Even if we are at the start of a long-drawn global economic downturn, these companies are focused on the domestic market where growth is significant and may not be captured by the government headline data on GDP growth. They have strong cash flows, high return on net worth and are available fairly low-priced relative to their growth prospects Analysis by ML Research Desk
These are confusing times. A few months ago, the world was worrying that the US faces a 1930s kind of Depression. The market was assuming that we were headed for a worst-case scenario. The media was full of gloom and doom stories. Governments all over the world became desperate to get growth going by pumping hundreds of billions of dollars into the system. Many experts still doubt whether this increased spending will turn economies around, citing the case of Japan which has spent more than a decade propping up banks and companies on low interest rates. There are fears that all this money infusion would lead to hyperinflation. Then, from 9th March, in a synchronised manner, markets all over the world have rocketed off their lows. Some stocks are up 40%-60% in a month, a return that one can only dream of over two years. This is because a lot of money can be made when things go from very gloomy to a little less gloomy, as has happened. There is widespread belief that the market lows are well behind us. Some well-regarded US investors have declared that this is the opportunity of a lifetime. In India, Rakesh Jhunjhunwala, the smart big bull, thinks that the market is headed even higher. Nobody is talking of the Sensex hitting 6,500 any more. Well, what if things are not as bad as everyone was assuming a few months ago? If so, are stocks worth buying now, especially for the long term? Are we entering a period when buying the dips would be a good idea? It would mean braving media reports on the sinking Japanese economy, wobbly global banks and rising unemployment rates in China, all releasing deflationary forces. There are enough data sets that point to the underlying firmness of the Indian economy. At the macro level, growth of non-food credit in March was as high as last year’s; cement prices are strong; steel companies are producing to their full capacity; and there is no slowdown in the purchase of air-conditioners, cars and two-wheelers. The only visible slowdown is in real estate, malls and job growth. Besides, as the past three months have proved, there is too much emphasis in India on where the US economy and the US market may be headed. The Indian growth story has turned out to be materially different and we would see the much-maligned word ‘decoupling’ resurfacing. The short point is: if the economy is, indeed, not getting worse, we do have a fantastic opportunity to buy stocks. The low expectations (of all but a handful of intrepid speculators), steady growth and low equity valuations can deliver a powerful upside over the next year. Remember that this approach has little to do with the actual market bottom. When the market goes down, your stocks will go down again but the key thing to judge is whether the market dip would have anything to do with the high-quality stocks you buy now. Maybe the market decline would be another chance to buy. The key to successful investing is not about buying the best companies and forgetting about them. It is also about not trying to buy low-value stocks or cheap stocks. It is buying shares of good companies when they trade at a significant discount to their growth potential. Here are nine such stocks. All of them have simple businesses, strong balance sheets and shareholder-friendly managements. Two fertiliser companies that are available at really cheap valuations are Coromandel Fertilisers (CFL) and Deepak Fertilisers and Petrochemicals Corporation (DFPCL). Look at Coromandel Fertilisers, a Murugappa group company. The kind of growth that this fertiliser manufacturer has recorded over the past five quarters is phenomenal. Its sales grew by 216% over the past three quarters while operating profit was up 149%. Coromandel earns an average operating margin of 12%. The stock currently trades at Rs107 at which its market-cap is just 0.13 times its three-quarter average sales and 1.36 times its operating profit. CFL is expected to end FY09 with total sales of Rs11,000 crore and net profit of Rs680 crore. On an equity base of Rs27.98 crore, it is expected to deliver an EPS (earning per share) of Rs48.60 for FY09. CFL earns a return on equity (RoE) of 26% while its dividend yield stands at 3%. Deepak Fertilisers operates mainly in two segments: chemicals and agri-business. The chemicals division is one of the largest producers of methanol and various concentrations of nitric acid and ammonia in the country. The agri-business division manufactures nitrophosphatic fertiliser, which sells under the Mahadhan brand, and is marketed through a network of over 1,000 dealers. DFPCL has also diversified into specialty retailing through Ishanya – India’s first international design centre and specialty mall. Ishanya provides an active platform for architects and interior designers to showcase their art, craft and vision to a targeted audience and also serves retailers of interiors and exteriors products. Like other fertilisers and chemicals companies, DFPCL too has been recording excellent growth. Its operational income has been growing an average 53% over the past three quarters while its operating profit was up a solid 80% over the same period. DFPCL’s margins are better than those of Coromandel’s, averaging at 19%. It is slightly pricier than Coromandel. At the current price of Rs61, its market-cap is 0.37 times its three-quarter average sales and 2.01 times its operating profit. At present, DFPCL’s fertiliser plant is operating below capacity. The company’s initial claim for gas from the KG D6 fields was rejected on grounds that only the urea plants would initially get the gas. Once