Markets have seen a mild correction in the last few weeks. However, it is important to emphasize that valuations are not exactly cheap, as the Sensex price to earnings ratio still remains near 18 times. However, if you are a long term investor, there are some excellent stocks to buy for the long term. In fact, we suggest that you should have long term perspective of at least 5-years. Here are a few stocks that you can buy if you have the patience to hold.
This stock tends to get stuck in a tight range and does not run-up as fast as many others from the A group. But, we believe that things could change dramatically in the next 5-years and that is for a number of reasons. We are bullish that Reliance Jio in the next two years, could corner a significant market share in the telecom space. The retail business, which has begun reporting profits at the operating levels, could also bolster profits. Not to mention the wonderful performance of the refinery business, which continues to be among the best in terms of gross refining margins across the world. The petchem business also continues to show record performance.
Financials of Reliance Industries
Reliance Industries has cash and cash equivalents as on 30th September 2016 at Rs 82,533 crore ($ 12.4 billion). That is staggering by any stretch of imagination. For the quarter ending Sept 30, 2016, the company reported a net profit of Rs 7,206 crores, resulting in an EPS of Rs 24.4. If you annualize the same, you can get an EPS of at least Rs 100 for the full year, which makes the stock price inexpensive at a p/e of slightly over 10. There is no other company in the Sensex which trades at such low p/e multiples.
Rationale for investment
The company is set to complete expansion in its traditional oil and gas and petrochemical businesses. The retail business is also set to flourish and grow. Reliance Digital is now the largest chain of electronics store. Reliance Brands launched two MUJI stores and entered into partnership with Dutch premium apparel brand Scotch n Soda. It already has a JV with Marks and Spencer. Raid expansion of Reliance Retail, Reliance Digital, Reliance Footprint and the jewelery business should augur well for the company. Reliance Jio will start contributing in the next few years and the product is already got off to a blazing start. We believe that in the next 5-years, the stock could generate superb returns. Hold Reliance Industries with a long-term perspective in mind.
This is one of the largest battery manufacturers in the country, with a strong presence in automotive and industrial led. It has a market share of more than 60 per cent and is one of the dominant players in the battery business. Today, it also manufactures inverter batteries, solar batteries, genset batteries, submarine batteries and Home UPS systems. The company had a fantastic performance for the quarter ending Sept 30, 2016, which we shall discuss further towards the end of the analysis. The stock is currently trading at Rs 293 on the NSE.
Positive triggers for the stock
There are a number of positive triggers for the stock of Exide Industries. The implementation of GST will benefit the company through cost savings and synergies. Apart from this, there has been a technology upgradation at the company of Rs 4.5 billion. This should bear fruit in the years to come for the company. The financial results of the company for the quarter ending Sept 30, 2016 were also good. We believe that a surge in automotive demand should be another big trigger for the stock.
We believe that the company can do an EPS of at least Rs 11 in FY 2016-17. If we apply a p/e multiple of 20 times, we should reach a stock price of Rs 220 at least. One also needs to value the insurance business, which can fetch at least 1.8 times the embedded value. There is a good potential for the stock price to rise in the medium to long term.
L G Balakrishnan and Bros
Like Exide, this is another dominant player in its line of business. The company has a market share of 70 per cent in direct supply to original equipment manufacturers in supply of drive chains. In the replacement market the company commands a market share of 70 per cent. The company is also the largest exporter of supply timings chains to the US. The company supplies to major Indian two-wheeler manufacturers like Bajaj Auto, Hero Motor Corp and TVS. A bulk of the sales goes to Bajaj Auto.
Reasons to invest
The company has recently commissioned a plant in Jalna to cater to the requirements of Bajaj Auto. this is expected to add to the bottomline of the company in the years to come. Another good feature is that the company has very low levels of debt. At the moment the debt to equity ratio is just 0.2. By FY 2017-18, we expect the EV/EBITDA to be 5.3 times and the EPS to be around Rs 60. Even, if you give a decent p/e of 17 times, the stock should trade at Rs 1000. The stock is trading at just 10 times, 1-year forward earnings and is certainly underpriced. Buy the stock, if you have a long term perspective in mind.
The article is not a solicitation to buy, sell in securities or other financial instruments. Greynium Information Technologies Pvt Ltd, its subsidiaries, associates and the author do not accept culpability for losses and/or damages arising based on information in this article. The author and his family do not own any shares in the above mentioned stocks.