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The current market turbulence is a good time to pick mid caps at low valuations
The people of Greece have voted against the austerity measures imposed on them. No party got majority in the election held on 6 May 2012. Fresh election would be held on 17 June 2012. This time around, the electorate could give a clear mandate to a socialistic government, which would be inclined to spend. The global markets are worried about such development. Greece has been given two options: to accept the tough conditions set by the European Union (EU) and the International Monetary Fund for debt bailout or exit EU. Grexit, a recent term coined indicating possible exit of Greece from the EU, is the buzz word in financial markets. Worse, depositors are withdrawing euro-dominated savings from Greek banks. Spain, another EU member, reported a surge in borrowing cost at a bond auction mid May 2012, with yield touching 5%. It has slipped into recession once again. The EU turbulence is expected to remain for the next few years, with variation in intensity. With these developments, the US dollar is emerging as a safe haven. Other assets are drifting southwards, be it gold, commodities or equities. The domestic market, meanwhile, is confused. High inflation and high interest rates continue to hamper economic growth. Reforms have come to a grinding halt. Thus, there is no growth push to the economy. Instead, populist measures are being taken. Look at the instructions issued by the prime minister to Coal India to sign fuel-supply agreements (FSAs) with power producers. Penal provision for failure to mandatorily supply 80% of its output have been fixed at a mere 0.01%. The original penal provision was at around 10%-40%. A few power producers have signed the FSAs, which are meaningless. Thus, trouble continues for the power industry due to non-availability of coal. Besides. the Indian rupee is under pressure. On 21 May 2012, it breached the crucial psychological level of 55 per US dollar. This is a historic low for the domestic currency. Despite several administrative tweaking and market intervention by the Reserve Bank of India, the currency remains under pressure. Fiscal deficit and current account deficit continue to make life difficult for the central bank. The rupee needs long-term measures that would encourage exports and reduce imports to curb trade deficit. Subsidised petroleum products like diesel, petrol and gas keeps the import bill inflated. This, in turn, adversely impacts the governments finances as it is reluctant to pass on the price rise to end-consumers, fearing backlash, or to reduce taxes on petroleum products owing to the poor fiscal state of affairs. In short, the situation is unlikely to change in the short to medium term. Foreign institutional investors (FIIs) have turned jittery due to the General AntiAvoidance Rule (GAAR) introduced in the Union Budget 2012-13 and later postponed by one year on pressure from market participants. GAAR proposes to tax entities in tax havens such as Mauritius with a letterbox presence. After emerging net buyers with net investment in equities of Rs 43950 crore between January and May 2012, FIIs net sold equities worth Rs 1109 crore in April 2012, but have net invested Rs 416 crore in May 2012 till 17 May. Finance minister Pranab Mukherjee has already dropped hints of difficult days ahead by talking about austerity measures. What these austerity measures will be is a different issue. The fact is all is not well with the domestic economy. Brand India is under cloud, with developments like write-offs by Norways Telenor post Supreme Court cancelling all the 2G licences issued in 2008. If history is any evidence, such turbulent times are good for long-term investment in equities. Investors can pick quality assets