its demand for gas is met, its fertiliser division is likely to post improved results. It ended FY08 with total sales of Rs1,144 crore which is expected to go up to Rs1,450 crore for FY09. It has already reported a topline of Rs1,078 crore for the first nine months of this fiscal. DFPCL is likely to end the year with a net profit of Rs138 crore against the Rs109 crore it earned last year. At an expected EPS of Rs15.65 for FY09, the stock is quite cheap trading at 3.32 times its expected FY09 net profit. The capital goods sector is supposed to have been badly hit by the slowdown in projects and the credit crunch of last year. As a result, engineering companies, which had attracted enormous interest in 2003-07, were sold off savagely. Was this overdone? Elecon Engineering Co Ltd (EECL) is among the oldest and the largest material-handling equipment companies in India, mainly serving power projects and fertiliser plants. These are the two sectors where the impact of an economic slowdown is likely to be the least and, consequently, should help EECL to continue to grow at a decent pace. This is visible in the growth of its order book. At the end of December 2008, its order book stood at Rs1,800 crore as against Rs1,100 crore at the end of December 2007. Its sales have been rising by an average 34% over the past three quarters while its operating profit was up 28% over the same period. EECL earns an operating margin of 16%. For the nine months ended December 2008, the company’s net profit stood at Rs40.45 crore against Rs44.23 crore during the same period last year, despite a forex loss of Rs11 crore during this period. Declining metal prices will help EECL improve its operational performance. The stock is attractively priced for growth. EECL’s market-cap is 0.44 times its three-quarter average sales and 2.77 times its operating profit. Elecon’s RoE stands at 28% and its dividend yield is 4%. The company is expected to end FY09 with a topline of Rs940 crore and record a net profit of Rs62 crore. This translates into an EPS of Rs6.68 for FY09. It currently trades at just 4.50 times its FY09 expected earnings. Looks like a good growth story at a fairly low price. Hindustan Dorr-Oliver (HDOL), a 53% subsidiary of IVRCL Infrastructure & Projects Ltd, is another company on our list of low-priced stocks. Dorr-Oliver specialises in providing engineered solutions, technologies and installations in liquid-solid separation. This fits in well with IVRCL’s span of infrastructure work which includes water management, building roads, power projects, etc. Dorr-Oliver has recently bagged two orders in the minerals sector worth Rs66 crore from the Vedanta group. For the nine months ended December 2008, its revenue was Rs326 crore and it is expected to end the year with revenues of Rs460 crore. HDOL is on a clear growth path, given the strength of its order book. HDOL ended FY08 with a net profit of Rs23 crore. For the nine months of this FY, it has already earned Rs22 crore in profits and is likely to end the year with a net profit of Rs30 crore; FY10 could be even better. At its current price of Rs51, its market-cap is 0.42 times its three-quarter average sales and 3.61 times its operating profit. The stock is trading at 4.60 times its FY09(E) EPS. The company’s RoE stands at 15% but its dividend yield is on the lower side – just 1%. Another reasonably priced engineering stock is that of Thermax. Thermax provides engineering solutions in the energy and environment sectors and also offers services in heating, cooling, waste recovery, captive power genera-tion, water treatment & recycling, waste management and performance chemicals. The slowdown has had its impact on the company’s growth in the December quarter with sales and operating profit declining by 6% and 8%, respectively, over the corresponding period last year. But Thermax has managed to maintain its margins at a consistent level even during this period. On an average, its revenues have been rising by 2% over the past three quarters, while operating profit was up 1%. Thermax earns an average operating margin of 12%. As on 31 December 2008, its order book stood at Rs4,103 crore. Currently trading at Rs240, its market-cap is 0.93 times its three-quarter average annualised sales and 7.64 times its operating profit. Another engineering company which is worth betting on, thanks to its attractive valuation, is Voltamp Transformers. Voltamp services the needs of the power sector, with a total installed capacity of 9,000MVA, manufacturing oil-filled power and distribution transformers, resin-impregnated, dry-type transformers and cast-resin, dry-type transformers. Almost 90% of Voltamp’s turnover comes from project business through consultants such as Engineers India, Kvaerner Powergas India Pvt Ltd and Uhde India Ltd, while turnkey contractors such as ABB, Siemens and L&T source their requirements for switchyard package orders from Voltamp. Despite a slowdown in the December quarter, Voltamp’s revenue has been rising by an average 14% over the past three quarters. Softening of metal prices has improved its operating margins which averaged 24% over the past three quarters. Valuation is low. Currently trading at Rs420, its market-cap is 0.67 times its three-quarter average annualised sales and 2.81 times its operating profit. Voltamp is expanding its capacity from the current 9,000MVA to 13,000MVA through a greenfield project. The next stock on our list is a company that is India’s largest private sector shipping company with experience spanning five decades. Great Eastern Shipping Co Ltd currently trading at Rs203, has a market-cap which is 1.01 times its three-quarter average annualised sales and 2.19 times its operating profit. This makes it an attractively priced stock with sound fundamentals. Great Eastern’s business comprises two segments, viz., shipping and offshore services. The shipping business includes transportation of crude oil, petroleum