"It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price." - Warren Buffett
With the volatility in Indian markets continuing on the back of worsening geopolitical tensions and stocks trading below their fair value, brokerage house Axis Securities believe that 'quality' is a promising theme under the current circumstances.
Quality stocks provide a flight to safety and lower volatility in the longer run. They usually have superior return ratios and lower earnings variability, which in turn, help them to perform consistently in all market cycles, explained the brokerage.
"In the longer run ‘Quality’ never goes out of fashion and we believe ‘Quality at a reasonable price’ offers greater comfort and provides superior long-term risk-reward in the current environment," added Axis Securities. They advise investors to take a quantitative approach to identify ‘Quality at a reasonable price’ theme in the NSE500 universe.
While the current geopolitical tensions will remain in focus as investors await a truce between the two nations, its impact may haunt the global growth for a while thus making it a good opportunity to buy 'quality' stocks.
It believes that the present macroeconomic developments are leading to volatility in all major asset classes including Equity, Debt, currency and Gold, and the volatility is here to stay for some time before it concludes in a concrete direction.
As per the brokerage, once the dust settles between the Russia- Ukraine tension, the market is expected to re-focus on earlier key events such as the inflation and central bank's view on the number of rate hikes in the current calendar year.
"Given the present context, Oil will be the dominating factor in the FED’s analysis of the prevailing situation. On the possibility of a cut in global growth, the FED may slow the pace of rate hiking. But we cannot rule out the possibility of an aggressive FED stance if it foresees a sharper pick-up in inflation. The wider view is that central banks' first focus will be more on controlling the inflationary effects rather than the growth effects," it highlighted.
Given the factors at hand, the brokerage maintains a Nifty target of 20,200 for 2022. It believes that the long-term story for the equity market is intact, as the favourable structure is emerging due to an increase in Capex spending which will enable banks to improve the credit growth. The earnings momentum would be the critical factor for the market performance, though it has been strong in the past few quarters and largely in line with expectations for the December quarter, added Axis Securities.
So choosing 'quality' stocks in this environment might be a challenge, hence the brokerage highlights 3 criteria to identify them.
1. High-quality score: High ROE, low EPS variability
2. High-Value score: Makes use of valuation ratios to rank the stocks that are attractively priced relative to the fundamentals (P/E, P/B, EV/EBITDA)
3. High Momentum Score: The stocks which are currently in an uptrend.
It also lists its top picks that fulfill these conditions. In the largecap space, it prefers Vedanta, Coal India, TCS, SBI and SAIL. For the midcap space, the brokerage likes Oil India, Persistent Systems, Canara Bank, Chola Investment and Dalmia Bharat. Its top picks in the smallcap space include Chambal Fertilisers, Redington India, Finolex Industries, Birlasoft and Gujarat Narmada Valley Fertilizers.