3 consistent stocks ripe for the picking

These companies are attractive since they have shown a revival in growth and are still quoting at cheap valuations.

By Narendra Nathan, ET Bureau | Feb 25, 2013, 10.00 AM IST

We all know that the stock market rewards patience, which is why long-term investing is the mantra expounded by all experts. However, no one can predict how much time it will take for a company on the cusp of revival to start rewarding its investors. There can be a significant time gap between the growth revival and its rerating.

Instead of complaining about this delay, investors should use it as an opportunity to make money. The strategy is to buy these stocks before the market spots them and hold them till it’s finally re-rated. As a first step, we have shortlisted companies that have grown consistently in the past four quarters.

In addition to the nominal revenue growth, we set a higher bar (over 15%) for the net profit growth. Since many of these fast growers are already quoting at high valuations, they offer no investment opportunities.

The next step was to identify the stocks that are available at reasonable valuations. Of these, we retained only those whose PEs were less than 15 and dividend yields were higher than 1.5%. Finally, we reached out to experts for a qualitative evaluation. Here are three stocks that made the final cut.

GIC Housing Finance

The company has been consistently giving a good performance for the past few quarters and repeated the same in the third quarter of 2012-13 as well. Its revenues and net profit during this period went up by 24% and 90%, respectively, on a year-on-year (y-o-y) basis.

After completing five good quarters, analysts are hopeful that GIC Housing Finance will be able to maintain this positive record in the coming quarters as well. Though it’s a small player, the company has a decent pan-India presence (it covers 37 locations with 32 business centres and five collection centres).

In addition to this, it has tie-ups with builders and corporates to provide finance to individual borrowers.

Though it is trading at a significant discount to its peers like LIC Housing Finance, the company can boast a good asset quality as the net NPA is nil. With a comfortable capitalisation (capital adequacy ratio is 14.8%), GIC Housing Finance can maintain growth without further equity dilution.

It also pays good dividends and had declared Rs 4.50 per share (45%) last year. “As it is heavily underpriced, GIC Housing Finance is a good stock for longterm investors,” says Daljeet S Kohli, head of research, India Nivesh Securities.

Jammu & Kashmir Bank

This is another counter that has shown a stellar performance over the past several quarters. The bank’s net interest income (NII) in the third quarter of 2012-13 grew by 32% on a y-o-y basis.

The advances and deposits grew by 20% and 17%, respectively, while the profit after tax (PAT) grew by 36% on a y-o-y basis. More importantly, its net interest margin (NIM) has gone up by 13 basis points (bps) to reach 4.1%, one of the highest in the industry. The strong asset quality and an increase of 130 bps in the CASA ratio to 39.4% helped it achieve this high NIM. The bank’s return ratios, such as return of assets and return on equity, are also better than those of most of its PSU peers.

Though the performance and asset quality of Jammu & Kashmir Bank are almost the same as that of high-quality private-sector banks, it is still lagging behind them in valuation because it is owned by the state government. This is why it is still quoting at a significant discount to its private-sector peers on the basis of PB ratio. Its PE is also very low and is, in fact, less than those of some PSU banks, which are still facing asset quality issues.

Will Jammu & Kashmir Bank be able to catch up with good quality private-sector players in terms of valuation? “Since the bank’s performance is much better, the valuation gap with the private sector should come down in the future,” says Hatim Broachwala, analyst, Karvy Stock Broking.

J K Cements

The company’s overall volume growth remained subdued in the first quarter of 2012-13 at only 5.5% on a y-o-y basis. However, JK Cements showed a net profit growth of 22% in the third quarter.

The reduced costs and better realisation from the white cement segment have helped the company improve its EBITDA margin by 23 bps to 19.6%. While the outlook for the cement industry is good because of increased construction (both housing and infrastructure), we cannot take a blanket call on all stocks in the industry. This is because though the cement companies based in the northern, central and western regions of India are doing well, those based in the southern states are facing overcapacity constraints. JK Cements is not affected by this issue because most of its cement units are in the northern region. It also has two new units with a capacity of 3 million tonne coming up in the north (1.5 million tonne in Rajasthan and 1.5 million tonne in Haryana).

“Despite a presence in the high-margin white cement business, JK Cements is still trading at a steep discount to its replacement cost. So, the valuation gap should come down in the next couple of years,” says Ravi Sodah, analyst, Elara Capital. The company also has a cost advantage over its peers because it uses pet coke, which is cheaper than imported coal.

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