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available at dirt cheap valuations. They should use the current challenging times for cherry picking. Capital Market has made an attempt to spot mid-cap stocks that have seen a sharp erosion in valuations. For this, companies with market capitalisation between Rs 500 crore and Rs 10000 crore were selected. Only those in the business for over the two decades were picked. Stocks to have reported over 50% correction from their five-year peaks were chosen. As additional filters, companies trading close to or below their book values (BVs) were taken into account. At the end, there were 85 mid caps (see table: Beaten down) From these 85 mid caps, 15 were selected for further analysis. While shortlisting these stocks, a variety of factors were taken into consideration such as market share in their respective businesses, quantum of correction, valuation, and financial track record. For instance, Great Eastern Shipping was picked because for its strong financials and better standard of corporate governance. Despite the ongoing 2G-related probe, Unitech has been considered due to the ruthless correction the stock has witnessed despite its assets. Bajaj Hindusthan and Essel Propack feature for the market share they enjoy in their business segments. Among the several mid-cap stocks that are in trouble and facing bear assault is Rolta India. The stock has declined by around 81% from its five-year high of Rs 390. It is available at 63% of its BV. Its price to earning (P/E) based on trailing 12 months (TTM) ended 31 March 2012 stood at 4.2 and dividend yield 4.7% based on dividend paid (35%) in year ended 30 June 2011. Rolta is a market leader in the geospatial information system (GIS) business. Several software biggies have attempted to penetrate this segment but have failed to even challenge Rolta. The firm has 4,000 employees and operates through several subsidiaries in international markets. It is focusing on ramping up its Internet Protocol-driven revenue. Rolta is confident of achieving a 12% bottomline growth without considering marked-to-market provisions in the year ending 30 June 2012. Formed in 1984 and part of the Essel group, Essel Propack is the worlds biggest manufacturer of plastic laminated tubes, with a market share of 33%. The company achieved a milestone by producing five
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and 67% in FY 2009. It ordered three trailing suction hopper dredgers of 5,500 cum capacity each in FY2011. The vessels are scheduled for delivery in November 2012, May 2013 and October 2014. Like a Phoenix, India Cement has emerged from ashes in the past. Reeling under a pile of debt, the company in 2003 opted for corporate debt restructuring and emerged profitable in FY 2005. With capacity of 14 tonnes, it is the biggest player in south India, with seven plants spread over Tamil Nadu and Andhra Pradesh. India Cements 50-MW captive power plant (CPP) at Sankarnagar, Tamil Nadu, commenced operation in the quarter ended 31 March 2012. Another 50-MW thermal CPP in Andhra Pradesh is likely to be commissioned by March 2013. Also, it has invested US$ 20 million in captive coal mine in Indonesia, which is expected to be operational by the second quarter of FY 2013. India Cement is the owner of Chennai Super Kings, a cricket team in the Indian Premier League. Since 1899, CESC is the sole distributor of electricity within an area of 567 sq km of Kolkata and Howrah, serving 2.5 million consumers. The company has four thermal power plants generating 1,225 MW of power: Budge Budge (750 MW), Southern Generating Station (135 MW), Titagarh Generating Station (240 MW), and New Cossipore Generating Station (100 MW). About 80% of its power requirement is met through own plants and remaining 20% comes from third-party producers. Around 50% of coal required for production is sourced from captive mines. CESCs transmission and distribution assets consists of 474-km circuit of transmission lines, 85 distribution stations, 3,837 km