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Picking From The Lows

Rahul Oberoi/Money Today | Print Edition: August 2012

For an equity investor in search of a bargain, the best place to find stocks with potential is the 52-week low charts, at least in the present market.

After all, the list of stocks that have hit their year's low in the first quarter of the financial year includes such big names as Bank of Baroda, Punjab National Bank, Bharat Heavy Electricals, Reliance Industries, Crompton Greaves, GAIL, Oil and Natural Gas Corporation and Adani Enterprises. All these have been top favourites of the investor community at one point or the other.

ALSO READ: How to gain from stock inclusions in indices

Some of these stocks can still give good returns in the long run. However, there's a caveat: 52-week low does not mean the stock has bottomed out. Individual stocks could still fall due to specific company- or sector-related issues or the general market sentiment.

But how does one spot the better ones among the lot, which includes stocks such as Suzlon and Kwality Dairy, that have been shunned by the market due to their inherent weaknesses?

The market picture looks something like this. The favoured defensive sectors, ones that do well even in a slowdown-pharmaceutical, fast moving consumer goods, or FMCG, and information technology-seem to have run their course. Infrastructure and capital goods are gaining ground while banks continue to offer opportunities.

An analysis of BSE 500 stocks shows that 114 companies touched their 52-week low in the financial year till 4 July 2012. Out of these 114 stocks, 37 rose up to 10 per cent, 42 surged 10-20 per cent, 26 rose 20-30 per cent while the rest rose above 30 per cent after hitting their 52-week low.

Stocks which touched their 52-week low during April-June 2012


GAME OF FUNDAMENTALS
Do these stocks offer a good investment opportunity? In a market largely driven by sentiment, such a milestone could be an important trigger for short- to mid-term investment decisions.

Sanjeev Zarbade, vice president, private client group research, Kotak Securities, gives fundamental valuation view. "If a stock is at a 52-week low, there has to be a reason. One can only say that since the stock is available at a 52-week low, to that extent, the risk-reward ratio is better."

Expert speakOne must always look into the reasons why the stock has fallen to such a level.

Sandeep Nayak, chief executive officer, Centrum Broking, says, "It may not always be a good strategy to invest in a stock bouncing marginally from its 52-week low without considering other factors. The chances of a stock giving good returns after hitting a year's low are high provided the company's underlying business is strong and it does not face any structural issue in expanding sales."

The stock could have fallen because of general negative sentiment in the economy or due to weakness in financial and operational health of the company. The investor must, therefore, figure out where the stock is headed by digging into the company's profitability, operational efficiency, order book and cash flow.

Ajay Puri, president, LSI Financial Services, a boutique investment banking firm, says, "It is worthwhile to look at the turnover and profit growth of companies, expansion plans, market price visà-vis book value, earning per share and price to earning ratio and compare with the industry average."

You can also judge the market sentiment about a stock by looking at its put-to-call ratio. The ratio is calculated by dividing the put volume of a stock by its call volume.

A high ratio indicates more put-buying, a sign of negative sentiment. A lower ratio indicates more call-buying, a hint that the market is positive on the stock. The put to call ratio is probably the most widely used sentiment indicator.

"One also needs to see the trading volume," says Satish Menon, executive director, Geojit BNP Paribas Financial Services. Higher volume means better liquidity and order execution.

INVESTMENT OPTIONS
Out of 114 stocks at their year's low, we analyse those that have the potential to give good returns. These stocks were selected after stringent quality checks.

First, we removed stocks that had already risen 35 per cent or more after touching the 52-week-low mark, as any upside from here may be limited.

The list was shortened to 47 by selecting only those companies whose operating profits have been rising for the last three financial years. From this, we picked stocks on which market experts are bullish.

David Pezarkar, head of equities, Daiwa Asset Management says, "In the current market, a bottom-up stock-specific strategy will be more rewarding than the sectorfocused one."

