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  • Apr 21, 2022 - Bargain Hunting in the Current Market? Look Out for these 5 Dig Deeper Stocks

Bargain Hunting in the Current Market? Look Out for these 5 Dig Deeper Stocks

Apr 21, 2022

Bargain Hunting in the Current Market? Look Out for these 5 Dig Deeper Stocks

It's been more than 2 years since the lockdown was announced.

While the restrictions have relaxed in most places, and people roam freely without masks, we are still far away from getting back to normal.

As I write this, Covid cases are on the rise. A headline from a leading daily read 'India logs over 2,000 cases in 24 hours.'

While some industries are slowly getting back on their feet, others are barely able to survive.

With uncertainty surrounding Covid, inflation, and the Russia-Ukraine war, many investors are expecting some downside.

But we never know how 'Mr. Market' will react. The random nature of the stock market often leaves investors confused.

At a given time, fraud stocks with no profits run up over 1,000% in no time while fundamentally strong stocks trade at the same level for years.

With no clarity yet, it's better to stick to the strong companies which can tide over the uncertainty.

We did a little digging and ran a query on all listed stocks in the market. We applied filters of profitability, growth, stability, dividend payout, and debt. We checked which stocks fare well on all fronts.

Let's call these stocks 'dig deeper stocks.' These stocks have reported stable profits and sales for decades (with no loss making years), have low or zero debt, and pay high dividends.

Also, these are businesses that will survive during tough and uncertain times like the current one.

Here are the top dig deeper stocks which should be on your watchlist.

#1 Nestle India

The company which holds the top spot if we take into consideration all parameters is Nestle India.

If there was one company that has stood tall throughout recessions, high inflationary periods or during turbulent times, it's Nestle India.

Despite concerns, Nestle India has not fallen short of expectations. It reported in-line results year after year.

Even during the pandemic, when most companies were struggling to keep themselves afloat, Nestle reported terrific results and posted its highest ever ROE of 103%.

Nestle India is an Indian subsidiary of Swiss based multinational company Nestle. It's one of the largest FMCG companies in India.

Nestle's brands enjoy superior market share across categories. These brands are leaders in their respective categories. Take for example Nestle's most popular brand in India, Maggi.

The company's ROE has averaged 72.5% over the past five years. On the ROCE front, the company fares much better, averaging at 104.5%.

If five years seem too less to you, let's go back to the year 2002. Nestle India has reported increasing revenues and profits since 2002 barring two years 2015 and 2016. No losses, consistent growth, that too with literally zero debt on its books...that's a tremendous track record.

From reporting total income of Rs 19.6 bn and net profit of Rs 2 bn in 2002, Nestle has come a long way. It reported an income of Rs 148.3 bn and Rs 21.5 bn in net profit in 2021.

And then there is the dividend factor. Nestle has an average dividend payout ratio of 97.3% over the past five years.

The company's dividend history dates to 1994. Ever since 1994, Nestle has consistently paid higher dividends.

No wonder the company stock is one of the highly priced stocks in India.

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If we are to go by track record, Nestle India is likely to report healthy growth this year too as it primarily focuses on domestic market.

One thing to look out for is the impact of raw material prices and what pricing plans the company has in such case.

#2 Hindustan Unilever (HUL)

Another FMCG company, Hindustan Unilever (HUL) is the second stock on our list.

HUL is India's largest FMCG company. On any given day, nine out of ten Indian households use its products. This has resulted in HUL being one of the top 10 most valuable companies in India for several decades.

It sells numerous products ranging from foods to consumer goods. HUL has enjoyed a dominant market share across categories. Some of its brands have now become synonymous with that product. Lifebuoy, Ponds, Lakme, Horlicks, and the like.

HUL's average ROE and ROCE for the past five years are 69.1% and 95.9%, respectively. The company has managed to report these numbers by growing consistently on the revenue and profitability front.

Just like Nestle, HUL too did not take any debt for most of years and has remained profitable.

Coming to dividends, barring the year 2008 (the year of financial crisis), HUL has paid dividends since 1995. Those who invested in the company's IPO have been richly rewarded.

For the year ended March 2022, the company has already paid an interim dividend of Rs 15 per share and the final dividend is expected to be a bumper one too.

Since its listing in 1956, HUL has announced bonus issues 4 times as well as a stock split from Rs 10 to Rs 1 in 2000.

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Even if you had missed the rally in early years and invested late, you would be sitting on hefty gains.

