5 stocks that can be good buys although shunned by institutional investors

Be cautious about stocks in which institutions are reducing stake, but also look for opportunities.

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Identifying stocks that witness increase in stake by institutional investors is a common investment strategy.
Investment interests of institutional investors play a significant role in the way stock markets move. On an aggregate basis, institutional investors held more than 25% stake in the constituent stocks of the BSE500 index in the April-June 2019 quarter. Institutional investors include FPIs, domestic mutual funds, foreign venture capital funds, banks, insurance companies and pension funds.

These large and sophisticated investors employ quality workforce, which help them track developments in the domestic and global financial markets. Moreover, they are in a position to forecast critical economic variables like inflation, currency values and interest rates that influence the performance of the stock markets. Negative sentiments of large institutional investors can put stock markets into turmoil. The recent market volatility is the result of a massive sell-off by FPIs that panicked after the government mooted additional surcharge on the super rich category. FPIs hold over 13% stake in the BSE500 companies as of the June 2019 quarter on an aggregate basis.

Identifying stocks that witness increase in stake by institutional investors is a common investment strategy. However, we tried to analyse stocks that were shunned by this sophisticated investor group. In the June 2018 quarter, there were over 1,150 companies in which institutional investors held over 4% stake. Out of these, institutions reduced their stake in 504 companies between June 2018 and June 2019 quarters.


To identify the most unwanted stocks, we considered those with a market cap greater than Rs 500 crore and analysed their institutional stake for three quarters— June 2018, March 2019 and June 2019. Stocks that witnessed an absolute stake decline of over 5% between June 2018 and June 2019 quarters were filtered out. Additionally, stocks should also have witnessed a decline in institutional stake between March 2019 and June 2019 quarters.

To examine the current and the future investment potential of the most unwanted stocks, only those that are covered by at least five Bloomberg analysts were filtered out. We found seven such unwanted stocks.

Fundamental issues, high valuations and a number of domestic and global macro factors have negatively affected the performance of the Indian stock markets in the last one year. Looking at the data for the listed companies, over 84% have delivered negative returns between 2 August 2018 and 2 August 2019. However, such considerable selling and the resultant price reduction have improved valuations for most of the companies.

Compared to the MSCI emerging markets index, the valuation premium of BSE Mid-cap, BSE Small-cap and BSE100 index has come down from 88%, 51% and 63% respectively in August 2018 to 42%, 17% and 43% respectively in August 2019. Such valuation premium is judged in terms of the Bloomberg’s 12-month blended forward PE multiple.

Due to the improved valuations, even some of the most unwanted stocks are available at bargain valuations. Let us look at the future potential of the shortlisted companies by looking at the views of the brokerages and analysts.


  • STOCKS TO BUY
1. JAIN IRRIGATION
Potential upside: 215%

PE Institutional stake (%) June 18 Institutional stake (%) June 19 Current price (Rs) 1-yr target price (Rs)
2.44 39.4 32.1 19.9 62.7

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Analysts’ recommendations
Buy: 6
Hold: 0
Sell: 0
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6-1

This diversified agro-business company is engaged in manufacturing plastic pipes and providing services like soil survey, engineering design and agronomic support. The company’s rising debts have placed it among the most unwanted stocks. In the past year, the stock price has declined over 76%. The management has indicated it plans to deleverage its balance sheet over the next 1-2 years. Moreover, diverse business segments of the company show significant growth potential going forward. Micro and sprinkler irrigation has enormous growth opportunities due to its efficiency in water usage and the PVC pipes segment is poised to grow due to increased government spending on infrastructure.

2. FIEM INDUSTRIES
Potential upside: 45%

PE Institutional stake (%) June 18 Institutional stake (%) June 19 Current price (Rs) 1-yr target price (Rs)
6.74 22.24 15.82 378 546

Analysts’ recommendations
Buy: 5
Hold: 0
Sell: 0

7-2

This automotive components player manufactures automotive lighting, signaling equipment and other products. Experts feel the automotive lighting industry is on a strong upward trajectory and has high entry barriers. Fiem is set to benefit from industry developments due to its strong R&D, backward integration, industry leading margins and higher cost efficiencies. New orders from existing clients provides strong revenue visibility. Moreover, the company has undertaken multiple joint ventures which will enhance its product portfolio. Entry into new products will provide growth opportunities in future.

Another growth driver is the government’s electric vehicles push. This will benefit the company over the medium term. The stock is trading at a discount of over 59% in terms of Bloomberg’s 12-month blended forward PE, relative to the BSE100 index. It offers a 12-month forward dividend yield of 2.25%, compared to an average of 1.72% by the BSE100 index.

