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Stock Analysis, IPO, Mutual Funds, Bonds & More

7 favourite stocks of mutual funds over past one year

As the stock markets rose and fell over the past one year, mutual fund managers focused their attention on the quality stocks. In the sixth edition of ET Wealth's most wanted stocks, we look at seven scrips mutual fund managers were most bullish on.

, ET Bureau|
Updated: Nov 04, 2019, 11.14 AM IST
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Investors should note that even though fund managers have favoured these stocks, the positions are typically built in a staggered manner.
Over the past year, the stock market has exhibited a high degree of divergence in returns. While the frontline BSE Sensex has jumped almost 20% during the year, the BSE Midcap index has gained a little over 5%. Within the frontline indices, gains have been lopsided with only a select few index heavyweights witnessing sharp upticks. Several bluechips have taken a beating. Even as the market tides ebbed and flowed, fund managers have been quietly adding a few select names to their baskets. In our sixth edition of Most Wanted Stocks, we have again identified a basket of stocks that have been consistently favoured by fund managers. These seven stocks have seen a rise in mutual fund holding since September 2018, with no dips in the intervening four quarters.

To identify mutual funds’ most favoured stocks, we applied several quantitative filters. Initially, we identified stocks from the BSE 500 index whose share in mutual fund holdings has consistently risen over the past four quarters, allowing for intermittent periods where the holding remained flat. Of the 500 companies, 135 stocks went through this preliminary screening.

Further, we had to ascertain that stocks qualifying for this study enjoyed a broad-based interest from mutual funds. So we picked only those scrips in which mutual fund holding was at least 5% of the company’s total share capital, and that were held by at least 20 equity schemes as of September 2019.

The 50 stocks so identified were further screened for a healthy return profile—only 31 stocks had an average return on equity (RoE) of more than 15% over the past three years. Finally, we filtered the shortlisted stocks for attractive valuations—only stocks trading at a minimum 10% discount to their 5-year average price-earnings multiple made the cut. From these 13 stocks, we arrived at a final list of the seven most sought after stocks after culling names with deteriorating return on equity or any regulatory overhangs.

How the most wanted stocks were identified
most-identified-stocks

Investors should note that even though fund managers have favoured these stocks, the positions are typically built in a staggered manner. Even when conviction on the bets is high, fund managers prefer to take advantage of any dips in the stock price. Investors would do well to take a leaf out of their book and stay invested over a longer period. Further, you should follow the same discipline as the managers and review your holdings when necessary. Keep a close watch for any deterioration in the fundamentals of these stocks. Not all bets play out as expected even after rigorous research, so it is only prudent to cut your losses and move on.

Stocks that funds are betting on
7-stocks


Healthy cash position, a strong demand pipeline

A slowdown in domestic infrastructure and industrial capex, as well as declining exports have dented the performance of engines and generators maker Cummins India.

While there is a strong demand pipeline from metro projects, airports and data centres, a slowdown in ordering has resulted in delays in these orders materialising. The company is looking at further rationalising costs in line with lower utlisation levels, which will protect margins from the demand squeeze.

  • Price (Rs): 546
  • PE: 22.2
  • 5-Year AVG PE: 31.8
  • 3-Year AVG ROE: 17.7

Exports have been sluggish for more than four quarters. However, despite the challenges, the company’s cash position remains healthy and there has been a sharp reduction in working capital requirements. Analysts and fund managers reckon the company is nearing a cyclical bottom, with a recovery in both domestic and exports business likely around the corner. Besides, Cummins is expected to be a key beneficiary of change in emission norms to CPCB-IV in the long run. After the sharp correction, the company’s stock price offers an attractive entry point.

Analyst recommendations
  • Buy: 15
  • Hold: 11
  • Sell: 9

“With an expected
ROE of 17.3% and FCF yield of 5%+ in 2020-21, we believe the stock offers an attractive entry point.” Emkay

MF holding as % of total share capital
84 schemes hold the stock
Cummins-India-MF-Holding

Top 5 funds holding the stock
Cummins-India-Top-5-MF

Cummins, ET Capital Goods and BSE 500
Cummins-India-BSE500


Excellent brand power, improving cost efficiency

Growth in the two-wheeler segment has been lacklustre amid a crippling demand slowdown, rising cost of ownership and transition to BS-6 emission standards.

