A bet on a contrarian investment idea has the potential to deliver significant profits. Warren Buffet, for example, made a five-billion-dollar contrarian bet on Goldman Sachs during the 2008 banking crisis and within five years, earned a 62 per cent return on it. However, adopting a contrarian approach just to stay away from the herd can be equally damaging. Given this, we have identified three companies from the top 100 companies in India that lost more than 15 per cent in the last year, using the following filters:
- Average ROE over three years greater than 15 per cent
- Rise in TTM earnings of more than 20 per cent in the last year
- Fallen more than 15 per cent in the last one year
- Trading at a PE below five-year median PE
Involved in the manufacturing, purchase and sale of alcoholic beverages, this subsidiary of Diageo plc is the second largest spirits company in the world. Currently, it boasts 58 manufacturing facilities across India and sold 78.5 million cases in FY18.
The company has divided its products into two segments, namely the popular category and the prestige and above category. The popular category, which contributed 53 per cent to its total sale in FY18, comprises brands that cost Rs 350 or less per bottle. The prestige and above category, on the other hand, has a wide range of brands priced anywhere between Rs 400 and Rs 2000.
Over the years, the industry has experienced several headwinds on the back of demonetisation, the Supreme Court's judgement on banning sale and service of alcohol near national and state highways (later eased) and complete/partial prohibition in some states which were huge markets.
In terms of the financials of United Spirits, it has reported a set of muted results over the last few quarters, owing to an increase in input costs, a decline in volume growth in its popular category. Nevertheless, the prestige and above category has been gaining traction over the last four quarters. Debt levels have been coming down year-on-year, along with a rise in earnings and an improvement in working capital. The stock is currently trading at 51 times, which is under its median PE of 86 times but higher than its listed peers.
Under the umbrella of the Zydus group, which has its presence globally with a strong footprint in regulated and emerging markets, Cadila Healthcare was formed as a part of the restructuring process of Zydus. Today, it is the fourth largest pharmaceutical company in India, having a presence in generics and active pharmaceutical ingredients (APIs) to animal healthcare and consumer healthcare products. It has a strong domestic as well as global footprint across the United States, Europe and emerging markets like Latin America and Africa. The company does have an edge over its peers, owing to its diversified and large abbreviated new drug application (ANDA) pipeline and its controlled approach to R&D investments.
With 77 ANDA approvals in FY18 and another 23 as recent as of Q3 FY19, the company has been doing well in the US market, which contributes significantly to its exports and overall sales. The market share of several drugs in its portfolio increased and the company registered a y-o-y growth of 22 per cent in Q3 FY19. The company witnessed very minimal price erosion of their products, along with new launches, in the US market during the same period.
But this concentration on the US market comes with great risks, especially some of its products are yet to see daylight because of regulatory delays. Adding to this, the possibility of further price erosion for its products cannot be ruled out.
Coming to its financials, the company witnessed a substantial rise in debt - from Rs 2442 crore in FY16 to Rs 5406 crore in FY18, including Rs 2300 crore in foreign currency borrowings. In terms of TTM earnings and sales, the company registered a five-year CAGR of 14 per cent and 9 per cent, respectively. A correction in the stock has resulted in the company trading at 13 times, which is well below its median PE as well as most of its listed peers.
Being the second largest commercial vehicle manufacturer in India, this flagship company of the Hinduja Group commands a market share of 33 per cent. Backed by nine manufacturing plants, the company has a diversified product portfolio into low to high gross vehicle weight trucks, 16-80 seater buses, vehicles for defence and special applications and diesel engines for industrial, genset and marine applications. Besides, new launches in the electric variant of buses and pre-buying ahead of the implementation of BS VI are expected to boost volumes.
Headwinds in the auto industry have dented returns in quite a few stocks in the sector, with this company being no exception. In addition, several factors, including high crude oil price, the NBFC crisis, the new axle load norm and an increasing time lag in construction projects have decelerated growth in its truck and commercial vehicle segments. However, the government's policy of mandatory scrappage of trucks older than 15 to 20 years if announced, coupled with aggressive infrastructure spend, is expected to revive demand for heavy trucks, wherein the company has a leadership position.
In terms of financials, its debt levels increased substantially from Rs 11053 crore in FY16 to Rs 15791 crore in FY18, while its debt to equity ratio is currently standing at 2.15 times. On the other hand, working capital days have decreased, which was at negative 20 days in FY18, depicting the strong bargaining power of the company. Its ROCE was consistently above 15 per cent in the last three years despite high debt, which is another positive factor. The company is currently trading at a PE of 13 times, which is significantly lower than its five-year median of 31 times and has had a correction of more than 40 per cent in the last one year.
Disclosure: The intent of the article is not to recommend any specific stocks. If you wish to invest in any of the above-mentioned securities, please do thorough research.