Technical analysts often use moving averages to determine the price momentum of an asset—be it a stock, commodity or even a currency. When an asset trades above its crucial moving averages (say 200-Day Moving Average or 50-Day Moving Average, etc); it often sends out a bullish signal to investors. Of course, various other indicators are used in conjunction to determine the strength of the trend.
If the price strength is important, why underestimate the earnings strength?
We decided to run a check on the earnings momentum of companies listed on BSE.
We considered 920 companies with market capitalization in excess of Rs 500 crore for the analysis. We then eliminated 395 companies that either incurred losses or earned a net profit of less than Rs 25 crore in Q2FY21.
From the remaining 525 companies, we ditched companies that failed to beat their previous 5-quarters average profit. To get an undistorted picture, we excluded Q1FY21 earnings from the average. Only 394 companies could pass these tests. At this stage we let go turnaround stories, companies showing less than 20% of PAT growth vis-à-vis their 5-quarter average and also the ones showing a supernormal jump due to extraordinary items.
This trimmed our list further and we were left with 265 companies. Then we narrowed down the list just to 15 companies by applying other parameters such as the Return on Equity (RoE) of at least 15% and Net-Debt-to-EBITDA of less than 1.
We decided to dig deeper and navigate beyond obvious large-cap companies. We emphasized on finding out businesses that could potentially benefit from the much-awaited transformation of India’s manufacturing sector. Hence, you won’t find services sector companies on the list. Similarly, we decided to give a miss to sectors that are showing unprecedented disruptions, such as auto and auto ancillaries, as they would obscure the picture.
Note: For the calculation of Price-to-Earnings (P/E) and Return on Equity (RoE) 12-month data excluding Q1FY21 considered
#5-quarter average excluding Q1FY21 profit
(Data Source: ACE Equity)
If India has to go any distance on its Atmanirbhar initiative, then companies such as some mentioned in the table above must perform well.
Some manufacturing companies that belong to sectors where India has demonstrated its capabilities already, specialty chemicals for instance, are still too small. They may attract global investors if they continue to grow and demonstrate good governance. Similarly, companies which have a huge domestic market may also benefit from the new policy initiatives undertaken by the government.
Let’s take a few examples.
Astral Poly Technik is one of India’s largest plumbing companies which earns 77% of its revenue from the piping business and 23% from adhesives. The company has been expanding capacities and has planned new product launches. It has guided that the construction work at its new plant in Odisha will be completed by May 2021 and the production from this facility may start in Q2FY22.
Organized players command 60%-65% of the market share of India’s plastic piping industry. The pandemic might have made the going tougher for unorganized players. Some companies such as Astral Poly Technik stand to gain substantially from this trend. Astral Poly is aiming at grabbing the market share within the organized space too.
Now that economic activity has resumed, the company has witnessed a massive surge in monthly sales numbers. Astral Poly clocked 30% revenue growth in September. October was even better and saw 85% growth. Adhesive business too grew 55% in October.
Astral Poly’s management remains hopeful that the growth in Q2FY21 wasn’t just on account of pent up demand and may continue even in future. The migrant labourers are slowly getting back to work and with metros becoming busy places again, the construction sector is expected to see robust activity going forward.
Interestingly, receivables of the company have dropped 30% in September 2020 as compared to a year ago, despite the growing sales. Inventory came down 9% over the same review period. This suggests that the firm might be following a conservative approach to manage its working capital.
Nonetheless, the stock isn’t cheap, therefore, it remains crucial to see how much of the positives are already factored in and whether the company can continue to surprise the street with impressive numbers in the coming quarters. It will be crucial to watch the trend in PVC prices, which are higher than their long term averages.
Oriental Aromatics is one of India’s largest manufacturers in the terpene chemistry segment. Its products find application in various industries such as flavours, fragrances, food and beverages, pharmaceuticals, soaps, cosmetics, rubber, tyres, paints and varnishes, amongst others.
The company is home to nearly 200 products that cater to 21 chemistries. Oriental Aromatics has proven R&D capabilities and its products are well-received even in the developed markets. As the global corporations are diversifying away from China, which is one of the dominant players in the aroma chemicals, outlook for companies such as Oriental Aromatics has improved substantially.
Exports make up approximately 30% of the company’s revenues at present. Oriental Aromatics has delivered stupendous performance in Q2FY21. The EBITDA margin has shot up from 13.27% in Q2FY20 to 26.71% in Q2FY21. PAT margin improved 5.28 percentage points or 528 basis points. In Q2FY21, the company paid off Rs 33 crore of debt, with which it became virtually debt free. Its debt to equity ratio has dropped from 0.45 in FY19 to 0.03 in H1FY21.
Likewise, each company on the list may benefit if India achieves a global scale in manufacturing over the coming decade and reaps demographic dividends. Strong manufacturing performance may help India grow its per capita income and growth in per capita income may potentially lead to even higher growth.
If you get tempted to sell a stock just because it’s at an all-time high, without even paying attention to the company’s prospects, you could perhaps be doing a great disservice to your portfolio. Similarly, you may not want to take large bets at a time when the stock is firing on all cylinders.
After all, stock price is just a number; the real math lies in the company’s earnings potential and its valuations.
Time to strike the right balance!
Please Note (read as a disclaimer): None of the stocks discussed in the article are recommendations to buy, hold or sell. This could just be the starting point for deeper analysis that you might want to carry out on your own. You may also take professional help as you feel appropriate.
If you are investing in any family run company, besides governance, you may also want to take stock of significant developments in the lives of the promoters. Sometimes, their personal life can overshadow market sentiments. Also pay attention to issues such as pledging of shares by the promoter group and the working capital.
You may also like to read: PSU Banks: value bargains or value traps?
Disclaimer
We, Ventura Securities Ltd, (SEBI Registration Number INH000001634) its Analysts & Associates with regard to blog article hereby solemnly declare & disclose that:
Consult your financial advisor before taking any investment decision.
We do not have any financial interest of any nature in the company. We do not individually or collectively hold 1% or more of the securities of the company. We do not have any other material conflicts of interest in the company. We do not act as a market maker in securities of the company. We do not have any directorships or other material relationships with the company. We do not have any personal interests in the securities of the company. We do not have any past significant relationships with the company such as Investment Banking or other advisory assignments or intermediary relationships. We are not responsible for the risk associated with the investment/disinvestment decision made on the basis of this blog article.
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