Prime Data Crunch: Companies resistant to Covid 19

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This is the first in a series of articles we plan to periodically do on stock screeners – how to define them, how to interpret the results, and how to further refine them – all for the purpose of creating short lists that will serve a particular theme or purpose. Please note that none of the screeners we run are our recommendations or suggestions. At best these number-based screeners may help bring some interesting stocks to your notice for further research. Today, we are looking at a  simple screener of stocks that withstood the 2020 Covid shock.

As Warren Buffett said, “Only when the tide goes out do you discover who’s been swimming naked”. A slowdown year helps you spot stories of resilience and even growth. And these could well be the wealth builders for long-term portfolios. But then when the big boys of Indian stock market – the Nifty 50 pack – see an aggregate 57% drop in their profits for the 6 months ending June 2020 (over a year ago), you wonder whether the others could have fared any better. Were there any high growth companies that managed better? And if so, which segments saw such high growth companies?

high growth companies

High growth companies that bucked the trend

To check this, we took the Nifty 500 companies to see how many managed to expand their profits for the six months ending June 2020. And surprise! A good 30% or 146 of the Nifty 500 companies managed to expand their profits for the six months ending June 2020 over a year ago. 1 in 5 companies in this list, in fact doubled their profits over the said period.

(You can download the 146-stock list with key metrics here)

A demand collapse in the lockdown period meant that sales growth was not a key trigger (sales grew just 2% or this 146-stock universe) for earnings growth. But well-contained costs saw operating profits expand by about 14% while net profits jumped 75%, due to a combination of low base, previous period loss to profits now (especially for banks) as well as extraordinary income. 

Remember this comes at a time when the parent index of these stocks – the Nifty 500 – saw a 70% crash in earnings for the 6-month period ending June 2020. Clearly these companies stood out among the fallen pack.

And no prizes for guessing which sectors managed growth in profits. Pharma and healthcare segments, chemicals, IT and FMCG were the most resilient- with their profits expanding in a lockdown period. Other sectors such as banks saw a big jump largely because moving to profits from losses in the earlier period. Banks such as IDBI Bank, Indian Overseas Bank and UCO Bank moved from losses in the year ago period to profits for this six-month period ending June 2020.

Not just growth stories

Growth is a key metric that market rewards. But are these strong growth companies also quality companies with sound balance sheets over the years? For this we took a simple metric – return on equity. We looked for companies with over 10% return on equity in their latest ended fiscal sheet and arrived at 118 companies of the 146.

But then, this 118-list masked companies whose ROEs had been steadily falling over the years, in line with the trend observed over the past decade for many Indian companies.  In our list of 118 companies with over 10% ROE, we could see many companies such as Cadila Healthcare, Larsen & Toubro, CDSL or Dilip Buildon, whose ROEs have steadily fallen in the past 3 years.

So, we went further to look for companies that have expanded their ROEs in the past 3 years. This immediately reduced the universe to just 40 companies.

In essence, our filters ran thus:

  • Companies that expanded profits for six months ending June 2020 (146 companies)
  • Of the above, companies that had a ROE of over 10% in the latest ended fiscal ((118 companies)
  • Of the above, companies that saw a steady increase in ROE over the past 3 years (40 companies)

In this list of 40, just 7 of them had a market cap of less than Rs 5,000 crore including names such as Kaveri Seed Company, Just Dial and Rail Vikas Nigam. But at the same time, there were only 7 companies that could be called large cap (over Rs 27,000 crore of marketcap). These were the usual suspects such as HUL, Colgate-Palmolive (India), Nestle India, GAIL India, IPCA Laboratories, Ultratech Cement and SRF to name a few. In other words, 24 companies were from the midcap space.

You can refer to the excel sheet link given earlier for all 40 companies.

At what price?

Now, a company may be resilient, utilise capital well but trade at a valuation that is beyond investing comfort. So, the next and final filter we did was to check the P/E (or P/BV for banks and finance companies) to know which of these 40 companies were trading lower than their January 2020 valuations. Do note such an exercise may take away some companies that are probably going through a valuation re-rating. And it did happen. In the filtered list of 20 high growth companies with growing ROE, we could hardly find any pharma companies.

But interestingly it was a mixed bag – from finance to FMCG to power and engineering. And you will see a mix of large mid and small cap companies. What this shows, then, is that there are always opportunities to be found – even if a sector has already rallied broadly or if a sector seems out of market favour. Digging into the numbers is one of the few ways you can identify where growth is coming from.

