As an investment strategy, growth at a reasonable price (GARP) combines growth and value investing. It zeroes in on those companies that have maintained consistent growth, while ignoring ones with high valuations. As underlined by the legendary manager of Fidelity, Peter Lynch, one of those who brought GARP investing to the limelight, 'The trick is not to learn to trust your gut feelings, but rather to discipline yourself to ignore them. Stand by your stocks as long as the fundamental story of the company hasn't changed.'
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The emphasis is on companies having a relative margin of safety. Value investors do not believe that the market is efficient and hence, it is possible to find undervalued stocks.
Based on the principles of the GARP strategy, we ran specific filters that we considered to be appropriate for large-cap stocks. These were:
- Large-cap stocks
- EPS (Quarterly) - YoY Growth > 10%
- EPS - One-Yr & Three-Yr growth > 10%
- Price to Earnings < 18
- PEG less than One (Current PE/three-year TTM eps growth)
- ROE in each of the last three-Yr > 15%
- Debt to equity < one
Indian Oil Corporation
This public sector enterprise is involved in refining, transporting and marketing petroleum products. Over the years, it has made its presence in the hydrocarbon value chain. The company went upstream with oil and gas exploration and downstream into petrochemicals. In addition, it diversified into natural gas and alternative energy sources.
The company owns 11 of India's 23 refineries, boasting a combined refining capacity of 80.70 million metric tonnes per annum, which accounts for 33 per cent of the domestic refining capacity. Last year, it rolled out auto fuel supplies of BS-VI compliant grade. When it comes to pipelines, IndianOil operates a network of 13, 400 km of cross-country pipelines for the transportation of crude oil, refined petroleum products and natural gas. Also, the company runs vehicle and aviation fuel stations. It has earmarked an investment of 30,000 crore for its petrochemicals business. The company also boasts of a 200-megawatt portfolio of wind and solar power capacity, which it intends to expand further.
In terms of its financials, the company's gross refining margins stood at $5.41 per barrel in FY19 as against $8.49 in FY18, reporting a 36 per cent decline year-on-year. Besides, it saw a substantial increase in debt levels, which stood at Rs 92,711 crore as on March 2019, up from Rs 62,141.49 crore as on March 2018. It was mainly because of unpaid dues from the government, coupled with a rise in capex and poor performance of its petrochemicals business this year, as its profit before tax fell 20 per cent for this year.
The company's net profit for FY19, on the other hand, fell 21 per cent, mainly on account of foreign exchange losses and lower inventory gains. The company is currently trading at a PE of eight times, which is lower than its five-year median of 12 times.
Tech Mahindra
Starting its journey as an outsourcing agent for British Telecom through a joint venture back in 1986, Tech Mahindra has come a long way with its presence in over 90 countries. Under the umbrella of 21-billion-dollar Mahindra Group, Tech Mahindra has diversified in IT outsourcing services, next-generation IT solutions, business process services and platform services, catering to a wide range of clients.
As per Q3FY19, over 40 per cent of its business comes from the communications space. The company has already carved a niche for itself in this space, with its clientele comprising some major global service providers in the sector. The manufacturing sector contributes another 20 per cent to its top line. Most of its businesses come from the US, which contributed 47 per cent to its revenue. Europe is its second largest contributor (29 per cent).
Cash equivalents on the books as on March 18 stood at Rs 6,500 crore. The company announced a buyback of shares worth Rs 1,956 crore, which is expected to reduce cash on the books and reduce equity by 2.1%. It is also a more tax-efficient way to increase the return for investors.
In terms of its financials, contingent liabilities at 69 per cent of the net worth as on March 2018, are a concern. Nevertheless, the company's TTM earnings have seen a steady rise year-on-year with a 3 year CAGR of 12 per cent. Its operating margins have continuously increased for the last seven quarters from 13.84% in June 2017 to 18.24 in March 2019.
There are some headwinds on its way, with further stringent visa-related regulations being a major one, as the company's local onsite workforce is comparatively less. Besides, currency fluctuations pose a threat to its overall business. Its stock is currently trading at 17 times, which is in line with its peers and its five-year median PE.
Disclosure: The intent of the article is not to recommend any specific stocks. If you wish to invest in any of the above-mentioned securities, please do thorough research.