While India's e-commerce giants are preparing for their great Diwali sale, the equity market seems to be already in festive sale mode as seen in the price drop across stocks. The past couple of weeks have been unmemorable for investors to say the least and if the smart money is on the selling or buying side will be evident soon in the market trend. Though it is too early to say if bargain hunters have stepped back into the market, many stocks did witness high delivery volume during the August 19 till September 4 mayhem when the Sensex plunged 10% and several stocks even more. Here's a compilation of such stocks and a brief description of the companies that we think stand out.
India’s second largest manufacturer of abrasives and performance plastics has a market share of 25% and will be a huge beneficiary of an industrial turnaround. While the growth in revenues is still healthy at 10-12%, economic recovery will lead to higher growth and strong earnings because of operating leverage. Its product leadership, global presence, sound financial track record, negligible debt and dividend payment history make it an investor favourite. Over the last decade, it has clocked an impressive 15% growth in sales and profits with 17-18% operating margin and an average return on capital employed of 30%.
This South India-centered NBFC has several valuable franchisees in commercial vehicle loans, asset management, consumer loans, home loans and insurance. Over the last five years, it has constantly grown its income, profit and book value while delivering high double-digit RoE. Its gross NPAs remain the best in class by a wide margin — even as other NBFCs grapple with the NPA transition and potential changes to the underlying business model, says, Abhinesh Vijayaraj, analyst, Spark Capital. “Notably, Sundaram Finance hasn’t raised capital over the last four decades, with other businesses such as housing finance, insurance and asset management all being built through internal accruals," he adds. Sundaram Finance is a pure play on the demand for consumer, auto and mortgaged-backed loans in South India as also truck finance where it continues to be a dominant player.
This company caters to the cement, mining and utility sectors. It operates in a very niche area providing chromium wear, corrosion and abrasion-resistant castings where it enjoys a high entry barrier and pricing power. While growth in cement has been mixed, pick up in power generation and mining will be the key trigger. That apart, falling raw material prices — mostly ferrochrome — is a big positive. Even on low off-take in its user industries, the company is able to make a 27% return on capital. Its asset light business model and almost zero debt could be reasons for Pulak Prasad’s Nalanda Fund holding more than 8%.
In the highly commoditised plastics business, Supreme Industries has carved out a space for itself through innovative products and research. Because of the rising share of value-added products like industrial packaging and furniture products, it is able to command a higher operating margin (15%) and a return on capital of 34% without the addition of debt. Since mid-August, its stock has corrected close to 11% and now trades at close to 16X FY17 estimated earnings. In terms of growth, investors expect opportunities to unfold as a result of housing demand, composite cylinder, agriculture growth and smart city projects.
This Pune-based energy and environment major will benefit if some of the ambitious projects of the government like Smart Cities, Make in India, power capacity addition, etc take off. Apart from domestic growth, it wants to increase its share of export (30% of order book) from 16% now to 40% by 2017 by commissioning a new facility. Investors are hoping that order inflows would improve in the coming months and losses (₹190 crore, largely, because of one-time investment write-offs) incurred by its subsidiaries (in super critical technologies) will narrow down. Despite the lean period, the company is making a profit, generating free cash flows and earns a 22% return on capital. Operating leverage will kick in once the investment cycle turns. While there could be a waiting period, the impeccable corporate governance is a source of comfort.