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India’s retail inflation measured by the movement of the Consumer Price Index (CPI) jumped to 6.95% in March. With three consecutive monthly readings of over 6%, inflation has been showing signs of stickiness now. It remains to be seen whether RBI shifts its policy stance from ‘accommodative’ to ‘hawkish’ sooner rather than later, and if it does, at what pace it will raise interest rates.

However, it doesn’t come as a surprise to us.

In fact if you remember, last week we told you: inflation is likely to stay and you may need to tweak your portfolio accordingly!

Just to recap, our research team conducted a comparative study of major global and local equity indices on three parameters—leverage, earnings and return on invested capital (RoIC). The findings were interesting. The NiftyNext50 index offered stock watchers brighter opportunities.  

Read the full article here.

This week we are presenting a list of 5 stocks that caught our research desk’s eye on the three parameters we described last time—Net-Debt-to-EBITDA, Net-Debt-to-Equity and RoIC.

How did we shortlist the stocks for further tracking?

Out of 25 non-financial stocks in the Nifty Next 50 index, just 11 are debt free companies. Our shortlisted stocks comprise companies from diverse sectors. Their growth trends and valuations also differ significantly from one another. But all of them earn attractive RoIC.

Nifty Next 50

As you can see in the table above, two of them are debt free, while others either have negligible debt or have been retiring debt aggressively of late.

For instance, Steel Authority of India Limited (SAIL) had a Net-Debt-to-Equity ratio of 1.3 in FY20 and a Net-Debt-to-EBITDA of 5.3. However, in FY22 both these ratios dropped to 0.4 and 0.9, respectively. With such a massive deleveraging, SAIL appears well-placed to take advantage of the on-going upcycle in steel.

Similarly, another Public Sector Undertaking (PSU), Indian Oil Corporation, has not only deleveraged its balance sheet in recent times but has also chalked out growth plans to take advantage of energy transition opportunities. It has an attractive dividend yield—another positive.

Some of you might be surprised to see L&T Infotech on the list, but that too fits in our criteria of companies with lean and clean balance sheets that can grow even under a high inflationary scenario.

You see, L&T Infotech is India’s 6th largest technology consulting and digital solutions company and perhaps one of the most popular large cap IT stocks in recent times.

The company has been ramping up its cloud and data services capabilities. And it has been growing its presence in the new spend areas such as ESG (Environmental Social and Governance). The company has been aiming to capitalize on trends in digitalization of businesses over the next 3 to 5 years.

The Banking, Financial Services and Insurance (BFSI) segment accounts for nearly 33% of its revenue.  The manufacturing sector is the second largest sector for L&T Infotech with its contribution of 17% in the top line.

Nonetheless, FMCG, retail and pharma along with new economy segments, such as high-tech media and entertainment have been witnessing strong growth. These segments together comprise nearly 22% of L&T Infotech’s revenue.

The company remains confident about its customer interactions, deal pipeline and conversions. 

And here’s a snapshot of positives that you may want to track further

Watch List

End Note

You see, rising inflation results in lacklustre performance of corporations that can’t pass it on to their customers. In such a scenario if they have undertaken debt-led capex, their performance might take a further beating.

That’s why you should stick to companies with strong growth trends and lean and clean balance sheets. Needless to say, our shortlisted stocks aren’t investment recommendations; but they do conform to the parameters that we’re tracking.

You may also like to read: India to play on the front foot for its defence! Time to cherry-pick defence stocks?

Disclaimer:

The blog is for information purposes only and anything mentioned herein shouldn’t be construed as a fundamental reason to buy/hold/sell any stock. Furthermore, the information provided in the blog and observations made therefrom shouldn’t be treated as the extension of recommendations made on the other properties of Ventura Securities. If you follow any research recommendations made by our fundamental or technical experts, you should also read associated risk factors and disclaimers.

We strongly suggest you to consult your financial advisor before taking any decision pertaining to your finances. Asset allocation becomes extremely relevant.

We, Ventura Securities Ltd, (SEBI Registration Number INH000001634) its Analysts & Associates with regard to blog article hereby solemnly declare & disclose that:

We do not have any financial interest of any nature in the company. We do not individually or collectively hold 1% or more of the securities of the company. We do not have any other material conflict of interest in the company. We do not act as a market maker in securities of the company. We do not have any directorships or other material relationships with the company.

We do not have any personal interests in the securities of the company. We do not have any past significant relationships with the company such as Investment Banking or other advisory assignments or intermediary relationships. We are not responsible for the risk associated with the investment/disinvestment decision made on the basis of this blog article.

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