Markets overvalue stocks in bullish times, but some stocks fall enough to be attractive in a correction. As investors, we sometimes wait months for a market correction hoping for better prices. But when the market does correct, some of us feel like a deer in the headlights: too stunned to act.
This post is about seven stocks that are worthy candidates for entering the next market cycle.
One set of stocks that people always find attractive as a strategy, but usually in hindsight: Growth at Reasonable Price. (GARP)
But first, what is GARP?
- Companies that are growing. But I don’t want to pay too much for it.
- Growth At a Reasonable Price is just that.
- GARP investors focus on companies with solid revenue & earnings growth with valuations that are not embarrassing.
Wait, these are stocks to buy?
No, they aren’t, not yet. This is a short list of companies with long-term growth triggers and not ludicrously expensive. A byproduct of our research process as we try and identify potential stocks for our portfolios. Each of these bear (no pun intended) further analysis to qualify them to be part of a long-term portfolio.
How do you filter for GARP?
To start with, we applied simple criteria as an initial filter:
- Stock universe: NSE 500 – the top 500 stocks by market cap.
- Non-cyclical businesses
- 3Y revenue CAGR > 15%
- 3Y Net Profit CAGR > 15%
- Returns on Equity, or ROE > 12%
Further, we went through this list. We agonised over potential growth, removing one-timers, avoiding governance snafus and understanding risks. And came up with these seven stocks, which are growth stocks but available at a decent valuation after the recent market correction.
Allcargo Logistics: A demerger play
The elevator pitch:
Owns terminals in ports, transports goods, and owns a 50% stake in Gati. The ongoing demerger will pay back debt and can unlock significant value.
Market Cap: 7,100 cr.
Allcargo is a logistics provider in LCL consolidation (LCL = Less than Container Load), container freight, and industrial and logistics parks. It is one of India’s largest LCL consolidators and third-party logistics players. In 2020, the company bought a 47.3% stake in Gati Logistics.
In the last five years:
- Revenue grew at 29% p.a. to 20,072 Cr
- EBITDA increased by 31.7% p.a. to 1515 Cr.
- Net Profit grew at a higher rate by 38% CAGR to 926 Cr
- A debt of 1877 Cr
- The ROE & ROA stands at 12% and 6.2%, respectively
The major trigger here is: that the sum of the parts is greater than the whole.
Allcargo Logistics (ACL): Supply chain, Ecommerce and Contract Logistics comes here. Also, the stake in Gati and ACCI. Allcargo’s largest segment by value. It contributes 95.8% of consolidated revenue & ~80% of EBITDA.
All Cargo Terminals (ATL): Container Freight Stations and Inland Container Depots. Presence in JNPT, Mundra, Chennai and Kolkata ports. Contributes only 2.7% of revenue but 10.1% of consolidated EBITDA.
TransIndia Reality (TRL): High-yielding rental assets arm. Developing logistics parks in Haryana, Hyderabad & Bangalore with a land bank of 380 acres. TRL contributes 1.5% of revenue and amounts to 10.1% of EBITDA.
Every shareholder of Allcargo will get one share each of Allcargo Terminals and TransIndia.
Key Triggers:
- Demerger unlocks value
- Debt reduction
- Divestment of non-core businesses
The stock has fallen -32% from the peak and is currently trading at a TTM PE of 7.5 times. Given the company’s growth prospects, Allcargo looks interesting at this price point for the long term.
Rail Vikas Nigam Ltd: A 5 PE stock with a 5% Dividend yield
The elevator pitch:
Super cheap Railway PSU with a growth path due to the Dedicated Freight Corridor and Railway infrastructure expansion. Cheap at five times earnings and pays lots of dividends.
Market cap: 6,400 cr.
RVNL is a Miniratna Category-I PSU, an engineering arm of Indian railways. It builds new lines for the railways, gauge conversion, electrification, metro projects, etc.
In the last five years:
- Revenue grew at a CAGR of 27% to 19,382 Cr
- EBITDA grew by 25.2% to 1181 Cr. EBITDA margins improved marginally from 5% to 6.1%
- PAT increased by 24% CAGR to 1183 Cr
- There’s lots of leverage. The debt has increased from 2200 Cr in FY18 to 6600 Cr as of Mar ’22. (Debt: Equity is 1:1) But it makes enough EBIDTA to pay for debt (14x interest cost)
- The return ratios are strong, with ROE and ROCE of 19% and 11.2%
Key Triggers:
- Growth visibility with an order book size of 55,000 Cr
- Strong balance sheet without excess leverage
- Consistent and high dividend-paying
In April 2019, it was listed at an IPO price of Rs 19/- per share. Since then, the stock price has returned 17.7% p.a. (All-time high of Rs 44/- per share in Oct 2021, currently down 35%) RVNL at the price of Rs. 31 is at a 5.4 TTM PE with a Dividend yield of 5.1%.
Deepak Nitrite: Growth at a kinda-sorta reasonable price
The elevator pitch:
A strong chemical company that makes intermediates for multiple industries. Margins have expanded. Scale trigger: China alternative. No debt.
Market Cap: 24,000 cr.
