Super Favourite Stocks of Mutual Funds With Highest Allocation in Top 5 Sectors

Introduction

In this article, we are going to see the 5 most favourite stocks of mutual funds in top 5 sectors and having highest allocation in their respective sectors.

Most Favourite Stocks of Mutual Funds in Top 5 Sectors

Thus, Mutual Funds have 1 super favourite stock in major sectors which they hold in large quantities. Which are those stocks?

1. HDFC Bank Ltd

• For October 2019, HDFC Bank is having 20% allocation in financial sector. It means if mutual funds have invested Rs.100 in entire financial sector, then HDFC Bank allocation is almost Rs.20.
• Mutual funds are having around Rs.4 Lakh Crore investments in financial services sector. Thus, close to Rs.80,000 Cr allocation is done in HDFC Bank Ltd. It indicates how much trust is built by HDFC bank stock across mutual funds.
• On account of high weightage in Index, Passive funds like Nifty as well as Sensex ETFs are mandatory to invest in the stock. In addition, in active funds also, fund managers are quite confident about the future earnings potential of the bank.
• If we do year on year comparison, HDFC Bank was having allocation of almost 18.6% in financial sector. It shows the Mutual funds’ interest grew YoY, so increased the allocation for the bank.
• Detailed analysis of HDFC Bank Ltd is available for our stock subscribers on our website.

2. Infosys Ltd

• If mutual funds are having Rs.100 investments in technology sector, then alone Infosys allocation is almost Rs.43.5. Infosys is having 20% allocation in technology sector for October 2019, while it was 44.2% last year October 2018.
• How can it be possible, if TCS is enjoying the valuation more than two times that of Infosys?
  • The reason behind such a big allocation of Infosys is the free-float market cap available for the non promoters. Infosys have very less promoter’s holding 13.15% as on September quarter 2019. If current market cap of Infosys is Rs.3 Lakh Cr, then its promoters are holding merely around Rs.40,000 Cr. While the remaining Rs.2.60 Lakh Cr is free-float market cap for Infosys. In such case, it gives mutual funds more stake to buy the stock.
  • On the other hand, TCS has promoter holding of 72.05%. Though market cap of TCS is around Rs.7.8 Lakh Cr, its promoter’s stake is around Rs.5.6 Lakh Cr. While, the left Rs.2.2 Lakh Cr is available as free-float.
• Thus, in current scenario, it gives mutual funds very less scope to invest in TCS on account of very high promoters holding as compared to Infosys. It makes the allocation of TCS in technology sector relatively very less than of Infosys.

3. Reliance Industries Ltd

• For October 2019, Reliance Industries Ltd (RIL) is having 32.9% allocation in energy sector. It means if mutual funds have invested Rs.100 in the Energy sector as a whole, then Reliance Industries allocation is almost Rs.32.9.
• The % allocation of RIL is increased from 27.3% last year in October 2018 to 32.9% in October 2019. Mutual funds are currently having around Rs.48,000 Cr allocation in RIL.
• Today also, the conglomerate – RIL is taken in Energy sector. As far as revenue as well as profits are considered, Oil and Gas are still the major contributors. But, the long term earnings growth is not there in Oil and Gas segments. So, mutual funds are currently making allocations in RIL on account of a great earnings visibility as well as growth potential in Reliance’s Retail and Jio businesses.
• However, in near future, if Reliance Retail and Reliance Jio get listed, then the % allocation of RIL in Energy sector will decrease. And separate allocations will be made for Retail and Jio in their respective sectors.

4. Larsen & Toubro Ltd

• In the construction related business, Larsen & Toubro Ltd (L&T) is the most favourite stock of mutual funds. If mutual funds are having Rs.100 investments in construction sector, then L&T’s allocation is almost Rs.43.8.
• The single stock – L&T is having 43.8% allocation in construction sector for October 2019, while it was 40.9% last year October 2018.
• In last 1 year, the % stake of mutual funds in L&T shareholding has increased from 14.87% in Sept-2018 to 18.41% in Sept-2019.
• The company is having a consistently growing revenue quarter on quarter with a steady operating profit margin (around 16-18%). Around 90% revenue of L&T comes from construction and project related activity.
• L&T has bagged many large orders across various business segments like Residential and related Infrastructure related projects (like CIDCO under Pradhan Mantri Awas Yojana, Mumbai Trans Harbour Link), Defence segment projects and other various projects in domestic as well as international market.
• It will add a great value to the earnings growth of L&T, which may be the reason for 43.8% allocation of L&T in Construction sector.

