Investor's Guide

INVITING DOLLARS INTO INDIAN MARKETS

Foreign investor participation likely to be limited: experts

After allowing qualified foreign investors (QFIs) to invest in equities indirectly through the mutual fund (MF) route in August, the government on Sunday paved the way for QFIs to invest in Indian equities directly as well.

Individual QFIs will soon be allowed to invest up to 5% of the paid-up capital in any company and up to 10% of the paidup capital on aggregate basis (all foreign individuals put together). These limits are over and above the cap earmarked for foreign institutional investors (FIIs) and NRIs who can directly invest in the Indian equity market.

The government hopes that the move will help in widening the class of investors and reduce market volatility. It also hopes to attract more foreign funds. Amid slowing economic growth, FIIs pulled out as much as around R2,800 crore in 2011 from the Indian stock markets

WILL QFIS INVEST?

Experts are of the view that the step is in the right direction but it would only have a meaningful impact in the long run. "A big chunk of investment in the stock market is driven by perception," said Aseem Dhru, MD and CEO, HDFC Securities Ltd. "Due to a slowing economy and lack of policy initiative, the perception about India is not very bullish overseas. Hence, not much investment will be made in the short run. But as Indian growth story is likely to attract investors in the long run, the move may counter the volatile behaviour of FIIs."

"Investment by foreign nationals would depend upon the way Indian growth pans out," said Jagannadham Thunuguntla, strategist and head of research at SMC Global Securities.

The limited impact the move may have in the near term can also be gauged from the fact that none of the MF firms have taken any initiative to expand their reach outside India despite government allowing QFIs to invest in equity schemes of MF houses last year. And probably this is the reason why the capital market has not reacted much to the news.

The other factor that could deter foreign investor from investing in India is exchange rate fluctuation. "While, it is relatively easier to evaluate a particular company, predicting currency movement would not be easy," said Vinay Agarwal, executive director, equities brokerages, Angel Broking Ltd.

Courtesy - Hindustan Times - Dt-07-01-2012

Bottom-Fishing with Caution

The market has been recovering from the meltdown, but a few stocks are languishing at lower levels. Some of these stocks can turn out to be good bets for the long run.

In the advanced stages of any rally, experts often dig much deeper to find stocks, which still can provide some value to investors. With frontline stocks already factoring in one or two years of expected growth, the focus shifts to stocks, which have not done well over the course of the rally. There could be many reasons for some stocks to languish during the rally. The first and the simplest is that they are simply off the investor’s radar. The other reason could be that their financial performance is wanting. Whatever may be the reason, one thing is for sure that there is an eye keenly going over the stock charts and finding out which of these stocks, can be a good investment. Seizing these opportunity, ET Intelligence Group analysed the stocks, which haven’t done well ever since the current rally started on March 09, 2009 to find out if there are good value picks for investors.

And we didn’t have to dig deep to find, as leading stocks of the FMCG sector – Hindustan Unilever (HUL) & Britannia - have been gross underperformers over the course of the past one year. HUL, in fact, didn’t move at all during the year. HUL it has underperformed most of its smaller peers since the past four consecutive quarters. Its performance is also way below its own track record also. For instance, its current operating margin of 14% is lower than its own peak margin of 18%(achieved in 2002) and below than other FMCG players, such as Nestle and Dabur that have operating margins of 19% and 17%, respectively. Rising competition has become a double-edged sword, as it has not only eaten into HUL’s market share, but has also made it necessary for the company to spend more on advertisement. Much like HUL, Britannia too fared poorly vis-à-vis its peers, such as Dabur and Marico. If Britannia’s stock price fared poorly compared to Sensex, its performance was equally subdued. The spiralling cost of wheat and sugar, key ingredients for the company, has adversely impacted its bottomline. Rising commodity prices amidst inflationary conditions are likely to be major hurdles for the company to deliver growth in earnings. Since the near-term prospects of both HUL and Britannia look bleak, investors are advised to stay away from them even though they are available at seemingly reasonable valuations.

