Equity funds accumulated these stocks in large numbers over the past one year. Here’s why you need to add them to your portfolio.
ET Bureau
The stock market has witnessed a lot of volatility over the past one year. Global uncertainties weighed heavy on the market earlier this year, but it bounced back following the passage of key reforms, a healthy monsoon and strong inflows of foreign investments.
However, the healthy uptick in stock prices has taken market valuations pretty high, even as corporate earnings growth has been moderate at best. The appetite for mid- and small-cap stocks, in particular, has been very high, leading to a surge in valuations in certain pockets. Equity fund managers have had to dig deep to find rewarding stocks.
In the third edition of our annual listing of Most Wanted Stocks, we have identified seven gems that mutual fund managers steadily accumulated during the past one year. These are stocks that have seen a consistent rise in mutual fund holdings in the past four quarters.
Does it make sense to follow in the footsteps of fund managers and invest in these stocks? The basket of seven stocks we identified last year has given phenomenal returns of 40%. This is 6 percentage points more than the best performing diversified equity fund and 29 percentage points higher than BSE 500. Our 2014 stock picks have also outperformed the average diversified fund and the BSE 500.
As in previous years, we have applied a robust methodology to identify these scrips. We first identified BSE 500 stocks that have seen a consistent rise in mutual fund holdings over the past four quarters. The list was pruned to include only those stocks which were held by at least 10 diversified schemes and where the current mutual fund holding was at least 5% of its total share capital.
This left us with 17 stocks. Of these, only 10 stocks boasted of an average return on equity (RoE) above 14% over the past three years. Finally, we looked at analysts’ recommendations to arrive at the seven most promising stocks from this basket. When considering these stocks, keep in mind that mutual funds invest with a longterm perspective.
Be ready to stick with these names for 3-5 years. In some cases, investors would also be better off buying on dips—or price corrections—if possible. Lastly, remember that even the most high-conviction bets need to be monitored regularly. If you are patient, this basket of quality stocks can prove rewarding in the long run.
Stocks that funds are bullish on
Equity funds accumulated these stocks in large numbers over the past one year. Here’s why you need to add them to your portfolio.
How we identified the most wanted stocks
1. We began by restricting the Most Wanted Stocks’ study to the BSE 500 universe of stocks.
2. Only 54 stocks were found to have seen a steady rise in mutual funds’ holdings over each of the past four quarters.
3. Stocks held by at least 10 diversified equity funds, forming at least 5% of their total share capital, were selected. Only 17 scrips made the cut.
4. Among these, only 10 stocks had an average return on equity in excess of 14% over the past three years.
5. Finally, of the 10 stocks that made the cut, on the basis of analysts’ recommendations, the list was finalised to 7 stocks.
EXIDE INDUSTRIES : Will gain from the rising auto demand
Equity funds accumulated these stocks in large numbers over the past one year. Here’s why you need to add them to your portfolio.
The market leader in the auto batteries segment and a preferred battery suppliers to major OEMs (original equipment manufacturers) in India, Exide Industries is well positioned to benefit from the rising auto demand. The positive impact of a normal monsoon and the Seventh Pay Commission has led to a jump in volumes, owing to increased demand from OEMs.
The replacement demand is also expected to revive by the next year and the industrial battery segment will pick up with the economic recovery. Exide is also likely to be a major beneficiary of the Goods and Services Tax (GST) due to the lower indirect tax rates as well as the shift from unorganised to organised players in the battery replacement market. The price advantage enjoyed by the unorganised players due to tax evasion will erode once GST is enforced.
The company has outlined a capex of Rs 1,400 crore over the next two years to enhance its product mix with high performance and more durable automotive batteries with punch-grid technology. With the introduction of cost-cutting measures and focus on more profitable segments, going forward, Exide is expected to maintain healthy margins.
MF Holding as a % of total share capital 45 schemes hold the stock
Equity funds accumulated these stocks in large numbers over the past one year. Here’s why you need to add them to your portfolio.
Top 5 funds holding the stock
Equity funds accumulated these stocks in large numbers over the past one year. Here’s why you need to add them to your portfolio.
“Keeping in mind the structural recovery in automotive demand, Exide remains a play that has strong re-rating possibilities.” ICICI Direct
Share price and index value normalised to a base of 100.
VOLTAS: Better product mix to sustain high margins
Equity funds accumulated these stocks in large numbers over the past one year. Here’s why you need to add them to your portfolio.
Voltas maintains its dominant position in the domestic air-conditioning market, despite competition from multinatinal companies and local players, because of its wide distribution network, strong product suite and quality after-sales support. The strong demand in the unitary cooling products (UCP) segment is likely to continue during the festive October-December season, supported by rise in discretionary spending.
