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Quest for blue-chip stocks

This large-cap company is able to tide over the crisis and currently trades at a PE of 25x as compared to its five-year median PE of 43x

Quest for blue-chip stocks

The Covid-19 pandemic and lockdown have cast a shadow on the economies across the world. While the past two months did not augur well for the markets, the future of oil is also going downhill and the demand for various products and services has come to a halt. Nevertheless, a silver lining during this dark time is the availability of quality stocks, which are being badly hammered, at throw-away prices.

Given this, we have looked for large-cap companies having well-established products and most importantly, the capability to get over this tide of uncertainty. During the process, we have used the following filters:

  • Large-cap companies
  • Debt to equity: zero to two
  • Interest coverage ratio: more than two
  • 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

And finally, we have come with only one company:

Godrej Consumer Products
Promoted by the Godrej Group, Godrej Consumer is a well-diversified company in the FMCG sector. This company has an extensive portfolio of well-established brands under its belts, with the likes of Goodknight, HIT, Ezee, Cinthol, Godrej Protekt, to name a few. Also, the company enjoys a diversified geographic presence, with its major presence in Indonesia (16 per cent), Africa (24 per cent) and India (54 per cent of revenues as of Dec 2019).

What actually has worked for the company in recent years is its 3-by-3 approach. Under this approach, the company is now targeting its expansion in three emerging markets (Asia, Africa and Latin America) across its three major product lines (home care, personal care and hair care).

With the ongoing COVID-19 pandemic changing consumer behaviour and increasing consumer concern about personal hygiene and protection, a new market is now emerging in the FMCG sector. Given this, the management is rethinking its product strategy and may launch new products in this segment. Godrej; however, already has hand-wash and hand-sanitizer products in its portfolio.

In terms of its financials, the company has a negative working cycle, which means the company receives cash for its products even before it pays its suppliers. This is because of its leadership position which has given the company high bargaining power. The company has also been able to retire some of its debt in the past few years and its debt-to-equity ratio stood at 0.25 times (as of September 2019).

Its stock has been out of favour, owing to the prolonged slowdown and the ongoing pandemic and has come down by more than 27 per cent over the last three months. The stock currently trades at a PE of just short of 25x as compared to its five-year median PE of 43x. This provides investors with an excellent opportunity to buy this stock.

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.