10 Expensive Stocks With The Lowest Earnings Growth Potential

India’s stock market scaled an all-time high on June 3 as equities jumped after Prime Minister Narendra Modi returned to power with a bigger majority. Yet, the benchmark indices have since remained volatile as investors awaited measures to boost the economy in the budget.Amid a consumption slowdown, a delayed monsoon, and the renewed U.S.-China trade tensions, Finance Minister Nirmala Sitharaman presented a budget that allocates funds to boost infrastructure and farm growth. But benchmark indices fell after the budget speech as she proposed to increase the minimum public float from 25 percent to 35 percent and increased taxes on the super rich.Still, stock-market valuations remain expensive. The benchmark Nifty 50 is trading at 20.4 times its 12-month forward earnings. That’s higher than the five-year average of 18.5 times.BloombergQuint compiled a list of the expensive stocks with not much upside in earnings growth, reflected by their price-to-earnings growth or PEG ratio—a ratio of the stock’s valuation to earnings growth. Higher is the ratio, the lower the growth potential over a specified period..10 Cheapest Stocks With Earnings Growth Potential.MethodologyStocks tracked by more than 15 analysts.Excludes companies from banking, financial services and insurance sector.Calculations based on Bloomberg’s 12-month forward PE multiple and earnings per share estimate for FY19-21.Here’s the list of stocks with the lowest growth potential, and the reasons cited by brokerages:.Mahindra & MahindraEarnings of Mahindra & Mahindra Ltd.—India’s largest tractor maker—are expected to decline due to a slowdown in sales, rising competition in utility vehicles segment and margin pressures due to aggressive pricing for new launches and regulatory issues.The stock continues to trade at a higher premium on expectations of a tractor demand recovery from measures in the upcoming budget and on expectations of transfer of interest rate cuts to consumers to stimulate demand.Alembic PharmaA high base for U.S. business, lack of new launches and higher operating cost due to commercialisation of new facilities will keep Alembic Pharma’s earnings growth stagnant over the next two years.The stock, however, continues to trade at a higher premium as the company is expected to benefit from relaxation of generic drug policy by China, expected benefits of past R&D investments.Phoenix MillsPhoenix Mills Ltd., which remained analysts’ most-preferred bet for the third straight year, is expected to witness an EPS growth of 2.6 percent over FY19-21, largely due to a high base and slower growth in some of its key malls due to the consumption slowdown. In FY19, the company’s earnings were higher as it recognised revenue from the sale of residential project.The company continues to command premium valuations due to its rent-yielding commercial properties with a stable occupancy, healthy balance sheet and planned strategic expansion.Hero MotoCorpSlowdown in sales, weak presence in premium motorcycles segment, slower-than-expected growth in exports, rising dealer inventory and margin pressures are expected to weigh on the earnings of world’s largest two-wheeler manufacturer.However, healthy growth in its core segment of entry-level motorcycles, developing portfolio in premium motorcycles and expectation of a near-normal monsoon and interest rate cuts that could spur demand have kept the street upbeat on the stock.Bharti InfratelAn expected decline in tenancies due to consolidation, weak balance sheet of telecom players and a slowdown in new tenancies acquired by Reliance Jio is expected to keep Bharti Infratel Ltd.’s earnings growth limited.Strong free cash flow generation and completion of its merger with Indus Towers Ltd. which is expected to lead to synergies have aided the valuations.Cadila HealthcareEarnings growth is likely to be muted due to rising competition in key products gLialda and levorphanol and a possible increase in competition in gAsacol HD. These products contribute nearly 30-35 percent to its U.S. sales and almost 45 percent of the drugmaker’s net earnings.Strong growth in India and its consumer business and expectations of 20-30 new approvals from other plants have kept the street bullish.Bajaj AutoWeak margins due to the automaker’s focus on increasing market share, higher cost due to regulatory compliances and challenges in three-wheeler volume growth is expected to keep Bajaj Auto’s earnings growth muted. Higher volume growth than the industry, new product launches and steady exports outlook, however, aided the valuations.EscortsExpected slowdown in tractor sales and a decline in construction equipment division business due to competition and low market share is expected to keep the earnings growth for Escorts at 1.5 percent over FY19-21.Stock continues to trade at a higher premium on expectations of a recovery in tractor demand after the upcoming budget and strong growth expectations from the railway business as many of its products have the ‘approved vendor’ status by the railways.Aditya Birla FashionsSlower same-store sales growth in Pantaloons and branded segments due to lower retail demand and relatively weak customer sentiment and higher ad spends will keep earnings growth in check.Improving store maturity, operating leverage benefits and aggressive expansion, however, have kept valuations high.MaricoConsumption slowdown, lower realisation in Saffola and weak volume growth in value-added hair oils would limit Marico Ltd.’s earnings growth over FY19-21.Valuations, however, have remained high due to consistent drop in copra—a key raw material—prices which is expected to aid margins and management initiatives on improving growth prospects and innovations..(Reasons collated from reports by JPMorgan, Maybank, HDFC Securities, HSBC, Motilal Oswal, JM Financial, ICICI Direct, CLSA and others)

10 Expensive Stocks With The Lowest Earnings Growth Potential

BloombergQuint compiled a list of expensive stocks with the lowest growth potential.

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