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Donald Trump win in US presidential polls, and note ban in India, have played havoc with Indian equity markets. Three weeks have passed but stocks continue to be choppy.
It is not clear when these headwinds will ease but most experts believe corporate India's performance would be under pressure in the current quarter and next. As a result of these expectations, and net profit downgrades, experts believe the market has started factoring in the pain. And, this could be a good time to buy shares that could see some pain even as their companies’ business remains structurally intact.
Ridham Desai, managing director, Morgan Stanley India, believes long-term investors should use this share fall to enter good quality stocks. So does domestic brokerage Sharekhan: "The recent correction is already discounting a large part of the earnings pain in FY17 and the partial spillover on FY18 earnings estimates. However, the next few months could be bumpy and this volatility offers investors an opportunity to gradually buy into quality stocks at reasonable prices."
A lot of good quality companies with a high return on equity (RoE or net profit returned as percentage of net worth), as well as long-term net profit visibility, have fallen a lot since November 8, when note ban and outcome of US elections were declared. RoE indicates how much net profit a company generates with its net worth or the shareholder funds it has employed in the business. An analysis of BSE 500 stocks reveals 20 shares, which are estimated to have an RoE of more than 18 per cent this financial year, having fallen meaningfully in the past three weeks.
These include Eicher Motors, Page Industries, Ashok Leyland, Bajaj Finance, Bharat Financial Inclusion (formerly SKS Microfinance), Berger Paints, Titan, IIFL Holdings, V-Guard, and Manappuram Finance. By Bloomberg consensus estimate, most of these are expected to grow net profits by 16 to 51 per cent over FY16-18 (see table). While future projections can go awry, a company's record, business model, corporate governance practices, and management are some factors that investors should consider. Many of these 20 companies would come out high on these parameters.
Most of these stocks are in consumer-facing sectors such as consumer durables (particularly building materials such as tiles, ceramics, sanitaryware, paints), automobiles, fast moving consumer goods, and non-banking financial companies (NBFCs). These sectors will witness slowing demand in the short term but will recover in a gradual manner, as their long-term growth prospects remain intact. Many experts believe the pain seems to be baked into the stock price.
"We view any sharp correction in NBFCs and housing finance companies as a buying opportunity, as we believe larger and relevant entities in this space have better loss-absorbing capacity (loan-loss allowances for bad loans)," says Veekesh Gandhi, analyst at Bank of America Merrill Lynch.
Jewellery companies such as Titan are likely to witness prolonged pain from note ban and the sales increase these entities were hoping for in the ongoing wedding season will not materialise. But the shift from unorganised players to organised ones could accelerate over the medium term and will be a key positive, believe analysts. Overall, though volatility is likely in the near term, investors can start buying quality stocks at current prices.
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