Deepak Nitrate is a fast-growing chemical intermediary company. The company has six manufacturing units across Gujarat, Maharashtra, and Telangana. The company has a portfolio of 30+ products in four segments.
- Phenolics: 50% of revenue. These are high-volume import substitute products like Phenol, Acetone, Cumene, and Isopropyl Alcohol. Deepak Nitrite is one of the largest players in Phenol and Acetone in the domestic market, with a market share of 65%. Target markets are industries like Pharma, Rubber, Paints, Adhesives etc.
- Basic chemicals: High volume and low margin products. Example: Sodium Nitrite, Sodium Nitrate, Nitro Toluidines, Fuel Additives etc.
- Fine & Speciality Chemicals: These are customised products per customer needs, low volume but high margin. These chemical intermediates are used in agrochemicals, pigments, pharmaceuticals and personal care industries.
- Performance Products: Performance chemicals are unique molecules or mixtures known as formulations. The chemical characteristics of these molecules influence the performance end product. They are used in industries like Paper, Detergents, Textiles etc.
In the last five years:
- Revenue grew at a CAGR of 38% to 6800 Cr
- EBITDA compounded at 26% to 647 Cr. During the same time, margins improved from 14% to 26%
- PAT compounded at an astonishing rate of 87%, as the margins quadrupled from 5% to 20%
- ROE & ROCE improved from 7% to 32% and 8% to 40% respectively
- The company is net debt free with consistent dividend payout history
What next for Deepak Nitrite?
- The company has a planned Capex of 1100 Cr over the next few years (300 Cr at the Dahej plant, 100 Cr for brownfield expansion, and another 700 Crs to add new solvents)
- To fund expansion, the company is looking to raise 2000 Cr via QIP
- Deepak Nitrite is looking to increase its portfolio of value-added products of Phenol and Acetone
The stock has fallen -40% from its peak and is currently trading at a TTM PE of 22 times (below the 10Y median PE).
Short-term risk: A fire in the Nandesari plant in June 2022 has taken it out of commission, and it’s only restarting part of the plant now. Consequently, the first two-quarters of FY23 wise, results will not be kind.
It may not be a screaming buy yet, but given the company’s market leadership and growth prospects, it is worth having a deeper look.
Manappuram Finance: A play on mean reversion
The elevator pitch:
Gold financing company that’s at a price-to-book of less than 1, growing slowly but steadily, and keeping bad loans under control. A position that rests on mean-reversion (in terms of P/E and P/B).
Market cap: 6,900 cr.
Manappuram has been around since 1949, with the core as a gold loan business. It gives loans against Gold as collateral and has a strong presence in rural south India, slowly settling into the urban mindset. It also has microfinance, housing and vehicle lending businesses.
Manappuram is India’s second largest Gold loan lender, with 68 tonnes of Gold as AUM. The Gold AUM stands at 20,200 Cr as of FY22, contributing to 67% of their advances. The company also has a presence in Micro Finance (22% of advances), Housing Finance (5%) & MSME and other segments (6%).
In the last five years:
- The Gold loan AUM grew by 14% CAGR to reach 20,200 Cr.
- The Net-worth of the company grew by 20% CAGR to 7942 Cr.
- The cost of borrowing reduced from 8.7% to 7.2%.
- The Opex to AUM also decreased from 9% to 7%.
- ROE and ROA are decent at 17.6% and 5%, respectively.
- The company is well capitalised, with a Capital adequacy ratio of 31%.
- Asset quality is stressed but under control. The GNPA had increased from 0.7% in FY18 to 3% in FY22. During the same time, the NNPA rose from 0.3% to 2.7%. The majority of this was due to Covid write-offs.
Key Triggers:
The trigger here is that there’s likely to be a reversion to the mean. Irrespective of the growth, the market had never given a sustainable premium to Manappuram. The company had always traded between a PE of 5x on the lower end and 12-14x on the higher end. Similarly, on the price-to-book basis, it traded between 1-time books to 3 times book.
In the recent fall, the stock has corrected -by 60% from its peak. It is currently trading at 5.5 times PE, 0.9-time book with a dividend yield of 3.3%. The stock is at a ten-year low regarding both PE & PBV ratios.
ICICI Securities: Is the worst priced in?
The elevator pitch:
A bank-backed broker that might survive the downturn that will hurt the younger, loss-making competitors.
Market cap: 14,000 cr.
ICICI Securities is India’s fifth largest broker, with a market share of 8.4%. It has a total client base of 6.1 million, of which 3.3 million are active clients. The company manages total assets of 5.6 Lac Cr across broking, private wealth & PMS segments.
- In the last five years, the company has grown its revenue at a CAGR of 17% to 3440 Cr. EBITDA increased by 19% CAGR to 2185 Cr.
- Margins are above 45% across market cycles.
- PAT grew at 20% CAGR, maintaining an average of 30% PAT margin
- Not a growth play in the short term. The company, in all probability, will see a fall in revenue & earnings for the next few quarters as the equity participation and trading volumes are falling.
Is the de-growth already priced in?
