India Strategy : GARP stocks largely emanating from cyclical sectors - ICICI Securities
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Sustainable growth continues to be expensive despite correction – companies under our coverage universe that exhibit sustained growth in earnings continue to have high optimism embedded in their market price as indicated by our proprietary ‘market implied long term growth value’ framework (MILTGV). These companies are largely asset light and from consumption space (refer Table 2).
Industrials entering expensive sustainable growth club – a few stocks in capital goods and engineering space exhibiting sustainable growth attributes have outperformed in the recent past and moved up into the high optimism zone along with consumption as incremental growth emanates from investment cycle (refer Table 2).
Pockets of ‘growth at reasonable value’ (GARP) stocks are largely from financials, industrials, discretionary consumption and IT services. GARP stocks are screened on the basis of the following criteria:
* Sustainable growth criteria - stocks that have displayed sustained earnings growth (> nominal GDP growth) and not just base effects during recent times and are expected to do so going forward with RoE > ke (cost of equity)
* Avoid high optimism - MILTGV<70% (the lower the better)
* Eye on relative performance and earnings revision to avoid value traps
Fundamental attributes of GARP stocks (please refer Table 1 for the list of GARP stocks)
* Cyclical growth stocks with leveraged balance sheet - financials and industrials (infrastructure, capital goods). Financials are at the cusp of a bottom in the NPA cycle with overall credit growth remaining robust and industry credit recovering from a decadal down trend. On the other hand, a recovery in capex cycle is augmenting medium-term growth outlook of industrials involved in capital goods and infrastructure sectors.
* Cyclical growth stocks within consumer discretionary - auto OEMs
* Defensive stocks with moderate growth or mean-reversion in profitability – tobacco and IT
Key risk – Downgrade in growth expectations due to the ongoing global banking crisis and rapid quantitative tightening cycle last year especially for stocks exposed to global demand.
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