by recovery in private consumption (in the first quarter of 2024-25).
A CLSA report, released in September, lists several factors that are driving sustainable economic growth in India. The lowest increase in government debt among large markets, low household leverage compared to large markets, contained bond yields and highest GDP growth among key equity markets are some of these factors.The report mentions reasons for the attractiveness of the Indian markets.A decline in balance sheet leverage, notable improvement in RoEs, stable and consistent EPS growth after Covid-19, declining beta (measure of market risk) of the Indian market relative to emerging markets, lowest stock and sectoral concentration risk among emerging markets, and steady inflow from domestic investors are some of the factors that are luring investors.
High market valuations create risk of near-term correction
High valuations
However, the market rally over the past few months has completely ignored the premium valuations. The BSE Sensex trades at a 12-month forward PE of 23.7 times, which is the highest among the US, European and Asian key benchmarks. High valuations could impact near-term market performance. CLSA’s India bull-bear index is at an extended bullish level, historically followed by a pullback or low returns. Additionally, equity valuations relative to bonds suggest lower absolute returns over the next one or two years, according to CLSA. Certain macro risks could make investors nervous. A recent CareEdge Ratings Foresights report for September has raised concerns about the decline in passenger vehicle sales for August and the increase in inventories. Any significant slowdown in auto sales could have broader implications for economic expansion.
The report highlights increased dumping by China and potential trade wars as challenges for Indian manufacturers. Experts, therefore, expect short-term market volatility, with returns unlikely to match the recent performance. Narendra Solanki, Head of Fundamental Research at Anand Rathi, advises caution in the short term due to high market valuations, external risks like geopolitical tensions, and uncertainty around the US elections.
Moreover, India Inc. is expected to deliver soft performance in the September quarter, which could have a bearing on the market’s performance. “Recent trends indicate that the second quarter corporate performance will be average, given the demand headwinds, late festive season and prolonged rainfall,” says Amnish Aggarwal, Director, Institutional Research, PL Capital, Prabhudas Lilladher. The markets have witnessed increased volatility in the week ending 4 October with Sensex declining over 4.8% from its 26 September all-time closing high. Rising tensions in the Middle East and a surge in oil prices have spooked investors.
Growth theme
With the global interest rate cycle reversing and RBI rate cut likely, growth stocks could benefit as lower rates drive liquidity in companies that are growing faster. These stocks, trading at higher PE multiples, have outperformed, with the Nifty Growth Sectors 15 index delivering 15.5% return in the September quarter, compared to 7.5% by Nifty 50 and Nifty 500. However, experts remain cautious due to the recent price surges and extended valuations.
Indian markets have outperformed most global markets in 2024
Rajat Chandak, Senior Fund Manager, ICICI Prudential AMC, believes that though growth is a timeless investment strategy, such stocks typically trade at high valuations and any disappointment in expected growth can lead to significant underperformance. Thorough research is crucial to uncover investment opportunities in the growth space.Many mid- and small-cap growth stocks are becoming expensive. Anirudh Garg, Partner and Fund Manager at Invasset, warns that the risk-reward ratio for these stocks is currently unfavourable.
Quality stocks
As the markets are seeing risks that could increase volatility, quality theme is grabbing the attention of experts. In the September quarter, the Nifty200 Quality 30 index registered 12.8% gains, substantially beating both Nifty 50 and Nifty 500 indices.
The primary attributes of quality are durable earnings growth, strong balance sheet, robust business model, good corporate governance, high return ratios and strong cash flows. Any stock with these attributes has a higher chance of withstanding shortterm volatility and witness faster recovery when the pessimism recedes. “Quality stocks can be resilient during turbulent times, considering the tensions in the Middle East and global economic slowdown worries. While quality stocks may sometimes trade at premium valuations, their strong fundamentals can justify these prices,” adds Aggarwal. He suggests that the portfolio should have a higher allocation to quality stocks. Chandak also advocates allocating a portion to quality stocks at this point of time.
Quality, growth themes have done better than the broader market
“The overall equity market valuations are rich. So, in the event of any negative triggers causing volatility or a market correction, the quality theme could offer a defensive cushion to an investment portfolio,” he adds.
Best of both themes
Experts advise a combination of growth and quality stocks in the current market conditions. Vinay Paharia, CIO of PGIM India Mutual Fund, believes that the combination of high-quality and highgrowth stocks is a perennial theme. “Superior investment returns are not generated just by companies’ ability to generate high return on equity. It has to be accompanied by the ability to deploy higher sums of capital at these higher rates to generate higher growth,” says Paharia. Hence, a combination of high returns on equity and high profit growth is one of the best ways to generate superior returns in equity investments over the medium to long term.
