Six Stocks That Delivered The Best Return Ratios

This is one of the prime parameters fund managers rely on along with free cash flows, according to Rusmik Oza, executive vice president, head of fundamental research at Kotak Securities. “These ratios speak a lot of companies’ efficiency and profitability. Higher the return ratios, better the valuations of those companies and vice-a-versa.”

BloombergQuint’s analysis threw up six companies from a list of 240 that have delivered the best return ratios:

• Return on equity or how efficiently a company is generating income from equity capital.
• Return on capital employed, a measure of profit made on total capital (equity + long-term debt)
• Return on assets or how efficiently a company uses its assets to generate profit.

Selection Criteria

• Market capitalisation of at least Rs 10,000 crore.
• Tracked by at least five analysts.
• A minimum RoE of 15% in FY20, and showing growth in the last five-year period.
• A minimum RoCE of 15% in FY20 and showing growth in the last five-year period.
• A minimum RoA of 5% in FY20, and showing growth in the last five-year period.
• Each of the three return ratios should have grown at least 1.5 times during the five-year period.

GAIL

The natural gas processing and distribution company’s revenue and operating income declined 34% and 72% over a year earlier, respectively, in the quarter ended June because of low volumes and crude prices.

Dolat Capital

• Expects a limited increase in volumes in the transmission business for a couple of quarters as the new pipeline capex is stalled.
• Performance remained positive in 2019-20 in most areas including construction of natural gas pipelines, expansion to new gas markets, and petrochemical production.
• Most negatives factored in in the current price.

JPMorgan

• It expects oil prices to move higher from and maintains ‘overweight’ stance on GAIL.
• The brokerage sees demand is improving across segments, aiding earnings.
• The current valuations adequately factor the risks.

Risks: Tariff cuts and gas trading losses could negatively impact GAIL’s performance.

Bharti Infratel

The mobile tower company’s net profit rose 8% quarter on quarter in the three months ended June despite the disruption caused by the pandemic.

Maybank Kim Eng

• Signs of Vodafone Idea Ltd.’s revival, a structural shift towards higher tariff, and merger with Indus Towers Ltd. will strengthen the company’s position.
• Fibre and small cells businesses are additional catalysts.
• An increase in 4G subscriber base will boost tower tenancies.

JPMorgan

• Bharti Infratel is the key- play in the Indian telecom sector due to its leadership in the Indian tower industry.
• Vodafone Idea’s market share loss is a significant headwind but will be counterbalanced by strong capacity expansion at Bharti Airtel Ltd. and Reliance Jio Infocomm Ltd.

Risks: Slowdown in capex, decline in realizations per tower, less than expected network capacity expansion by Airtel and Jio.

Petronet LNG

The LNG importer saw volumes fall 13.2% quarter-on-quarter in the three months ended June as the lockdown reduced offtake. Revenue tumbled 43% sequentially, but Ebitda and net profit grew 30.5% and 44.9%, respectively.

ICICI Direct

• As India continues to remain short of natural gas supply, Petronet LNG will benefit from the increasing usage of LNG.
• The stock has an attractive dividend yield of 5.5% and the brokerage expects a healthy dividend payout in the future.

Systematix Securities

• Perceived risks to under-utilisation of Dahej terminal as new terminals coming online seem overblown.
• India’s gas demand has surprised on the upside given the low international prices.
• No risk to Dahej volumes for the next two years.

Risks: Slowdown in volumes due to delayed economic recovery.

Ipca Labs

The pharmaceutical company’s sales and adjusted net profit rose 42.3% and 259% over a year earlier in the quarter ended June, helped by strong momentum in business and supplies of Covid-19-related drugs.

AnandRathi

• Growth will be driven by exports, plans of new product launches in newer therapies, investments in raising API capacity (300 tonnes at Dewas), and backward integration.

Elara Capital

• Outlook of the base business remains healthy across segments.
• Strong API capability and diversified model are advantages under the current environment.

Risks: Slowdown in domestic formulations and currency fluctuations.

Mphasis

The software services provider’s dollar revenue fell 4.6% sequentially in the quarter ended June. But EBIT margin was better than estimated at 16.2%, helped by the reduction in general and administrative costs and headcount.

AnandRathi

• Current valuations are fair given the company’s limited exposure to the troubled hospitality sector and higher exposure to the BFSI segment, which is showing strong signs of growth.

Antique Stock Broking

• Strong deal wins and a healthy deal pipeline will aid growth in the future.
• The impact of the pandemic was not very significant on Mphasis due to the lack of exposure to travel-related sectors.

Risks: Slowdown in DXC (solution partner) business in impacting the performance.

Escorts

• Tractor maker’s cost cuts helped its earnings grow 5% year-on-year in the quarter ended June.

Maybank Kim Eng

• Increased investments in the farm sector due to enhanced food security in the wake of Covid-19 to aid demand.
• The company will benefit from the policy changes by the government to double farm income by 2021-22, and Kubota stake purchase.

JP Morgan

• Valuations are likely to improve due to the margin improvement and favourable cycle.
• The company has attained a competitive edge from the Kubota deal.

Risks: Adverse monsoon and/crop cycle and muted response to new tractor launches.