The situation in TVS Motor Company is no different and it is likely to face more near-term headwinds. However, the auto major will possibly outperform industry volumes on the back of new launches, improved cost efficiency and a better product mix. Strong performance of its brands bodes well for the company. Despite the challenging environment, TVS has reported operating margin expansion for two consecutive quarters, owing to cost-cutting. The company also witnessed strong growth in its average realisations per vehicle.

  • Price (Rs): 459
  • PE: 30.7
  • 5-Year AVG PE: 38.9
  • 3-Year AVG ROE: 25.7

Its pricing power is a reflection of the company’s brand strength. However, with the lowest margins among two-wheeler peers, TVS remains susceptible to margin pressure due to substantial cost increases expected.

Analyst recommendations
  • Buy: 12
  • Hold: 9
  • Sell: 23

“TVS has well established marquee brands which we believe will help the company outperform the industry growth in its domestic and international business.”
Karvy Stock Broking

MF holding as % of total share capital
42 schemes hold the stock
TVS-Motor-MF-Holding


Top 5 funds holding the stock
TVS-Motor-Top-5-MF


TVS Motor, ET Automobiles and BSE 500
TVS-Motor-BSE500


  • Larsen & Toubro
Share trading at discount despite healthy earnings

Amid a challenging and uncertain environment, engineering giant L&T has exhibited resilience to show a healthy earnings growth trajectory. Momentum in revenue growth has been robust supported by strong execution in key projects. Healthy traction in heavy engineering and hydrocarbon business has kept revenues buoyant, with further contribution from the IT services vertical.

  • Price (Rs): 1,432
  • PE: 21.2
  • 5-Year AVG PE: 25.4
  • 3-Year AVG ROE: 16.9

L&T’s order book surpassed Rs 3 trillion in the first half of this fiscal, bolstered by robust order inflow from abroad. The management expects strong order pipeline going forward, taking its order book to Rs 5 trillion by the end of this fiscal. The hydrocarbon business particularly has been in a sweet spot, growing rapidly in the last few quarters.

L&T’s focus on enhancing its return profile is also playing out with a steadily improving RoE in the past few years. The digitalisation initiative will improve operational effectiveness, facilitate timely execution and help in cost savings. The company’s shares continue to trade at a discount to its long term average, providing a good entry point.

Analyst recommendations
  • Buy: 35
  • Hold: 2
  • Sell: 2

“We continue to view L&T as the best infrastructure play in India considering huge opportunity, proven execution track record and strong diversification.” Reliance Securities

MF holding as % of total share capital
232 schemes hold the stock
L&T-MF-Holding

Top 5 funds holding the stock
L&T-Top-5-MF


L&T, ET Capital Goods and BSE 500
L&T-BSE500


Good monsoon will lead to higher yields, rising acreage

Fertilizer maker Coromandel stands to benefit from a healthy monsoon in its key markets. Above-average rainfall in the kharif season has led to increased reservoir levels and better moisture content which will likely ensure higher yields and drive acreage in rabi.

Additionally, farm profitability in kharif season is expected to be better in Coromandel’s key markets. This bodes well for fertiliser and agrochemicals consumption in the Rabi season.

  • Price (Rs)470
  • PE 16.6
  • 5-Year AVG PE 19.3
  • 3-Year AVG ROE 21.4

During the September quarter, Coromandel’s fertiliser manufacturing volumes increased 8% y-o-y, whereas trading volumes were down 62%. However, lower trading volumes will not impact margins as manufactured fertilisers offer higher margins than traded fertilisers. Also, the rising backward integration and the decline in phosphoric acid prices is expected to drive margin expansion for Coromandel. The company continues to boast a healthy RoE profile and its shares are trading at a discount to its 5 year average, putting it on fund managers’ radar for the second straight year.

Analyst recommendations
  • Buy: 13
  • Hold: 1
  • Sell: 0

“Positive momentum in ra bi season, lower raw material prices, backward integration and new launches should improve Coromandel’s margins” Emkay

MF holding as % of total share capital
54 schemes hold the stock
Coromandel-MF-Holding

Top 5 funds holding the stock
Coromandel-Top-5-MF

Coromandel Intl, ET Fertiliser and BSE 500
Coromandel-BSE500


  • KNR Constructions
Track record of before time execution of projects

Leading road construction player KNR Construction has a strong reputation of on-time project execution. KNR’s order book stands at a healthy Rs 6,500 crore, a bulk of which is from the roads division.

