Top 5 Beaten
Sep 26, 2023
Indian benchmark BSE Sensex has run up quite a bit in recent months. After touching its all-time high of 67,619 in July 2023, it currently trades at 65,400 levels.
In this bullish market, most stocks have climbed up the ladder, commanding rich valuations. However, there are some high-dividend paying stocks available at a bargain.
Undervalued stocks offer a margin of safety in their valuations. But high-dividend stocks that are undervalued can be a win-win investment. Not only do they have the potential to grow in value over time, but they also provide a steady stream of income.
It’s like a win-win situation if you play your cards right.
So, with that in mind, let’s look at 5 beaten-down dividend stocks that also look undervalued at the current valuations.
At the top of our list we have Fiem Industries.
Fiem is one of the leading manufacturers of automotive lighting, signalling equipment, and rear-view mirrors in India. Majority of its business comes from the two-wheeler domestic segment (95.7%).
Fiem exports automotive lighting to Honda Japan, Harley Davidson (USA & Thailand), and Kubota Japan (Tractors & Farm equipment), besides exporting to other OEMs in Austria, the UK, Germany, Thailand, Indonesia, and Vietnam.
In terms of clientele, Fiem supplies all major auto clients. Over the years, the company has developed a strong client roster of more than 50 OEMs, supplying to them since their inception.
The company rewards its shareholders well, boasting an average dividend yield of over 5% in the past 5 years.
Despite a long history of dividends, a leading market position, and an impressive clientele, the stock is trading close to its 5-year median Price to Earnings ratio (PE ratio) of 15.6x.
At 16.6x, Fiem is only 6% away from its long-term PE ratio, and 43% away from its higher PE of 23x in the past year.
Over the past 5 years, the company’s net sales and profits have grown at a CAGR of 8.4% and 21.6%, respectively.
The 5-year average return of capital employed (RoCE) and return on equity (RoE) stands at 18.9% and 14.4%, respectively.
However, in fiscal 2023, the total sales grew at a slower pace in comparison to fiscal 2022. But this does not dampen the company's growth prospects going forward.
Fiem is well-poised to grow, given the strong anticipated growth in the two-wheeler segment and the expansion of its product offerings.
It has entered into an agreement with Gogoro India to expand its product portfolio in the 2-wheeler EV segment.
As part of this agreement, Fiem will gradually indigenise the hub motor assembly and motor control units.
The deal with Gogoro India gives Fiem a foothold in the emerging EV market, boosting its growth prospects.
Next on our list is Bayer CropScience.
Bayer CropScience is engaged in the Agri Care business, which primarily includes manufacturing and distributing insecticides, fungicides, herbicides, and other agrochemical products and corn seeds.
In the agrichemical domain, the company offers an array of offerings that contribute to its strong market presence.
The company has been a dividend paymaster, with a 3-year average dividend yield of 2.5%.
The stock trades at a PE of 30.2x, a discount of 23% to its 5-year median PE of 37.4x and a discount of 80% to its PE of 54.9x in January 2022.
Coming to its Price to Book Value ratio (PBV), the stock trades at a P/BV multiple of 7.7x, a 5% discount to its 5-year median P/BV of 8.1x.
The company's patchy performance in recent quarters has caused its valuation to decline. This was due to inflationary raw material prices and supply chain challenges, which reduced operating margins and scared investors.
However, the June 2023 quarter is showing signs of a business turnaround. And its history of healthy profits supports this thesis.
The sales have grown at a CAGR of 14% in the last three years, while the net profit has grown at a CAGR of 21%.
The return ratios have also consistently increased. The RoE has increased to 28.9% in fiscal 2023 from 16.9% in fiscal 2019 while RoCE has risen to 38.8% from 24.4% over the same period.
While inflationary pressures will continue to affect the business in the near term, the company is confident of retaining its leading position and expanding on the back of new launches.
Moreover, India’s agrochemicals industry is expected to continue growing in double digits, primarily driven by strong exports and stable domestic demand.
Additionally, a large part of this growth also stems from the “China plus one" strategy of global players.
Fourth on our list is Ambika Cotton Mills.
Ambika Cotton manufactures premium quality compact and elitwist cotton yarn used in hosiery and weaving.
It is an established textile player in the international and domestic yarn market, with exports constituting over 60% of its revenues.
Ambika Cottom is well-poised to benefit from the growth in the textile segment, which comes from rising disposable income in the country and the low cost advantage in terms of skilled manpower.
