There are companies which have shown consistent increase in sales and earnings over the years. Inspite of displaying consistent performance in terms of earnings and revenues, they remain relatively undervalued compared to growth stock. This is because of investor’s herd mentality where more investors are attracted to growth stocks, strong price momentum. The strong upward movement in price is because of strong earnings growth visibility.
We have built this Neuron of companies which have been consistent performer in terms of revenue and profit growth but are trading at attractive valuations.
Growth rate is a measure of the rate at which a company's net earnings have increased during the previous fiscal quarter. Companies in a high growth trajectory have big investment opportunities and they invest their earnings in the business. The increase investment spending year on year is reflected in the continuous increase in profit. Stocks price of these companies show strong price momentum in market and are relatively outperformer in the market. Comparative valuations of these companies are historically on the higher side reflecting strong earnings growth.
This Neuron is built by selecting companies which are showing earnings growth and strong price momentum.
With the rapid growth in per capita income, disposable income among the middle class and the increase in the number of millionaires has led to increase demand for luxury goods in the country. Some of the items in the luxury segment are high-end jewellery, high brand cosmetics, apparels, luxury cars, and consumer electronic goods. This Neuron consists of stocks expected to benefit from India's affluent consumers increasing demand for luxury goods and services.
Budget 2017 focused on development of rural areas, infrastructure and consumption. On these broad themes the finance minister announced a balanced budget keeping the long term growth in mind and tried to offset the negative impact on the economic growth because of demonetisation. Rural allocation increased by 24 percent to Rs 1.87 lakh crores in 2017-18, given that the pain of demonetization was felt more acutely by rural India.
The finance minister announced several measures to revamp infrastructure, expanded a scheme to give concessional loans to farmers, offered incentives to states to computerize primary agricultural credit societies (PACSs) and increased allocation to the National Bank for Agriculture and Rural Development (NABARD) to ease fund-flow for farmers. The govt. has set the target of 100% rural electrification by May 2018. MNREGS, the world's largest job guarantee scheme, received top billing with budgetary allocation of Rs 48,000 crores, a 24 percent increase over the previous year's Rs 38,500 crores.
He doubled the credit target under the MUDRA scheme for raising the available loans to the unfunded and underfunded to Rs 2.44 lakh crores in 2017-18. In order to boost consumption, tax rate has been slashed to 5% from 10% for those earning between Rs 2.5 lakhs and Rs 5 lakhs and those earning between Rs 50 lakhs and Rs 1 crore annually will have to pay a surcharge of 10 percent in addition to a 30 percent income tax.
For Micro Small and Medium Enterprises (MSME) with annual turnover less than Rs. 50 crores , tax rate has been reduced to 25% from the current effective tax rate of 30%. This was done with the intention to stimulate small and medium enterprises after the liquidity crunch impacted their business.
Funds for infrastructure received a big push as the government is looking to revive the economy amid global uncertainty and demonetisation at home front. The total capital outlay for Indian railways have been raised to 1.31 lakh crores in 2017-18 from Rs 1.21 lakh crores in 2016-17, while the outlay for the national highway programme has been raised by Rs 7,000 crores to Rs 64,000 crores in 2017-18
Affordable housing got infrastructure status, which would help the housing construction companies to get loans at reduced rates from banks.
Overall estimated Budget spending for FY18 is up 6.6 percent to Rs 21.47 trillion.
Finance Minister hiked capital investment by 25.4 percent, and announced a 24 percent increase in rural and farm spending. Health spending will rise by 28 percent.
Considering the government's huge spending on infrastructure, rise in rural allocation and tax relief to lower income group, we have built this Budget Neuron by identifying companies that are expected to the benefit the most directly or indirectly by the above policy announcement.
Energy is critical for any nation’s economic growth. India’s Energy sector is one of the most diversified in the world. Sources of power generation range from conventional sources such as coal, lignite, natural gas, oil, hydro and nuclear power to viable non-conventional sources such as wind, solar, and agricultural and domestic waste. Electricity demand in the country has increased rapidly and is expected to rise further in the years to come.