The market enthusiasm is also fuelled by valueunlocking potential in various sectors. Riya Oswal Bafna, Co-fund Manager at Purnartha, says that it is crucial to remain invested in the market than attempting to time it. Rather than worrying about a potential 25-30% correction, it’s wiser to remain invested in companies with strong growth drivers. “One should prioritise growth and quality drivers and navigate this volatility effectively,” adds Bafna.
As a combination of growth and quality is likely to do well, ET Wealth identified nine stocks that score well on both growth and quality parameters. For growth, the stocks were evaluated using sales growth, EBITDA margins, net profit margins and PE, whereas for quality, RoE and debt to equity ratio were used (see box for methodology). Banking and financial stocks are excluded.
10-year yields of US and India have been trending lower
However, due to the recent rally in stock prices, the upside potential of most stocks is drained. There are 524 stocks where the consensus target prices are compiled by Reuters-Refinitiv for a minimum of two analysts. Of these, 68.3%, or 358 stocks, are offering an upside potential in single digits (including those offering a downside). With a vast majority of the stocks having no significant upside potential, we ignored the upside potential criterion while selecting stocks.
Moreover, with the upcoming earnings season and the likelihood of a rate cut by the RBI, stocks may see a revision in their target prices over the next few weeks or months. So, after obtaining the list of stocks that pass all the thresholds defined in the methodology, the final stocks have been selected on the basis of the proportion of their buy and hold ratings as a percentage of total ratings. The selected nine stocks have a ratio of over 80%. In other words, every eight out of 10 ratings of analysts that are covering such stocks have either a buy and/or hold rating.
These nine stocks may not currently have a good upside potential. However, these have good business prospects. A significant proportion of buy and hold ratings indicates analysts’ confidence in such stocks. Any decline in their prices provides investment opportunities due to their good business prospects. The following are the nine stocks that score well on both growth and quality parameters:
How we selected the stocks
Affle (India)
The global technology company enjoys good growth prospects led by digitisation. This is aided by government support, Internet and smartphone penetration, availability of affordable data plans, rising mobile advertising and strong growth prospects of digital commerce. As for the June quarter results, the company reported 27.8% and 30.6% year-on-year (y-o-y) growth in the revenue and net profit, respectively, supported by broad-based growth across business verticals and markets.
While the emerging markets registered 24.8% y-o-y growth, developed markets revenue grew by 36.9% during the quarter. The growth prospects of both emerging and developed markets remain buoyant, led by recovery in RMG clients in India and a large addressable market in North America and Europe. The management is also focusing on targeting specific verticals in the developed markets to capture long-term growth opportunities.
The company aims at improving operating profit margins and expects over 20% revenue growth in 2024-25. Steady employee expenses will create operating leverage benefits and support margins in the future. In addition, the successful integration of all platforms (gained from acquisitions) will create strategic synergies and strengthen its market position.
Analysts list industry tailwinds from mobile advertising spend, differentiated RoI-linked revenue model, premiumisation strategy, focus on faster growing emerging markets, Google’s plans to scrap third-party cookies depreciation, and improving digital marketing in e-commerce and video-based companies as the key positives.
Indian Hotels Company
The hospitality company is expected to benefit from strong structural tailwinds in the travel sector. This is led by demand-supply mismatch (demand is expected to outpace supply), release of pent-up demand, pick-up in corporate travel, and improvement in inbound travel. Though the company reported a muted performance in the June quarter due to temporary headwinds amid elections and heatwave, the performance is set to improve in the coming quarters with a double-digit revenue growth in 2024-25.
The strong demand for both corporate and leisure, improvement in MICE activities and increase in business associated with weddings are the near-term performance drivers. Further, the new business (Ginger, Qmin and amã Stays & Trails) and re-imagined businesses (Taj SATS and The Chambers) are expected to provide an accelerated growth. The former is expected to grow 30-35%, whereas the latter will see 15-20% y-o-y growth in 2024-25. It has also announced a foray into the branded residences segment in Chennai. The international portfolio in the US market is expected to gain traction after the November elections. The company is on track to open 25 hotels in 2024-25.
