Global Selloff Alert: 5 Fundamentally Strong Stocks to Watch Out for Big Gains

The Indian stock market suffered a significant setback on 5 August 2024, as a wave of global market uncertainty engulfed investors.

The Sensex and Nifty indices experienced steep declines, mirroring the broader sell-off triggered by concerns over a potential US recession. Weaker-than-expected US jobs data fuelled fears of a recession, leading to a risk-off sentiment among investors.

The dramatic plunge in Japan's Nikkei index further amplified the negative sentiment, highlighting the global nature of the market downturn. This confluence of factors resulted in a panic-selling environment, with investors rushing to liquidate positions across various sectors.

Midcap and smallcap stocks, often more susceptible to market volatility, bore the brunt of the sell-off.

However, the current market correction might present a strategic opportunity for long-term investors.

Sectors such as FMCG, auto, and consumer durables appear particularly resilient in the face of potential global economic headwinds.

These domestically-oriented sectors are primarily driven by India's robust consumption story, which is largely insulated from external shocks.

With a growing middle class and rising disposable incomes, the Indian consumer market is poised for consistent growth.

The resurgence of rural demand, driven by a robust monsoon, increased farmer incomes, and recovering sales, further strengthens the prospects of these sectors.

FMCG companies, catering to essential goods and staples, are well-positioned to benefit from steady demand.

The auto sector, supported by government initiatives and increasing urbanisation, is expected to maintain its growth trajectory.

Consumer durables, benefiting from pent-up demand and festive season sales, are also likely to exhibit resilience.

With this in mind, we highlight 5 stocks in this editorial.

While short-term volatility persists, these stocks, with their strong domestic focus and underlying growth fundamentals, could offer a relatively safe haven for investors seeking to capitalise on the market downturn.

#1 Varun Beverages

At the top of our list is the soft-drink giant Varun Beverages.

Varun Beverages manufactures, sells, and distributes soft drink products under trademarks and brands owned by PepsiCo. These include both carbonated and non-carbonated beverages.

Varun Beverages, operating on a franchisee model, holds licenses for 17 states and two union territories in India, along with several international markets.

The company offers comprehensive end-to-end execution capabilities, encompassing manufacturing, distribution, warehousing, customer management, and in-market execution.

While PepsiCo provides the brands, concentrates, and marketing support, Varun Beverages handles everything else.

Varun Beverages boasts an extensive distribution network, with a strong presence in urban, semi-urban, and rural markets, reaching a wide range of consumers.

This impressive reach is set to expand even further with infrastructure improvements, particularly the electrification of rural areas.

The business has enjoyed a great run over the past five years. While the revenue has doubled in value in the last 5 years, the profitability has shot up by 47.8% on a 5-year CAGR basis.

This has expanded the RoCE and RoE which have averaged 20.9% and 23% in 5 years.

This stellar performance comes from market share gains and an improvement in the contribution of non-carbonated drinks. This has allowed the company to maintain a healthy balance sheet.

Varun Beverages Financial Snapshot (2020-2024)

	2019-2020	2020-2021	2021-2022	2022-2023	2023-2024
Revenue Growth (%)	0.86%	0.84%	28.94%	6.83%	16.95%
Operating Profit Margin (%)	40.00%	50.00%	50.00%	50.00%	50.00%
Net Profit Margin (%)	24.57%	29.10%	31.54%	29.29%	30.88%
Return on Capital Employed (%)	50.00%	53.20%	54.90%	57.20%	55.20%
Return on Equity (%)	34.48%	39.11%	51.19%	42.30%	44.15%

Source: Equitymaster

Varun Beverages is aggressively expanding. The company is investing heavily in capacity expansion. This includes new facilities in Rajasthan and Madhya Pradesh, as well as upgrades to existing plants.

To support these endeavours, a substantial capital expenditure of Rs 25-26 billion (bn) is planned for 2025.

