Best Nifty Stocks and 3 questions that let us shortlist them

Taking cues from Morgan Stanley’s ‘Connecting the Dots’ (June 2012), we decided to shortlist our own set of dependable stocks. For this we used following filters –

Filter 1: Is the Sales growth faster than nominal GDP growth?
This can be achieved by either being a part of a fast growing industry and/or gaining market share within the industry.

Filter 2: Is Profit growth faster than Sales growth?
This signifies a combination of several dimensions like market dominance, pricing power, better cost management, judicious investments and right mix of debt and equity.

Filter 3: Is Earnings per Share (EPS) growth broadly in line with Profit growth?
This signifies that growth and capital efficiency are linked. This also indicates whether an individual shareholder participates proportionately in company’s growth or not.

After shortlisting stocks by using the 3 filters, we added information about Return on Equity (RoE), Debt/Equity (D/E) & Dividend Yield (DY) as these are information which should be looked into before taking a final call to buy any stock.

We started with a universe of 50 safe large cap stocks which form the Nifty50. After putting Filter 1, we were left with 35 stocks. On putting Filter 2, we were left with 19 stocks. Final filter resulted in shortlisting of 13 stocks, which met all three criterias.

During last 3 years, average sales growth of these 13 stocks was 22.10%, which was much above the nominal GDP growth rate of 13 percent. Average Profit growth for these stocks was 31.40% & EPS grew at an astounding CAGR of 33.40%.

So, without much delay, we present the 13 rock solid and dependable stocks of Indian markets…
  • TCS
  • ITC
  • HDFC Bank
  • Wipro
  • BHEL
  • Power Grid
  • Bajaj Auto
  • Kotak Mahindra Bank
  • Axis Bank
  • Hero Motocorp
  • Asian Paints
  • Bank of Baroda
  • IDFC

How these 13 stocks fared on 3 criterias is detailed in table below –

During the last 3 years, an investment made in portfolio of these 13 stocks would have given a market beating return of 17.90% (CAGR)

Only one stock, BHEL, gave negative returns (-17.34%) in this period. Overall market returned a meager 3.73%. This portfolio outperformed the market by 14% + (!!).

A snapshot & analysis of all 50 stocks can be found below. Please click the image to enlarge.

Click to enlarge
Caution – This is not a recommendationto BUY any of these stocks. We have not considered valuations of these stocks in the post. So do your due diligence before buying any of these stocks. Also, past performance is no guarantee of future results.


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Nifty Stocks and PEG Ratios

In our previous post, we saw that Indian markets are presently trading at PEG ratio of 0.97. We arrived at this figure by dividing current P/E of 16.7 by average growth rate (in last 18 years)of 17.1%.

For details, please check the post on Historical EPS Growth Rates & PEG Ratio of Indian markets.
In continuation of our analysis of PEG ratios, we calculated PEG ratios of a few Indian large cap stocks –
Click to enlarge
Some details/observations of our analysis are as follows –
  • We have chosen EPS growth rates to represent growth rates of a company. One can also use any other growth rates.
  • For each company, we have calculated 3 PEG Ratios –
    • Using latest EPS Growth Rates (2010-2011)
    • Using Average of all EPS growth rates in last 5 years
    • Using least positive EPS growth rates in last 5 years
  • Afterwards, we calculated another PEG for each company – Average PEG – which is an arithmetic average of previous three PEGs.
  • Normally, a PEG greater than 1 indicates an overvalued company, and less than 1 indicates an undervalued company. But we must understand that PEG is just a ratio and it should always be looked in conjunction with other ratios and numbers.
  • For instance, a company like Bharti has an average PEG of 0.33, which is quite an attractive number when looked at on a standalone basis. But if we consider that Bharti operates in a highly competitive industry; has loads of debt due to 3G fee payments and African expansion; has decreasing average revenues per user (ARPU) and has a negative PEG(!) for current fiscal, the number 0.33 may not look so attractive.
  • But there are also few companies like BHEL (0.59), PowerGrid (0.83), Tata Steel (0.40) and Tata Motors (0.42) which have considerable moat (competitive advantage & operations in industries having high entry barriers) and can be said to be available at good valuations. But once again, one should understand that stock like Tata Motors are rate sensitive and cyclical. And under current global circumstances, may slip further.
  • A company like Sterlite Industries (pegged by few as future RIL) is available at a ridiculous PEG of 0.19 (or 0.25, 0.08, 0.26). But that does not mean that it is going to become a future multibagger. Similarly, Maruti is available at PEG of 0.10(!)
  • Then there behemoths like SBI which may be available at outrageous mathematically calculated PEG of 6.6, but are worth investing as there current PEG stands at 0.54. But one should also consider rise in NPAs of SBI and other factors before investing.
So a Stable Investor understands that one should never rely on just one mathematical tool to arrive at any investment decision. Any number should always be looked in conjunction with other ratios and numbers.