5. ITC Ltd

• For October 2019, ITC Ltd is having 34.3% allocation in FMCG sector. It means if mutual funds have invested Rs.100 in the FMCG sector, then ITC’s allocation is almost Rs.34.3.
• The % allocation of ITC is decreased from 40.1% last year in October 2018 to 34.3% in October 2019. Mutual funds are currently having Rs.30,500 Cr allocation in ITC Ltd.
• Such a high % allocation of a single FMCG stock (ITC Ltd) is due to the greater availability of free float market cap of ITC (Rs.3.04 Lakh Cr) as compared to its peer FMCG companies :
  1. Hindustan Unilever Ltd (Rs.1.45 Lakh Cr)
  2. Nestle India (Rs.50,000 Cr)
  3. Britannia Industries (Rs.36,000 Cr)
  4. Godrej Consumer Products (Rs.27,000 Cr)
  5. Marico (Rs.18,400 Cr)

4 High Quality Premium Valuation Stocks

Introduction

In this article, Quality vs Valuation relationship is explained with example. Analysis of 4 High Quality Premium Valuation Stocks is done. Does valuation of a quality stock really affect its returns in long run? Should you refrain yourself from buying quality stocks at premium valuations? To answer the above questions we look into the numbers of few quality stocks and analyse the significance of valuation parameters.

Quality Vs Valuation Relationship Explained

4 High Quality Premium Valuation Stocks

A Lesson in Value Investing

• Benjamin Graham, the Dean of Wall Street built a great fortune by following his own advice on Value Investing – ”Invest in low-priced, solidly run companies with good dividends.”
• Warren Buffett is a also great role model for value investors. Over the years Buffett moved towards buying high-quality businesses and did not hesitate to pay up for quality time and again and again.
• The term ‘value investing’ is widely used to imply the purchase of stocks having attributes such as a low ratio of price to book value, a low price-earnings ratio, or a high dividend yield
• The bottom line is – Pay up for quality, but don’t overpay. If the fundamental performance of the stock justifies its subsequent upward re-rating, then the idea of paying up for quality makes great economic sense, as Buffett figured out.

Quality Vs Valuation Relationship Explained

• High valuation comes hand in hand with the quality stocks or quality businesses. There are 2 scenarios of high valuation :
  1. Overvaluation
  2. Premium Valuation
• In case of overvaluation, the stock can’t remain overvalued or can’t sustain higher valuation for a long time. It will go through a correction phase cyclically after sometime and same trend can be repeated in the long term.
• On the other hand, if the stock is trading at a premium valuation, then the stock go through a cycle of re-rating of PE ratio (Price to Earnings Ratio). It means its PE ratio is re-rated upwards ie. increases after a certain period of time.
• As far as quality vs valuation relationship of a stock is concerned :
  • Does valuation of a quality stock really affect its returns in long run?
  • Should you refrain yourself from buying quality stocks at premium valuations?
• To answer the above questions we look into the numbers of few quality stocks and analyse the significance of valuation parameters.

Let see which are those 4 High Quality Premium Valuation Stocks.

