Special Feature     29-May-12
Stocks: Bargain hunting
The current market turbulence is a good time to pick mid caps at low valuations
Related Tables
 Beaten down
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 government's 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 Anti-Avoidance 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 letter-box 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 Norway's 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 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 world's biggest manufacturer of plastic laminated tubes, with a market share of 33%. The company achieved a milestone by producing five billion tubes in the fiscal ended March 2011 (FY 2011). It has 23 manufacturing plants spread over 12 countries including India, the US, Mexico, the UK, Germany, China, and Russia. Essel Propack caters to the diverse packaging requirement of industries like oral care, cosmetics, personal care, pharmaceutical, and food among others. In May 2012, the company merged Ras Propack Lamipack and Ras Extrusions with itself. Ras Propack produces soft-squeeze laminated tubes and Ras Extrusions is into multi-layer flexible laminated sheets.

Bajaj Hindusthan is the county's largest sugar and ethanol manufacturing company. It has 14 sugar plants with aggregate sugarcane crushing capacity of 1,36,000 tonnes crushed per day (tcd). All the plants are located in Uttar Pradesh (UP). With distillery capacity of 8,00,000 liters of alcohol per day, Bajaj Hindusthan generates 430 MW of power from the bagasse produced in its sugar mills. The firm supplies surplus power of around 105 MW to the state grid. It is further expanding the power generation capacity by 450 MW through new coal-based power plants of 90 MW each in the vicinity of five of its existing sugar units. This entitles capital outlay of Rs 2300 crore. Bajaj Hindusthan is also looking at diversification. It would be developing two mega thermal power projects, with capacity of 1,980 MW each, in UP in the next five years.

Ballarpur Industries (Bilt) is the country's largest manufacturer of writing and printing paper. Its subsidiaries include Bilt Graphic Paper Products, Malaysia's largest pulp and paper company Sabah Forest Industries (SFI), and Bilt Tree Tech. Bilt and Bilt Graphic have six manufacturing units across India. Bilt accounts for over 53% of the coated wood-free paper market, 80% of the bond paper market, and 35% of the hi-bright maplitho market. It is also India's largest exporter of coated and uncoated paper. The company acquired SFI in 2007. This was the first overseas acquisition by an Indian paper company. Bilt's installed capacity is of 2,32,068 tonnes.

Incorporated in 1948, Great Eastern Shipping Company is the country's largest private sector shipping firm. It is into two businesses of shipping and offshore. Shipping activities involve transportation of crude oil, petroleum products, gas, and dry bulk commodities. The offshore business services oil companies in carrying out offshore exploration and production activities. The offshore business is undertaken by its subsidiary Greatship (India). The company's fleet includes 34 vessels comprising 24 tankers (nine crude carriers, 14 product carriers and one LPG carrier) and 10 dry bulk carriers, with an average age of 8.9 years and aggregating to 2.62 million dead weight tonne.

Established in 1976, Dredging Corporation of India provides dredging services like maintenance dredging, capital dredging, beach nourishment, reclamation, and environmental protection through its six project offices to major ports, non-major ports, private ports, the Indian Navy and shipyards. The mini ratna (category i) public sector undertaking's fleet consists of three cutter suction dredgers and 10 trailer suction dredgers. Capacity utilisation stood at 79% in FY 2011 compared with 81% in FY 2010 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 Cement's 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. CESC's 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 custom-molding business, it acquired four companies in 2007 including Nief Plastics (France), Wausaukee Composites (US), Nero Plastics (US), and Bright Autoplast (India). Sintex Industries's monolithic and prefabs business derives 90% and 70% of revenue from the government.

Incorporated in 1998, Amtek Auto is among the largest integrated auto and non-auto component manufacturers in the country. The auto segment covers forging, aluminum casting, machining and sub-assemblies. The non-auto division manufactures components for tractors, earth-moving equipment, construction and locomotive segment. Amtek Auto holds 61.64% equity stake in Amtek India, 54.96% in Ahmednagar Forgings, and 96.6% in Amtek Ring Gears. It has joint ventures with MPT Amtek Automotive (India), Amtek Tekfor Automotive, and SMI Amtek Crankshaft Pvt Ltd. Amtek Auto has limited capital expenditure requirement, going forward. The company's focus is going to be cash generation and debt reduction, with debt-to-equity ratio at 0.87 times end 30 June 2011.

