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5 Beaten Down Stocks to Add to Your Watchlist

May 20, 2022

5 Beaten Down Stocks to Add to Your Watchlist

Indian share markets have been very volatile in the past few months where the benchmark indices have been swinging like a pendulum. Sharp changes have become routine.

During the month of May 2022, markets have seen a heavy correction with benchmark indices dropping close to 15% from their 52-week high which they hit in January 2022.

Bluechip stocks are hitting 52-week lows.

Four out of every five companies in the BSE 500 index have been in a bear grip. A stock or an index is said to have entered a bear market when it falls 20% or more from its peak.

Inflationary concerns, monetary tightening, elevated crude oil prices, geopolitical crisis, lofty valuations, depreciating rupee, and constant FII outflows are the key reasons which are hurting the sentiments.

The next few quarters don't look that good at all as far as the Indian stocks are concerned. There's every chance the markets may fall further if the situation doesn't improve.

But for long term investors, this can just as well be an opportunity in a crisis.

I'm sure many of you must be confused what to do in a falling market...should you cut losses or dig in deeper?

The temporary blip in the markets could help you buy into businesses that remain solid wealth creators and offer margin of safety in valuations.

Keeping that in mind, let's take a look at the top beaten down stocks. These stocks have good fundamentals and have fallen quite a lot from their recent highs.

#1 Wipro

The global aversion to technology stocks has had its fair share of rub-off on Indian technology service providers as well.

Whenever there's a fall in tech-heavy Nasdaq, Indian share markets follow suit and plunge. The Nasdaq just had its worst day in over two years so you get the idea what's happening with Indian IT stocks.

Although domestic IT shares have fallen less than their global counterparts, they are still down a whopping 16-35% from their 52-week highs.

Most Indian IT companies are moving their operations out of Russia while helping clients maintain business continuity by shifting work to other locations. But this is likely to increase margin pressure.

Wipro is among the worst-hit companies in this tech rout. The scrip hit its 52-week low yesterday and is down 35.8% in 2022 so far.

Earlier this month, Wipro posted 3.8% year-on-year (YoY) rise in net profit at Rs 30.9 bn for the quarter ended March 2022. The revenue from IT services jumped 3.1%, but the company's margin contracted 130 basis points.

During the period, the Bengaluru-based IT giant had 11.5% of overall revenue coming from energy, natural resources, and utilities. Europe is its second-largest market in terms of revenue by geography.

Volatility in the global markets amid higher inflation, along with the Russia-Ukraine war which is unlikely to end soon, can cause a slowdown in orders.

In line with this, analysts have cut the IT company's earnings forecast. Higher than usual salary hikes, heavy attrition, and an increase in discretionary costs reported during the quarter under review, have further encouraged such pruning in estimates.

Overlooking the short-term turbulence, Wipro could be a good bet for the long term.

The company's net profit has been increasing at a CAGR of 8.8% over the last 5 years.

Wipro is also known for rewarding shareholders with continuous dividends. In April 2022, the IT major declared another interim dividend of Rs 5 per share for the 2022 fiscal.

If you're looking for high dividend-paying companies, the market selloff could be a good opportunity. Also read - dividend yield funds worth your money?

#2 L&T Infotech

Typically, technology investors cheer a weakening rupee as it increases earnings when dollar revenue is converted into the local currency.

With the rupee weakening to its all-time low, you wouldn't expect to see two IT majors on this list. Well, there's a reason Charlie Munger calls the current market a 'mania of speculation'.

L&T Infotech recently finalised the terms of its merger with Mindtree, creating a US$3.5 bn IT services provider. The deal is expected to close in 9-12 months.

The company hopes that its services business will be boosted by the merger.

In a recent interview, chief executive officer and managing director of Larsen & Toubro, SN Subrahmanyan said:

  • LTI (L&T Infotech) is very strong in ERP (enterprise resource planning), and Mindtree is very strong in the customer experience space. A combination of these provides a fantastic service input to the clients.

Despite a positive outlook for the company and cost-cutting strategies, L&T Infotech share price is down close to 45% in 2022 so far.

Most of this could be attributed to the expected slowdown in the economy.

Although IT projects cannot be postponed by businesses if they want to maintain their edge against competitors, in a recession, businesses can postpone such spends.

Another IT giant facing the storm is Tech Mahindra. The scrip is down over 36% in the 2022 calendar year.

The current meltdown in IT stocks could be a great buying opportunity for long term investors. As the long-term view on the sector is still positive, given the strong order pipelines and continuous demand for cloud and digitalisation across verticals.

#3 Metropolis Healthcare

This is another stock that hit its 52-week low yesterday on the bourses.

Metropolis Healthcare operates the only Indian multinational chain of pathology labs & diagnostic centers.

The company has a chain of 124 clinical laboratories and 2,400 collection centers across 7 countries while the central laboratory is located in Mumbai.

Back in February 2022, the company reported a disappointing set of numbers for the December 2021 quarter, dragging the stock down by 23% in two trading days.