Note: This article on high growth companies is based on simple screeners to provide you with some interesting trends on companies that bucked the trend in the current economic slowdown. They are not stock recommendations. As an investor, you need to do your due diligence before deciding to invest in any of them.

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23 thoughts on “Prime Data Crunch: Companies resistant to Covid 19”

  1. Hello Anush, Welcome to the PrimeInvestor family. You have a great team to work with and looking to many more excellent articles like this from you.
    Is it possible to get ROE for FY21 – projected/estimate based on companies earning projection. The past results may be good but understanding future potential is key as well.

    1. Hello sir, I will convey your wishes to Anush 🙂 In screener based stories, it is not possible to provide projections whether earnings or otherwise. Future potential is best done for companies individually, not within the scope of screener stories. thanks, Vidya

    1. Sir, If you would have downloaded the initial set of 146 Companies which have expanded their profits you will find that 1 in 5 will be a pharma company but as we move further into various levels of filters at the last stage we were down with just one hence the mention “hardly any Pharma companies were found”.

      1. Alright my friend, I get that point. I would push the thinking further and ask ourselves “what does it mean for an investor?” “How does it impact the decisions of an investor?” “What actions does it drive?”
        Think of it more fundamentally – you do an analysis to derive insights – those insights are relevant only if they drive actions. Otherwise, these are just good numbers, interesting insights and analysis – it’s academics :))

        Somehow I felt we left this article midway – we did the analysis, found insights, but didn’t ask ourselves what does it mean for a normal investor. How does it help them make better decisions.

        Just trying to help you buddy, looking for more great articles 🙂

  2. Well, all of this is good analysis, but what’s the “so what” of this article? I would expect something actionable for investors at the end, otherwise it just feels like yet another piece of analysis

    1. It is indeed ‘yet another piece of analysis sir, to make it VERY clear 🙂 A screener’s job is to point to you potential opportunities for you to investigate further. It’s job is not to give you the one multibagger 🙂 This is only a screener and not a recommendation article. Many investors find such screeners valuable to do further research. So it may not serve your purpose. thanks, Vidya

  3. Good analysis. It would have been more useful if you had given the ROE and ROCE for the last three years along with the data. Nevertheless, an eye -opener and a good beginning.

  4. Will you continue recommending these stocks …when to sell or hold …? for example, if I buy one of these stock ..when should I sell them or till when I continue to buy?

    Or this is just one time recommendations, and you don’t intend to keep an eye on these 20 stocks?

    1. Sir, These are not recommendations just a filtered list of stocks from the Nifty 500. We are yet to roll out our stock recommendations product. Kindly do your due diligence before deciding to invest in any of them

  5. Nice article ! I now understand the importance of the screening tools to short list the stocks for further analysis. Could you kindly suggest some simple ,versatile stock screeners for beginners like me.
    Are you coming out with stock recommendation in near term?
    swetharanyan

  6. @Vidya
    This article is like the soup after the appetizer served by you earlier.
    I’m quite hungry now…let the new service roll out please 🙂

  7. Can you also follow this article with some fundamental analysis – companies that may be resilient to ongoing issues with china (TataMotors, Biocon – seems to be affected by this. Their export sales may come down). Possibly after US elections might be a good time to come up with a detailed study.

    1. Hello Sir, Thank you for your suggestions. Depending on our expertise and bandwidth, we will definitely look at diferent angles. thanks, Vidya

  8. Very interesting analysis. I was looking at a similar analysis a couple of days ago – and could not find any pharma background. I blamed it on my data lookup skills 😛 and ignored it.
    Also, this covid pharma boon is all about the getting the entry timing right. People who would have done that would gain, entering now might be risky. Is this a fair analysis ?

    1. Partly, yes 🙂 But pharma is undergoing re-rating (not just because of covid). At such times, there will be many misses thinking valuations are expensive. Since the pharma story has NO ONE broad trend (it has half a dozen stories to play), it is not easy to say the story is over or story is yet to take off, unless one views them individually. SO entry point has to be seen based on each opportunity and whether it has played out or yet to play thanks, Vidya

  9. SUNDARESAN SUBRAMANIAM

    A good beginning, regarding stocks, for conservative investors like us. A crisp , content rich article. Keep it up Shri.Anush Raj.
    S.Sundaresan

      1. protyay91banerjee

        Anush Sir and Prime Team,
        Thank you. Keep educating us about stocks, with solid resources and links(like ROE provided)

        I’m waiting for stock research feature rollout

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