Meanwhile, the company is deepening its ties with PepsiCo. It has secured exclusive rights to produce and sell snacks in key African markets, while its new DRC plant is already operational, tapping into a promising growth region.

Leveraging its strong market position and the anticipated growth in rural consumption, Varun Beverages is well-positioned to capitalise on the expanding F&B market. The company aims to increase market share across product categories through targeted customer initiatives.

The stock of Varun Beverages is trading at a price-to-earnings (PE) ratio of 81x, a premium of 32% to its 5-year median PE of 61x.

To know more about the company, check out its financial factsheet and latest financial results.

#2 Hindustan Unilever

Next on the list is Hindustan Unilever.

Hindustan Unilever (HUL), part of the Unilever Group, stands as India's leading fast moving consumer goods (FMCG) company.

It has a vast portfolio of over 44 brands in 14 categories such as fabric solutions, home and hygiene, skin care, and foods. It enjoys widespread adoption, with nine out of ten Indian households using its products.

HUL holds either the top spot or a strong second position in most categories it operates. Its portfolio targets various market segments, including premium, mid-price, and economy. This sets it apart from competitors focused solely on premium or mass markets.

Moreover, its revenue skew towards health and hygiene segments provides a relatively advantageous position compared to peers.

HUL boasts one of India's most extensive distribution networks. It comprises over 4,500 distributors and 8 million (m) retail outlets.

The FMCG landscape has been marked by volatility in recent years, with sustained high inflation and erratic weather patterns impacting market volume recovery.

Rural growth, historically outpacing urban, has lagged behind in the past year. This explains the flattish growth in 2024.

However, green shoots of recovery are emerging in rural India. The company is optimistic of growth going forward.

The company's strategic focus on premiumisation and market development is yielding positive results. By expanding its product portfolio, strengthening distribution, and investing in brand building, HUL has been able to navigate the evolving consumer landscape successfully.

While commodity prices have stabilised after a period of unprecedented inflation, the company continues to prioritise operational excellence to protect margins.

Between 2020-2024, the sales and net profit have grown at a CAGR of 9.5% and 11.2%, respectively.

The returns have been robust with the RoCE and RoE averaging 42.9% and 31.5%, respectively.

Hindustan Unilever Financial Snapshot (2020-24)

	2019-2020	2020-2021	2021-2022	2022-2023	2023-2024
Revenue Growth (%)	1.40%	17.40%	11.10%	15.90%	2.20%
Operating Profit Margin (%)	25%	25%	25%	23%	24%
Net Profit Margin (%)	17.00%	17.00%	17.00%	16.70%	16.60%
Return on Capital Employed (%)	113.10%	22.50%	24.40%	26.80%	27.80%
Return on Equity (%)	82.30%	16.80%	18.10%	20.20%	20.10%

Source: Equitymaster

Looking ahead, HUL is likely to benefit from the ongoing economic recovery and increasing disposable incomes.

However, intense competition will continue to shape the operating environment.

In FY25, HUL plans to split its beauty and personal care business to focus on driving growth and premiumisation in the beauty segment.

The stock is trading at a PE ratio of 62.9x, in line with its 5-year median PE of 63.9x.

To know more about the company, check out the financial factsheet and the latest quarterly results.

#3 Mahindra and Mahindra

Third on our list is Mahindra and Mahindra.

Mahindra & Mahindra (M&M) is a powerhouse in the tractor industry.

The automotive major is the world's largest tractor manufacturer and a key player in India's utility and low-commercial vehicle segment. Its dominance in the tractor market is undeniable, with a staggering 41% market share.

In FY24, the automotive and farm equipment segment accounted for more than 70% of the total revenues.

Apart from this, M&M is present across a host of sectors, such as IT, finance, hospitality, real estate etc, running businesses in eleven different sectors via various listed and unlisted entities.

The business has done well over the last few years on the back of strong product launches.