#3 Castrol

Castrol, promoted by BP (British Petroleum), is one of the key lubricant manufacturers in India.

You're probably wondering how a boring stock like Castrol made this list. Well, for Castrol India, its track record speaks for itself.

Castrol's five-year average ROE stands at 66.1% while ROCE is much better at 97.8%.

The company's revenues have not been as consistent as HUL or Nestle but it has a solid track record on top of zero debt. Same is true for its profits.

On the dividend front, the five-year average payout comes to 82%. Castrol fares much better than HUL or Nestle here with yields ranging up to 4%. The management of Castrol is determined to stick to its policy of paying out as much as 75% of profits or more, as dividends to shareholders.

But how has Castrol managed to stay ahead of its competition? What is its USP?

Well, Castrol's strong brand positioning and tie-up with major auto original equipment manufacturers (OEMs) allows it to command higher pricing power over its competitors.

Castrol can be called as the price maker in the Indian automotive lubricant market.

While the company's stock performance over the years is not thrilling, it should be noted that Castrol has declared as many as 10 bonus issues over the past 30 years. Talk about wealth creation!

The company's sturdy balance sheet, steady profitability and excellent return ratios make it one of the safest plays in the oil and gas sector.

For those of you who do not want to look at the most popular blue-chips and take a contrarian view, Castrol is the best.

#4 CRISIL

2017 was a crucial year for CRISIL and other rating agencies when the market regulator asked them to downgrade any company to 'junk' if it misses loan repayment.

This was done when India has over Rs 8 tn non-performing assets (NPAs) in the banking system. Making rating agencies the watchdog of quality of bank loans has clearly made them more systemically important.

CRISIL's journey goes way back in 1987 when the first rating agency was set up. The rating agency's business took off in a few years after banks and companies realised that a good credit rating can help them borrow at cheaper rates compared to competitors.

The rest is history. CRISIL has grown by leaps and bounds over the years. Today, it has market leadership the rating segment for corporate bonds, bank loans, and SME ratings.

It has a five-year average ROE of 38.1% and ROCE of 47.1%. Barring 2019, the company's revenues have growth each year since 2003. Profits too have grown multifold.

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Dividend consistency, zero debt, and stability in profits...you name it and CRISIL has it.

CRISIL has consistently paid dividends over the past three decades and the average payout ratio over the past five years has been around 92.7%.

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

#5 VST Industries

Last on our list we have a company engaged in the cigarettes and tobacco products segment.

Incorporated in 1930, VST Industries' principal activities are manufacturing and selling cigarettes and unmanufactured tobacco.

The key raw material for the company is tobacco. The company uses diversified sourcing from dealers, farmers, as well as sourcing in different seasons.

How does a smallcap company like VST forms part of the list dominated by largecaps and bluechips?

Well, one look at the company's numbers will tell you this company ranks high as most parameters.

The average ROE and ROCE of VST Industries for past five years are 36% and 52.7%. The company has a solid track record of stable profits and revenues for the past two decades.

It has handsomely rewarded shareholders with dividends too. The company has paid more than 50% of its profits as dividends without fail for more than a decade now.

All this with zero debt on its books.

VST is in a segment which has high barriers to entry. This is a big plus point for the company. Cigarette advertisements and FDI investments in cigarettes are banned by the government. This prevents competition from big foreign firms.

While there are big players like ITC and Godfrey Phillips in the segment, VST has stayed away from competing with them by focusing on a different set of customers, the rural population.

To know more, check out VST Industries' financial factsheet.

Which other stocks form part of this list?

Apart from the above, here are few dig deeper stocks which might come up if you dig a little deeper. All these companies will be relevant for decades to come.

Company Name Average ROE (%) Average ROCE (%) Dividend Payout (%)
P&G Hygiene and Health Care 52.3 74.8 126.0
Sanofi India 23.8 33.7 118.0
Hindustan Zinc 23.1 28.0 101.4
Gillette India 34.6 49.6 99.0
Colgate-Palmolive 56.0 77.0 83.6
Britannia Industries 36.6 47.9 76.9
Marico 31.9 37.8 71.6
ITC 23.9 32.8 70.6
Dabur India 29.2 33.9 61.5
Page Industries 44.4 61.6 60.6
Data Source: Ace Equity
5 Year Average

If you are on the lookout for such companies and want to apply your own filters and parameters, look no further than Equitymaster's Powerful Stock Screener.

This screener allows you to screen stocks based on both pre-set queries and your own criteria.

Here are some of the popular screens:

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...

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