4 Popular Stocks with Sound Management, Strong Fundamentals and High ROE. Worth a Look?

Even as geopolitical tensions remain overhang, domestic CPI inflation goes past 6%, Federal Reserve hikes interest rates, and foreign portfolio investors withdraw money, Indian share markets continue to make a strong comeback.

On 9 March 2022, the BSE Sensex reached a low of 52,258. The market has gained about 7,000 points since then.

Indian markets have been gaining traction due to various reasons. Factors such as India's strong corporate health, green energy transition, PLI scheme, and promoter confidence about company prospects are boosting investors' faith in the economy.

Also, a buoyant stock market has been attracting new investors. The number of demat accounts have more than doubled to 77 million as of November 2021 from 36 million March 2019.

Millions of young individuals have entered the market as first-time investors since the pandemic-driven lockdowns and work-from-home culture began.

Every year, a constant stream of newcomers enter the stock market.

However, due to lack of sound knowledge and increasing social media nuisance, many market players get trapped in dubious investments.

To avoid getting sloshed by such irrational investments, investors should hold stocks for the long term and do their research.

How to evaluate stocks for long-term?

The stock market is filled with unpredictability. However, some tried and tested concepts can assist investors and increase their prospects of long-term success.

Return on Equity (ROE): ROE is the measure of a company's net income divided by its shareholders' equity.

It is useful in demonstrating how much money a firm can create with the money invested by shareholders. It examines the firm's profitability and assists in determining if the company is profitable or operating inefficiently.

Company's financial statement: Stakeholders of a company heavily rely on financial statements to understand its functioning.

A company's financial statements provide an accurate picture of its success. They show both earnings and losses, as well as assets and liabilities.

These statements also reflect the managerial effectiveness of a firm. How well a company is performing depends on its profitability, which these statements show.

Sound management: Creating a strong management team is a vital component of running a successful business.

A firm is only as good as the individuals who manage it. Checking management quality entails doing a background check on persons in charge of the business.

Here's the list of stocks based on above parameters.

1. Infosys

Infosys is an Indian multinational information technology company that provides business consulting, information technology and outsourcing services.

Infosys is the second-largest Indian IT company after Tata Consultancy Services (TCS).

Currently, Salil Parekh is the CEO of Infosys. Before joining Infosys, he has been a part of major IT company called 'Capgemini' for more than 25 years.

Today, the largecap IT company is recognised as a highly innovative software services global company because of N.R. Narayana Murthy.

Mr Murthy is the legendary cofounder and retired chairman of Indian tech giant Infosys, in which he continues to hold a minority stake.

Infosys is placed second overall in the list of 'Most Respected Companies,' trailing only Google India and ahead of TCS. In the total rankings of 55 organisations, Infosys was ranked second in terms of the quality and depth of senior management, people practises, and talent management.

On financial front, the company is almost debt free. Also, it maintains a good track record for return on equity (ROE). Three years average ROE is 25.4%, while the firm's present ROE stands at 25.6%.

In the recent quarter, the Pune based IT firm reported a 12% year on year (YoY) rise in net profit at Rs 56.7 bn. It delivered highest annual growth in a decade.

Also, the IT major has guided for revenue growth of 13-15% YoY in constant currency for the financial year 2023, while it guided for an operating margin of 21-23% for the financial year.

Infosys grew faster than its bigger rival TCS in revenue for the third year in a row, a trend that is likely to continue in the near term as it aims to become the country's IT bellwether again.

Moreover, the company has been maintaining a healthy dividend payout of 54.6%.

So far in the past year, Infosys shares have jumped by nearly 24% taking into consideration yesterday's closing price. The shares stood near Rs 1,425 apiece in April last year.

2. Hindustan Unilever

Hindustan Unilever (HUL) is a consumer goods company headquartered in Mumbai. It is a subsidiary of Unilever, a British company.

Its products include foods, beverages, cleaning agents, personal care products, water purifiers and other fast-moving consumer goods.

The company has manufacturing facilities across the country and sells primarily in India.