Between 2020-2024, the revenue has grown at a 5-year CAGR (compounded annual growth rate) of 6% and the net profit has delivered a 15.4% growth.

Mahindra & Mahindra Financial Snapshot (2020-24)

	2019-2020	2020-2021	2021-2022	2022-2023	2023-2024
Revenue Growth (%)	-27.78%	-1.35%	21.00%	34.54%	15.21%
Operating Profit Margin (%)	18.00%	19.12%	16.73%	17.16%	18.78%
Net Profit Margin (%)	3.43%	4.81%	7.77%	9.00%	8.47%
Return on Capital Employed (%)	9.18%	9.46%	11.92%	15.02%	14.88%
Return on Equity (%)	6.83%	9.14%	16.44%	22.09%	20.11%

Source: Equitymaster

This has also helped propel returns over the years. The 5-year average return on capital employed (RoCE) and return on equity (RoE) stand at 12% and 14.9%, respectively.

However, in FY24, the company reported that the El Nino conditions led to deficient rains in India impacting rural incomes which were partly offset by stronger construction activity. Farm machinery grew by 32% despite rural slowdown, driven by record performance in rotary tillers.

Looking ahead, M&M is confident of further growth, fuelled by a robust order book that promises healthy growth in the future.

Moreover, with the anticipated pick up in rural economy the farm segment is expected to cross 30%+ growth rate.

The stock is trading at a PE of 31x, a 47% premium to its 5-year median PE of 21x.

To know more about the company, check out its financial factsheet and latest financial results.

#4 Maruti Suzuki

Fourth on the list is Maruti Suzuki.

Maruti Suzuki holds a commanding 40% share in the traditional combustion engine segment, making it a household name across the country.

The company is focussing beyond maintaining the lead, with a keen eye on the future of mobility. It is constantly innovating to stay ahead of the curve, committing to a multifaceted strategy that ensures the auto major remains relevant in the evolving market.

While it is exploring electric vehicles (EVs) with the recent unveiling of the Concept eVX, the primary focus for rural India remains to offer reliable, fuel-efficient vehicles at competitive prices.

In 2023, a substantial 45% of Maruti Suzuki's sales originated from rural India. This demonstrates the company's effective strategy of catering to diverse customer segments. By offering affordable and fuel-efficient vehicles, Maruti Suzuki has successfully captured the rural market.

Maruti Suzuki Financial Snapshot (2020-24)

	2019-2020	2020-2021	2021-2022	2022-2023	2023-2024
Revenue Growth (%)	-10.87%	-7.20%	22.87%	32.90%	18.50%
Operating Profit Margin (%)	13.27%	11.22%	8.14%	10.81%	NA
Net Profit Margin (%)	7.08%	5.94%	4.24%	6.75%	9.51%
Return on Capital Employed (%)	14.96%	10.58%	8.87%	17.70%	24.00%
Return on Equity (%)	11.77%	8.61%	7.20%	14.02%	18.30%

Source: Equitymaster

Between 2020-2024, the sales and net profit have reported a 5-year CAGR of 9.9% and 12%, respectively.

The returns have been strong, with the RoCE and RoE averaging 15.2% and 11.9% over a 5-year period.

Maruti Suzuki delivered a strong performance in FY24, surpassing 2 million annual sales for the first time. The company maintained its position as India's top exporter for the third consecutive year. SUVs drove growth, while the hatchback segment declined.

It's rural sales grew at a faster pace than urban sales, even though the overall rural market has slowed down.

However, a full recovery hinges on a rebound in first-time car buyers, which hasn't materialised yet. With a promising monsoon season underway, there's hope for an uptick in this segment.

The company's current EV presence is limited. However, it's established brand recognition, extensive dealer network and focus on affordability, position the company for potential future dominance in the electric mass market.

To meet increasing demand, Maruti Suzuki is investing heavily in capacity expansion, including new plants in Rajasthan, Madhya Pradesh, and Gujarat. The company is also focusing on sustainable mobility, with a significant increase in CNG and hybrid vehicle sales.