Hindalco Industries:
The company reported standalone operating profit of Rs 1,025 crore for the quarter ended March 2012 as against Rs 1,020 crore a year ago. Net profit was Rs 640 crore as against Rs 708 crore in the same quarter in 2011. Market experts said this was better than expected.

"Hindalco is trading at 6.3 multiple of 2012-13 expected earnings and at six times 2013-14 expected earnings. This is cheap compared to global peers. It can touch Rs 179 over one year," says Menon of Geojit BNP Paribas Financial Services. On 4 July, it was at Rs 125.50. It touched its 52-week low of Rs 105.35 on 18 May.

The performance of the stock hinges on recovery in aluminum prices and timely execution of projects.

Any sharp rise in coal prices may also affect performance.

Bank of Baroda:
The stock of Bank of Baroda touched its 52-week low of Rs 615 on 15 May. After that, it rose and was at Rs 732.50 on 29 June.

According to a Prabhudas Lilladher report issued in May 2012, the management of the bank has maintained its guidance of 1.2-1.4 per cent slippage or bad loans. The report said the strategy of no bulk infrastructure loans would be a big differentiator over the next two-three years.

Expert SpeakWith valuation of 0.85x 2012-13 book value in line with that of Bank of India and Punjab National Bank, all asset-quality risks have been factored in the stock price. The stock can touch Rs 900 in the next few quarters.

Petronet LNG:
With demand for natural gas growing, the company is planning to set up its third liquefied natural gas (LNG) terminal at Gangavaram port in Andhra Pradesh with a capacity of 5 million tonnes per annum (mtpa) at a cost of Rs 4,500 crore.

According to market experts, the demand for imported regassified LNG will increase from 33 mmscmd in 2010-11 to 81 mmscmd in 2013-14. Domestic supply, they say, will fall far short of this, necessitating huge imports.

Dhananjay Sinha, co-head, research, Emkay Global Financial Services, says, "With demand and supply extremely skewed, we expect Petronet's volume to grow at 7 per cent compounded annual growth rate (CAGR) from 10.7 mtpa in 2011-12 to 12.4 mtpa in 2013-14."

The stock hit its 52-week low of Rs 122.25 on 18 May. It rose after that and was at Rs 144.70 on 28 June. On 4 July, it was trading at a P/E of 10.52, compared to the industry average of 12.01.

"The stock can touch Rs 194 in the next four quarters as the current valuation captures marketing margin concerns. It is attractive at 8.5 times 2013-14 expected earning per share," says Sinha.

Rallis India:
Rallis India makes and sells pesticides, nutrients and seeds. It also sells insecticides, fungicides, and herbicides.

Expert SpeakThe company has the second-largest market share of 13 per cent in India. It owns seven out of India's top 12 brands in the category. It earned more than 75 per cent of its 2010-11 revenue from domestic operations, mostly through sale of pesticides.

It has a good distribution network that covers 80 per cent of India's districts. Rallis recently added manufacturing capacity by setting up a plant in Dahej (annual capacity 5,000 million tonnes) as a special economic zone (SEZ) to mainly cater to the international market.

"We expect this plant to scale up over the next one-two years and drive growth for the international business. Rallis should also get benefit from tax and other sops that SEZs get. The industry outlook, too, is bright as the crop protection market in India is growing at 10-12 per cent per annum." says Prabhakar of Anand Rathi.

The plant will be exempt from income tax and excise duty in the first five years of operations.

"The Dahej plant will help the company boost both top line and bottom line. We forecast earning per share to grow at a CAGR of 25 per cent between 2011-12 and 2013-14. We believe that the stock should trade at 17-18 times 2012-13 price to earning with a target of Rs 168," said Prabhakar. On 4 July, it was at Rs 139.65.

It had touched its 52-week low of Rs 111.55 on 27 April.

Muthoot Finance:
After the 60 per cent cap on loan-to-value (LTV) ratio imposed by the Reserve Bank of India, the business model of gold loan companies will have to undergo a change. This will put bigger players like Muthoot Finance on a strong footing by reducing non-performing assets (NPAs).

