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Aug 14, 2023

5 Beaten Down Growth Stocks that Have Fallen Out of Favor. How Long Before They Bounce Back?

Despite inflation, rising interest rates, and the recently solved debt ceiling crisis, the stock market has had a solid 2023. The Sensex touched a record high of 63,588 on 21 June 2023. Given the

Despite inflation, rising interest rates, and the recently solved debt ceiling crisis, the stock market has had a solid 2023. The Sensex touched a record high of 63,588 on 21 June 2023.

Given the market's robust performance, investors are looking for bargains in a rising market.

One effective strategy is identifying stocks that have experienced significant declines from their all-time highs.

However, it is not enough to solely focus on discounted prices.

Finding businesses that possess outstanding qualities, such as a competitive advantage and ample growth prospects, is also essential.

With that framework in mind, here are five beaten-down growth stocks for your watchlist.

First on the list is Aarti Industries.

Aarti Industries is one of India's leading manufacturers ofspeciality chemicalsand pharmaceuticals.

The company has a diversified basket of products and has a monopoly in manufacturing several chemicals. It also manufactures active pharmaceutical ingredients (API), intermediates, and xanthine derivatives.

Over the past one year, shares of the company have fallen over 25%.

Up until December 2021, the share price of Aarti Industries was booming. But with the announcement of the Russia-Ukraine war, the dream run of Aarti industries came to an end.

Due to rising crude oil prices and disruptions in the supply chain, raw material costs increased. This directly impacted the profit margins of the company.

For the March 2023 quarter, the company reported lower-than-expected quarterly results. While the revenue for the quarter jumped 15% YoY to ₹16.6 bn, the net profit grew marginally by 2% YoY to ₹1.5 bn.

In the last three years, Aarti Industries' revenue has grown at a steady CAGR of 19.7%, driven by export growth. Its net profit jumped 33.7% due to the low cost of production during the same period.

Going forward, the capacity expansion across product lines, diversified revenue profile, and low cost of manufacturing is expected to drive the revenue and margins of the company.

Second, on the list is Shankar Lal Rampal.

Shankar Lal Rampal Dye-Chem is a small-cap company that operates in the chemical industry. The company is a leading trader, exporter, importer, and supplier of phosphoric acid, hydrogen peroxide, citric acid monohydrate, paraffin wax, sulphur dyes, and refined glycerin in India.

In the last year, shares of the company have corrected more than 24%.

This can be attributed to several factors such as high energy costs, rising freight expenses, and skyrocketing raw material prices that exerted pressure on the margins.

Additionally, a global decline in demand for dyes, influenced by an economic slowdown, further impacted Shankar Lal Rampal.

For the March 2023 quarter, the company’s revenue declined 4.7% YoY to ₹877 m, while net profit came in lower by 83.8% YoY at ₹10.9 m.

In the last three years, the company’s revenue and net profit grew at CAGR (compound annual growth rate) of 31.8% and 115%, respectively. This was due to the higher demand for chemicals in the domestic and global markets.

Going forward, capacity expansion and diversification of the product portfolio will drive the company's growth.

Further, it is also set to benefit from the growth in the Indian Chemical sector due to the China plus one strategy.

Third on the list is Mphasis.

Mphasis is a global information technology services company specialising in application development, maintenance services, infrastructure outsourcing services, and business process outsourcing (BPO) solutions.

The company's core servicing sectors include BFSI, technology and media, and logistics and transportation.

Over the past one year, shares of the company have fallen over 19%.

This can be attributed to the challenging conditions faced by the Indian IT sector in both 2022 and 2023. High attrition rates were a major concern for IT companies in 2022. 2023 brought a fresh set of problems characterised by significant uncertainty, as mentioned in the earnings call transcripts of top IT companies.

Mphasis, like other companies in the sector, faced pressure due to industry-wide challenges.

The company relies heavily on revenue from the US market. Consequently, with the reduction in IT spending in the US, it is facing lower demand.