products, gas and dry bulk commodities; on the offshore front, it provides services to oil companies in exploration and production, through Greatship (India) Ltd. Declining dry bulk freight rates and a lower movement of goods have been hurting shipping companies. Dry bulk rates, which were declining, have picked up since December but tanker freights have not, yet. Take a look at how the Baltic Dry Index, a measure of the bulk market sentiment, has done over the recent past. From an average of 11,793 in May 2008, the Index fell to a low of 663 in December 2008. From there on, the Index has improved, rising to 905 in January 2009 and shot up to 1,816 in February 2009. In mid-March 2009, the Index was trading at 1,900 – an indication of the gradual improvement in the movement of goods across the globe. This could spell better days for Great Eastern. As for the tanker market, VLCCs (very large crude carriers), which were earning an average $55,475 a day in October 2008 and around $45,000 a day in December 2008, fetched an average of $44,000 a day in January 2009 and $30,600 in February 2009. These are reported to have further collapsed to as low as $16,300 a day at the end of March 2009. Great Eastern operates in both segments and so the probability of balancing a lower realisation in one segment with higher capacity utilisation in the other looks brighter. As for now, its revenue has been rising by an average 25% over the past three quarters while its operating profit was up 22% over the same period. The company earns an average margin of 45%. One sector which is expected to weather the slowdown far better than others is the medium-sized pharma companies. The Indian pharma stocks, which had been lying low for most part of the bull run between 2003 and 2007, have been gaining pace steadily even as other sectors fell flat due to the economic gloom. Unichem Laboratories Ltd has been on the Indian pharma scene for nearly six decades. Unichem is primarily into formulations but also manufactures bulk actives. It has a presence across various therapeutic areas including gastro-intestinal, cardio-vasculars, diabetes, psychiatry, neurology, anti-bacterials, anti-infectives and pain management drugs. The company operates five manufacturing units across Maharashtra, Goa, Uttar Pradesh, Madhya Pradesh and Himachal Pradesh. The company has also expanded its research & development facility in Mumbai to focus on novel drug-delivery systems and developed approaches that do not infringe on patents for manufacturing products directed at the regulated markets. Unichem recently received the USFDA’s approval for marketing Topiramate tablets used for the treatment of epilepsy. Its sales have been growing at an average 15% over the past three quarters while operating profit was up 45% over the same period. Unlike others, Unichem has seen its operating profits improve in the December quarter over the corresponding year-ago period. It has maintained its margins at an average of 24%. Currently trading at Rs167, its market-cap is 0.89 times its three-quarter average annualised sales and 3.68 times its operating profit. Here is a company operating in a niche area. Gemini Communication Ltd is into networking, network security, LAN, WAN, e-governance, ITeS, IT strategy, IT consulting and wireless, particularly servicing small and mid-sized businesses. Gemini is among the top 10 networking companies in India and ushered in the use of radio frequency identification device (RFID) systems in the country. Operating through its 18 offices and 68 service locations, Gemini has close to 1,000 clients. On an average, Gemini’s revenue has been declining by 10% over the past three quarters. On the profitability front, however, it has been doing extremely well. Its operating profit has been rising by an average 29% over the past three quarters. This, of course, is partially due to a spike in profits registered for the quarter ended December 2007. Gemini’s main strength is its strong margin, an average of 36%. The company is de-merging its system integration business (enterprise convergence group, wireless & telecom and the 4S division) into a separate entity. According to the management, this will enable it to focus on clear lines of businesses. Gemini will retain the technical services division, PointRed Telecom (which is into wireless design & products) and the RFID business. All these are fast-growing segments with a tremendous growth potential. The stock currently trades at Rs19; its market-cap is 1.07 times its three-quarter average annualised sales and 3.01 times its operating profit. It enjoys an excellent RoE of 30%. The companies we have discussed here are growing, enjoy good margins and high returns. But there is no reason to go out and stock your portfolio with them right now. The runaway market of the past few weeks is not the start of a bull market. It is, in fact, a false rally. So, buy these stocks on correction; buy 20% on each decline. This strategy had worked well in late September 2008, when we had suggested a few stocks to be bought as the market fell sharply. Overall, even if the doomsayers turn out to be correct and we may be just at the start of a lengthy and severe global economic downturn, these companies are focused on the domestic market where growth is significant. They have strong cash flows and stable balance sheets and high return on net worth. Moreover, all these stocks are fairly low-priced relative to their growth prospects and, hence, their downside appears limited. And, if the economy manages to recover faster than the market expects, buyers at today’s prices will enjoy a pleasant surprise over the next few years – and beyond. Source : Latest Issue of Money life dated 7th May --~--~---------~--~----~------------~-------~--~----~ You received this message because you are subscribed to the Google Groups ""GLOBAL SPECULATORS"" group. 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