circuit of high-tension lines, and 9,867-km circuit of low tension lines. Sintex Industries is into three business segments of building material (49% contribution to revenue in FY2011), custom molding (41%), and textiles (10%). The firm manufactures building material and composites at its 16 plants. This mid-cap stock has forayed into overseas market through acquisitions. To expand its custommolding business, it acquired four companies in 2007 including Nief Plastics (France), Wausaukee Composites (US), Nero Plastics (US), and Bright Autoplast (India). Sintex Industriess monolithic and prefabs business derives 90% and 70% of
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141.6, the dividend yield works out to 8.5%. It reported 44.3% rise in net sales and and 97.1% in profit in TTM ended 31 December 2011. Nava Bharat Ventures has diversified business operations with main focus on power, ferro alloys and sugar. It has power generation capacity of 237 MW in Andhra Pradesh and Orissa. The company is among the leading ferro alloy producers in the country, with capacity of about 1,25,000 tonnes of manganese and 75,000 tonnes of chrome alloy. Also, Nava Bharat Ventures has a 3.500-tcd sugar plant. It is in the process of setting up a 150-MW power plant at Paloncha, Andhra Pradesh. In the overseas market, the company has presence in Zambia (mining and power generation) and Laos (hydro-electric power project). Nava Bharat Ventures is also exploring Zimbabwe and South Africa for business opportunities. A few words of caution for investors. It is necessary to unearth the reasons for the correction in share prices of these companies on best-effort basis. It could be due to industry- or company-specific reasons. For instance, why is Rolta subject to a bear assault despite its strong positioning in the GIS segment? The key reason is the companys foreign currency convertible bonds (FCCBs) that are due for redemption in June 2012. The depreciation of the rupee against the US dollar has added to Roltas woes, making redemption of FCCBs that much expensive. The rupee touched on all-time low of Rs 55 in May 2012. Earlier, too, when the rupee was under pressure in December 2011, the stock was hammered ruthlessly in the trading ring. However, in a positive development, it recently tied up funding of US$ 135 million through external commercial borrowings to redeem FCCBs due in June 2012. Sintex Industriess business in FY2012 was severely impacted by slowdown in orders from the government and global recession, which led to underutilisation of capacities. A recessionary economic environment in the EU has hit its custommolding business. Besides a high quantum of debt on the balance sheet in case of several stocks including Unitech and Punj Lloyd, even contingent liabilities and corporate governance are issues in a few cases. But one needs to keep in mind the
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Beaten down
Stocks
Select mid caps trading near their five-year lows due to industry- and company-specific reasons
COMPANY CMP (Rs) M-CAP 52-WK 52-WK 5-YR TTM TTM NET CHG IN (Rs cr) HIGH (Rs) LOW (Rs) HIGH PRICE ENDED SALES TTM SALES (Rs) (LATEST) (Rs cr) (%)
174.4 64.06 37.5 364.4 236.95 350 48 305.25 262.8 118.5 246.45 166.9 144.25 195 204 600.9 197.5 199 864 66.95 725 702.15 132.65 59 86 32.6 134.8 54 86.1 107 158 87.4 107.7 52.5 124 47.55 414.95 35.4 200.4 65.7 240 543.5 86.05 23.35 17.5 186.3 137.05 187.05 23.65 183 141 62.1 158 73 50.15 50.2 129.5 324.45 78.25 116.65 625 32.7 468.95 413 63.25 37.5 50 15.8 63.6 21 42 38.25 116.5 58.75 70.65 14.8 38.8 25.05 260 15.9 86.7 26.85 166.05 210 526 337.39 43.55 715 490.05 1356.1 80.7 572 609 333 462.4 1070 390 307.5 508.5 5555 284.5 424 2880 167.3 1535 1849.95 211.86 105.8 343 101.5 245.95 133.5 128.5 845 275 184.7 231 129.29 299.95 70 884 139.45 398.9 163.5 2364.25 899.95 201203 201203 201203 201203 201112 201112 201203 201203 201203 201203 201112 