|Ashu Dutt, Financial Expert|
The current collapse in the stock market is because of a liquidity squeeze. It’s a case of too little money chasing too many assets. Consequently, such markets throw up opportunities to buy stocks at prices that are way below their real values.
But what is the real value of a business? Let’s take a hotel. Firstly, there is the cost of building a hotel. Then the brand must be created, and there’s also the downtime to get it running. If it costs Rs 500 crore and takes three years for a five-star hotel to be up and running, and a company with five such hotels is selling at Rs 500 crore, then the price will adjust itself at some point when people don’t need to sell their stocks because they require the money.
I have picked five stocks that, I believe, just don’t reflect the underlying reality of the business and have been pounded because of reasons that have little to do with their quality. In essence, these picks epitomise what will go on the buying lists of FIIs, pension funds, insurance companies and promoter buybacks.
Unitech: The stock fell more than 50% on 27 October 2008 to around Rs 31. At this price, Unitech would have been valued at around Rs 5,000 crore. This is preposterous. That’s because the company would be sitting with a land bank worth thousands of crores of rupees, not to speak of the many office towers, hotels, etc, that are leased out and earn a decent sum. When the dust settles, it makes perfect sense to invest in such a company.
Reliance Communication: The stock fell to Rs 149 on 27 October 2008. This would make its market capitalisation about Rs 30,000 crore. Compare this with the market capitalisation of Malaysia Telecom and you start wondering if the price is silly. At some point, it makes sense for a pan-Asian FII to either sell its holdings elsewhere and buy into Reliance Communication or, alternatively, for a global telecom player to buy into the company. At the end of the day, any new entrant will take at least 5-10 years to lay the kind of network that Reliance Communication already has.
Biocon: India’s premier biotech company trades at around Rs 900 crore. There’s a clear case for promoters to raise their stakes or for a global biotech or pharma company to pick up a stake. Even if its earnings per share were to fall to Rs 30 this year, we still have a stock at three times its earnings—and I’m not counting the milestone payments from its drug discovery pipeline.
Fame India: The company is a prime M&A target. With a market cap of Rs 57 crore, you have one of the country’s top five established multiplex chains. Imagine a new player trying to set up multiplexes. Firstly, it will take over six-to-seven years to create Fame’s network and will still not be at prime locations. Any media chain will look at buying this company out (if it is for sale). Such companies will be the targets of sustained buying by competitors or global investors at some point.
Pantaloon Retail: At around Rs 3,000 crore, buying into India’s largest retail franchise is limited to foreigners by the rules on foreign ownership in retail. Should the rules be relaxed, this is a stock that could find significant FII buying. Promoters could also increase their holdings as a falling stock price opens the door for a significant purchase by an insurance company.
Note: I have just shared my thoughts. This is not a solicitation to buy or sell any stock.