A smart city is an urban development vision to integrate multiple information and communication technology (ICT) and Internet of Things (IoT) solutions in a secure fashion to manage a city's assets – the city's assets include, but are not limited to, local departments' information systems, schools, libraries, transportation systems, hospitals, power plants, water supply networks, waste management, law enforcement, and other community services. The goal of building a smart city is to improve quality of life by using urban informatics and technology to improve the efficiency of services and meet residents' needs. The Central Government has launched a 'Smart City Mission' to transform 100 cities into the highest level of urbanization. The project has an outlay of INR.98,000 crore. This Neuron consists of stocks expected to benefit from this Smart City Project.’
Indian economy is growing at an average rate of 7%, the highest among the major economies of the world. In order to sustain or increase the rate of growth, the government announced huge spending on infrastructure in Budget 2017. The total capital outlay for Indian railways have been raised to 1.31 lakh crore in 2017-18 from INR 1.21 lakh crore in 2016-17, while the outlay for the national highway programme has been raised by INR 7,000 crore to INR 64,000 crore in 2017-18. Afforadble housing got infrastructure status, which would help the housing construction company to get loans at reduced rates from banks, thereby boosting demand in real estate sector. With huge outlay on infrastructure spending planned by the government, we believe that there is an opportunity to make good returns by having an exposure into this sector. We have built this neuron of those companies which are going to be direct beneficiaries of huge infrastructure spending.
The Digital India programme is a flagship programme of the Government of India with a vision to transform India into a digitally empowered society and knowledge economy. The major objective of this programme is to achieve a high-speed digital highway, government services accessible on mobile devices, empowerment of farmers through real-time data, cyber security and financial inclusion.
Affordable Housing is one of the flagship plans of the govt. that addresses the needs of housing for people whose income is below the median household income. Affordable housing is an important issue in developing countries where majority of the population is not able to afford house at the market price. In June 2015, Government announced Pradhan Mantri Awas Yojana with an aim of building 2 crore houses over the next 7 years.
This Neuron is built based on investment criteria set out by Kevin Matras, an US based investment expert in his book "Finding #1 Stocks: Screening, Back testing and Time-Proven Strategies". Companies having high return on capital employed will be able to manage endurable earning growth. High return on capital employed with low debt/equity ratio leads to high return on equity which gives good return in stock market. In this Neuron, stocks have been selected based on high return on equity in the same sector. Companies have been further screened based on its P/OCF (Price to Operating Cash Flow) instead of just PE ratio. High operating cash flows gives the company the ability to sustain earnings growth. In addition we have selected stocks which have given positive dividend growth rate.
Investment in those companies which efficiently utilizes its capital gives high return. Companies which have consistently earned high return on its investments will not only be able to cover borrowing cost but also earns high return on equity. Companies with high return on capital employed and return on equity with significant earnings in cash gives high return in stock market. This Neuron is built based on the investing strategy of UK investor and journalist - Richard Beddard. This strategy combines Greenblatt's Magic formula and Joseph Piotroski's F-Score to select fundamentally resilient companies that have been utilizing their capital efficiently and are currently trading at a reasonable price.
India’s strong GDP growth is leading to increasing per capita income. With the rise in income the component of disposable income is also rising. India’s large population consists more of young people, with this favorable Indian demographic and increase in disposable income, the consumption of goods will also rise. Increasing consumption expenditure is leading to change in consumption pattern, as more and more people are now becoming brand conscious. With the increase in discretionary spending demand across diverse sectors like food beverages, clothing & footwear, household goods, healthcare and leisure facilities will rise. Consumer’s changing lifestyle and awareness is attracting them towards goods and services which have strong brand. We have built this Neuron of only those companies which have products with strong brand name. These companies are further screened to select companies which have consistently shown earnings growth in the last five years.