The stock has fallen -52% from its peak. It is currently trading at a market cap of ~13,900 Cr. Even if we assume a 40% drop in profits this year, we estimate a net profit of approximately 1000 Cr in FY23E. That translates to a PE of 14 times and a dividend yield of ~ 3%, which is OK in terms of valuation compared to its direct peers like Angel One, which is trading at 25 times (FY23E) and a quasi-player like BSE, which is trading at 32 times.
Key assumptions:
- The current price could have factored in the de-growth scenario for the next year
- ICICI Securities will continue to maintain its market share and be part of the top 5 brokers in India
- The company will continue paying 50% of its profits as dividends
Key risks:
- SEBI’s margin rules hurt broking revenues big time
- Market downturns make some of their customers become bad assets (they lend to their customers)
- Slow down in market volume growth
Chambal Fertilisers: A play on financial leverage
The elevator pitch:
It makes Urea, which we otherwise import, and gets subsidies from the government. Reduced debt substantially. Fertilisers in play to reduce dependence on Russia/Ukraine.
Market cap: 13,000 cr.
Chambal Fertilisers & Chemicals Ltd mainly produces Urea, fertilisers, and Agri-inputs such as Di-ammonium Phosphate, Muriate of Potash, Ammonium Phosphate Sulphate, etc. Urea is an essential crop nutrient that plays a vital role in ensuring food security and is the highest-consumed fertiliser in India. As of FY21, Chambal has a market share of 12% in the Urea Sector.
The Urea produced in India does not suffice our demand, so we import. So Chambal is a crucial import substitution company. The government controls the selling price of Urea in India and makes it available to buyers at a subsidised price. The company, in turn, receives a subsidy amount from the government. The only disadvantage is that the subsidy payments do not happen on time. The government keeps these arrears outstanding for long periods, which makes it difficult for Chambal to manage its short-term working capital and long-term borrowings.
The company has shown remarkable growth in the last five years:
- Revenue grew at a CAGR of 20.8% to 16069 Cr
- EBITDA compounded at 31.4% to 2262 Cr. During the same time, margins improved from 10% to 14%
- PAT compounded strongly at 44.2%, with margins nearly doubling from 4.8% to 9.8%
- ROE & ROCE improved from 17.1% to 20.3% and 12.9% to 20.5% respectively
- The company has significantly reduced its Net debt of 9481 Cr in FY20 to 3729 Cr in FY22 with a consistent dividend payout history.
Triggers:
- Agri continues to be a focus point for the future, especially after Russia-Ukraine on fertilisers.
- Cut debt down after it doubled revenue and tripled net Profit in the last four years.
- The company has a 500 Cr Capex plan to increase the Urea capacity for the next two years.
The stock has corrected -42% from its recent peak and is currently trading at eight times PE (below 10Y median at 11.3 times).
Glenmark Life Sciences
The elevator pitch:
A recently listed API player will likely show solid growth going forward. No debt. Fourteen times earnings, 30% ROE, and increase at 20% or more.
Market cap: 5,800 cr.
Glenmark Life Sciences just listed from parent Glenmark Pharmaceuticals. It makes select high-value Active Pharmaceutical Ingredients (APIs). Also operates in Contract Development and Manufacturing Operations (CDMO) to offer services to speciality pharmaceutical companies. They focus on cardiovascular disease (CVS), Central nervous system disease, diabetes, etc. This company is a spin-off from Glenmark Pharma spun its API business into Glenmark Life Sciences. They acquired all the API manufacturing facilities, assets, intellectual property, employees & corresponding liabilities through a slump sale from the promoter.
The company has two main business segments. Generic API division contributes 91.7%, and the CDMO division contributes 8.3% of revenue.
In the last three years:
- Revenue grew at a CAGR of 24.4% to 2123 Cr
- EBITDA margins consistent at around 29%
- PAT compounded at a rate of 20.9% to 418 Cr, with margins remaining constant at 20%
- ROCE at 29%
- The company is net debt free
Key Triggers:
- The company repaid its debt from the IPO proceeds last year. This had financial leverage on the P&L, saving ~70 Cr every year as interest costs.
- In FY22, the company announced a Capex program increasing the total reactor capacity from 1400 KL to 2205 KL.
- Low float. The company is tightly held, with the promoter’s shareholding of 82.5%. However, in two years, the promoter has to bring down the stake to 75%. (Expect float to increase then)
The company’s IPO coincided with the recent market top. The stock had since fallen -42% from its peak. It is currently trading at 13 times PE and an EV/EBITDA of 8 times. The valuation looks reasonable for a global API player with a strong balance sheet and growing revenue in the mid-teens.
Summing up:
We reiterate these stocks can fall 50% from here. Or more. You should do your research before jumping to add any stock to your portfolio. Like any stock, these might fall significantly from current levels.
We hold some of these companies as part of Capitalmind model portfolios. Please read our note on recent additions: Adding three new stocks to the Focused Portfolio [Premium]
The complete portfolio on the Dashboard: CM Focused Portfolio [Premium Access]
Disclaimer: This article and the analysis presented are for informational purposes only. Nothing mentioned here is investment advice.
Let’s start a conversation on the #long-term-stocks channel on Slack, or let us know your feedback on premium[at]capitalmind[dot]in.
