Stocks of firms performing well in Q4 of FY18-19 can be good bets now

The BSE Sensex has gained over 2,700 points since the start of 2019. The rally has been fuelled by low inflation, declining interest rates, increased FII inflows and receding global concerns. However, at 29.16, the Sensex PE is 46% higher than its 10-year average PE of 20.04. The results of the fourth quarter of 2018-19 will help determine whether the companies’ rich market valuations are justified. They will also point at the market’s future course.

Experts feel that the market may witness heightened volatility due to the ongoing general elections and the likely below normal monsoons. Therefore, those inter-These stocks promise growth at a time the market is likely to stay volatile due to the ongoing elections. Firms with strong fourth quarter performance can be good bets ested in investing in stocks should look for companies that are expected to report good results in the fourth quarter. A simple way to find out companies with good fundamentals is by examining their revenue and profit growth rates.

Revenue and adjusted earnings per share (EPS) estimates for nearly 300 companies are available on Bloomberg for the fourth quarter of 2018-19. We filtered companies that are tracked by at least 10 analysts and are expected to report year-on-year revenue and adjusted EPS growth of over 10% in the fourth quarter. We then selected companies that showed higher adjusted EPS growth estimates for the fourth quarter compared to their third quarter EPS growth. Finally, we looked at their 1-year forward target prices and extracted companies that promised at least 15% growth.

Only 12 stocks passed all our filters. Of the 241 recommendations on these stocks, 77% are buy, 17% are hold and 5% are sell recommendation. The net worth of these 12 companies has jumped 81% in the past five years—between 2013-14 and 2017-18. Of these 12 companies, 11 have paid dividends regularly in the past five years. The average dividend paid by these 11 companies was 167.3% in 2018-19.

Companies likely to post strong fourth quarter results
These expected strong performers are also projected to give an aggregate 26% return over the next one year.


*Estimated revenue growth in the fourth quarter of 2018-19 over the previous quarter. Current prices as on 9 April 2019. PE for 2018-19. Data source: Bloomberg.

Let us look at six companies out of these 12 that have decent analyst recommendations and substantial one-year forward price potential:

IRB Infrastructure: A strong order book and execution of ongoing projects will aid this infra company’s revenue growth, say anslysts. Also, its toll revenue is witnessing a steady growth which will contribute reasonably to its earnings growth in the coming quarters.

Granules India: It makes active pharma ingredients, pharma formulation intermediates and finished dosages. The company’s improved manufacturing capacity, traction in the US generics revenue and increased focus on strategic portfolio selection—high volume and niche products—has made analysts bullish. The promoters’ pledging is expected to fall further and, at the current market price, the stock is trading at attractive valuations compared to peers.

Alkem Laboratories: This company develops, manufactures and markets pharma and neutraceutical products. Besides India, it is present in 50 countries. Analysts are bullish on the stock due to its healthy balance sheet and superior return ratios. Improved operating leverage in the US market, strong brand positioning, and likely improvement in free cash flows will be additional growth drivers.

Parag Milk Foods: This private sector dairy firm has products across 15 categories. According to the latest report by Elara Capital, the company is likely to report revenue growth of 18% over the next three years, led by double-digit growth in value added dairy products and expanded distribution in the north and east regions. Shortening of working capital cycle will improve cash flow from operations, and free cash flow will remain healthy.

VRL Logistics: In the logistics segment, this company is engaged in courier services, full truck load services and liquid transportation. The improving efficiency of its existing fleet has helped the company’s revenue per truck in 2017-18. There are signs of improvement in business sentiment which will enhance the company’s tonnage growth, say analysts. With a strong distribution network and full compliance to GST and e-way bill, the company is in a position to benefit from industry consolidation.

Aurobindo Pharma: This integrated pharma company exports to more than 150 countries and derives more than 90% of its revenue from its international operations. According to a report by SBI Securities, acquisition of US units of Sandoz and cancer drug portfolio of Spectrum Pharma, and the likely bounce back in its anti-retroviral business will be major growth drivers for the company. Aurobindo Pharma’s net debt is also likely to fall steeply after the closure of its Sandoz acquisition.