3. JK TYRE & INDUSTRIES
Potential upside: 70%

PE Institutional stake (%) June 18 Institutional stake (%) June 19 Current price (Rs) 1-yr target price (Rs)
5.2 12.12 6.68 56 95

Analysts’ recommendations
Buy: 5
Hold: 1
Sell: 0

7-3

A tyre manufacturer that offers products for the entire range of passenger and commercial vehicles. According to a recent research report by Reliance Securities, the company may face challenging environment in the near-term. However, its performance is expected to improve in 2020-21 on the back of additional capacity, reduction in manpower cost and better cost control. A likely pick-up in utilisation and moderate capex requirement will help JK Tyre to de-leverage its balance-sheet over the next 3-5 years. In terms of historical EV/EBITDA, the stock trades at a discount of over 45%, relative to the BSE100 index.

4. J KUMAR INFRA PROJECT
Potential upside: 131%
PE Institutional stake (%) June 18 Institutional stake (%) June 19 Current price (Rs) 1-yr target price (Rs)
4.37 34.65 23.03 130 299

Analysts’ recommendations
Buy: 6
Hold: 0
Sell: 0

7-4

This constructions sector player designs and constructs roads, bridges, flyovers, subways, over bridges, and skywalks. The company’s revenue, operating profit, and adjusted EPS have significantly improved in 2018-19, compared to 2017-18. In the first quarter of 2019-20, the company’s total income and EBITDA grew at 8% and 10% year-on-year respectively. It has also managed to reduce its debt-equity ratio to 0.42 in the June 2019 quarter, compared to 0.45 in the June 2018 quarter. Moreover, the healthy order book of Rs 9,606 crore provides strong revenue assurance.

Factors like sustained project execution and focus on high margin products will further strengthen its financials going forward. As per Bloomberg’s consensus estimates, the stock is trading at its 12 months blended forward PE multiple of 4.4 times and historical EV/EBITDA of 3.35 times. Comparatively, BSE100 index trades at an average 12 month blended forward PE multiple of 16.5 times and historical EV/EBITDA of 11.8 times.

5. STERLITE TECHNOLOGIES
Potential upside: 66%
PE Institutional stake (%) June 18 Institutional stake (%) June 19 Current price (Rs) 1-yr target price (Rs)
9.28 18.59 12.91 149 248

Analysts’ recommendations
Buy: 9
Hold: 2
Sell: 1

7-5

A technology company that is engaged in end-to-end data network solutions. Analysts believe that the company is well positioned to benefit from the increasing demand from projects like smart city development and BharatNet. The company’s healthy order book provides strong revenue visibility. Increased capacity expansion coupled with superior return ratios will aid its future growth. According the Bloomberg estimates, the stock is likely to deliver 30.6% RoE over the next 12 months, compared to an average RoE of 16.5% by BSE100 index companies.

  • STOCKS TO AVOID
1. SHREE CEMENT
Potential upside: -2%
PE Institutional stake (%) June 18 Institutional stake (%) June 19 Current price (Rs) 1-yr target price (Rs)
40.15 29.73 19.07 20,219 19,845

Analysts’ recommendations
Buy: 10
Hold: 16
Sell: 9

7-6

This cement manufacturer has a production capacity of 37.9 million tons per annum. According to a recent research report by JP Morgan, there is uncertainty around the volume growth outlook and the company’s underperformance with respect to its peers is visible across key markets.

A persistent weakness in volumes and loss in market share will not be taken well by the market. According to the data compiled using Bloomberg, the valuation appears steep. The stock is trading at a premium of 2.4 times in terms of 12 month blended forward PE multiple and 2.2 times in terms of historical EV/EBITDA, relative to the BSE100 index.

2. YES BANK
Potential upside: 14%
PE Institutional stake (%) June 18 Institutional stake (%) June 19 Current price (Rs) 1-yr target price (Rs)
15.95 67.67 50.72 85 98

Analysts’ recommendations
Buy: 0
Hold: 16
Sell: 18

7-7

The private sector bank has a presence across 29 states and seven Union Territories. Analysts believe that the bank’s credit costs and nonperforming loans will continue to remain elevated in 2019-20, posing a threat to the bank’s asset quality. Investors should remain cautious due to the increase in slippages, rating downgrades and capital raising uncertainty. According to Bloomberg estimates, the bank is likely to report a RoE of 8.7% in 2019-20 compared to the average 16.5% by BSE100 index companies.

Stock and index values have been normalised to a base of 100. PE and RoE is 12 month blended forward. BSE100 index: forward PE- 16.49, forward RoE- 14.46%. Price as on 6 Aug. Source: ACE Equity & Bloomberg.
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