Analysts expect an improvement in ARR due to higher demand, cost optimisation measures, sustainability of occupancy levels, strong room addition pipeline, likely improvement in income through management contracts, focus on inorganic growth opportunities, value addition from new brands and a healthy balance sheet.
Trent
The retail company continues to deliver a robust performance led by its strong execution capabilities, integrated supply chain, innovation and healthy customer relationships. In the June quarter, it reported a growth of 57% and 131% in the top line and bottom line. While there were demand and consumption challenges, the company’s profitability continues to improve due to cost control and operating leverage benefits.
Moreover, store additions, improving productivity of Zudio and double-digit LFL (like-for-like) growth also supported the performance during the quarter. Star Bazaar (grocery business) saw traction led by a focus on fresh foods and own brands. The emerging categories like beauty and personal care, innerwear and footwear also witnessed strong momentum.
The company is also investing in resetting technology across the entire value chain, which bodes well. Analysts list the company’s store economics, industry-leading SSSG, growth consistency and improvement in return ratios as the key positives.
A Systematix report released after the June quarter results states that the growth momentum at Westside will sustain through accelerated store openings, improved customer experience after modernisation of stores, and limited competition in the fast-fashion category beyond metros and tier 1 cities. As for Zudio, aggressive store addition plans in tier 2/3 cities offer significant growth opportunities. Moreover, the likely improvement in the demand environment in the future will help the stock to sustain premium valuations.
Mankind Pharma
The healthcare company has strengthened its position in the industry due to its diversified presence across chronic, acute and consumer healthcare segments, and entry in new therapeutic segments, which are niche, have high entry barriers and offer high margins.
In the June quarter, the company reported double-digit growth in both revenue and net profits. While the domestic pharmaceuticals and export segments registered 9% and 62% growth, respectively, the consumer healthcare reported a 1% decline on y-o-y basis. The domestic business was driven by cardiac and anti-diabetes therapies, whereas traction in the US generics supported the export growth.
Analysts believe that the company’s multiple initiatives will sustain its growth visibility. Over the past few years, the management has consistently implemented plans to launch differentiated products and improve market diversification. It is also adding new growth levers by investing in biosimilar, pet food and ayurveda portfolios. The BSV acquisition has also helped the company gain wider access to the high entry barrier superspeciality portfolio, speciality R&D tech platform, in-house complex manufacturing capabilities and strong institutional reach.
A Motilal Oswal report (released in August 2024) lists the expansion in product offerings in major therapies, capitalisation on leverage, further improvement in the share of chronic therapies, improvement in MR productivity, and footprint expansion in metro/ tier 1 cities as the key strongholds.
Triveni Turbine
The industrial steam turbine manufacturer enjoys healthy growth prospects from order inflows from both domestic and international markets. While sectors like renewables will drive international order inflows, industries like steel, cement, chemicals, sugar, distilleries, and paper and pulp will drive domestic order inflows.
In the June quarter, the company reported a healthy growth in revenue and PAT, with 23% and 32% y-o-y growth, respectively. The order book remains healthy at Rs.1,730 crore, which grew by 23% y-o-y.
While export orders surged by 74%, domestic orders were muted due to the election impact and registered a 2% growth. However, the management expects order inflows in the domestic market to pick up, given the strong enquiry pipeline from end-user industries. Moreover, the increased demand in the Middle East, Southeast Asia and Europe is expected to drive export growth in the future. On the other hand, margins are expected to remain stable due to the growing share of higher margin exports, aftermarket sales and stable commodity prices.
The management continues to focus on R&D to keep up with the global competition and aims to introduce new products with wider applicability.
A recent Motilal Oswal report lists factors like expansion in key international geographies, widened product offerings, scaling up of the aftermarket business and focus on innovation as the key positives. The report expects revenue and PAT CAGR of 29% and 32%, respectively, over 2023-24 and 2026-27.
Computer Age Management Services
The company is a technology-driven financial infrastructure and services provider to mutual funds, AIFs (alternative investment funds) and insurance companies. It is a beneficiary of the growing mutual funds industry, digitisation and increased retail investor participation via SIPs. It enjoys a market share of 68%, with Rs.44.3 lakh crore worth of AUM serviced by the company, compared to Rs.66 lakh crore AUM of the mutual fund industry (August 2024).
In the June quarter, it reported a net profit growth of 41.3% y-o-y, which is driven by an increase in the share of non-MF business and an improved mix of equity AUM in the total mutual fund AUM.
