Weak markets an opportunity

Five stocks that have healthy growth prospects

After last Monday's massive fall in the Indian markets, a lot of quality stocks have fallen significantly. These have healthy growth prospects and many are also a play on an improving macro economy. Not surprisingly, many research houses are recommending that investors selectively pick up good names among these. Here’s a shortlist of the top five stocks, among the most preferred picks of well-known brokerages. Additionally, these are trading in close proximity (six to 15 per cent higher) to their respective 52-week lows. State Bank of India (SBI), ICICI Bank, Larsen and Toubro (L&T), Coal India and Oil and Natural Gas Corporation (ONGC) are the stocks investors can consider at current levels.

COAL INDIA

• The government’s impetus on raising coal production will benefit Coal India, boosting its output in the coming days. Already production is up 10.5 per cent year-on-year at 156.15 million tonnes in April-July, 98 per cent of the target set for the company
• The more profitable e-auction volumes are also increasing regularly
• Though realisations are under some pressure, increasing volumes should offset these
• Analysts at Nomura have tweaked realisation estimates but raised output estimates, arriving at a target price over Rs 400

ICICI BANK

• Inexpensive valuations, coupled with the improving prospects of power and infrastructure sectors, are key positives
• Value unlocking in subsidiaries like life insurance, as well as their healthy prospects, should aid consolidated performance
• Bottoming out of asset quality pressures, healthy earnings growth and returns ratios should reduce the valuation gap with peers
• The bank's earnings are likely to grow 18 per cent annually over FY15-17, with 200-250 basis points expansion in return on equity likely

LARSEN & TOUBRO

• L&T remains the best play as the Indian infrastructure segment recovers, while exposure to markets abroad helps diversify revenue streams
• The company is likely to benefit from order flow in verticals such as defence, shipbuilding, nuclear power, etc, though some of these will accrue only in the longer run
• Order flow and execution is likely to grow in all verticals in the country and operations abroad
• Analysts at IDFC see earnings growing at a compounded annual rate (CAGR) of 25 per cent over FY15-17 as business prospects improve

OIL & NATURAL GAS CORPORATION

• Lower crude oil prices have pulled down the stock, as it directly impacts the prospects of subsidiary ONGC Videsh
• Clarity on subsidy sharing in advance will help clear the uncertainties and, hence, prop investor sentiment
• Lower subsidies are already rubbing off well on net realisations, which, along with increasing production, will drive earnings. Analysts peg its earnings to grow at a little over 20 per cent CAGR over FY15-17 assuming crude oil at $55 a barrel
• Further falls in natural gas and crude oil prices to unattractive levels for a prolonged period are key downside risks

STATE BANK OF INDIA

• SBI is a direct play on domestic economic recovery, given its strong presence across the country and in business segments
• Healthy capital ratios, stabilising asset quality and competitive lending rates are key positives
• It is among the few public sector banks that have protected its market share even with intensifying competition
• Analysts expect earnings to grow at a CAGR of 22-25 per cent over FY15-17