Mutual funds buy value stocks for alpha play in October
Fund managers have been grappling with the challenge of generating alpha given the high valuations of key large-sized companies. To deal with this, in October, managers focused on a few key parameters in selecting companies. They focused on companies which failed to participate in the rally but have immense potential for strong earnings growth in the coming quarters. These companies have strong cashflows, established market share and quite favourably trading at attractive valuations in comparison with their peers.
Here is a list of five companies in which fund managers have shown considerable intent:
CMP: Rs 257 | MCAP: Rs 3,12,619 crore | Buyer: ICICI, HDFC Mutual Fund
After the announcement of cess on cigarettes under the Goods and Services Tax (GST) in July, the company’s stock fell close to 10% till October. The cess impacted its cigarette business as sales from the segment fell by 46.6%. To deal with the cess, the company took price hikes. Analysts point out that the company’s financial performance in the subsequent quarters could be much better led by improving cigarette volumes and no more GST disruptions. They point out that earnings growth would rebound in the second half with earnings growing in the range of 10%. This could continue for the next two fiscals. Another key reason which has been instrumental for sustained interest in the ITC stock is its attractive valuation. The company has been trading below its 10-year average price to earnings multiple.
CMP: Rs 546 | MCAP: Rs 1,30,995 crore | Buyer: HDFC Mutual Fund
The recent fund raising of Rs 11,526 crore by the bank should help absorb credit costs and enhance its growth, both of which will help it return back closer to its historical return ratios. It will also help the bank provide for bad loans that rose to 5.90% of total advances in the September quarter. With the capex cycle likely to revive over the next couple of years, and NPAs likely to hit a bottom, funds believe it is a good three-year bet. Bain Capital will invest $1.06 billion (Rs 6,854 crore) in the form of equity and the balance $349.3 million (Rs 2,260 crore) via warrants. This is expected to improve the bank’s Tier-I ratio by 170 basis points to 13.8-14% by FY18E, which will provide the bank capital for business opportunities. Due to capital raising, analysts estimate the bank’s earnings would grow at a compounded annual growth rate of 42% between FY17 and FY20.
CMP: Rs 290 | MCAP: Rs 5,437 crore | Buyer: HDFC, Reliance MF
Tube Investments of India has generated interest among fund managers largely due to four key reasons. First, margin improvement in bicycle segment due to high volumes and consolidation of plants. Second, rising exports of tubes, which would result in higher margins. Third, the company’s focus on after-market and new products as regards its chain business. Lastly, the company is expected to capture higher market share in its blanking business. Analysts expect earnings could grow at a CAGR range of 23-25% between FY17 and FY19.
CMP: Rs 314 | MCAP: Rs 2,01,440 crore | Buyer: HDFC, ICICI, SBI Mutual Fund
Investment in ICICI Bank’s stock is driven by improving financials and attractive valuation. After seven quarters, the bank reported double-digit growth in its operating profit in the September 2017 quarter. Also the bank’s fresh slippages of Rs 4,100 crore were lower than the Street’s estimates for the quarter. Also the bank’s non-performing loans have been stabilising. The management has maintained its guidance that in FY18 slippages will be down substantially from FY17, which gave confidence to fund managers.
CMP: Rs 1,828 | MCAP: Rs 7,912 crore | Buyer: Franklin Templeton Mutual Fund
BASF India is a part of BASF SE, the largest chemicals company in the world. Profitability and top line visibility is high on account of new product launches in the high-margin agri solutions business. The Dahej plant is the largest investment made by BASF and the facility is developed as a chemical complex to reduce imports of intermediate products. Based on product-wise plant capacities, the Dahej plant is likely to add significantly to manufacturing revenue. With the plant stabilising in the last couple of years and technical issues resolved, margins are set to improve.
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Via:: Economic Times – Stocks