5 Beaten Down Stocks with Strong Fundamentals, Poised to Make a Comeback in 2023

With sticky inflation in the US and even in India, interest rates are expected to be high this year. It's said that when interest rates are high, the hiding places in the stock markets are limited.

Investors rather look for high dividend yield stocks which can provide them with a source of passive income. Or they choose to invest in beaten down stocks which have the potential for a strong rebound because of their established moat and strong fundamentals.

So, if you're on the lookout for opportunities in this stock market rebound, keep your eye on these 5 beaten down but fundamentally strong stocks that are poised for a comeback in 2023.

These companies have corrected more than 30%, making the risk reward ratio favourable.

#1 HLE Glascoat

First on the list is HLE Glascoat.

It manufactures process equipment such as filtration and drying equipment and glass-lined equipment for the chemical and pharmaceutical industries.

In its 40 years of existence, it has grown to become the largest player in filtration and drying equipment segment, with a market share of 50% in India as of December 2022.

It is also the second-largest player in glass-lined equipment, with a market share of 25% as of December 2022.

In the last one year, shares of the company have corrected by more than 50%.

Several factors have contributed to the fall. A slowdown in the economy has marginally affected their order book. Geopolitical factors such as the Russia-Ukraine war have led to supply constraints for a brief period.

To add to this, high inflation has led to increased input prices, such as fuel and metal, which affected the company's net margin. However, it was able to pass on the increase in cost to customers.

In the last few quarters, the company is experiencing robust demand for its products from chemical and speciality chemicals industries due to China plus one megatrend. The same is reflected in their order book. As of December 2022, its order book stood at Rs 5.3 billion (bn).

As the company had already invested in capacity expansion at all its plants, it is able to accommodate higher orders indicating revenue visibility.

The company's revenue has grown at a CAGR (compound annual growth rate) of 47.2% due to higher orders. The net profit has also grown at a CAGR of 60.9%.

The company's return ratios are high, with five-year average RoE (return on equity) and RoCE (return on capital employed) at 38%.

Moreover, the company has been paying dividends consistently for the last 20 years.

Its debt-to-equity ratio has also reduced from 2x to 0.5x in the last four years, so it could pay dividends in the future as well.

With strong fundamentals and high order book, the company could see a rebound in its share price this year.

#2 Metropolis Healthcare

Next on the list is Metropolis Healthcare.

The company has a chain of 170 clinical laboratories and 2,400 collection centres across seven countries, while the central laboratory is located in Mumbai, India.

The company's share price hit a 52-week low in February 2023, falling close to 49% from its 52-week high in April 2022.

In November 2022, the company's office was raided by the income tax department as a part of a tax evasion investigation.

To add to these worries, in the December 2022 quarter, the company reported a muted growth in revenues. Although the non-covid revenues grew by 13%, the fall in covid revenues affected revenue growth. The net profit also fell by 12.9% YoY.

The non-covid revenues have grown in the last four quarters. The company expects it to grow further on the back of increasing health awareness among consumers.

Its operational metrics have also grown steadily. In the December 2022 quarter, the revenue per patient and the number of patient visits went up by 3.6% and 15.7% YoY respectively.

Due to its marketing initiatives, the B2C (business to consumer) revenue also witnessed a strong growth of 21% in the first nine months of the current fiscal.

Metropolis plans to capitalise on the growing demand for accessible healthcare and aims to set up 90 labs and 1,800 service centres by 2025.

In line with its network strategy, it has added 12 labs and 396 centres in the nine months of FY23.

The company also plans to increase its customer base through its asset-light expansion plan by establishing partnerships with third-party patient service centres.

In the last five years, the revenue and net profit has grown at a CAGR of 13.7% and 13.9%, respectively. The return ratios are also strong, with five-year average RoE of 26.5% and RoCE of 37.8%.

It also plans to repay its debt entirely by the end of financial year 2024.

Although short-term sentiment around the stock is bleak, we feel it's only temporary, and the company is up for a rebound.

#3 Clean Science And Technology

Next on the list is Clean Science and Technology, a leading chemical manufacturing company.

It manufactures speciality chemicals, pharmaceutical intermediaries, and FMCG chemicals.

The company's products are used in textiles, FMCG, pharmaceutical, and agricultural industries.

In the past one year, shares of Clean Science & Technology have fallen by over 30%.

