Finding quality in the worst of times

Finding quality in the worst of times

Probably for the first time in all of history, economies have come to a standstill. Country after country is announcing a lockdown because of the pandemic. Consequently, economies are under great stress, and the Indian economy is no exception. India will, in fact, witness one of the slowest GDP growths in decades in this financial year. Amidst this backdrop and such uncertainties, investors need to make sure that they stay with the right quality stocks.

The below article talks about companies that have managed to deliver some value to shareholders, and have also given three years of ROE greater than 15 percent. Moreover, these companies have not just run their operations effectively but have also grown their earnings per share by more than 20 percent over the last three years, year on year, without incurring any losses.

Endurance Technologies

The lockdown has had some severe medium-term impacts on the auto sector. Using individual vehicles because of not wanting to space will likely become a normal thing in the near future, which can then lead to a rise in the number of auto sales. And this promises well for this auto ancillary company.

Endurance Technologies manufactures aluminum dry casting, suspension, transmission as well as braking system parts for 2W, 3W and 4W OEMs (original equipment manufacturer). In fact, it is one of the largest players in India in its field.

The fact that Anurag Jain, the promoter of the company, is related to the Bajaj Family has also helped since Bajaj is one of the closest customers of the company.

The company has a strong presence in India and Europe and has managed to grow its revenue by 7% over the last three years, until December 2019. At the same time, its net profit grew by 23 %, as a result of falling input costs and tight fixed cost control. Additionally, the company boasts of having a reasonably strong balance sheet with net debt to equity of 0.03. Moreover, it does not even foresee CAPEX in the near term.

Further, electronic vehicles do not threaten the company in the longer run, as only its clutch business will be affected, which accounts for just eight percent of its India revenue. Over the past year, the stock has halved. Currently, the stock is trading at a PE of 13.5 as compared to the three-year median of 37.0.

Indian IT companies have definitely been hit hard because of the economic slowdown. But when things do get back to normal; LTTS, which is a mid-tier IT firm in the engineering research and development domain, will surely be able to bounce back gracefully. Even currently, the company is braving the situation smartly, having allowed 90 percent of its employees to work from home for the time being. The company has promised growth and development for quite some time now, and though right now it is not apt to predict the various changes that the lockdown will bring in, it is likely that transportation and plant engineering segments will be negatively affected. The company’s prime business now is to offset this impact.

The company has a really strong balance sheet and has 51 of the top 100 global R&D spenders as its clients. LTTS also had net cash of INR 208 crores as of December 2019. In just nine months till December 2019, the company generated free cash of INR 423 crores and during the last three years till December 2019, it managed to grow its revenue by 19 percent YoY. At the same time, net profit grew by 22 percent.

The company improved margins as most of the work was done offsite, and LTTS has delivered more than 30 percent ROE consistently.

However, in the near future, the company will most probably witness slow-paced revenue growth, as a result of clients delaying their discretionary expenses and visa restrictions in the US taking place because of rising domestic unemployment. However, in the long run, LTTS will easily be able to strengthen its relationships with its clients as even clients choose to offshore more R&D services to cut down on costs.

Over the past year, the stock has corrected by more than 30 percent. Currently, it trades at a PE of 15 as compared to its three-year median of 23