If you felt that betting on the strongest companies would help you outperform and only fools would invest in ‘weak’ companies when the world was still battling a pandemic, well, those fools seem to have outfoxed you.
An analysis by DSP Mutual Fund, which manages nearly Rs 1 lakh crore worth of assets, says companies with worst return ratios and poor earnings performed the best during the late stages of pandemic, proving the projections of most of the market analysts wrong.
“Since the first vaccine announcement, it is the bottom quintile that has outperformed. These are companies that had the lowest average revenue growth, lowest Ebitda margin, highest leverage, lowest ROE, lowest valuation and highest beta,” the fund house said in a note.
The analysis took into account the performance of Nifty500 companies (ex-BFSI), which eliminated any skewedness due to investor exuberance towards penny stocks. The analysis was done for the period starting November 8, 2020, when the first vaccine was announced. By that time, there was certain visibility about the future business environment.
The outcome of the analysis could tie in with the broad market narrative that money has moved into ‘deep value’ and ‘cyclical’ stocks, as they were among the worst performers in the last few years, and hence undervalued.
“While high ROE and earnings growth seems like a good combination to have, it is not necessary that such a high quality portfolio will always do well, especially in the short term,” the fund house said.
Data compiled from Accord Fintech database threw up Hindustan Copper, Adani Total Gas, Graphite India, MMTC, Adani Transmission, Adani Enterprises, NCC, Tata Motors, Tata Chemicals, HEG, Dixon Technologies, BEML, Praj Industries and Shipping Corporation as the best performing names since November 8. They delivered 100-250 per cent return.
DSP clarified that the names are just indicative and are not necessarily part of DSP’s ‘bottom quantile’.
Earnings beat a mirage?
The DSP MF analysts believe the earnings ‘outperformance’ by India Inc in the last couple of quarters could be a mirage, as Dalal Street has lowered its expectations drastically due to the pandemic.
Since the start of 2020, Nifty has given 23 per cent return, while the FY22 consensus EPS has been cut from Rs 731 to a low of Rs 609 in July 2020 to then go up from there to Rs 677 (as of Feb 28, 2021), which is still a 7.4 per cent downgrade, implying a gap of 30 per cent.
“We saw this movie play out painfully in 2017, where the market rallied in the face of earnings cuts. Hopefully, this time is different,” the analysts said.
So, who will be next winners?
The analysis showed given their relative under-penetration, categories such as footwear, cosmetics, modern grocery retail, ACs and fast food can each grow 12-14 per cent or more (CAGR) for the next 40-50 years.
But many stocks among them are expensive even after discounting future cash flows. “The runway for growth in the country does exist in many such pockets. However, 40-year discounted cash flow for select companies even within these high-growth sectors shows there is downside from current prices, rather than upside,” the DSP analysts said.
So, where should one invest? The fund house said it likes some of the private banks, and this is reflected in the top holdings in most of its funds. A pickup in real estate and the infrastructure recovery could bode well for select stocks from cement, home improvement and engineering sectors.
“We are closely watching the demand recovery – and whether this would continue to drive consumption beyond what is just ‘pentup’, currently visible in auto and the white goods space,” the analysts said.