Indian stocks: three long-term winners the market has missed

I have a simple investment philosophy: buy good businesses run by competent and honest people, and buy them at a price that leaves enough of a margin of safety for mistakes or bad luck. I try to buy companies that other people are not looking at. That is where I find bargains and an adequate margin of safety. This process tends to lead me away from big stocks.

As a result, Fidelity Asian Values has most of its capital deployed in small companies (those with a market capitalisation of up to £5bn); stocks above that threshold only make up about 20% of the trust’s holdings. The trust also has a value bias given my focus on companies that are mispriced, either because they are yet to be discovered by investors or are currently undervalued owing to near-term concerns.

With value-investing out of favour, the current market offers unprecedented opportunities to invest in good companies at competitive prices, while demanding patience in the near-term. Several stocks in our portfolio, despite delivering good operating performances and being undervalued, have not appreciated, as a narrow group of stocks in a few sectors have carried the market.

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But our stocks’ long-term prospects remain promising. If investors can find businesses capable of growing revenues while earning high returns on capital, and purchase them at an attractive price, they will go a long way towards attaining their financial objectives.

A profitable power player

Among the stocks being ignored by a market focusing on growth stocks is Power Grid Corporation of India (Mumbai: POWERGRID), one of our largest holdings. Power Grid is a high-quality, regulated monopoly for electricity transmission in India and has an enviable track record of growth, stability and return on equity (a key gauge of profitability). The stock is trading on less than eight times earnings, yields 6% and will grow profits this year, despite Covid-19. Irrespective of its strong fundamentals, the stock has been sold off owing to the pandemic.

Financial stocks you can bank on

Similarly, high-quality private-sector banks in India have underperformed so far this year and trade at appealing valuations. HDFC Bank (Mumbai: HDFCBANK), the largest private-sector bank in India, is one of the trust’s top holdings.

It has an impeccable track record of consistently delivering growth superior to the rest of the industry and has maintained the best asset quality among banks across several economic cycles. It has an excellent management team, strong systems and processes, and enjoys a low cost of funds. Another key holding, Axis Bank (Mumbai: AXISBANK) is India’s third-largest private sector bank. It has one of the best liability franchises in the country and only HDFC Bank boasts a lower cost of funds. Its ratio of current accounts to savings accounts (Casa), another way to gauge banks’ costs and profitability, is slightly better than HDFC Bank’s.

It also has one of the best returns on assets in the industry. These banks will come out of this challenging operating environment in a stronger position than their peers, particularly the inefficient government-owned banks, and gain market share in the process.