4 High Quality Premium Valuation Stocks

Nestle India

• Nestle has been in India for over a century and has grown along with the growth in the Indian economy.
• Average disposable income of Indians is in an upward spiral. It offers an advantage to the companies like Nestle as more disposable income means more consumer spending which in turn means more revenue for sectors like FMCG and Consumer Durables.
• Compounded Annual Growth (CAGR) of Sales, Profit and Share Price over the last 10 years are as follows :
  • Sales Growth 10-years CAGR = 10.07%
  • Profit Growth 10-years CAGR = 11.61%
  • Share Price Appreciation 10-years CAGR = 18.61%
• Along with the consistent top-line as well as bottom-line growth, the PE ratio of Nestle was consistently rising from 2009 till 2015 to almost 99.7 (Refer the above chart). After the issues with company’s flagship brand Maggi, the PE ratio came down drastically in 2016 to 58.06. Still the ratio was sustained around 50+ range. And then the valuation again started rising continuously as on today.
• This clearly indicates that Nestle India is enjoying a premium valuation on account of its strong fundamentals and decent future prospects.

Asian Paints

• Since 1967, Asian Paints has been a leader in Indian paint Industry. It is an undisputed king in the sector with more than 50% market share. The company is having very strong brand penetration across its target market.
• Compounded Annual Growth (CAGR) of Sales, Profit and Share Price over the last 10 years are as follows :
  • Sales Growth 10-years CAGR = 13.91%
  • Profit Growth 10-years CAGR = 18.44%
  • Share Price Appreciation 10-years CAGR = 26.82%
• Thus it is evident that the appreciation in share price of the company is a reflection of its sales and profit growth.
• Many a times inexperienced value investors gives much attention in buying stocks when at very low P/E multiples. Successful investors value quality over ratios.
• In 2015 PE of the stock rose by 35% to 55.6. The stock has almost always sold at a premium valuation. An investor who paid up for quality and bought the stock at PE 55 times earnings in 2015 still did very well. Because its premium valuation has been sustained as it is trading at 66 in 2019.
• Thus, Asian paints remains to be an attractive stock irrespective of its all- time premium valuations.

Pidilite Industries

• Since its inception in 1959, Pidilite Industries has been a pioneer in consumer and specialities chemicals in India. The company is having a diverse and ever-evolving product portfolio including – adhesives, sealants, waterproofing solutions and construction chemicals, industrial resins, polymers etc.
• Over the last 60 years, Pidilite is having virtually no competition from its peers. Its flagship brand – Fevicol is enjoying a strong monopoly in the segment.
• Compounded Annual Growth (CAGR) of Sales, Profit and Share Price over the last 10 years are as follows :
• Sales Growth 10-years CAGR = 13.55%
• Profit Growth 10-years CAGR = 23.75%
• Share Price Appreciation 10-years CAGR = 31.26%
• There has been a consistent rise in the valuation of the company over last 10 years and currently it is enjoying a premium valuation. Thus, Paying up for quality paid off very well for Pidilite’s long-term investors.

HDFC Bank

• The bank is engaged in providing a range of banking and financial services including retail banking, wholesale banking and treasury operations. With a sequential growth of its retail banking , the
• HDFC Bank is another name of the consistency in delivering the performance.
• Compounded Annual Growth (CAGR) of Sales, Profit and Share Price over the last 10 years are as follows :
• Sales Growth 10-years CAGR = 20.48%
• Profit Growth 10-years CAGR = 25.82%
• Share Price Appreciation 10-years CAGR = 31.98%
• Although lending in India has increased tremendously in the past decade on the grounds of faster loan approvals, India is still way behind developed economies.
• However, enhanced spending on infrastructure, speedy implementation of projects and continuation of reforms are expected to provide impetus to growth.
• All these factors suggest that India’s banking sector is assured for robust growth. The rapidly growing business would turn to banks for their credit needs.

Conclusion

• If a company has good fundamentals and decent future prospects, valuation does not play an imminent role in deciding returns of stock in long term.
• India has a class of high-quality businesses that will continue to prosper on account of the demographic position of the country.
• Regardless of the growth delivered over the last few decades, these businesses are still nowhere near saturation.
• Thus, paying up for these quality businesses, but not overpaying for them, should work out very well for long-term value investors.
• So, one should stop associating value investing with low P/E multiples. Now its a time to move towards buying high-quality businesses. One should not hesitate to pay up for quality.

How Much High Dividend Yield of Stocks Matters in Stock Selection?