With a robust product lineup and aggressive expansion plans, Maruti Suzuki is well-positioned for continued growth in the coming years.

The stock is available at a PE ratio of 26.4x, a discount of 30% on its 5-year median PE of 37.6x.

To know more about the company, check out the fact sheet and quarterly results.

#5 Computer Age Management Services (CAMS)

Last on our list is CAMS.

CAMS is the largest registrar and transfer agent of mutual funds in India, boasting a market share of more than 60% based on average assets under management in the mutual fund industry.

It offers a comprehensive range of services and plays a significant role in shaping and upholding the market perception of its clients.

Servicing 10 of the 15 largest mutual funds in the industry, the company derives 90% of its revenues from the mutual fund business. The balance 10% comes from the non-mutual fund side of the business.

CAMS Financial Snapshot (2020-24)

	2019-2020	2020-2021	2021-2022	2022-2023	2023-2024
Revenue Growth (%)	0.86%	0.84%	28.94%	6.83%	16.95%
Operating Profit Margin (%)	40.00%	50.00%	50.00%	50.00%	50.00%
Net Profit Margin (%)	24.57%	29.10%	31.54%	29.29%	30.88%
Return on Capital Employed (%)	50.00%	53.20%	54.90%	57.20%	55.20%
Return on Equity (%)	34.48%	39.11%	51.19%	42.30%	44.15%

Source: Equitymaster

The business has done well in the past 5 years, thanks to its dominant position in the market. While the sales are up 10% CAGR, the net profits have more than doubled between 2020-2024.

This has allowed the return ratios to expand substantially. The RoE has jumped from 34.5% in the FY20 to 44.2% in FY24.

CAMS has reported a stellar Q1FY25, crossing the significant milestone of Rs 40 trillion in Assets Under Management (AUM). This impressive growth is driven by a robust performance in equity assets, which surged by 56% YoY.

CAMS has solidified its market leadership with a 66% market share in equity assets.

The company's dominance is further evident in its role as the industry's preferred partner for mutual fund houses. CAMS-serviced funds garnered a substantial 71% of industry equity net-flows, with SIP registrations hitting a new record of 9.3 million.

Beyond core mutual fund services, CAMS is expanding its footprint. The company has made strategic investments in technology, including a partnership with Google Cloud to modernise its RTA platform.

Its foray into the alternative space is gaining traction, with a growing client base and new offerings. CAMS KRA, the KYC arm, is also experiencing robust growth, adding new clients and expanding its reach.

While challenges such as economic fluctuations and increased competition exist, CAMS' strong market position, financial performance, and strategic initiatives suggest a promising growth trajectory.

CAMS' business model positions it as a relatively insulated player in the face of global economic uncertainties. As a registrar and transfer agent, its core revenue streams are derived from recurring fees, largely independent of market volatility.

In times of financial meltdown, while asset values may fluctuate, the need for record-keeping, investor servicing, and transaction processing remains constant.

The stock is trading at a PE ratio of 50.5x, a premium of 13% to its 5-year median PE of 44x.

To know more about the company, check out its financial factsheet and latest financial results.

In conclusion

As global economic uncertainty casts a long shadow, India's robust domestic consumption emerges as a beacon of hope for investors. With a burgeoning middle class and a resilient rural economy, the country's consumer-driven growth story remains intact.

Sectors such as FMCG, auto, and consumer durables are particularly well-positioned to capitalise on this trend. Their focus on the domestic market makes them less susceptible to global economic headwinds.

Factors like a growing middle class with increasing disposable incomes, coupled with a resurgent rural economy, are driving demand for these sectors.

While these sectors offer a promising investment landscape, it's crucial to remember that short-term market volatility can impact stock prices.

However, for investors with a long-term horizon, these sectors present an opportunity to ride the wave of India's consumption boom.

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...