201203 201203 201203 201203 201112 201203 201203 201203 201112 201112 201112 201203 201203 201203 201112 201203 201203 201203 201203 201112 201112 201112 201112 201203 201203 201203 201203 201112 201203 201112 201203 2165.23 3879.71 4710.03 4710 40779.6 397.61 1580.57 2934.25 1423.98 4203.4 991.8 3666.36 1860.24 4436.76 996.58 3258.49 1145.69 1046.74 295.31 2196.66 1099.08 2856.95 19149.5 5006.21 1326.39 1824.48 3106.86 2034.03 2097.21 5536.07 1676.82 1340.09 3550.05 1501.14 10665 995.09 445.62 3991.46 208.86 160.12 499.67 1145.36 29.8 -12.2 7.4 17.7 44.3 -21.5 11.9 20.6 27.9 20.1 -12.7 5.6 6.8 -0.9 30.2 -6.1 36.3 27.8 -67.1 7.3 37.1 -1.1 25.8 21.1 13.2 20 -2.6 1.4 6.2 -0.3 26.2 31.6 41.4 -1.9 -11.2 14.4 14.9 -2.5 -36 -19.7 -35 10.1
TTM CHG IN CHG FROM PAT TTM PAT 5-YR HIGH (Rs cr) (%) (%)
82.69 -154.33 156.13 565 268.76 -4.54 48.01 316.55 62.34 292.97 174.59 75.04 283.19 306.81 61.17 392.66 113.46 117.64 1679.17 -10.53 78.88 141.49 533.04 11.92 69.6 74.99 50.37 98.2 75.15 91.23 165.39 168.86 345.57 99.42 81.55 14.63 100.46 -222.25 50.38 -87.86 57.34 63.93 -60.7 PL -23.2 16 97.1 PL 4.2 -32.5 -51.6 330.2 -50.1 -38.8 -25.9 -33.3 64 1106.3 11.8 58.4 -27.7 -35.4 496.2 -40.3 -57.4 LP -20.8 -45.2 -70.6 13.2 -1.4 -23 14.9 43.3 278.2 89.9 -63.6 -70.2 16 PL -33.9 10.9 -73.9 -61.4 -78.3 -92 -50.4 -61.8 -71.1 -83.1 -53.3 -56.9 -65.6 -76.9 -58.5 -92.1 -80.9 -82.8 -69.1 -93.4 -50.7 -67.6 -73.1 -66.4 -74.4 -64.7 -62.2 -84.3 -81.4 -73.4 -73.6 -56.4 -95.2 -55.7 -67.5 -65.8 -87.5 -85.9 -58.1 -57.6 -86.8 -74.3 -92.4 -67.7
P/E P/BV
Amtek Auto Bajaj Hindusthan Ballarpur Industries CESC Chennai Petroleum Corporation Dredging Corporation of India Essel Propack Great Eastern Shipping Company HEG India Cements Nava Bharat Ventures Patel Engineering Rolta India Sintex Industries Sundaram Clayton Aban Offshore Ahmednagar Forgings Arshiya International Bajaj Holdings & Investment Balrampur Chini Mills Bannari Amman Sugars BEML Central Bank of India DCM Shriram Consolidated Elecon Engineering Company Electrosteel Castings Escorts Finolex Cables Finolex Industries Gammon India Gujarat Alkalies & Chemicals Gujarat Industries Power Co Gujarat Narmada Valley Fertili Co Gujarat NRE Coke HCL Infosystems HeidelbergCement India Hinduja Ventures Hindustan Construction Company HMT Hubtown Indian Metals & Ferro Alloys
114.25 26.9 21.6 273.3 141.65 229.15 37.7 246.7 209.35 76.85 192 84.55 74.4 52.75 157.1 367.3 140.2 137.25 775.7 50.5 515 473.85 74.85 39.95 54 18.85 65.4 35.3 56.05 40.55 121.8 59.95 78.9 16.1 42.35 29.35 375.1 18.35 34.75 179.95 291
2578.62 1719.99 1415.88 3414.61 2110.58 641.62 590.38 3756.99 836.56 2360.68 1714.56 590.16 1200.3 1440.08 596.04 1597.76 515.23 807.72 8632.77 1233.72 589.16 1973.11 5509.86 662.77 501.39 616.02 690.75 539.91 695.58 553.51 894.5 906.74 1226.26 929.57 943.98 665.13 770.83 1113.11 1336.87 2642.22 1308.96 756.02
31.2 PL 9.1 6 7.9 PL 12.3 11.9 13.4 8.1 9.8 7.9 4.2 4.7 9.7 4.1 4.5 6.9 5.1 7.5 13.9 10.3 55.6 7.2 8.2 13.7 5.5 9.3 6.1 5.4 5.4 3.5 9.3 11.6 45.5 7.7 PL 26.5 22.8 11.8
0.44 0.59 0.53 0.99 0.56 0.47 0.74 0.62 0.92 0.69 0.9 0.41 0.63 0.6 1.04 0.88 0.83 1.08 1.16 0.96 0.81 0.92 0.74 0.51 1.2 0.35 0.4 0.75 1.12 0.29 0.6 0.66 0.54 0.6 0.49 0.83 1.15 0.93 1.13 -1.18 0.81 1.02
-69.8 -117.2
-78.7 -30.1
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COMPANY CMP (Rs)
79.5 19.05 44.75 14 62.4 305.85 168.9 75.35 12.21 10.15 81.25 75.4 111.4 120.45 8.41 21.9 23.5 31.9 40.3 127.45 216.1 138.6 53.9 45.1 45.45 62.7 56.75 290.9 26.5 54.45 150.05 136.15 205 20.15 209.8 75.7 101.25 21.45 56.5 25 65.2 174.4 52.9
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M-CAP 52-WK 52-WK 5-YR TTM TTM NET CHG IN (Rs cr) HIGH (Rs) LOW (Rs) HIGH PRICE ENDED SALES TTM SALES (Rs) (LATEST) (Rs cr) (%)