Introduction

This article contains details about 4 high dividend yield stocks with positive returns over last 12 Months. Many a times retail investors select high dividend yield stocks without analyzing other important parameters like historical returns, revenue growth, profit growth and also the future earnings visibility of the business. Thus, investors should focus on quality of stocks rather than blindly following dividend yields.

4 High Dividend Yield Stocks

What is Dividend Yield?

• Companies distribute a portion of their profits as dividends, while keeping retained earnings aside to reinvest in the business. Dividends are paid out to the shareholders of a company.
• Dividend yield is the financial ratio that measures ratio the annual cash dividends paid out to shareholders relative to the current share price of the company. It measures the quantum of earnings in the form of total dividends that investors make by investing in that company.
• The formula for computing the dividend yield is :
  • Dividend Yield = (Cash Dividend per share / Share Price) * 100
• Example : Suppose a company with a share price of Rs.100 declares a dividend of Rs.10 per share. In that case, the dividend yield of the stock will be (10/100)*100 = 10%. 
• Many a times we come across dividend declared of 100%, 300%, even 1000% etc. However, this dividend is calculated on the face value of the company which the company declares during its Initial Public Offer (IPO).
• In short, dividend yield measures the amount of cash flow you’re getting back for each rupee you invest in an equity of the company.

High Dividend Yield Stocks with Negative 1-year Return

• From the above table, we can see the top 4 high dividend yield stocks with negative returns over last 1 year.
• In these stocks, a shareholder seems to get higher comparatively higher dividends. However, these stocks share prices are continuously falling over last 12 months.
• There was a great deterioration in the market capitalization of these stocks. So, we can say shareholders are getting the higher dividends with much greater capital erosion.
• After referring such negative returns over last 12 months, how much high dividend yield of stocks matters in stock selection?

Thus, we should go for stocks paying higher dividends and also giving positive returns over last 12 months. Lets see which are these stocks.

High Dividend Yield Stocks with Positive 1-year Return

Procter & Gamble Health Ltd

• The company is engaged in manufacturing and marketing of pharmaceuticals, bulk drugs, fine chemicals and pigments.
• Market Capitalization = Rs.7,183 Cr, Small Cap Company.
• P&G Health basically has a consumption driven business. So the company is having a good earnings visibility in the future also.

Esab India

• The company is engaged in the business of fabrication technology. Esab India is a world leader in the production of welding and cutting equipment and consumables. 
• Market Capitalization = Rs.1,917 Cr, Small Cap Company.
• In spite of being related to the manufacturing industry, the company has given almost 38% return over last 1 year.
• In terms of performance, 3-years sales growth is 14%, while 3-years profit growth is 24%.
• Current Price to earnings ratio is 30. Debt to Equity ratio is 0, debt-free company. Promoter holding is also high 73% which is also a positive sign.

Hindustan Petroleum Corporation Ltd (HPCL)

• The company is engaged, primarily in the business of refining of crude oil and marketing of petroleum products.
• Market Capitalization = Rs.44,221 Cr, Large Cap Company.
• HPCL is getting the advantage of divestment program. The positive cascading effect of government’s divestment target is going to support major oil marketing companies in India – HPCL, BPCL and IOC .
• PE ratio is 8.25, in spite of great return on equity (24%) and return on capital employed (21%). So we can say that the stock is currently trading at discounted valuation.

Rural Electrification Corporation Limited (REC)

• REC is engaged in financial services and activities-other Credit granting. The Company provides finance to power sector. It finances and promotes rural electrification projects all over the country.
• It provides financial assistance to State Electricity Boards, State Government Departments and Rural Electric Cooperatives for rural electrification projects as are sponsored by them
• Market Capitalization = Rs.28,231 Cr, Large Cap Company.
• The company is capable of generating consistent cash flow on account of government support. It is one of the PSU stocks in which a good positivity is seen in recent months.

Q2 FY20 Results Highlights of Aditya Birla Capital Ltd

Introduction

In this article, we are going to do Aditya Birla Capital Ltd (ABCL) stock analysis. Key business segments, Q2 FY20 results, shareholding pattern and the current valuation of the company are also analysed in detail.

