HUL, TCS, Asian Paints, Lupin show resilience in a falling market: CLSA

Many fund managers, who cannot afford to sit on cash for long when markets slide, spot stocks keeping in mind capital preservation. They typically shortlist companies which have been scoring well on one of the key ratios — ‘return on capital’ (RoC), the ratio between operating profit and the combined debt and equity capital that has been deployed.

In addition to this, fund managers consider companies with steady cash flow, strong profitability measured through consistent RoC, low price volatility measured through beta, consistent dividend-paying record, stable growth history relative to the rest of the market.

Historical evidence indicate that companies which fit these criteria outperform even in turbulent times. On Monday, foreign brokerage CLSA came out with a list of stocks that have the potential to show resilience in a falling market. These are HUL, Lupin, Asian Paints and TCS.

In the past five years, whenever the market fell 5-10%, chiefly due to global events, HUL, Lupin, Asian Paints and TCS have been preferred highly by fund managers who have been screening stocks based on capital preservation. The companies also have an impeccable record of dividend-paying. For instance, in the past 20 years, paints major Asian Paints has missed only one year in paying dividend. The company maintained stable RoC of 36% during the global financial crisis of 2008-09.

Also, software giant TCS did not give dividend only in one year in the past 10 years. During the global financial crisis of 2008-09, the company had high RoC of 53%. Companies which emerged outperformers due to external shocks have been Hero MotoCorp, Exide, Cipla, Dabur India, Infosys, ITC, Engineers India and Hexaware Technologies.