The recent performance of the Indian stock market is not in sync with economic fundamentals. While the market continues to hit all-time highs, macro indicators paint a dismal picture of the economy. The weakness comes across through numbers that show declining core sector growth, falling consumption, likely fiscal slippage and lower GDP growth projections. Some experts believe that deteriorating macro fundamentals are due to structural issues that will create obstacles on the road to economic recovery. As markets cannot remain isolated from the economy for a long period of time, one can expect high volatility in the near future.Generally, volatility analysis is done using the returns a stock or an index generates and such returns are calculated for different time frames—weekly, monthly, quarterly or yearly. Statistical tools like standard deviation and beta are often used for volatility estimation and for identifying stable or low volatile stocks. Instead of looking at volatility from the returns side, how about looking at companies that have displayed low volatility in their core fundamentals like revenue growth or EPS growth over a period of time?Companies that maintain stability in principal fundamentals tend to control systematic or market risks better than the rest. Stability in revenue growth implies pricing power and durable demand for the company’s products or services. On the other hand, stability in EPS growth indicates operational efficiency and cost control. To identify such companies, the consolidated numbers showing sales revenue growth and adjusted EPS growth were analysed for the past 10 financial years, starting from 2009-10. Over 700 companies with market cap greater than Rs 500 crore were considered. Similar growth numbers were extracted for the aggregate BSE500 index.Standard deviation of the series of revenue growth and adjusted EPS growth were worked out for the companies and for the aggregate BSE500 index. Only companies that reported positive adjusted EPS in all of the past 10 years were included in the analysis. To identify companies with low volatility in financials, only those with standard deviation of revenue growth and adjusted EPS growth less than that of the BSE500 index were filtered out. Only 22 companies passed these filters. The past 5-and 10-year average return of this group was 82% and 413% respectively. The BSE500 delivered 42% and 133.3% returns during the same period. All returns are absolute and point to point. The numbers clearly show that stocks with stable financials outperformed the market substantially. To look at the future potential of these shortlisted companies, only those that are covered by at least four Bloomberg analysts and those with a 1-year forward price potential greater than 10% were included.Out of the seven companies, NTPC, Power Grid and Infosys have also shown stability in their RoEs (%). The standard deviation of these stocks based on their last 10-year RoE is less than the standard deviation of the average RoE of the BSE500 index.NTPCThis PSU with Maharatna status is engaged in electricity generation and allied activities. The company reported strong PAT growth in the September quarter despite low PAF. The performance is helped by capacity additions and reduction in operation and maintenance costs. PE: 9.8ROE(%): 10.8Current price (Rs): 1171-yr target price (Rs): 153Potential upside: 31%JM Financial is bullish on the stock and believes that improving coal supply from captive mining and coal imports will help NTPC maintain its PAF at over 85% for the full year 2019-20. Moreover, the research house feels that the CCEA approval for the sale of the government’s stake in THDC and NEEPCO to NTPC will be earnings and value accretive due to the company’s access to low-cost debt.

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Analysts’ recommendationsBuy: 25 Hold: 1 Sell: 0ITCThe diversified conglomerate has a presence in FMCG, hotels, packaging, paperboards and specialty papers and agriculture. Despite consumption slowdown, the company reported decent numbers in the September quarter with 6.6% and 36.2% year-on-year growth in sales and adjusted EPS on a consolidated basis. Lower tax and improved EBITDA margins aided the company’s performance.PE: 20ROE(%): 24.2Current price (Rs): 2491-yr target price (Rs): 321Potential upside: 29%Analysts believe the company’s strong brand leadership, product innovation, healthy business model, high cash generation, cost control measures and diversification across non-cyclical sectors are the key positives. Moreover, low capital intensity and robust pricing power have helped the company to maintain a strong RoCE profile.