Beta measures the volatility of stock. The stocks beta is measured against its benchmark Index, In this case either Nifty or Sensex. A beta of 1 indicates that the stock is as volatile as the market. It means that if Nifty rises or falls by 10%, then the stock with beta 1 will also rise or fall by 10%. Similarly if beta is less than 1, then the stock is less volatile than market. Portfolio of low beta stocks protects the investor under adverse market condition. For investors whose risk appetite is less low beta stocks will suit their investment goal. We have built this neuron whose stock beta is less than 0.65 and has increased institutional holding.
For an investor it is a very difficult task to choose Mutual Fund scheme for investments from more than 200 schemes. Any investor making an investment in Mutual Fund will have an indirect exposure to market. We have built this Neuron so that investor can have the direct exposure to market thereby reducing their transaction cost significantly, which the mutual fund charges at regular interval. Mutual Fund invests in market at regular intervals keeping the objective of the scheme in mind. This Neuron is built by selecting those stocks where top performing funds have high exposure. Out of the same basket of stocks we have selected fundamentally strong stocks which are trading at attractive valuation. Stocks having high institutional support are generally a relatively high performer in market in the long run. So investors investing in stocks with high financial institutional support will be able to achieve high return on stock investment. We keep track of Mutual Fund exposure in various stocks and accordingly we rebalance this Neuron regularly.
CAN SLIM is a philosophy of screening, purchasing and selling common stock based on William O'Neil, famous book "How to Make Money in Stocks". The book defines seven criteria for selecting stocks such as Current Earnings, Annual Earnings, New management, new product, new market or new high in stock price, Supply and demand of outstanding shares, leader or laggard, Institutional sponsorship and market
direction. The following is the description for all the seven criteria:
Current Earnings - The last four quarter earnings growth rate should be more than 20% on an average.
Annual Earnings – Annual earnings growth rate for last 2 years should be more than 25%. New - William O'Neil observed that 95% of the company he screened has something new like new product, new market, and new management before there was a big move in stock market. Supply and Demand - It is easier for smaller firm with less number of outstanding shares to show big gains than large cap companies with huge number of outstanding shares. The reason being that a large cap company will require much higher demand
than a small cap company to demonstrate the same kind of percent gain. Leaders and Laggards - In every industry there are leaders and laggards. The strategy is to identify leaders who can give good return to shareholders and exclude laggards which give average return. Institutional sponsorship – Institutional ownership is high in good quality companies and it is important to take this into consideration. But sometimes high institutional ownership in particular stocks can be a worrying factor, because any change in market sentiment will spark off large scale selling in that stock. It is important to see institutional ownership in stocks but not at a very high level. Market Direction – It is important to recognize the direction of the market while investing in stock market. While making investments one should see the whether the
market is in uptrend or downtrend as going against the trend will incur loses to investors. This Neuron is built based on the above criteria taking into consideration of those stocks which has shown growth of 10% in earnings over last two years and is having high return on equity. In addition to that we have selected relatively strong stocks which have shown positive stock price movement and have performed better than
75% of the stocks in previous year.
The “Little book that beats the stock market” written by Joel Greenblatt's talks about value investing strategy. The books discusses about higher return on capital employed which leads to higher profit earning. Return on capital employed measures the profitability and efficiency of the company. This Neuron is built by applying the Magic formula as described in the book, with special emphasis being given on those stocks which are trading at reasonable price.
GST, regarded as one of India's most sweeping reforms since Independence, will help turn the country into a common market by removing state tariffs that act as a barrier to free movement of goods and services. We believe implementation of the Goods and Services Tax (GST) would be a boon for India Inc. as a whole, since it would simplify and rationalize the tax system, shift trade from the unorganized to the organized segment and improve efficiency in the system.
We believe that four key themes that would emerge, which might have a significant impact on India Inc are : a change in effective tax rates for various products and services; availability of seamless input credit across the value chain; shift of trade from currently unorganized segments to organized segments; and re-jig of the present supply chain management system.
The current effective indirect tax rate for most companies is in the range of 22-29%, and it does not allow a set-off of tax paid on services. After GST implementation, the effective tax for these companies is expected to go down to 18-20%, as the base rate comes down. Also, companies will be entitled to set off tax paid on services.