A better product mix—rising proportion of higher margin split and inverter AC compared to window AC—and lower operating leverage is expected to sustain margins at a healthy level. The company has recently entered the air coolers space, which is a highly underpenetrated segment and will add to the company’s margins. Voltas’ EMP (electromechanical projects) business, which was underperforming owing to a weak demand environment, slow execution and cost-inefficiencies, has seen healthy order inflows in the past few quarters and is starting to show signs of a recovery.
Analysts expect international awarding activity to improve in the run-up to the Dubai Expo 2020 and Qatar Football World Cup 2022. The company’s superior return ratios, clean balance sheet and zero-debt position justify its premium valuations, say analysts.
MF Holding as a % of total share capital 39 schemes hold the stock
Equity funds accumulated these stocks in large numbers over the past one year. Here’s why you need to add them to your portfolio.
Top 5 funds holding the stock
Equity funds accumulated these stocks in large numbers over the past one year. Here’s why you need to add them to your portfolio.
“Because of improvement in performance of all of its business segments, we expect improved profitability and better investment return ratios for the company, going forward.” Angel Broking
Voltas and BSE 500
Equity funds accumulated these stocks in large numbers over the past one year. Here’s why you need to add them to your portfolio.
Share price and index value normalised to a base of 100.
CHOLAMANDALAM FINANCE: Lower cost of funds will help build margins
Equity funds accumulated these stocks in large numbers over the past one year. Here’s why you need to add them to your portfolio.
Cholamandalam Investment and Finance Company (CIFC) is among the biggest beneficiaries of the recent reduction in the cost of funds for non-banking finance companies. The ratings upgrade last year and improved operating performance have also contributed to a rapid decline in the firm’s cost of funds, boosting net interest margin expansion.
The bank’s costs are expected to fall further as nearly 48% of its nonconvertible debentures (which command a relatively higher interest) retire over the next two years and the lender further increases its share of low-cost bond borrowings. The firm’s reduced cost of funds, along with a higher share of used commercial vehicle and light commercial vehicle loan book, is expected to help sustain its margins despite increasing competition.
A strong visibility in asset quality improvement and a relatively lower exposure of the loan book to highly competitive segments should broadly offset the impact of the new guidelines that require a loan to be categorised as an NPA if payments aren’t received 90 days past due date. However, CIFC’s valuation is at a significant premium to its long-term average, so investors should wait to buy on dips.
MF Holding as a % of total share capital 40 schemes hold the stock
Equity funds accumulated these stocks in large numbers over the past one year. Here’s why you need to add them to your portfolio.
Top 5 funds holding the stock
Equity funds accumulated these stocks in large numbers over the past one year. Here’s why you need to add them to your portfolio.
“Whilst current valuations are at their historical peak, they can rerate further as CIFC demonstrates secular earnings growth by scaling up its home finance business.” Ambit capital
Cholamandalam and BSE 500
Equity funds accumulated these stocks in large numbers over the past one year. Here’s why you need to add them to your portfolio.
Share price and index value normalised to a base of 100.
PI INDUSTRIES: earnings growth track justify high valuations
Equity funds accumulated these stocks in large numbers over the past one year. Here’s why you need to add them to your portfolio.
Agro chemicals player PI Industries continues to maintain its leadership position in the industry. Pick-up in sowing activity for the Rabi crop because of a good monsoon bodes well for the company’s domestic business. Despite intensifying competition, the company’s weed-killing product, Nominee Gold, continues to perform well due to its strong brand recall and efficacy.
While there are near-term concerns on the slowdown in the global agrochemical industry, analysts expect the company’s custom synthesis and manufacturing (CSM) growth will accelerate from next year, given its strong order book and commissioning of new dedicated facilities. Advancement of order from global customers helped the company show a robust growth, in this segment, in the September quarter.
A healthy product mix and operating efficiencies also helped PI Industries to clock a sound margin. Pick-up in recently commercialised molecules, launch of new molecules in the domestic space and a healthy pipeline of molecules in the CSM space is expected to drive the company’s future growth. While PI Industries trades at a premium to peers such as Rallis India and Dhanuka Agritech, its superior return ratios and earnings growth trajectory justify the valuations, say analysts.
MF Holding as a % of total share capital 18 schemes hold the stock
Equity funds accumulated these stocks in large numbers over the past one year. Here’s why you need to add them to your portfolio.
Top 5 funds holding the stock
Equity funds accumulated these stocks in large numbers over the past one year. Here’s why you need to add them to your portfolio.
“PI will continue to show best execution among agri input peers. Profitability improvement continues to surprise and reflects improving operating efficiencies and product mix.” Ambit capital
PI Industries and BSE 500
Equity funds accumulated these stocks in large numbers over the past one year. Here’s why you need to add them to your portfolio.
Share price and index value normalised to a base of 100.
FINOLEX INDUSTRIES: GST will boost this market leader’s growth
Equity funds accumulated these stocks in large numbers over the past one year. Here’s why you need to add them to your portfolio.