Revenue from operations were muted at Rs 2.9 bn as against Rs 2.8 bn in the year ago quarter.

Metropolis Healthcare also said non-covid business could have grown faster. However, the company witnessed sharp drop in volumes from a government contract.

The company expects the testing volumes from the government contracts to normalise in the March 2022 quarter. The company is set to report the March quarter results on 24 May 2022.

During the quarter under review, the company made increased investments in digitisation and marketing, manpower, and customer experience initiatives to strengthen its brand. This had impacted margins, which the management believes, is a short term phenomenon.

The slow growth in December quarter damped the investor sentiment. Metropolis Healthcare's share prices are down near 50% in 2022 so far.

Another company from the healthcare sector, Dr Lal PathLabs, also hit the 52-week low mark.

The company posted March quarter results yesterday which miss street estimates leading the stock to dive 48.6% in 2022 so far.

Increasing competitive landscape, declining covid sales and low margins of Suburban have put pressure on the operating margins of healthcare companies.

Despite such pressure, both the companies continue to post strong financial fundamentals in terms of revenue and profit growth.

#4 Lux Industries

Kolkata-based hosiery maker, Lux Industries shares have corrected close to 41.7% in 2022 so far.

The stock came under pressure in January 2022, when the market watchdog barred 14 entities for insider trading in its scrip.

The regulator had also impounded wrongful gains worth nearly Rs 30 m. Udit Todi, the company's executive director and son of the managing director was one of the barred entities.

According to the regulators initial findings, Todi had passed price sensitive information pertaining to financial results of the company. The information was allegedly used to build long position in shares of Lux by connected entities in May 2021 ahead of its result announcement.

Post the outbreak of this news, Lux Industries slumped 20% in a single day.

On the financial front, the company has strong fundamentals with sound key ratios.

  2018-2019 2019-2020 2020-2021
Revenue (Rs m) 12,164 16,744 19,649
Growth (%) 12.70% 37.70% 17.30%
3-year CAGR (%) 22.10%
       
Net Profit Margin (%) 8.20% 10.60% 13.80%
3-year CAGR (%) 51.60%
       
Gross Profit Margin (%) 14.70% 16.10% 19.50%
3-year CAGR (%) 35.10%
       
Return on Equity (%) 24% 23.90% 26.80%
Return on Asset (%) 15.30% 15.90% 18.90%
Data Source: Equitymaster

To know more about the company, check out Lux Industries' financial factsheet.

#5 ICICI Securities

Down over 40% so far this year, ICICI Securities is the last stock on our list.

ICICI Securities is engaged in the business of broking (institutional and retail), distribution of financial products, merchant banking, and advisory services.

Why is a broking firm part of this list? In the last about 18 months, the number of investors investing in share markets has only gone up.

True.

But during volatile periods, investors wait on the sidelines and broking companies get affected.

This is exactly what Zerodha CEO Nithin Kamath said when the company declared results:

  • 'In almost every bull market, it looks like the broking industry can grow forever, but it cannot. There are significant risks.

  • If the markets take a turn for the worse, the user growth drops, leading to a reduction in active traders & hence revenue.

  • And brokerage firms can do nothing; it is like being a sitting duck'.

ICICI Bank holds 75% stake in ICICI Securities. So the company has the advantage of strong operational linkages with ICICI Bank.

It enjoys customer sourcing and has access to the bank's clientele, branch and infra network.

The company's established track record in the industry is another plus point. ICICI Securities is among the leading brokerage houses in terms of trading volumes.

On the financial front, over the past three years, the company has reported increasing sales and profits.

ICICI Securities Financial Snapshot

(Rs m, Consolidated) FY17 FY18 FY19 FY20 FY21
Net sales 14,042 18,610 17,057 17,191 25,862
Sales growth (%) 24.90% 32.50% -8.30% 0.80% 50.40%
Operating profit 5,665 9,172 8,145 9,007 15,922
Operating profit margin (%) 40.30% 49.30% 47.80% 52.40% 61.60%
Net profit 3,386 5,535 4,907 5,420 10,677
Net profit margin (%) 24.10% 29.70% 28.80% 31.50% 41.30%
Data Source: Ace Equity

The road ahead...

One of the lessons financial markets have taught us is that the only guarantee is 'change'.

At the beginning of the year, stock markets were riding high, smashing record after record. Today, the whole situation is entirely different.

In volatile times like these, editors at Equitymaster agree on one thing...

Don't panic! The market will come through this phase stronger. Hold on to your long-term investments.

To conclude, do remember that the volatility is likely to persist going forward...so in this situation, be careful before you go bottom fishing.

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...

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1 Responses to "5 Beaten Down Stocks to Add to Your Watchlist"

Panduranga Rao Bandi

Sep 28, 2022

Very useful. The rationale is very convincing. The caution to acknowledge that the markets are volatile before doing bottom fishing is pragmatic.

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Equitymaster requests your view! Post a comment on "5 Beaten Down Stocks to Add to Your Watchlist". Click here!