Being organised players, companies will enjoy level playing field as the GST will reduce or eliminate tax sops enjoyed by unorganised players which, at this point, has placed them in an advantageous position. Another benefit will come from warehousing and logistics cost benefits as GST is also expected to reduce the logistics costs. GST will allow the industry to redesign the supply chain to reduce the cost of goods sold and speed up the time taken by the product to reach the market. Also, elimination of tax cascading is expected to lower input costs and improve profitability. GST will eliminate different state tax and will reduce the number of warehouse at various state check points that will result in lower warehousing cost.
Taking into account the above advantage, we have identified those companies in different sectors that are likely to be big beneficiaries of this tax reform.
Demonetisation is one of the biggest economic reform measures taken by the central government since Independence. There have been talks of disruption in economic growth in the short term due to demonetisation, but as on date, most of the short term pain from demonetisation has subsided and we believe it is the right time to focus on the long term positive, as we expect demonetization exercise will bring a transformation in the economy going forward.
The transition to a cashless economy will benefit intermediaries such as Banks, NBFCs and micro-finance companies. In the medium to long-term we expect demonetisation to lead to a proper flow of funds through formal channels, thus increasing the flow of funds into banks and other financial intermediaries. This will lead to an increase in Net Interest Margins of banks due to low cost of deposits. Demonetisation will decrease unaccounted cash from the informal economy which would help to curb inflation. This will enable RBI to cut interest rates further and would lead to an increase in demand for both business loans and retail loans, thus increasing the credit growth.
Furthermore, the sustained crackdown on black money will prevent people from parking their savings in physical assets such as gold and real estate. This should boost the flow of savings into the financial system to a significant extent. This in turn should spell a higher influx of flows for financial services providers, such as banks, non-banking financial companies (NBFCs) and stockbrokers. We expect asset management companies to benefit in the long term and expect Mutual Fund companies combined AUM ( Asset Under Management) to grow to 20 lac cr from 17 lac cr in 2017.
Another benefit is that as people will have to disclose their income by depositing money in their bank accounts, tax to GDP ratio will improve and with this we expect an increase in tax revenue. Government will increase spending on infrastructure, hospitals, educational institutions, roads. Sectors like infrastructure will be the biggest beneficiaries, as the government is will increase spending in this sector to set-off the adverse impact of demonetization in the economy.
The share of cash component in property deals is expected to come down drastically post-demonetisation. This will help in easing property prices and increase demand for housing which would be beneficial for organized lenders and housing finance companies (HFCs).
While building this Neuron we took a long term view and tried to identify companies in various sectors that will benefit from this path breaking reform measure.
Private banks controls 30% of the total credit in the country, while the rest 70% is done by public sector bank. Over the years we have seen that private banks have left behind public sector banks in terms of performance like growth of bank network, asset quality, return on asset, profit per employee etc. We have observed that recently Public Sector banks have been loaded with high NPA, and this has affected theirs credit growth. On the other hand we have few private banks whose NPA is low compared to its peers, has shown strong credit growth, and we expect this trend to continue. We expect RBI will cut repo rate further in FY18, from the current 6.25%, these private banks whose asset quality is in good shape will be the biggest beneficiary.
NBFC ( Non Banking Financial Companies) have grown exponentially in the unbanked areas and have played pivotal role in giving credit to rural areas. Government's focus on infrastructural development in rural areas is beneficial for NBFC's as its major operations are in rural or semi-urban areas. Given low penetration of banks in rural areas, NBFC's are in a better position to grow its lending business by taking advantage of its strong branch network.
Positive business sentiments, improved consumer confidence and controlled inflation are likely to prop-up the country's economic growth. Enhanced spending on infrastructure, speedy implementation of projects and continuation of reforms by the Government are expected to provide further impetus to growth. All these factors suggest that India's banking and finance sector is also poised for robust growth. This Neuron consists of both banks and NBFCs which has improved asset quality, low NPA , with sufficient fund that are expected to benefit from this growth in finance sector.