As a result, the company's performance in Q4 failed to impress investors. In the March 2023 quarter, the company reported a 2.6% YoY increase in revenue, amounting to ₹34 bn. Net profit saw a 3.3% YoY rise, reaching ₹4.1 bn. These improvements were due to domestic demand.

Looking ahead, the company intends to expand its recently launched AI services and increase its global market share. This strategic direction aims to capitalise on emerging opportunities and enhance the company's growth prospects.

Fourth on the list is Voltas.

Voltas, a household name, offers engineering solutions primarily in the air-conditioning market.

Apart from catering to the retail market with its branded cooling products like air-conditioners and refrigerators, it offers MEP (mechanical, electrical, and plumbing) services, and supplies engineering equipment.

Over the past year, shares of Voltas have fallen over 19%.

This fall can be attributed to continuous FII selling.

FIIs have been selling their stake in the stock consistently since March 2022. From 26% in March 2022, the total FII holding has dropped to 20.6% in March 2023.

For the March 2023 quarter, the company reported a 10.7% YoY rise in revenue at ₹29.6 bn. The the net profit for the quarter declined 21.7% YoY to ₹1.4 bn. The profits were impacted due to provisions made on delayed collection in the international project business.

In the last five years, the company's revenue has grown at a CAGR of 8.5% due to value growth. The net profit, however, fell by a CAGR of 36.3% due to a rise in commodity prices.

The prices of key inputs such as aluminium, steel, copper, and high-density polyethene, have grown exponentially, leading to a fall in the margins.

In its latest investor presentation, the company announced its plans to launch a range of products with enhanced features and quality. It also plans to manufacture more value-added products to improve margins.

Apart from this, the Tata Group company is investing around ₹3.5 billion (bn) to ₹5 bn in the next 18 months to increase its manufacturing capacity to 5 m units.

Last on the list is CarTrade Tech.

CarTrade Tech is a multi-channel auto platform with a presence across vehicle types and value-added services.

The platform connects new and used automobile customers, vehicle dealers, vehicle OEMs, and other businesses to buy and sell different types of vehicles.

Since its debut on Dalal Street, the company's shares have been under significant pressure, losing approximately 75% of their value from the issue price.

Out of the past 23 months, the stock has only experienced positive gains in five months. It has never traded above its initial public offering (IPO) price since the market debut by over 15%.

One of the primary reasons for this downfall is the increase in interest rates, which has raised concerns about the business model of start-ups. This, in turn, has triggered a heavy sell-off in new-age tech stocks like CarTrade Tech.

Continuous selling by mutual funds has also added pressure on the stock. Mutual funds have significantly reduced their stake in the company over the past five quarters, decreasing from 4% in March 2022 to 2.3% in March 2023.

For the March 2023 quarter, the company reported a revenue of ₹1.2 bn, up 19% YoY. The net profit for the quarter came in at ₹174.9 m against the net loss of ₹213.9 m a year back due to an increase in unique customers.

Over the past three years, the company's revenue has shown marginal growth at a CAGR of 1.6%, while the net profit has experienced a decline of 57%. This decline can be attributed to an increase in operating expenses.

Looking ahead, the company is focused on delivering enhanced value to its customers, aiming to differentiate its products from those of its competitors.

Investing in beaten-down growth stocks can offer compelling opportunities for investors. These stocks, which have experienced a decline in their share prices, often due to temporary setbacks or market pessimism, can provide significant upside potential.

By purchasing these stocks at a lower price, investors can benefit from future gains as the stock recovers and regains its growth trajectory.

Additionally, investing in beaten-down growth stocks aligns with a value investing strategy, allowing investors to acquire shares at a discount to their intrinsic value.

These stocks often represent companies with solid fundamentals, competitive advantages, and promising growth prospects, presenting long-term growth opportunities.

However, despite the positive odds, it is essential to conduct thorough research and analysis before investing. Investors must consider factors such as the company's industry outlook, catalysts for growth, and overall portfolio diversification.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.

This article is syndicated from Equitymaster.com