In the backdrop of global economic issues, ET Wealth identified these four companies that have continued to do good overseas business and remained resilient to global developments. They show positive net foreign exchange earnings over five years.
Getty ImagesSuch companies have stable overseas businesses and can resist turbulent global developments/
The spillover effect between global and domestic markets have a significant bearing on a nation’s economic growth. The spillover effect can be defined as the impact certain events in one economy has on another economy. For example, a consumption slowdown in the US negatively impacts countries that export a major share of their production to the US. On the other hand, a slowdown in China leads to a supply chain disruption for the world’s producers, as China is a major supplier of raw materials.
Over the past few years, the world has seen US-China trade tensions, credit tightening in China, economic upheaval in Argentina and Turkey, the build up to Brexit and a slowdown in some big emerging economies including India. According to IMF’s October 2019 World Economic Outlook report, the volume of global trade in the first half of 2019 saw the slowest growth for any six-month period since 2012. However, it expects a modest recovery in global trade growth, projected at 3.2 % in 2020 and 3.75% thereafter.
Of 403 companies in the BSE500 index, for which net forex earnings data are available, over 59% have reported negative forex earnings in 2018-19. Net forex earnings is total inflows in foreign currency minus total outflows in foreign currency. Inflows include export revenue, technology transfer fees, dividends and interest earnings. Outflows include raw materials, spare imports, capital outflows, royalty and loan repayment. In the backdrop of issues the global economy is experiencing, we tried to identify companies that have continued to do good overseas business and remained resilient to global developments.
Star performers despite global turbulence These companies reported positive net foreign exchange earnings over five years.
PE and RoE(%) are Bloomberg’s 12-month blended forward estimates. Current price as on 5 Nov. Source: ACE Equity & Bloomberg. *Dolat Capital estimates for 2019-20.
Data for the past five years, starting 2014-15, for 638 companies with market cap greater than Rs 500 crore were analysed. Only those companies that reported positive net forex earnings in all of the past five years were included. Moreover, companies where y-o-y growth rate of net forex earnings was positive in the defined time frame were filtered out. We found 32 such companies. These have also delivered marketbeating returns across time frames.
The average 2, 3, 4 and 5-year returns of these 32 companies were 13.95% (31 companies), 45.1% (30 companies), 100.3% (28 companies) and 193.1% (28 companies) respectively. The number of companies with share price data available in the respective time frames is mentioned in brackets.
Comparatively, BSE 500 delivered 5.7%, 28.9%, 43.5% and 47.05% returns in the given time. All returns are absolute and point to point, with 30 October the latest date. Let us look at four companies (out of 32) that are covered by a minimum of five Bloomberg analysts and with a one-year forward price potential of more than 10%.
Aurobindo Pharma This pharma company exports to over 150 countries and derives more than 90% of its revenue from international operations. According to a JP Morgan report, the uncertainty after the company received US FDA’s Form 483 will remain an overhang in the near term. However, the current stock price barely factors in the EPS rate and imparts no value to the Sandoz deal, growth in ex-oral solid revenue, approval from other OSD facilities and growth from ex-US revenue and hence provides a good buy opportunity. The research house believes the stock price performance over the next year will be supported by earnings visibility.
NIIT The company offers multi-disciplinary learning management and training delivery solutions in over 30 countries. The company reported strong operating performance in the September quarter. Dolat Capital is bullish on the company due to large deals ramp up and operating leverage gains that will improve the revenue momentum in its corporate lending business. The brokerage house expects cash yields to improve in 2019-20 and 2020-21.
Sonata Software This tech firm provides IT solutions to the retail, manufacturing and distribution, travel and software industries. Reliance Securities is bullish on the stock due to Sonata’s differentiated business model, focus on IP and platforms, high dividend yield, quality balance sheet, high RoE, and no equity dilution for several years.
Hexaware Technologies This IT company with 33 global offices is engaged in computer programming, consultancy, software development and business process management. A report by Maybank Kim Eng expects 16-17% revenue growth (USD) for the next two years driven by acquisitions and organic growth. The company’s revenue growth is backed by large contracts and its industry targeted strategies are playing out.
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