With the government’s focus on increasing the land under irrigation and improving rural sanitation infrastructure, Finolex Industries, the country’s largest PVC pipes player, is poised for a healthy growth in the coming years. A good, well-distributed monsoon this year, which will spur rural demand, is expected to provide better earnings visibility to Finolex going forward.
Being the dominant player in the agri-pipes segment, it is well-placed to benefit from the increase in demand. Finolex is strengthening its distribution network, particularly in the underpenetrated North and South Indian markets, by adding dealers and setting up warehouses. It is also looking at adding almost 1 lakh tonne in capacity, over the next couple of years, to cater to the rising demand. The company has, in recent years, pared down its debt significantly and reduced its receivables (money others owe the company) leading to improved operating cash flows.
Analysts expect Finolex’s return ratios to improve going forward as it focuses on high-margin products and incurs nominal capex. The implementation of GST will also be a positive for the company as demand will shift from the huge unorganised agri-pipe market towards the organised players, due to the reduction in the pricing gap.
MF Holding as a % of total share capital 18 schemes hold the stock
Equity funds accumulated these stocks in large numbers over the past one year. Here’s why you need to add them to your portfolio.
Top 5 funds holding the stock
Equity funds accumulated these stocks in large numbers over the past one year. Here’s why you need to add them to your portfolio.
Analyst recommendations Buy : 9 Sell : 1 Hold : 2
“With robust cash flows, an established brand and nominal capex needs, Finolex is in a comfortable position to give a 50%-plus dividend payout and improve its capital efficiency further.” Antique stock broking
Finolex industries and BSE 500
Equity funds accumulated these stocks in large numbers over the past one year. Here’s why you need to add them to your portfolio.
Share price and index value normalised to a base of 100.
CREIT ANALYSIS & RESEARCH: Revenue will rise with economic recovery
Equity funds accumulated these stocks in large numbers over the past one year. Here’s why you need to add them to your portfolio.
Credit Analysis and Research (CARE), the second largest credit ratings company in the country by market share, offers a focused play on the rating business with nearly all of its revenue coming from this segment, unlike peers such as Crisil and ICRA. CARE boasts of the best margin among rating agencies: 65% operating margin and 44% net profit margin in 2015-16.
This is primarily on account of its focus on the highmargin bank loan and bonds rating business and bolstered by relatively lower employee costs. CARE’s presence in the small and medium enterprise segment is muted compared to peers, but the company intends to improve its involvement in this segment by increasing its locations and hiring employees.
While revenue growth from its rating business has moderated significantly in recent years, in line with the slowdown in the economy, analysts expect improved traction in the coming years as the economic recovery plays out. CARE’s asset-light business model and a strong operating cash flow has helped the company increase its dividend payout over the years. With limited capital requirement, incremental profit growth is expected to further enhance its already healthy return ratios.
MF Holding as a % of total share capital 24 schemes hold the stock
Equity funds accumulated these stocks in large numbers over the past one year. Here’s why you need to add them to your portfolio.
Top 5 funds holding the stock
Equity funds accumulated these stocks in large numbers over the past one year. Here’s why you need to add them to your portfolio.
Analyst recommendations Buy : 6 Sell : 1 Hold : 1
“We remain bullish on the stock from a long-term perspective. CARE has proved its ability to gain market share in the ratings segment and has maintained bestin-class margins.” ICICI Direct
CARE and BSE 500
Equity funds accumulated these stocks in large numbers over the past one year. Here’s why you need to add them to your portfolio.
Share price and index value normalised to a base of 100.
FAG BEARINGS INDIA: New emission norms will drive demand
Equity funds accumulated these stocks in large numbers over the past one year. Here’s why you need to add them to your portfolio.
With the new set of emission norms slated to kick in the coming years, automakers are expected to shift to newer generation of bearings to meet the stringent requirements, which provides revenue visibility for the country’s largest supplier of bearings to the passenger car segment, FAG Bearing.
Since the new generation of bearings are pricier compared to the earlier offerings, the shift in the product mix will improve the company’s realisations and support margins. FAG recently commissioned a new plant in Gujarat, which offers higher revenue visibility going forward.
The government’s plan to upgrade railway infra through dedicated freight corridors, metro and highspeed trains in major cities also augurs well for the company. FAG has seen a steady rise in its RoE over the past three years. Its stock, however, is trading at rich valuations despite a muted growth in recent years. Investors should come in only for the longer term.
MF Holding as a % of total share capital 40 schemes hold the stock
Equity funds accumulated these stocks in large numbers over the past one year. Here’s why you need to add them to your portfolio.
Top 5 funds holding the stock
Equity funds accumulated these stocks in large numbers over the past one year. Here’s why you need to add them to your portfolio.
Analyst recommendations Buy : 7 Sell : 0 Hold : 1
FAG Bearings India and BSE 500
Equity funds accumulated these stocks in large numbers over the past one year. Here’s why you need to add them to your portfolio.
Share price and index value normalised to a base of 100.
ET Bureau
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