Value investing is an investment strategy where stocks are selected that trade for less than their intrinsic values. It is generally seen that market overreacts to good and bad news, resulting in stock price movements that do not correspond with a company's long-term fundamentals, giving an opportunity to profit when the price is deflated. This value buying strategy based stock selection gives good upside return potential in the long term. In this Neuron stocks are selected based on its intrinsic value, which is above its current market price.
Rural consumption is on strong growth track and is estimated to increase faster than urban India. Considering we had overall good monsoon this year, this has led to increase in rural income and giving fillip to rural consumption. In the last budget, the Government allocated Rs 36,000 crore for agriculture and farmer welfare. The Government has further planned to double farmer income by 2022 through various incentives and planned investment in rural infra, road building & water management; and augmented allocation towards MNREGA scheme. Besides this a whopping Rs 9 lakh crore of agricultural credit is set to be disbursed in the financial year 2016-17. Crop insurance schemes, a unified e-marketing platform for farmers and highest ever MNREGA allocation all intend to boost rural consumption. We are expecting huge government spending in rural areas to be announced in the next budget for financial year 2017-18, to counter the negative impact on rural demand. This Neuron consists of companies which derives its revenue from rural demand and is likely to benefit from Government infrastructure spending in rural areas.
High growth companies are those where large investment opportunities are seen and the company's earnings are reinvested. This boosts the future earnings of the company, and so does command high valuation.
Buying such stocks that offer decent growth potential can be a smart way to invest in markets, but companies that offer explosive growth tend to be quite risky. While the ones that succeed can go on to produce multibagger returns. Many high-growth stocks are destined to wipe out in spectacular fashion due to its high valuation. For that reason, it's especially important for potential investors to be quite picky when choosing which high-growth stocks are deserving of their money.
With that in mind, we research on stocks that are expected fast growth but are currently trading at reasonable price by screening for the following qualities: sales growth, earnings growth and market cap. From there, we select companies that are projected to grow EPS at very high rates over the next five years.
It is worth noting that Indian economy is agrarian in nature with almost 49% workforce employed directly in the agricultural sector and the percentage getting amplified to 70% when we consider both direct and indirect employment. This work force contributes a quarter of India's GDP and is very intricately affected by the level of rainfall in the monsoon season.
For the FY 18, the Indian Meteorological Department (IMD) has predicted rainfall at 96% of Long Term Average of 89 Cm rainfall which in all likelihood will have a positive effect on the Indian economy. Though there were earlier concerns regarding the dreaded El Nino effect factoring in which has a history of causing droughts, the officials at IMD have now stated that another phenomenon- Indian Ocean Dipole which has counter effect on El Nino has been gaining strength and will be resulting into a normal to above normal monsoon.
A normal/above normal rainfall has historically been benign for the Indian economy as it initiates a cycle of events starting with higher disposable income in the hands of farmers which leads to greater spending on various goods and this cycle of events has a lingering effect on the economy as the spending spree continues in the festive season that follows monsoon and the wedding season towards the end of fiscal.
It is with this idea, that we at CapitalVia Global Research Limited have come up with an exclusive portfolio for our clients to tap into the investment opportunity that monsoon presents.
This Neuron is based on a book "The Naked Trader by Robbie Burns" which is a growth investment strategy. Stocks are exclusively selected on the basis of strong growth and earnings in the recent past . Other factors are also taken into consideration like the price momentum and value, and focus on small and mid-cap stocks. High leverage companies are avoided in this selection process as it affects the profitability and return on equity of the company. Stocks are also screened on valuation parameters like PE, EV/EBITDA, P/BV ratio, so that reasonably priced stocks are selected.
Market Neuron is a theme based trading strategy which revolves around a certain event/idea that you believe will materialize in the future. Market Neuron captures the effects of the theme on the financial market. Our analysts follow a top-down approach to select the right stocks & weights that reflect the theme. Next, a basket of a maximum of 20 stocks is formed based on the same theme.
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