Aditya Birla Capital Ltd – Stock Analysis

Company Profile

• Aditya Birla Capital Limited (ABCL) is a part of Aditya Birla Group.
• ABCL is the holding company for the financial services businesses of the Aditya Birla Group. (It was formerly known as Aditya Birla Financial Services Limited)
• The company is engaged across life insurance, asset management, NBFC, infrastructure project and structured finance, private equity, broking, wealth management and distribution, online money management, and general insurance advisory services. 

Key Business Segments

• Aditya Birla Capital Limited (ABCL) is one of the largest financial services players in India with presence across protection, investment, Financing and Advising business.
• The key business verticals of ABCL are :
• Lending :
  • NBFC : Aditya Birla Finance Ltd
  • Housing Finance : Aditya Birla Housing Finance Ltd
• Insurance :
  • Life Insurance : Aditya Birla Sun Life Insurance Ltd
  • Health Insurance : Aditya Birla Health Insurance Ltd
• Asset Management : Aditya Birla Sun Life AMC Ltd
• Here, NBFC and AMC are established businesses, HFC and Life Insurance are transformational businesses, while Health Insurance is an incubating business.
• Thus, ABCL is having a diversified business model like other financial entities like HDFC and Bajaj.

Aditya Birla Capital Ltd – Subsidiary Companies

• Aditya Birla Finance Ltd, Aditya Birla Housing Finance Ltd and Aditya Birla Insurance Brokers Ltd are fully owned subsidiaries of Aditya Birla Capital with 100% stake.
• While Aditya Birla Sun Life Insurance and Aditya Birla Sun Life AMC both are joint venture between Aditya Birla Group (51% stake) and Sun Life Financial Inc. Canada (49% stake).

Aditya Birla Capital – Q2 FY20 Results Highlights

• Gross Revenue
  • In Q2 FY20, the Gross Revenue is increased by 10.7% YoY to Rs.3,976 Cr from Rs.3,591 Cr in Q2 FY19. While the QoQ rise is 9% from Rs.3,646 Cr in last quarter.
• Operating Profit
  • In spite of 10.7% growth in the Gross revenue, operating profit has increased by 20.4% YoY. It indicates the improved efficiency resulting into the lower growth in operating expenses.
  • Operating profit was Rs.1483 Cr in Q2 FY20 from Rs.1232 Cr last year. However, the QoQ performance is poor giving negative growth of -5.5%. In spite of 9% QoQ rise in revenue, operating profit was lower on account of increased operating expenses in Q2 FY20.
  • Operating profit margin is also deteriorated to 37.29% in September 2019 quarter from 43.07% last quarter but it is improved YoY from 34.32% last year.
• Profit Before Tax (PBT)
  • PBT was increased just by 31% YoY from Rs.284 Cr to Rs.372 Cr in Q2 FY20. However, the sequential growth QoQ was negative almost -15%.
• Net Profit
  • On account of reduced tax from 41%-46% to 18%, the net profit increase by 37.6% YoY. PAT in Q2 FY20 was Rs.256 Cr.
  • Differed Tax Adjustment (DTA) was Rs.64.83 Cr.

Revenue QoQ Trend

There is very inconsistency in the revenue. We can say the revenues are consistently inconsistent past few quarters.

Revenue Mix

• The revenue mix is shown in above column chart. In Q2 FY20, Life Insurance, NBFC, Housing Finance and Asset Management were having 42%, 36%, 8% and 7% contributions respectively in the Gross Revenue.
• Life Insurance sector was the highest revenue offering sector amongst the other business segments.
• Asset Management business’s revenue % contribution is consistently decreasing YoY as well as QoQ.

Operating Profit & Operating Profit Margin QoQ Trend

Operating Profit of ABCL is increasing sequentially from last few quarters. However, the for the recent quarter the increasing trend of operating profit has affected due to the high operating expenses in the September 2019. Owing to the same, the operating profit as well as margin (%) has came down QoQ.

