These 5 stocks have consistently outperformed the economy

Several studies have shown that there is a positive correlation between the stock market and a country’s GDP in the long run. So, analysing sub-segments of the GDP can throw up promising sector stocks.

We tried to identify stocks that have outperformed the GDP and the net national income (NNI) growth consistently over the past five financial years. NNI is the sum of the GDP and the income that is generated abroad. It excludes the consumption of fixed capital or depreciation. We analysed 875 companies with market-cap greater than Rs 500 crore. Their operating profit (including other income) and adjusted EPS growth were calculated for the past five years, starting 2013-14. The companies whose operating profits and adjusted EPS growth were more than GDP and NNI growth rates in the all five years were filtered out. Since revenue and, therefore, profit takes into account the rising prices over time, we considered both GDP and NNI at the current prices (not-adjusted for inflation).

Only 18 companies passed the above filters. Out of these, 14 companies, whose 5-year returns are available, delivered an average point-to-point return of 839% between 12 December 2013 and 12 December 2018. The BSE500 Index delivered 87% return during the same period. The 14 companies outperformed the index almost 10-times. We did the exercise for the past 3- and 2-year periods and the results were similar: 74 companies in the past three years delivered a point to point average return of 140%, while the BSE500 delivered 41% return. Over the past two years, 166 companies delivered an average point-to-point return of 82.4% while the BSE500 delivered 29% return.


Let us look at the five companies from the 5-year study period with decent buy calls and substantial 1-year price upside, as per Bloomberg.

Company Name	Current price (Rs)	1-year target price (Rs)	Upside potential (%)
Mold-Tek Packaging	270	376	39.45%
Natco Pharma	705	926	31.31%
Tata Elxsi	1,016	1,277	25.63%
IndusInd Bank	1,640	1,957	19.34%
HDFC Bank	2,136	2,404	12.54%
BSE500

Target prices from Bloomberg. Current prices as on 18 December 2018. Data source: ACE Equity & Bloomberg.

1. Mold-Tek Packaging
A packaging company, Mold-Tek is involved in the manufacturing of containers for lubes, paints, food and other products. SMC Securities expects the company’s food and FMCG segment to play a key role in improving its volumes, whereas expansion of its Mysore and Vizag plants will lead to further growth in the paints segment. Additionally, the shift in capacity from its plant in UAE will lead to better utilisation of the company’s assets.

2. Natco Pharma
An R&D-focused pharma company, Natco develops, manufactures and markets finished dose formulations and active pharmaceutical ingredients. AnandRathi is bullish on the company due to its strong products line-up, clear focus on complex filings in the US and niche product opportunities. The brokerage house expects 16% revenue compound annual growth rate (CAGR) over the next three years due to the firm’s target of launching of 8-10 products a year.

		2018-19 Estimates		Analyst Recommendations
Company Name	5-year return (%)	PE	ROE	Buy	Hold	Sell
Mold-Tek Packaging	1575.7	22.0	18.6	8	0	0
Natco Pharma	364.4	16.0	22.1	16	0	0
Tata Elxsi	547.8	21.2	35.5	7	0	1
IndusInd Bank	264.9	25.9	15.3	41	10	0
HDFC Bank	200.0	27.2	16.7	46	3	1
BSE500	86.7

Estimates and analyst recommendations from Bloomberg. 5-year returns are point to point absolute returns between 12 December 2013 and 12 December 2018. RoE stands for Return on equity. Data source: ACE Equity & Bloomberg.

3. Tata Elxsi
The company provides design and technology services for product engineering and solutions across industries including broadcast, communications and automotive. According to a report by Karvy, several factors will drive the company’s growth. These include increased focus on safety and regulatory norms, significant expansion in the choice of content and delivery mechanism due to multiple delivery and consumption options such as TV, mobile and emergence of over-the top (streaming) services.

4. IndusInd Bank
A new generation private sector bank, IndusInd offers commercial, transactional and electronic banking products and services. Ambit Capital believes that the risks from IL&FS exposure are already priced in and there is no reason to doubt the credit quality of other assets. Moreover, better operating trends offer safety as return of growth in credit will make private sector banks the biggest beneficiaries. The brokerage expects the bank’s loan book to grow at 26% CAGR over the next three years with stable net interest margins.

5. HDFC Bank
A leading private sector bank, HDFC’s key business segments include wholesale banking, treasury and retail banking. According to a report by Bloomberg Intelligence, the bank’s profit growth will be supported by more than 20% expansion in loans and higher margins. It has the ability to contain funding cost growth which will boost margins as interest rates rise. Moreover, liquidity crunch at non-bank financiers should also support HDFC’s competitive edge on low-cost funding.