The organised apparel segment is to grow at a compound annual growth rate (CAGR) of more than 13% over a ten-year period.
The business has been doing well in the past five years, with sales and profits growing at a CAGR of 7.7% and 12.9%, respectively.
The growth in profits have pushed the return ratios. The 5-year average RoCE and RoE stand at 21.7% and 15.4%. This phenomenal growth comes without any borrowing.
So it is no surprise that the stock has done well in the past few years. However, the returns have dwindled in the past few months.
The stock is trading at a PE multiple of 9 times, a premium of 2% to its 5-year median PE of 8.8 times. This is attributable to the drop in sales and profits in the preceding quarters over fiscal 2022.
Moreover, the Indian cotton textile industry, during the last year, has faced multiple challenges. The high price volatility and the higher absolute raw materials prices have dented the margins. The relative price differences compared to the international markets have led to a massive competitive disadvantage for most Indian textile players.
Apart from this, a demand slowdown due to geopolitical tensions and inflation in European and US economies has dented the profitability further.
#4 Gujarat State Fertilizers & Chemicals (GSFC)
Fourth on our list is Gujarat State Fertilizers & Chemicals.
Gujarat State Fertilizers & Chemicals, a government entity, manufactures various fertilizers and industrial products like plastics & synthetic rubbers and man-made fibres.
In FY23, GSFC declared a one-time special dividend of 6.3%. This was significantly higher than the company's average dividend yield of 2.1% over the past 5 years.
However, the company has a long history of paying dividends, and investors can expect the same going forward.
Irrespective of hefty dividends, the government entity's stock trades at a discount to its 5-year median PE of 7.9x. At 6.3x, Gujarat State Fertilizers & Chemicals is available at a 20% discount.
On a PBV basis, the stock is available at an 8% premium to its 5-year median PBV.
The drop in its valuation can be attributed to its erratic sales in recent quarters. Net sales have been falling since the December 2022 quarter, which was the highest-ever quarterly sales for the company.
Net profit has also declined, from ₹4.1 bn to ₹1.1 bn in the same period. Weak demand and higher raw material costs not only hurt profits but also made investors less confident in the company.
Despite this weakness, over the past few quarters, the business has done admirably well over the long-term.
The revenue and profits have grown at a 5-year CAGR of 13% and 22%, respectively. The 5-year average RoCE and RoE stand at 8.7% and 6.6%, respectively.
Gujarat State Fertilizers & Chemical seems confident of its future prospects, given the abating input costs and its massive capital outlay. The company expects to spend over ₹6 bn in expanding capacity this year. And ultimately, ₹40 bn in 2 phases.
The company is heavily reliant on government subsidies, as it is a fertilizer manufacturer. However, it is gradually planning to move away from fertilizers and focus on other chemicals which bodes well for long-term investors.
Last on our list is VST Industries.
VST Industries was incorporated in 1930 under the name Vazir Sultan Tobacco Company. The company manufactures and sells cigarettes and tobacco.
The company has been good to its investors, rewarding them with generous dividend payments. The company's 5-year average dividend yield is 3.6%.
However, hefty dividend payments have not piqued the interest of investors. The stock is trading at a PE of 16.6x, which is a 3% discount to its 5-year median PE of 17.2x.
The company's strong financials also reflect its sound business. While the revenue has grown at a 5-year CAGR of 7.1%, the net profits have grown at 10.1%. The 5-year average RoCE and RoE stand at 35% and 43% respectively.
So what explains the drop in valuations? There could be other factors responsible for that.
One factor could be the rise of ESG investing, which has created headwinds for tobacco stocks globally.
Tobacco companies are often seen as being harmful to society and the environment, and as a result, they are avoided by many ESG investors, including large institutional investors.
Another factor could be the risk of higher taxes. The incidence of taxes on cigarettes has more than tripled since 2012-13, raising concerns over future implications.
While these factors can continue to affect the valuations, the business prospects remain strong.
The company is confident of future growth through the launch of new products strategically designed to increase incremental market share and volume.
These are just a few examples of beaten-down dividend stocks that look undervalued right now.
Investors who are looking for a combination of income and growth potential may want to consider investing in high-dividend stocks that are trading at a discount.
But before you go about investing in any stock, it is important to do your own research and understand the risks involved.
No matter how great the prospects, you must consider your risk-bearing capacity and investment horizon.
Disclaimer:This article is for information purposes only. It is not a stock recommendation and should not be treated as such.
This article is syndicated from Equitymaster.com#4 Gujarat State Fertilizers & Chemicals (GSFC)