"There will be a dip in growth rate in the short- to medium-term but we believe that the demand for gold loans is robust. In addition, the cap on LTV will sharply reduce NPAs. The company will also benefit from a cut in interest rates in 2012-13," says Vinay Khattar of Edelweiss Securities.

In 2011-12, Muthoot Finance registered a net profit of Rs 892 crore, up 81 per cent from Rs 494 crore in 2010-11. On 4 July, it was trading at a PE of 5.80, while the industry PE was 11.28.

At Rs 139 on 4 July, the stock was trading at 1.8x price-to-book value. "Due to revival of growth in the second half of the year and low valuations, there is high chance of the stock touching Rs 175 in the next 12 months," says Taher Badshah, senior vice president and co-head, equities, Motilal Oswal AMC.

Cox & Kings:
Cox & Kings, a travel company, booked net sales of Rs 295.87 crore in 2011-12, up 26 per cent from Rs 235.66 crore in 2010-11. The company's operating profit has grown at 25 per cent CAGR in the last three financial years. The growth in net profit has also been healthy. In 2011-12, the company registered a net profit of Rs 77.68 crore as against Rs 76.72 crore and Rs 50 crore in 2010-11 and 2009-10, respectively.

The stock hit its 52-week low on 15 June. However, the market is optimistic about the future.

Prayesh Jain, assistant vice president, research, IIFL, says, "The stock can jump on the back of robust outbound tourism potential from India. By the end of the financial year, we see the stock at Rs 190."

Expert SpeakOn 5 July, it was at Rs 134.95. Cox & Kings is a direct bet on the fast-growing India outbound market. Out of around 20 per cent of the 13.6 million outbound travellers who bought a package in 2011, the company's share was 50 per cent.

"We forecast India outbound revenue CAGR of 22 per cent between 2011-12 and 2013-14," says Jain.

Mahindra and Mahindra:
The automobile industry is feeling the heat of higher interest rates, input costs and fuel prices. M&M, however, is in a better position due to a number of reasons.

As Alex Mathews, head of research, Geojit BNP Paribas Financial Services, says: "Despite slowdown in the industry, the company is on track with many product launches planned for 2012-13. Sales at the farm equipment division may revive if the monsoon is normal."

The automotive business margins have improved due to better cost management. The return on equity is 25.81 per cent and the operating margin is 15.47 per cent. The company has also been managing its working capital well, say experts.

"The stock is trading at a PE of 13.5, which offers a good long-term investment opportunity," says Mathews. On 4 July, it was trading at Rs 718.60.

TIME TO STAY AWAY

Since August 2011, the rupee has fallen 25 per cent against the dollar. The general view in the market is that it's better to be cautious on companies and sectors that have huge debt burdens, for instance real estate and power utilities. Alongside, businesses that have exposure to the euro zone and depend on imported raw materials are prone to foreign exchange risk.

Expert SpeakBrijesh Parnami, chief executive officer, distribution, Destimoney Enterprises, says, "Our country imports construction material, heavy machinery and even some cement. Considering the way the rupee is depreciating, things have worsened for the real estate industry. The high cost of imports has drastically increased the cost of real estate projects."

Menon of Geojit BNP Paribas believes that investors shoud avoid companies which have foreign currency convertible bond, or FCCB, repayment obligations. FCCB is a convertible bond issued in a currency different than the issuer's domestic currency. Vinay Khattar, head of research, retail capital markets, Edelweiss Securities, says, "Investors should stay away from the global economy-linked sectors."

Also, avoid sectors impacted by government policies. These include telecom and infrastructure. Between 2 April and 4 July, the CNX Realty index slipped 2.55 per cent to 237. Likewise, the CNX Infrastructure index fell 2.5 per cent to 2,484.

On telecom, AK Prabhakar, senior vice president, equity research, Anand Rathi, says, "Lack of clarity on 2G and 3G policies has put pressure on financials of telecom companies. The only revenue growth source is value-added services. However, Indian consumers are still not ready to pay extra for these services."

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