HEG successfully completed expansion of its graphite electrode capacity from 66,000 to 80,000 tonnes per annum, with capital investment of approximately Rs 275 crore, in FY 2012. This expansion has helped the company to consolidate its position as the largest single-site producer of graphite electrodes in the world. Its plant is located at Mandideep, near Bhopal in Madhya Pradesh. Incorporated in 1972, HEG has aggressively ramped up its capacity since FY 2001, when its capacity stood at mere 24,000 tonnes. It exports over 80% of its production to more than 25 countries of the world. The company also has three power generation facilities with total capacity of 77 MW.

Patel Engineering is in the construction and engineering businesses over the last six decades. It has expertise in hydro power, tunnelling, irrigation, railways, and roads. It is the only company in Asia to deploy superior technology of underwater lake tap works for micro tunneling in hydropower projects. Patel Engineering aims to double its turnover from the core business in the next five years. Consolidated order book stood at around Rs 9000 crore on 31 December 2011. Its real estate division operates mainly in Mumbai, Noida, Bangalore and Mauritius. The division started contributing to revenue in the fourth quarter of FY2011.

Established in 1962, Sundaram Clayton is part of south India-based TVS group. The company is a leading manufacturer of aluminium die castings to the automotive and non-automotive sectors. It supplies raw aluminium castings and machined castings for the commercial vehicle, passenger car, and two-wheeler segments of the automotive industry. Sundaram Clayton has reported profit and paid dividend in each of the last 10 years. In April 2012, it started production of die castings for Hyundai at its new plant at Oragadam, near Chennai. The company has planned capital expenditure of Rs 130 crore in the next two financial years.

Chennai Petroleum Corporation had two refineries, one each at Manali and Nagapattinam in Tamilnadu, with aggregate refining capacity of 11.5 million tonnes on 31 March 2011. It has one of the most complex refineries in the country, with fuel, lube, wax and petrochemical feedstock production facilities. The public sector company plans to increase capacity of the Manali facility with brownfield expansion. The stock is known for its high dividend yield. At the current market price of Rs 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 company's 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 Rolta's 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 Industries's 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 custom-molding 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 fact that even Satyam Computer Services, renamed Mahindra Satyam by its new owner, the Mahindra & Mahindra group and recently merged with group company Tech Mahindra, has managed to bounce back from shambles post financial scam banking on its customers, brand and business.

Bajaj Hindusthan is suffering owing to both company- and industry-specific issues. Accumulated debt stood at Rs 8759 crore on 30 September 2011. Its debt-to-equity ratio stood at 2.2 times. The firm is also diversifying into power generation, which is a risky business as several power projects are stuck due to non-availability of fuel.

Order cancellations, delays in financial closure for capital-intensive projects, high interest rate, slowdown in order are immediate concerns for Patel Engineering. The stock has corrected over 90% from its five-year high. It is trading at attractive P/BV ratio of 0.41. The silver lining is the company is in the business of engineering and construction for over last 60 years and it has weathered many storms.

A few of these companies are cash-rich and are suffering due to industry-related challenges. HEG reported decline in the bottom line due to moderation in demand for graphite electrodes. The company completed buyback with a maximum outlay of Rs 67.5 crore in November 2011. This is well ahead of the schedule end date of 13 March 2012. The upper price for the buyback stood at Rs 350 per share. It was not a hollow buyback, which also shows optimism and confidence of HEG towards its business in the medium to long term. High dividend yield is another feature.

Subdued market sentiment is spoiling the party for some. Sundaram Clayton reported 64% rise in PAT and 30% increase in net sales in the trailing 12 months (TTM) ended 31 March 2012. Its dividend yield based on FY 2011 dividend stood at 5.4%. The correction in stock seems to be largely driven by market sentiments rather than any fundamental reasons.

There are also concerns about deteriorating financials. For instance, out of 85 companies, 13 have reported loss. Among these 13 companies, six have plunged into red from profit in the latest TTM, while seven reported losses in the previous two TTM periods.

However, the current bearish phase will be over in a matter of few quarters. Anyway, the market is seldom fairly valued. It is either overvalued, when bulls are ruling the trading ring, or it is undervalued, when bears on the rampage. As no one can predict the bottom, it is better to start evaluating stocks for investment and make a gradual entry. With these intentions, investors could monitor these mid-cap stocks that have witnessed a sharp correction from their heyday peaks.

These companies are in trouble because of a variety of reasons. However, these concerns would not remain forever. Several of them have valuable assets. Also, they possess brands, market share, and significant quantum of business, which will help them to bounce back when sentiments improve. Instead of focusing excessively on short-term concerns, investors could be better off putting more emphasis on the profile of companies.

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