While revenue prospects from the mutual fund business continue to remain robust, the management aims to increase the contribution of non-MF businesses from 13% in 2023-24 to 20% by 2026-27. Continued growth in the AIF segment, increase in clients in GIFT City, expansion of CAMSPay operations beyond MFs in new sectors like education and cards, and acceleration of ePolicy conversions in CAMSRep are some of the factors that are expected to augment the non-MF revenue.
Analysts list automation across the process value chain, introduction of AI across stack, redesign of its transfer agent platform in Google Cloud, opportunities arising from stringent KYC process in capital markets and strong prospects in the insurance segment (Bima Central) as the key positives.
UltraTech Cement
The cement player will benefit from the likely increase in cement demand amid an increase in construction activities and traction in the infrastructure and housing sectors. The cement demand is expected to grow at 7-8% in 2024-25, according to the company’s 2023-24 annual report. However, the June quarter registered a mixed performance, with revenue meeting Reuters-Refinitiv estimates, but EBITDA and net profit missing the estimates.
Weak realisation amid pricing pressure impacted the performance during the quarter. The performance challenges are expected to continue in the September quarter as the cement demand is yet to pick up. However, an improvement in project momentum after the monsoon is expected to boost the demand for cement from the third quarter (December quarter) of 2024-25.
The targeted cost savings over the next few years through an increase in the share of green power and alternative fuels, lead distance reduction, increased blending and operating leverage will also support margins and profitability in the future. Moreover, the acquisition of India Cements will strengthen its foothold and market share in the southern markets.
A recent HDFC Securities report remains bullish and states that the long-term outlook for the company remains intact, aided by its focus on cost reduction, likely decline in fuel costs in 2025-26, industry consolidation, ongoing organic expansions and jump in consolidated capacity with the acquisition of Kesoram Industries and India Cements.
Venus Pipes and Tubes
The manufacturer of stainless steel pipes and tubes is a beneficiary of growing demand from multiple industries, including oil and gas, fertilisers, pharma, engineering and chemicals. It is gaining market share in the export market, whereas in domestic markets, import substitution is helping to capture the share from unorganised players.
In the June quarter, it reported a strong 33.7% and 73.8% y-o-y growth in revenue and EBITDA. A significant increase in export, better product mix and backward integration benefits supported the performance during the quarter. The capacity expansion is on track and the management has announced a capex of Rs.175 crore for venturing into higher profitable fitting solutions, welded tubes and titanium tubes. It is aiming to increase its current total capacity of 4,800 tonne per annum to 7,200 tonne per annum by the end of 2025.
Further, the cost-saving initiatives through backward integration and operating leverage benefits (due to higher capacity) are also expected to support profitability in the future.
An Ambit Capital report released after the June quarter results expects the company to be a key beneficiary of the heightened industrial capex and it is constantly building channel profiles to ensure growth longevity beyond its traditional base. It estimates revenue and EBITDA CAGR of 29% and 31% over 2023-24 and 2026-27, respectively.
Century Plyboards (India)
The plywood manufacturer enjoys multiple growth drivers, such as traction in the real estate sector, rising number of commercial projects under implementation, an increase in private capex and demand shift towards branded players. Moreover, increasing use of readymade and easy-to-install furniture is a key growth driver for the MDF segment.
However, the company witnessed a sluggish demand in the June quarter. The rise in input costs and weak realisations in MDF dented the overall margins during the quarter. While the plywood segment reported good performance, led by expansion in the distribution network and market share gain, both the MDF and laminates segments’ performance was hit due to pricing pressure and low operating rate of the newly commissioned unit in Andhra Pradesh.
The management expects the demand to improve in the future, led by the growing housing market, and has kept its volume guidance intact at 10%, 20% and more than 40% for plywood, laminates and MDF for 2024-25, respectively. The ramp-up of capacities at the Andhra Pradesh plant, easing MDF imports after BIS implementation from February 2025, recent price hikes in plywood and laminates, and the likelihood of timber prices peaking in 2025-26 are expected to aid margins in the future.
A recent HDFC Securities report is bullish on the company and lists strong franchise (pan-India distribution, aggressive marketing and wide range of SKUs), leadership presence in most wood segments, healthy return ratios and strong demand outlook as the key strongholds.
Price and PE values as of 1 October 2024. | Revenue growth and RoE figures are for 2023-24. | Industry classification by Reuters-Refinitiv. | Nifty 50 TTM PE: 26.3 times, Nifty 50 12-M forward PE: 22.8. Source: Reuters Refinitiv