One of the reasons behind the fall is its high valuation. The shares are trading at a price-to-earnings (P/E) ratio of 52.3x, which is much higher than the industry average of 24.3x.

Along with this, the fall in net profit margin, despite increasing revenue led by high input costs, has contributed to the share price correction.

In the December 2022 quarter, the company's net profit improved by 44.5% YoY on the back of easing input costs.

The revenue also grew by 32.7% YoY. It is further expected to grow in the coming quarters as the company has started manufacturing Hindered Amine Light Stabilizers (HALS), a performance chemical which India imports.

In the last five years, the company's revenue has grown at a CAGR of 12.1%, driven by growing demand. The net profit also grew at a CAGR of 18.5% during the same time.

India is the sixth largest chemical manufacturer in the world. With the government's 'Make in India' initiative and China plus one trend, the speciality chemicals industry is poised for growth.

This bodes well for Clean Science and its future prospects look bright.

#4 Dr Lal Pathlabs

Fourth on the list is Dr. Lal Pathlabs.

Shares of this leading diagnostic company have corrected 20% in the last one year.

In the December 2022 quarter, the company's total revenue fell by 2% YoY, and its Covid revenue fell by 80%.

The net profit margin also declined from a high of 22% in June 2021 quarter to 11% in December 2022 quarter.

Inflation and falling covid revenues have impacted the margins of Dr Lal PathLabs. To add to this, the low margins of Suburban Diagnostics, an acquisition of Dr Lal Pathlabs, is dragging the margins.

As the covid situation is subsiding in the country, its time diagnostic companies focus on non-Covid revenues.

Dr. Lal Pathlabs has now focussed its attention on strengthening its operation, product and geographical expansion.

As a result of its efforts, the company's non-Covid revenues have improved from 88% in December 2021 quarter to 97% in December 2022 quarter.

The operating metrics, such as the number of patients and public service centres, have also improved significantly.

The last five years have been good for the company as its revenue and net profit have grown at a CAGR of 14.5% and 15.3%, respectively.

The return ratios are also strong. The company has also shared profits with its shareholders consistently in the form of dividends.

Going forward, strong fundamentals and good revenue visibility will drive the growth for Dr Lal PathLabs.

#5 LTIMindtree

Last on the list is LTI Mindtree.

After the merger between L&T Infotech and Mindtree, LTI Mindtree is the fifth largest IT services company in India in terms of market capitalisation.

With attrition rate hovering at all-time high in the industry, investors fear that the merged entity would also have high attrition.

To add to this, a slowdown in the economy and a fall in the company's net profit in December 2022 quarter has caused shares of LTIMindtree to fall by over 19% in the last one year and 27% from its 52-week high.

However, the company's fundamentals are quite strong.

In the last five years, the revenue of the company has grown at a CAGR of 15.9%, driven by increased digitisation. The net profit also grew by a CAGR of 15.6%.

The five-year average RoE and RoCE stand high at 28.4% and 38.5%.

It also pays dividends consistently and has a five-year average dividend payout of 35.8% and a dividend yield of 1.54%.

With emerging technologies and the growing need for digitisation, the IT industry is a good long-term investment. A correction in IT stocks has given a great investment opportunity for long-term investors.

Also, with high interest rates, the Indian rupee is expected to fall against the dollar which will benefit IT stocks.

Most IT stocks have fallen by 30-40% from their peaks in 2022 and offer a good risk reward ratio on the valuations front. The recession impact in the US is mostly priced in to Indian IT stocks.

2023 may not be a great year for the market. But IT stocks could chart a strong rebound.

The road ahead...

Three months in to 2023 and the benchmark Nifty is down to 17,500 levels. Just a couple of days ago, the feeling among midcap and smallcap investors was already that of Nifty at 16,000 levels.

But yesterday's rally of more than 270 points in the Nifty has changed the sentiment so quickly.

The point is...investing in stock markets can be tricky and many might consider it risky. The main reason behind this is volatility, which is caused due to demand and supply forces.

A sharp rise or a sharp correction shouldn't excite you or create panic, as it is a common phenomenon for the markets.

It's best to stick to your investing strategy and not make rash decisions during volatile times.

Remember, Warren Buffett accumulated a large portion of his wealth only after his 50th birthday. So, think long-term when you are investing in stock markets.

Happy Investing!

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...