Aditya Birla Capital Ltd – Current Statistics & Valuation Update

• Debt to Equity Ratio = 5.52. The company is debt-burdened (very high debt). The interest coverage ratio is also very low 1.35. It is very negative sign for the company.
• The shareholding pattern on the company in September 2019 quarter with % stake of key shareholders is :
  1. Promoters = 72.70%
  2. FIIs = 2.8%
  3. Mutual Funds = 1.39%
  4. Other DIIs = 7.09%
  5. Public = 16.02%
• The lower stake of institutional investors like FII and DII indicates that they not very confident about the future earnings visibility and growth potential of the company for the long-term.

Valuation

• The current Price to Earnings ratio (19) is much lower than its historical average PE ratio(35.4). It is mainly because of the continuous falling trend in the share price of the company.
• The stock was trading at Rs.237 when listed, but today the share price has fell almost 65%. The stock is currently trading at Rs.82.

Who Will Save Vodafone Idea & Airtel?

Introduction

Vodafone Idea and Airtel have reported biggest losses of Rs.50,921 Cr and Rs.23,045 Cr respectively on account of Adjusted Gross Revenue (AGR) provisions to make to the Department of telecommunications (DoT).

Vodafone Idea – Airtel Report Biggest Losses in Q2 FY20

Adjusted Gross Revenue (AGR) Rule

• Telecom providers in India pay the Department of Telecommunications (DoT) nearly 3-5% of their adjusted gross revenue (AGR) in usage charges for spectrum or airwaves and 8% of AGR as licence fees.
• The DoT and the mobile carriers had been at odds over the definition of AGR. The companies argue that AGR should comprise just revenue accrued from core services, while the DoT says AGR should include all revenue.
• The Supreme Court backed the government’s stance that non-core items should be included while calculating AGR. Licensee fee and SUC are calculated on the basis of AGR
• Last month, on October 24, 2019, the Supreme Court upheld the DoT’s view on AGR, that wireless carriers pay Rs.92,000 Cr in overdue levies and interest.
• Vodafone Idea and rival Bharti Airtel, two of India’s three main mobile carriers, will have to pay a bulk of this state demand.
• The Telecom industry as a whole faces dues worth over Rs 1.33 Lakh Cr in licensee fee, spectrum usage charge (SUC), penalties and interest.

Vodafone Idea Ltd (VIL)

• The company reported a net loss of Rs.50,921 Cr, the biggest ever loss in corporate India’s history, due to outstanding payment on account of Adjusted Gross Revenue (AGR) provisions.
• Vodafone Idea accounted for the estimated liability of Rs. 27,610 Cr related to licence fee and Rs.16,540 Cr related to spectrum usage charges up to September 30, 2019.
• The company has made a provisioning of Rs.30,774 Cr.
• Last year September 2018, VIL made net loss of Rs.4,974 Cr.
• VIL’s gross debt as of September 30, 2019, stood at Rs.1.17 Lakh Cr, including a deferred spectrum payment obligations due to the government of Rs. 89,170 crore, but excluding lease liabilities

Airtel

• Bharti Airtel posted a loss of Rs.23,045 Cr for the quarter due to a Rs.28,450 Cr provision towards AGR dues.
• Last year September 2018, Bharti Airtel made net profit of Rs.1,19 Cr.
• Relatively, Bharti is better placed, which runs operations in South Asia and Africa, its Indian revenue rose 3% year-on-year to Rs. 15,361 Cr.
• But its operating cash flow will be close to Rs 20,000 Cr. If they now have to pay the AGR dues of around Rs.30,000 Cr, then everything will be gone.
• They will not have any cash left to survive in the business. No bank will finance this kind of obligations.

Conclusion

• Both telecom players are cash-starved and find themselves unable to pay dues in full. The doors are closed for them, as Vodafone’s parents have refused to infuse money. Moreover, borrowing such a large amount will not be easy for either of them.
• The Management of both the firms have expressed a material uncertainty, whereby it may be unable to realise its assets and discharge its liabilities in the normal course of business.
• Accordingly it may cast significant doubt on the group’s ability to continue as a going concern.