Top-five blue-chip stock picks in a volatile market
Though the market scenario is gloomy at present, some stocks can generate steady returns during all phases of an economic cycle.
By ET Online | Updated:
NEW DELHI: Indian markets wrapped up the week in the red for a third straight week, weighed by weakness in the rupee and muted global cues.
Additionally, global markets witnessed profit-booking on concerns over the US monetary policy, which might become less accommodative after two Federal Reserve officials on Tuesday (August 6, 2013) said a reduction in Fed's asset purchases is likely later this year.
To tackle volatility in the markets, ICICI Securities suggests top-five blue-chips, in its report 'Quality Stocks' released earlier this week.
ICICI Securities describes quality stocks, which are commonly perceived to be blue-chips, as those of companies with consistent profitability and cash flows. These stocks generate steady returns during all phases of an economic cycle.
"In our view, quality stocks are less risky ones that have relatively high historical spreads (RoE - return of equity) and also have the propensity to maintain or grow spreads, from both existing and new investments, over extended periods of time," added the ICICI Sec report.
The report has benchmarked stocks based on three parameters; one is high and sustainable return on equity (RoE), net debt to equity ratio (lower the better), while the third is high and sustainable earnings growth.
This report has twin objectives – (a) identify the set of fundamentals factors that explain the performance of 'Q-stocks' over the last 10 years; and (b) identify the 'less favoured' amongst the latest set of 'Q-stocks', which we believe would play catch-up with their more popular peers or have the potential to move up over the medium term.
ICICI Securities cherry-picked the 'less favoured' from the latest set of 50 'Q-stocks' based on a minimum of two out of the three distinct and independent criteria- one is stock performance on a YTD basis; second is valuation gap with their peers; and lastly institutional under-ownership.
The brokerage firm expects the 'less favoured' stocks to outperform over the next 12 months. Our best picks are Amara Raja Batteries, Cipla, Emami, Torrent Pharma and Yes Bank.
Here is a list of top-five stocks:
Amara Raja Batteries: Has underperformed relative to benchmark indices and is relatively cheap
Amara Raja Batteries is a leading brand in domestic lead acid battery market for both automotive and industrial segment. The company has high growth prospects in segments like telecom towers, home UPS and solar batteries.
The battery maker is also trying to increase their market share in replacement and OEM market. The battery maker operates in high pricing power owing to duopolistic business.
Key concerns: Aggressive competition in the market place by Exide and increase in Lead prices are key overhang on the stock in the near to long term.
Cipla: Underperformed and relatively cheap
Cipla is a leading player in the domestic market. The pharma major has the potential of a strong growth in generic export marketwith exposure to emerging markets. Improving product pipelines like inhalers should lead to improvement in margins.
Concerns: However, regular delays likely in inhaler market. Additionally, increase in filing costs for the US front end might weight on the stock.
Emami: Relatively cheap and under-owned
Emami has strong brands in niche segments. It has higher domestic growth compared to its peers. Margins are likely to improve due to reduction in raw-material costs.
Increase in competition and tax rates are some of the near term concerns over the stock.
Additionally, global markets witnessed profit-booking on concerns over the US monetary policy, which might become less accommodative after two Federal Reserve officials on Tuesday (August 6, 2013) said a reduction in Fed's asset purchases is likely later this year.
To tackle volatility in the markets, ICICI Securities suggests top-five blue-chips, in its report 'Quality Stocks' released earlier this week.
ICICI Securities describes quality stocks, which are commonly perceived to be blue-chips, as those of companies with consistent profitability and cash flows. These stocks generate steady returns during all phases of an economic cycle.
"In our view, quality stocks are less risky ones that have relatively high historical spreads (RoE - return of equity) and also have the propensity to maintain or grow spreads, from both existing and new investments, over extended periods of time," added the ICICI Sec report.
The report has benchmarked stocks based on three parameters; one is high and sustainable return on equity (RoE), net debt to equity ratio (lower the better), while the third is high and sustainable earnings growth.
ADVERTISEMENT
This report has twin objectives – (a) identify the set of fundamentals factors that explain the performance of 'Q-stocks' over the last 10 years; and (b) identify the 'less favoured' amongst the latest set of 'Q-stocks', which we believe would play catch-up with their more popular peers or have the potential to move up over the medium term.
ICICI Securities cherry-picked the 'less favoured' from the latest set of 50 'Q-stocks' based on a minimum of two out of the three distinct and independent criteria- one is stock performance on a YTD basis; second is valuation gap with their peers; and lastly institutional under-ownership.
The brokerage firm expects the 'less favoured' stocks to outperform over the next 12 months. Our best picks are Amara Raja Batteries, Cipla, Emami, Torrent Pharma and Yes Bank.
Here is a list of top-five stocks:
ADVERTISEMENT
Amara Raja Batteries: Has underperformed relative to benchmark indices and is relatively cheap
Amara Raja Batteries is a leading brand in domestic lead acid battery market for both automotive and industrial segment. The company has high growth prospects in segments like telecom towers, home UPS and solar batteries.
ADVERTISEMENT
The battery maker is also trying to increase their market share in replacement and OEM market. The battery maker operates in high pricing power owing to duopolistic business.
Key concerns: Aggressive competition in the market place by Exide and increase in Lead prices are key overhang on the stock in the near to long term.
Cipla: Underperformed and relatively cheap
Cipla is a leading player in the domestic market. The pharma major has the potential of a strong growth in generic export marketwith exposure to emerging markets. Improving product pipelines like inhalers should lead to improvement in margins.
Concerns: However, regular delays likely in inhaler market. Additionally, increase in filing costs for the US front end might weight on the stock.
Emami: Relatively cheap and under-owned
Emami has strong brands in niche segments. It has higher domestic growth compared to its peers. Margins are likely to improve due to reduction in raw-material costs.
Increase in competition and tax rates are some of the near term concerns over the stock.
Torrent Pharma: Relatively cheap and under owned
The pharma major enjoys leadership position in niche, highly profitable therapeutic segments like CNS and CVS. Its product like has large emerging market exposure such as India, Brazil and rest of the world (ROW).
Concerns: Brazilian business showing de-growth due to more generic competition. Large acute portfolio in India faces more competition.
Yes Bank: Recent sell off in the stock should mitigate the risk
The private sector bank has strong brand and high business growth. Its CASA deposits are increasing at a fast pace. Yes Bank also enjoys best asset quality in the private banking space.
ADVERTISEMENT
The bank is well poised to capture growing potential in the retail segment.However, increase in competition, interest rates and worsening asset quality are some of the overhangs on the stock in the near term.
Too busy to trade in stocks? Invest in Mutual Funds with ET Money!
Bookmark or read stories offline -
Download ET Markets APP
Download ET Markets APP
ADVERTISEMENT