KNR operates several road projects on the hybrid annuity model (HAM) and some on the build operate transfer (BOT) model. Its focus on monetising its BOT/HAM assets allows it to maintain strong cash flow position (it recently closed a deal for paring stake in four under construction HAM projects to Cube Highways in a phased manner).

  • Price (Rs): 225
  • PE: 13.4
  • 5-Year AVG PE: 14.9
  • 3-Year AVG ROE: 20.0

The company’s bidding strategy emphasises on projects having funding support of the central government, execution through own fleet of equipment to ensure timely resource availability and close proximity to ongoing projects to maximise efficient equipment mobilisation. It prefers limited number projects with large ticket sizes and emphasises on profitability. KNR enjoys better operating margins than peers, supported by good completion track record, which entitles it to early completion bonuses.

Analyst recommendations
  • Buy: 25
  • Hold: 1
  • Sell: 0

“Considering strong execution, best in class working capital, healthy balance sheet and strong return ratios, we initiate coverage on the stock with a BUY.” ICICI Securities

MF holding as % of total share capital
48 schemes hold the stock
KNR-MF-Holding

Top 5 funds holding the stock
KNR-Top-5-MF

KNR, ET Construction and BSE 500
KNR-BSE500

High earnings growth over multiple quarters

Cigarettes to FMCG conglomerate ITC has exhibited consistently healthy earnings growth over the past few quarters, yet seen de-rating in valuations. While investors have flocked towards its peers like HUL, Dabur and Britannia, ITC has not enjoyed similar interest.

  • Price (Rs): 249
  • PE: 23.9
  • 5-Year AVG PE: 29.6
  • 3-Year AVG ROE: 23.3

This is despite accelerated cigarette volume growth in 2018-19 on the back of stable tax regime and better product mix. The September quarter marked the sixth consecutive quarter of positive volume growth, albeit moderated relative to the last fiscal. Operating margins in the cigarette business expanded by 1% during the Septemebr quarter, continuing a trend reversal since the start of this fiscal. Meanwhile, ITC’s non-cigarette business has delivered robust growth, and now contributes 32% of the company’s topline. FMCG business growth has been largely in line with many of its peers in the segment. Operating margins in the FMCG business have also seen expansion despite ongoing expenses towards brand building. Given these positives, analysts believe the valuation discount to peers will narrow.

Analyst recommendations
  • Buy: 34
  • Hold: 4
  • Sell: 0

“We believe de-rating is unwarranted when the company is consistently showing quality earnings.” HDFC Securities

MF holding as % of total share capital
197 schemes hold the stock
ITC-MF-Holding


Top 5 funds holding the stock
ITC-Top-5-MF


ITC , ET FMCG and BSE 500
ITC-BSE500


  • Sundram Fasteners
Diversification with focus on high value products

The downturn in automobile demand has affected auto components firms in equal measure, but Sundram’s diversification into areas such as retail and exports has put it on a solid footing.

A part of the TVS group of companies, automotive components maker Sundram is now looking to transform into a diverse engineering firm capable of making components and assembly systems for automotive and other engineering applications worldwide. Recently, the company floated a subsidiary—Sunfast TVS—to cater to opportunities in the defence and aerospace sectors. This entity will continue to grow SFL’s existing business in space vehicles and helicopter components. SFL has added significantly to capacity despite the ongoing slump.

  • Price (Rs): 471
  • PE: 23.5
  • 5-Year AVG PE: 26.6
  • 3-Year AVG ROE: 28.6

Having spent Rs 450 crore this fiscal, SFL intends to incur a Rs 350 crore capital expenditure towards setting up a unit making high precision automotive components. The company continues to put emphasis on improving product mix with focus on highvalue products and increasing contribution of exports.

Analyst recommendations
  • Buy: 3
  • Hold: 1
  • Sell: 0

“Anticipating the future growth potential of the auto component industry and the positioning of SFL as a multiproduct and multilocation company, we believe that it has high growth potential.” Anand Rathi

MF holding as % of total share capital
28 schemes hold the stock
Sundaram-MF-Holding

Top 5 funds holding the stock
L&T-Top-5-MF

Sundram, ET Auto-Ancillaries and BSE 500
Sundram-BSE500

All data relating to mutual fund holdings as on 30 Sep; stock prices as on 24 Oct. Source: Capitaline

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