5 stocks that have beaten analyst estimates and have high 1-year growth potential

These companies stocks scored on their average Ebitda (earnings before interest, tax, depreciation and amortisation) margins, which improved from 36.3% to 38.3%.

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These companies have strong fundamentals and can be good bets in an economy facing growth challenges.
The stock market has been rallying after the Lok Sabha election results. Expectations of reforms, falling crude oil prices and softening bond yields have been fuelling the rally. However, the rally is not supported by earnings growth: the price-to-earnings (PE) ratio of the BSE Sensex is 28.7—31% higher than its fiveyear average. The economy is also facing challenges, such as weak GDP growth, credit issues due to NBFC troubles, and falling global trade.

In such market conditions, direct equity investors should opt for fundamentally strong companies. The stock prices of such companies tend to recover when the government steps in to support the economy. One way to identify good companies is by looking at stocks that have beaten analysts’ expectations over a period of time. Financial analysts arrive at earnings estimations through a comprehensive fundamental analysis, which includes several accounting variables like sales, expenditure, earnings, margins and other return ratios.

So far, nearly 3,500 companies have declared their fourth quarter results for 2018-19. Of these, Bloomberg analysts provide consensus earnings estimates for 224 companies. We have taken into account the adjusted reported and estimated year-onyear (y-o-y) growth in earnings per share (EPS) for the past three quarters. The companies whose adjusted reported, y-o-y EPS growth was higher than the adjusted estimated, y-o-y EPS growth in all three quarters were filtered. Two additional filters were applied to select stocks that are covered by at least five Bloomberg analysts and those with one-year price growth potential of greater than 10%.


Only five of the 224 stocks passed all our filters. Based on their annual unaudited results, their aggregate revenue, expenditure and operating profit grew 23.3%, 11.8% and 39%, y-o-y, respectively, between 2017-18 and 2018-19. On the other hand, 386 companies of the BSE500 Index, which have declared their results, witnessed revenue, expenditure and operating profit growth of 17.7%, 18.9% and 13.9%, y-o-y, respectively, during the same period.

Stocks likely to give 19% return in one year
These companies are showing a high upside potential, with Parag Milk Foods at the top with 26.1%.
11-1
PE and ROE estimates for 2019-20. Current price as on 3 June 2019.
Source: ACE Equity and Bloomberg


These five stocks also scored on their average Ebitda (earnings before interest, tax, depreciation and amortisation) margins, which improved from 36.3% to 38.3%. In comparison, the average Ebitda margin of 386 companies of the BSE500 Index have shown a meagre growth from 26.1% to 26.7% between 2017-18 and 2018-19. Let us look at these five promising companies:

1. Parag Milk Foods
A private sector dairy company, Parag is engaged in the manufacturing and processing of milk and milk products with a diverse portfolio of more than 15 consumer-centric products. Edelweiss is bullish on the stock due to the company’s increasing distribution footprint, rising pace of new product launches, and increasing share in the health and nutrition segment. The brokerage house believes that the reduction in the working capital requirement and higher asset utilisation will help the company report 17% earnings compound annual growth rate (CAGR) and 20% return on capital employed (ROCE) by 2020-21.

2. Multi Commodity Exchange
A listed commodity derivatives exchange, MCX facilitates online trading, clearing, and settlement of commodity derivative transactions. The company’s market share increased in the fourth quarter of 2018-19 and it showed impressive cost control. HDFC securities is bullish on the stock due to its market leadership and growth in average daily trading volumes in the face of increasing competition. The brokerage house believes that MCX’s volumes can increase with regulatory tailwinds like institutional participation, launch of indices, and partnership with retail bank subsidiaries. MCX’s revenue and profit after tax CAGR should be 18% and 14%, respectively, between 2018-19 and 2020-21, according to HDFC securities.

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3. Persistent Systems
It specialises in software development and technology services. Business segments include infrastructure and systems, telecom and wireless, life science and healthcare, and financial services. Analysts are bullish on the stock due to its attractive free cash flow yields, better operational performance, and likely benefits of the recent change in leadership. Revival in global IT spending, stronger delivery model, rupee depreciation, employee productivity are other significant growth drivers. The stock is available at an attractive valuation— trailing 12-month PE is at a substantial discount to its five-year average.

4. L&T Finance Holdings
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This NBFC has a presence in rural business, housing business, wholesale business, mutual funds and wealth management services. According to a report by JM Financial, the company is well positioned to deliver sustainable return due to its easy access to funding, high credit rating, diversified lender base, higher share of retail book, prudent capital allocation, viable fee income, and operating leverage. The brokerage house expects 23% earnings CAGR between 2018-19 and 2020-21.

5. SOBHA
This real estate company is primarily engaged in residential and contractual projects. According to a research report by JP Morgan, the company’s earnings will be driven by reversal in Ind-AS accounting standard and completion of high-value projects. Improving collections and robust construction spending will help its operational performance. The brokerage house expects 10-15% pre-sales growth over 2019-2021 and the company to stabilise at `25,000 crore pre-sales mark over the next two years.
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