We wish our readers a happy Deepawali and a prosperous Samvat 2076. To celebrate the occasion, we have chosen a Diwali package of six stocks for you—stocks that we believe offer just the right mix of growth and safety for these challenging times.
We have crunched the numbers, weighed what company managements have said, analysed balance sheets and cash flows to hand pick select stocks that offer growth and earnings visibility at a reasonable valuation. Our research picks for Diwali should not only light up your portfolio but also protect it during times of trouble.
Thank you for the support you have given us and may we have a profitable journey together in the New Year.
Here goes our Diwali package:
Cochin Shipyard is attractively valued at 7 times its estimated earnings and currently offers a dividend yield of close to 4 percent. This is despite reasonable revenue and earnings visibility over the next two years. This zero debt company is sitting on residual cash of about Rs 1,000 crore or 21 percent of its market capitalization. The company currently has an order book of Rs 8,000 crore, four times its annual revenues from shipbuilding and another Rs 10,000 crore in the pipeline. The valuations should also be looked at from the perspective of reasonable earnings growth expectations of 15-16 percent over the next two years, which is without taking into account the impact of the new corporate tax rates. The tax change can help in even higher earnings growth, as the company is currently paying tax at 34 percent annually.
HDFC Bank has easily been the most consistent performer on the Street. While it is not immune to the economic slowdown, it is definitely well-equipped to ride through it as it enjoys dual moats, or competitive advantages, on both the assets as well as the liabilities side. Its steady and high Return on Equity offers opportunities to the bank to deploy profits at a high rate and compound its book value consistently. The bank is expected to continue to register profitable growth over the next few years as it is garnering market share at an accelerated pace, despite its huge balance sheet size of over Rs 12 lakh crore as at end-September. More importantly, a predictable earnings growth in the high teens, in a market struggling to deliver double-digit earnings growth, makes HDFC Bank a safe bet.
HOEC (Hindustan Oil Exploration Company) has a healthy portfolio of discovered oil & gas assets and is rapidly monetizing them and ramping up production. Barring the June 2019 quarter, the company has posted a strong performance. Its performance wasn’t up to par in Q1 FY20 due to a plant shut down at the customer end, which has mostly been resolved now. It has a debt-free balance sheet and planned capex related to the development of the fields is expected to be funded through internal cash and accruals. The monetization of the discovered blocks and further ramp up of production volumes leaves scope for a re-rating of the stock.
ICICI Prudential Life, one of the top private insurers, is well positioned in the growing insurance space with its strong brand recall, efficient operating cost structure, strong bancassurance distribution network and improving business mix. To reduce business volatility and improve profitability, it is transiting from a capital market player into a diversified franchise by growing the protection business (term insurance), moving into new products and customer segments and differentiated propositions in its traditional savings (ULIP) business. With a new strategy in place, profitability is expected to improve gradually and drive the valuation.
IRCON International, a listed public sector undertaking (PSU) and an integrated engineering and construction company from the railways space, has been a big beneficiary of capital expenditure by the railways. Its order book in the last one year has jumped from about Rs 22000 crore to Rs 33500 crore, or 7 times its annual sales. This is also getting reflected in its financial performance. During the June 2019 quarter, it reported a strong 35 percent year on year growth in revenue. Moreover, despite strong earnings growth, better return ratios, zero debt (on a net basis) in the books, the stock is trading at 5.5 times FY21 estimated earnings and offers an attractive dividend yield of about 4 percent.
Navin Fluorine, a leading player in the complex fluorochemicals industry, has shown strong improvement in operating performance for its CRAMS (Contract research and manufacturing services) and specialty business segments. Both these higher margin businesses constitute more than 50 percent of the topline. We note that some of the headwinds in the CRAMS space have abated and the company has bagged a multiyear contract with the MNC client. The new cGMP facility (Current Good Manufacturing Practice regulations enforced by the FDA) in Dewas slated to commence production by December this year and a greenfield project in Dahej for specialty chemicals could be future growth drivers as well. Dewas facility has a revenue potential of Rs 230 crore per year which is two times the investment made (fixed asset turnover of 2x). While the company stands out with zero debt and a strong operating margin of 22-25 percent, it could also be a key beneficiary of corporate rate cuts announced recently, particularly for the new ventures. The company may utilise this tax benefit for its upcoming capex programme.