Sanjiv Mehta is an Indian business executive, and the chairman and managing director (MD) of Hindustan Unilever India's largest fast moving consumer goods (FMCG) company. Mehta is also a member of the Unilever Leadership Executive, its global executive board.

HUL has been the market leader in most personal care categories for decades now, Mehta's quest for innovation has helped it maintain its position at the top.

The company has delivered a good profit growth of 16% over past five years and has maintained a healthy dividend payout of 92.5%.

To know more, check out HUL's financial factsheet and its latest quarterly results.

3. Kotak Mahindra Bank

Kotak Mahindra Bank is a diversified financial services group providing a wide range of banking and financial services all over India.

Uday Suresh Kotak, an Indian billionaire banker, is the executive vice chairman and managing director of Kotak Mahindra Bank.

Presently, the bank is the fourth largest bank and third largest private bank in India, in terms of market capitalization.

The Kotak group has one of the best organisational structures in the banking business, and it is managed by an extraordinary team of industry experts with adequate experience.

The company has a decent ROE of 11.8%.

On the financial front, Kotak Mahindra Bank's standalone net profit increased 15% in the quarter ended December 2021 led by brisk loan growth from the retail segment and also helped by better asset quality which resulted in a write back in provisions during the quarter.

Over the last 5 years, revenue has grown at a yearly rate of 15.2%, while net income has grown at a yearly rate of 23.6%.

HUL also offers good dividend has consistently declared dividends for the last 5 years.

4. Tata Consumer Products

Another FMCG company from the list is Tata Consumer Products.

Tata Consumer Products is one of the leading companies of the Tata Group, with presence in the food and beverages business in India and internationally. It is the second largest tea company globally and has significant market presence and leadership in many markets.

Tata consumer also owns Starbucks in India.

Being a part of Tata group, the company is very well placed in terms of institutional framework.

At present, Mr Sunil D'Souza is leading Tata Consumer Products. Prior to this, he served as the Managing Director of Whirlpool India for four years and is credited with having turned Whirlpool into a remarkable growth story in India.

With 29 years of rich experience, it is expected that Mr D'Souza will bring major changes in the company's operations going ahead, which will eventually help Tata Consumer to become India's top FMCG company.

Currently, the company's ROE is very low at 6.8%.

However, the company has delivered good profit growth of 151.4% compounded annual growth rate (CAGR) over last 5 years.

For the December 2021 quarter, the company reported a 22.19% jump in its consolidated net profit to Rs 2.9 bn for the third quarter ended 31 December 2021. The company had posted a net profit of Rs 2.4 bn in the same quarter last year.

That apart, two weeks back, Tata Consumer Products announced the merger of all businesses of Tata Coffee with itself as part of a reorganisation plan in line with its strategic priority of unlocking synergies and efficiencies.

Since the news, the FMCG giant is creating a lot of buzz in the market. In the past month, the company has managed to deliver returns of 13% to its investors.

Speaking of Tata group, over the last few decades, the most preferred brand among the people of India is Tata group of companies.

Tata has always developed products that are sensitive to the needs of Indian consumers and hence people trust it more than any other competing brands.

It's vital to note that Tata has provided consumers with a service or solution that is both inexpensive and feasible.

The bottom line

One of the most essential characteristics of stocks is consistency. Many companies can produce good results, i.e., outperform benchmark indices in specific market situations, but many small and weak firms may not able to recover from this volatile market churn.

That's why it becomes important to check certain factors before investing in any stock.

Solid balance sheets, high return on equity, good management team and good cash flow are among some of the defining quality characteristics in a company.

This will eventually be reflected in a rising share price, therefore quality equities should be included in any long-term investing portfolio.

Quality investment, like all investing, requires a combination of 'qual' and 'quant' work to spot the stocks capable of grinding reasonable returns to its shareholders.

Before putting your whole trust in a firm, you should conduct extensive research, assess the fundamentals of the stock, and determine whether it fits in your portfolio before owning a stock.

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...