The markets have just witnessed one of the biggest gains in its history, thanks to the recent corporate rate tax cut. Not only has this rally provided a much-needed relief to investors but has also given them a reason to cheer. Furthermore, this rally has also sent some of the most trusted blue-chip stocks up again, leaving investors in a dilemma over where to invest.
To help you, we have filtered out three blue-chip companies having strong fundamentals, robust business models and also trading at reasonable valuations as compared to their five-year earnings growth. Belonging to different industries, all three companies have demonstrated a steady track record with a long operational history.
- Mid and small caps
- Debt to equity: 0 to 2
- Interest coverage ratio: more than 2
- Return on equity five-year average of more than 20 per cent
- EPS - five-year growth of more than 20 per cent
- Five-year price-earnings to growth (PEG): zero to 1.5
- Last twelve-month EPS growth should be positive
Godrej Consumer Products
Part of the 122-year-old Godrej Group, Godrej Consumer is a well-diversified consumer company with a key focus on three product divisions (hair care, home insecticides, hair care and personal wash) and three geographies (Asia, Africa and Latin America). Apart from the diversified product portfolio, the company also boasts a diversified geographic presence with India contributing just 54 per cent to its revenue while no-product category contributing more than 32 per cent to its revenues in FY19.
Godrej Consumer is the number one player in India and Sub-Saharan Africa in hair colour, number one in insecticides with a market share of 50 per cent both in both India and Indonesia, with brands like Goodknight and Hit and a leader in the air-care segment in both India and Indonesia. Its 100-year-old soap division also includes well-known brands like Godrej Number 1 and Cinthol in India, with a market share of around 12 per cent.
This leadership position has also translated into a strong bargaining power for the company, which is reflected in its negative working capital cycle, robust cash flows and consistent dividend payouts. The company has also shifted its focus towards its three key markets and as a part of that strategy, it sold its UK business in 2018. However, in the last three years, its sales and profits have not witnessed any meaningful growth because of a slowdown in the home insecticides segment as a result of customers moving towards illegal incense sticks to kill mosquitoes. However, the government has recently banned such illegal incense sticks and the company has come up with its own legal version.
This slowdown has also led to a fall of around 25 per cent in its stock price in the last one year, resulting in its price to earnings falling to around 46 times - close to its five-year median of around 43 times.
Founded in 1984 by Chandrakant Gogri, along with his two other friends and younger brother, the company has maintained its focus on niche speciality chemicals, with special emphasis on research and development. This niche focus has enabled the company to gain a global leadership position in benzene-based derivatives, with a global market share of 25-40 per cent and domestic market share of 70-90 per cent. It primarily operates in speciality chemicals (used in agrochemicals, printing inks, aircraft, paints & coatings, automobiles, electronic products, rubber chemicals) and pharmaceuticals (manufactures active pharmaceutical ingredients used in medicines), which contributed 84 per cent and 16 per cent, respectively, to its revenues in FY19.
The company recently received a 20-year supply contract from a speciality chemical conglomerate for a key speciality chemical intermediate worth Rs 10,000 crore. It also received another 10-year supply contract of Rs 4,900 crore for a key herbicide intermediate. The presence of long-term contracts and the closure of polluting industries in China reinforce long-term visibility for the company.
It also caters to more than 200 products, with a global as well as domestic client base of more than 400 and 700 customers, respectively, which de-risk it from dependence on a particular customer. Further, its ability to pass on the increased cost of crude oil - which is its key raw material - cushions its profitability from any volatility in crude oil. However, lower margins in its pharma segment, its high dependence on short-term borrowings, the risk of an accident because of the hazardous nature of business and the government focus on curtailing pollution are the potential risk factors.
In the last five years, its return on equity (ROE) has never fallen below 20 per cent in any year and stood at 23 per cent in FY19. With the recent demerger of its low-return home care segment, ROE is expected to improve further. The stock has also compounded its investors' wealth at a rate of 41 per cent in the last five years and currently, trades at a price to earnings of 27 times as against a five-year median of 22 times.
Founded in 1964 by Suresh Krishna with a team of just eight people, which now stands at more than 8000, Sundram Fasteners is a part of the TVS group. Involved in manufacturing fasteners, oil pumps, water pumps, radiator caps and other components used in gears, clutch primarily for automotive and industrial use, the company started with producing just 450 tonnes of fasteners in 1964 and the volume has now reached 80,000 tonnes. It derives more than 90 per cent of its revenues from the automotive segment, with fasteners accounting for a large part of its revenue.
Driven by the culture of staying faithful towards its employees and shareholders, the company has never faced any labour strike in its over 50-year operating history. On the other hand, it has rewarded its shareholders with consistent and increasing dividends. Over the years, it has diversified its operations in multiple products and countries, including China and the United Kingdom. In FY19, exports contributed more than 34 per cent to its total revenues. In the last five years, the company has witnessed a rise in its margins on the back of its focus on cost control and favourable product mix.
However, 30 per cent of its portfolio will be impacted if there is a sudden shift towards electric vehicles, which is a potential risk for the company. Besides, the ongoing slowdown in the automobile sector has also started impacting profitability. Its visionary founder, Suresh Krishna, has now retired from the company, passing on his responsibilities to her daughter Arathi Krishna (who has been associated with the company for more than 10 years). However, he still remains as a director and chairman of the company.
Over the years, Sundram has been a consistent dividend-paying company, with the return on equity standing at more than 25 per cent in FY19. It has also compounded its investors' wealth at a rate of more than 25 per cent over the last five years. Currently, it trades at a price to earnings of 23 times as against its five-year median of 26 times.