hares of many companies, considered to be high- quality because of strong financial ratios, too have corrected between 5 per cent and 15 per cent since the beginning of February.
The Sensex has declined 4.63 per cent since February 1, erasing almost all gains of 2018 on account of a mix of the turmoil in global bond market, long-term capital gains tax, widening fiscal deficit and likely inflationary pressures due to MSP hikes. Shares of many companies, considered to be high- quality because of strong financial ratios, too have corrected between 5 per cent and 15 per cent since the beginning of February.
In the BSE 200 index, there are 15 mid-cap stocks( market capitalisation below Rs 30,000 crore) with debt to equity ratio of less than 1 and those that have consistently maintained return on capital employed (RoCE) of over 15 per cent in each of the last five years. They have also generated free cash-flow for at least three out of the past five years.
These include Exide Industries, Kajaria Ceramics, Castrol India and Ajanta Pharma among others. According to Bloomberg consensus estimates, these stocks can give a return between 17 per cent and 20 per cent in one year. “In our view, the current fall and any further correction in the near term should be viewed as a window of opportunity to enhance allocation to quality stocks, especially those that have underperformed relative to the markets,” said Ravi Sundar Muthukrishnan, head - institutional equity research at Elara Securities.
“Quality stocks are those with high and consistent RoCE and operating spreads, low variability and less accrual accounting induced operating margin, free cash flow positive, low leverage and high earnings visibility”, he added.
