Mid and small caps have been under the hammer for the past one year, with both falling more than six per cent and 14 per cent, respectively. Undoubtedly, this would put investors in a bit of a dilemma over where to invest their money.
Against this backdrop, we can examine investors' behaviour by using the concept of loss aversion bias - an important part of behavioural finance. According to the concept, people prefer avoiding losses as compared to gaining the equivalent amount of money. This means that an investor would prefer not to lose Rs. 10 in anticipation of earning the same amount.
In the present situation, investors would definitely like to park their hard-earned money at a place where the chance of loss is lower. Large-cap stocks tend to be the best option, with the large-cap index growing by 8.5 per cent in the last one year.
However, when we started searching for quality large caps that are available cheap using our filters, we have found only one company was able to clear all the filters. The company has a proven record of rewarding its investors with high returns over the last ten years. Also, it has the potential to grow in the future as well.
Market cap more than 32,000 crore
Earnings yield more than five per cent
Z-score more than three, F-score equal to or more than seven, C-score less than four
PEG(P/E to growth) less than one
P/E to median P/E less than 1.5
Incorporated in 1998, it is promoted by GAIL, Oil & Natural Gas Corporation (ONGC), Indian Oil Corporation Limited (IOCL) and Bharat Petroleum Corporation Limited (BPCL), with each holding 12.5 per cent stake in the company. The company imports, re-gasifies and markets LNG (liquefied natural gas) in India. At present, it owns and operates two out of four LNG terminals in India. Initially, its Dahej plant had a production capacity of 15 MMTPA, which later increased to 17.5 MMTPA (million metric tonnes per annum) in June 2019. Its other terminal is located at Kochi, with a total installed capacity of five MMTPA. However, it is currently being utilised at close to 10 per cent of its total capacity owing to inadequate pipeline connectivity.
Over the last one year, the company's revenue has grown at a healthy pace even as profits were lower. This could be attributed to a decrease in LNG spot prices from $8.25 per mmbtu to $4.3 per mmbtu due to the revaluation of inventory. On the other hand, revenue growth was driven by higher capacity utilisation of the Dahej plant, which stood at 104 per cent. The newly-added capacity is expected to grow the company's revenue in the future. At present, it is planning to increase the plant's capacity to 19.5 mmtpa in the next 2-3 years.
On the other hand, the completion of the Kochi-Mangalore pipeline infrastructure (expected by September-October 2019) is likely to improve the utilisation at the Kochi terminal post, which will lead to an increased capacity utilisation of 25-30 per cent from a current level of 10 per cent.
The company also eyes international expansion in Bangladesh and Sri Lanka. On the domestic front, the demand for LNG is on the rise, with India's LNG imports growing by 5.6 per cent y-o-y for the period ending April-May 2019. All these factors are likely to pave the way for the company to grow steadily in the future.
In terms of financials, revenue grew 25.5 per cent in FY19, while its profit increased 5.7 per cent. Over the last three years, ROE has been well above 20 per cent. Also, the stock has compounded investor wealth at a rate of over 22 per cent compounded annually in the last five years. Currently, the stock trades close to its five-year median PE at 16.4x.
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.