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Analysts’ recommendationsBuy: 34 Hold: 4 Sell: 0NESCOThis diversified engineering conglomerate is in the business of exhibitions, events, hospitality, MICE and realty. In the September quarter, the company reported strong net profit growth helped by a decline in raw material and employee benefit costs. It generated high net cash amid consistent operating cash flows. PE: 23.1ROE(%): 15.4Current price (Rs): 6161-yr target price (Rs): 790 Potential upside: 28%Nirmal Bang is bullish on the stock due to the restructuring of the NESCO IT park, increase in rentable space of BEC and the expected increase in rental rates. Moreover, a healthy balance sheet, consistently positive free cash flow and management’s growth-oriented focus with the expansion of the flagship business over the next 20 years are other positives.

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Analysts’ recommendationsBuy: 4 Hold: 0 Sell: 0UPLThe company is in the business of agrochemicals, industrial chemicals, chemical intermediates and specialty chemicals and provides crop protection solutions. The company reported revenue growth of 11% y-o-y and EBITDA margin of 19.7% in the September quarter.PE: 16.1ROE(%): 16Current price (Rs): 5421-yr target price (Rs): 678Potential upside: 25%According to a recent report by JP Morgan, the company’s diversified crop protection business has been strengthened by the Arysta acquisition which is known for its crop focused marketing approach and R&D capabilities. The acquisition has augmented the UPL’s portfolio with specialty crop products, bio-solution, and patented products. The research house expects the company’s debt/EBITDA to decline to less than 2.5 times in March 2021 aided by growth from the complementary portfolio, cross-selling opportunities in the core markets and cost synergies.

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Analysts’ recommendationsBuy: 28Hold: 2 Sell: 2Oracle Financial Services SoftwareIt operates in the banking IT software space and provides services such as core banking, analytics, digital, and risk and compliance. In the September quarter, the company signed 13 new deals and the management continues to be positive on the strong deal pipeline. PE: 16.2ROE(%): 31.6Current price (Rs): 2,9161-yr target price (Rs): 3,697Potential upside: 27%Dolat Capital is bullish on its long-term prospects and believes the continued deal momentum coupled with improving profitability, robust cash generation as evident from FCF yield greater than 5%, makes a compelling case for re-rating the stock. However, the brokerage has expressed concerns over general weakness in BFSI by the service peers. According to Bloomberg consensus estimates, the company is likely to deliver RoE of 31.6%, compared to 11.4% by the BSE500 index.

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Analysts’ recommendationsBuy: 4Hold: 1 Sell: 0InfosysThis IT company is engaged in consulting, technology, outsourcing and next-generation services. The company is chasing large public sector deals in the Asia Pacific and Europe. HDFC Securities is bullish on the stock due to better visibility on growth, stable margin trajectory and the recent stock underperformance. The growth is likely to sustain and margins are expected to remain steady due to its focus on large deals, recovery in large account mining, pricing lever in digital, and completion of accelerated investment phase. PE: 18.2ROE(%): 25.6Current price (Rs): 6911-yr target price (Rs): 816Potential upside: 18%The brokerage house expects USD revenue and EPS to grow at 10% and 9% CAGR respectively between 2018-19 and 2021-22. The stock correction and partial recovery following the whistleblower allegations and clarifications provide an opportunity. The stock is currently available at its median valuations which is at a peak discount to TCS.

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Analysts’ recommendationsBuy: 29Hold: 13Sell: 4Power Grid CorporationThis Navaratna PSU is engaged in the power transmission business with responsibility for planning, implementation, operation and maintenance of inter-state transmission system. The company continues to lead in project wins and was declared the successful bidder in two of the intra-state transmissions system projects in Uttar Pradesh under Tariff Based Competitive Bidding (TBCB). PE: 9.4ROE(%): 17.5Current price (Rs): 1941-yr target price (Rs): 228Potential upside: 18%According to a research report by SBICap Securities, the past TBCB project returns generated by Power Grid is superior to the regulated returns due to competitive capital costs and lower capex. It remains a good play on the dividend yield. However, the brokerage house feels that the recent Supreme Court ruling on adjusted gross revenue will be an overhang.

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Analysts’ recommendationsBuy: 21Hold: 6Sell: 1 PAF is Plant Availability Factor. PE and ROE estimates for 2019-20. BSE500 index estimated PE: 21.5, RoE: 11.4%.Current price as on 26 November. Index values normalised to a base of 100. Source: ACE Equity & Bloomberg.

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