For those looking at direct equity investing from a long-term perspective, it is advisable to identify companies that have maintained strong fundamentals over a period of time. Here are five companies with strong fundamentals as per analysts.
Getty ImagesCompanies that maintain strong fundamentals over a long period of time are less prone to economic shocks.
The ongoing economic growth concerns, being construed by some experts as structural slowdown, have significantly dented the long-term performance of equity markets. Data for the past 10 years for over 1,800 listed companies shows that 61% of the stocks have underperformed the BSE500 index between 9 October 2009 and 11 October 2019. The RBI, World Bank, IMF and various rating agencies have downgraded India’s GDP forecasts due to a host of issues that include deteriorating industrial performance, weak consumption, stressed government finances, rising unemployment and declining consumer confidence.
For those looking at direct equities from a long-term perspective, it is advisable to identify companies that have maintained strong fundamentals over a period of time. The stock prices of such companies are generally resilient to economic shocks and have the ability to generate above average wealth in the medium to long term. Steady profitability, falling or zero debt levels and rising networth are some of the factors that can help in judging such companies. Profitability in terms of net earnings helps to derive return to the shareholders, whereas falling debt levels reduces the likelihood of insolvency. In addition, rising net worth implies that a company’s total assets are growing faster than its total liabilities, which indicates its financial health.
Consolidated data for adjusted EPS, net worth and debt to equity ratio for 700 companies with market cap greater than Rs 500 crore have been analyzed for the past 10 years, starting from 2009-10. Companies that have consistently reported positive adjusted EPS were filtered out. In addition, only those companies whose net worth was consistently rising in the past decade were included. To look at the solvency prospects, only those with zero or consistently falling debt to equity ratios were included.
Only 24 companies passed these filters comprehensively. In the last one, three, five and 10 years, the average returns of these companies was 16.3% (24 companies), 24% (22 companies), 99.5% (20 companies) and 720.5% (19 companies) respectively. The number of companies for which share price data was available in the respective time frames have been mentioned in the brackets. While, the BSE500 index delivered 7.1%, 22.2%, 43.1% and 126.2% returns in the past one, three, five and 10 years respectively. All returns are absolute and point to point.
The numbers show substantial outperformance with respect to the BSE500 index. In the last five and 10 years, the outperformance over the market was over 2.3 times and 5.7 times respectively.
To look at the future potential of such companies, only those covered by at least four Bloomberg analysts and with a one-year forward price potential greater than 10% have been considered. Let us look at five such companies:
Voltamp Transformers
The company manufactures power and distribution transformers with a total installed capacity of 13,000 MVA per annum. Analysts are bullish on the stock due to its strong order book, debt-free status, free cash flows and robust return ratios. Its margins are likely to improve due to the higher operating leverage and superior execution capabilities. Moreover, any uptick in the private sector capex will add to the company’s order inflows and in turn will enhance its revenue.
Finolex Cables
A manufacturer of electrical and telecommunication cables, lighting products, electrical accessories, switchgear, fans and water heaters. The company’s performance was impacted in the recent past due to the macro issues like weak construction activity and slowdown in automobiles and communication sectors. Currently, the stock is available at appealing valuations and has maintained strong EBITDA margins. Expectations of recovery in the wires segment, improved performance of new products and joint ventures, robust balance sheet, strong distribution network and powerful branding are some of the key positives for the company going forward.
Steady finances are good news Consider companies with a one-year forward price potential of more than 10%
Nesco
This is a diversified engineering conglomerate with business verticals including exhibitions, events, hospitality, MICE and realty. Positive free cash flows, healthy balance sheet and management’s focus on business expansion makes the stock a decent medium to long term investment. In addition, the company’s Bombay Exhibition Centre and foods segment are well poised to grow and the likely improvement in rentals will support its EBITDA margins going forward.
This media and entertainment company covers movies, entertainment, music, documentary and news in several Indian languages. Robust growth in domestic service revenues and expected recovery in ad growth in the festive season are the key growth catalysts. Tamil Nadu’s digitization potential, diminishing negative impact of the National Tariff Order and much needed focus on the OTT segment will aid its performance. According to Bloomberg consensus estimates, the stock trades at over 25% discount in terms of its 12-month blended forward PE multiple relative to the average forward multiple of the BSE500 index.
The company and its subsidiary operate Domino’s Pizza brand. Product innovation, superior technological skills, judicious expansion strategy, cost optimisation and operating leverage are strong positives for the company. However, analysts have expressed concerns due to the entry of Amazon and Dunzo into the food delivery business, which is likely to create disruption to the delivery moat of Jubilant Foodworks.
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