6336.15 548.64 1194.83 503.55 528.53 2640.4 726.61 1427.88 915.63 2422.6 1246.78 1419.78 509.54 955.17 559.97 1379.7 1976.7 818.39 665.35 897.76 6304.93 3096.32 2345.62 606.55 1509.39 1468.5 1211.5 7145.38 788.11 2536.28 695.63 559.98 1013.73 1013.73 1204.67 1097.65 731.13 5611.96 2039.65 761.75 797.14 5284.67 2621.41 152.3 35.7 78.9 25.95 167.3 517.5 390.5 111.9 26.4 22.4 143.65 133.7 198.5 185 20.75 48.8 67.1 91.65 59.6 293.9 378 364.15 82.25 82.8 82 107.95 102.5 612.4 70.65 109 275.9 178.9 335 50.15 330.5 166.9 226 37.95 102.4 59.25 115.5 219 74.95 72.85 16.15 27.1 10.5 58 167 143.05 66.05 11.55 9.06 80 64 83 108 6.75 21.1 18.6 31.4 34.4 112.25 190.1 125.3 32.45 25.6 37.05 56.05 54.15 225.5 22.1 46.6 148.2 121.05 156.65 19.7 207.55 72.5 98.25 17.45 45.55 21.8 48 162 43.85 228.9 88.8 287.5 83.35 185 1049.8 700 243.8 159.19 87.4 407.99 263.75 675 527 40.85 219.45 94.95 372.8 172.4 344.4 545 795.45 299 354.6 589.1 149.7 535 2925 177.9 221.33 739.95 488 774 162.22 444.3 250 325 546.8 152.2 154.4 172.4 864.38 115.35 201203 201203 201203 201203 201112 201112 201203 201112 201112 201203 201112 201203 201203 201203 201203 201203 201203 201112 201203 201203 201203 201203 201112 201112 201203 201203 201203 201112 201112 201112 201203 201203 201112 201203 201203 201203 201203 201203 201203 201203 201203 201203 201203 17903.7 916.1 4959.5 2590.28 666.66 13115.2 2312.55 7438.97 806.92 10381.5 2841.96 3112.88 5897.37 1774.26 4629.74 3358.57 2629.96 6330.28 1260.3 1838.98 15814.9 12890.7 917.57 1873.72 10312.9 6474.5 813.05 6049.17 6098.45 3668.34 1480.08 410.36 5541.29 2375.84 3512.73 2705.09 4514.12 2446.59 7961.09 3362.57 5171.59 12668.4 7988.11 47.9 -56.4 -11.7 14.4 -13.9 14.9 -13.6 9.8 -7.5 28.7 0.1 31.3 9.2 -8.5 56.7 -10.1 123.1 2.5 1 7.1 30.8 226.6 -10.3 8.1 30.7 31.3 36.5 10.1 29.7 3 1.2 1105.5 19.4 47.6 17.6 15.1 29.2 -23.2 25.5 10.5 2.7 4.3 36.7
TTM CHG IN CHG FROM PAT TTM PAT 5-YR HIGH (Rs cr) (%) (%)
1050.12 -385.27 24.08 53.8 648.6 -1062.44 128.25 -56.83 108.47 -1930.29 169.73 246.07 -379.74 31.2 -154.14 -4018.45 591.46 100.68 110.2 41.81 1141.56 108.42 105.5 264.14 91.84 451.28 135.73 122.01 389.09 -78.53 210.16 1.34 96.93 111.81 387.38 307.59 255.55 248.3 632.53 3.61 77.96 429.19 580.99 -2.1 7.7 -84.7 -45.2 397.4 PL -78.3 PL -37.6 160.9 -8.9 20.3 80.7 -49.2 161.3 42.1 109.2 -66.9 19.5 -73.2 -24 -28.7 -28.6 -1.7 LP -14.2 15.1 -66.1 50.7 PL -8.4 LP -26.7 -37.6 -19.9 0.4 -63.3 -56.3 20.7 -97.4 1.6 -33.2 10.9 -65.3 -78.5 -84.4 -83.2 -66.3 -70.9 -75.9 -69.1 -92.3 -88.4 -80.1 -71.4 -83.5 -77.1 -79.4 -90 -75.3 -91.4 -76.6 -63 -60.3 -82.6 -82 -87.3 -92.3 -58.1 -89.4 -90.1 -85.1 -75.4 -79.7 -73.5 -87.6 -52.8 -69.7 -68.8 -96.1 -62.9 -83.8 -62.2 -79.8 -54.1
P/E P/BV
Indian Overseas Bank ITI IVRCL Jayaswal Neco Industries JB Chemicals & Pharamaceuticals Jet Airways (India) Jindal Poly Films Jindal Stainless JM Financial JSW ISPAT Steel Kalpataru Power Transmission Karnataka Bank Kesoram Industries Kirloskar Brothers Lloyds Steel Industries Mahanagar Telephone Nigam Manappuram Finance NCC NIIT Orchid Chemicals & Pharma Oriental Bank of Commerce Pantaloon Retail Parsvnath Developers Prakash Industries Punj Lloyd Punjab & Sind Bank Puravankara Projects Reliance Capital S.Kumars Nationwide Shipping Corporation of India Shiv-Vani Oil Shree Ram Urban Infrastructure Simplex Infrastructures SREI Infrastructure Finance SRF Tulip Telecom Uflex Unitech United Bank of India Usha Martin Uttam Galva Steels Videocon Industries Vijaya Bank
Source: Capital Market Databases
6 -1.4 49.6 9.4 0.8 5.7 PL 8.4 7.3 5.8 -1.3 30.6 -3.6 -0.3 3.3 8.1 6 21.5 5.5 28.6 22.2 2.3 16.4 3.3 8.9 58.6 2 PL 3.3 10.5 9.1 3.1 3.6 2.9 22.6 3.2 211 10.2 12.3 4.5
0.78 -0.6 0.44 0.52 0.77 0.45 0.64 0.46 0.76 0.58 0.39 1.12 -3.62 0.21 1.03 0.32 1.2 0.84 0.57 1.03 0.89 0.39 0.51 0.52 0.77 0.92 0.29 0.35 0.49 1.03 0.93 0.33 0.78 0.91 0.39 0.48 0.57 0.43 0.84 0.6 0.79
PL -15.42
-1.3 -102.96
-72.1 417.9
Consolidated figures considered wherever available. CMP (current market price) is closing as on 18 May 2012. PL: profit to loss. LP: loss to profit. Change from 5-year high price is on CMP.
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