Similarly, oil marketing companies (OMC) are facing tough operating environment. All three of them - Indian Oil, BPCL and HPCL, have grossly under performed the market over the past one year due to their continuing inability to control their profitability. They face a peculiar predicament as they can’t decide the selling price of most of their products despite rising costs. What is more, they can’t even curtail their sales even if higher sales lead to higher losses. In the meantime, the government has cut down on its aids to OMCs for selling products below cost. These three companies, which have launched expansion projects that may be dubbed as ambitious considering their cash generation capacity, are likely to become debt-ridden, unless some bold decisions are made. The governments past attempts at bringing in reforms in the oil industry have failed miserably. Investors should shun these stocks too even though they are available at bargain prices.

Bargain hunters may, however, find value in the power sectors with the country’s two largest utilities-NTPC and Power Grid- available at significant discount to their peers. While NTPC’s stock price, the country’s largest power generator, has suffered due to a delay in the commissioning of new projects due to various issues; Power Grid stock continues to languish despite a robust financial performance by the company in the first quarter of FY 10. However, the recent lull in NTPC earnings growth is about to end as it recently commissioned a 490 MW units in Delhi and is expected to augment its product capacity by nearly 60% in a phased manner by the end of FY 13. This will not only double the company’s revenues and net profit but would also improve its return ratios such as return on equity (RoE) and return on capital employed (RoCE), which suffered in the past two years due to a sharp increase in capital expenditure. The stock is currently trading at just 19 times its trailing net profit. In contrast, its peers, such as Tata Power and Neyveli Lignite are trading in the range of 30-40 times. This makes it a value buy for long-term investors though immediate gains may be difficult.

Power Grid is working on equally big capacity expansion and implementing projects, which will nearly double its transmission capacity by 60% in the next three years. This will help maintain earnings momentum in the near to medium term. Power transmission is a highly scalable business, and once a project gets commissioned, operating profit can be as high as 90% with hardly any operational risks. At its current price, Power Grid is down nearly 18% from its 52-week peak and looks undervalued with a price-to-earning multiple of 21x and looks a safe bet for investors.

Then there are stocks, which seem to be poised to yield good returns for their shareholders going forward. For instance, Koutons Retail’s stock price has largly remained flat in the current rally. This is despite the factors like improved inventory management, lesser markdowns and higher volumes have enabled this retailer to post a 16% growth in its profit in the nine months ended December 2009. Moreover, the company is expected to gain from ladies and kids segment, which have higher margins. On the other hand, improved inventory management will result in lesser working capital thereby improving the cash flows. Given the expected improvement in financial, Koutons Retail can be a good bet for investors at current levels.

Similarly, investors can take a sigh of relief as far as India Cements is concerned. It has been one of the worst performing stocks due to a tough operating environment in its markets in Tamil Nadu, Andhra Pradesh and Karnataka. The region is facing a glut in cement supply, which has depressed prices. However, worst seems to be over for the company. In May last year, the company opened a grinding unit in central Maharashtra to lessen it independence on South India and enter central and west India where cement prices remained firm. The stock is currently trading at just 1.2 times its book value. In contrast, most of its peers are trading at 2-5 times their book value. At this level, a lot of bad news is already factored into the stock price and any improvement in financial may lead to a rally in the stock’s price.

Similarly, industrial cylinder manufacturer Everest Kanto Cylinders (EKC) had a disastrous run till now, as its consolidated profit fell by 76% in the nine months ended December 2009. The company is facing pressures of high cost inventory. However, it is expected to get a breather as its 3-lakh units per annum plant in Kandla SEZ is expected to commission operating soon. The profitability of EKC’s subsidiaries has drastically come down, particular those in the UAE and US, while the newly acquired subsidiary in Kolkata, which holds marketing rights for ONGC’s coal-bed-methane block in Jharkhand, is yet to begin operations. However, this situation is likely to improve in the near future with demand picking up and company getting rid of its high cost raw material inventory. So, investors can make use of the current fall in stock price by investing in the stock

Another stock, which has not done well of late but can be a good potential investment, is EIH. The hospitability major is trading at a significant discount to its rival- Indian Hotels. Indian Hotels. While EIH is trading at a price-to-earnings (P/E) multiple of 48, Indian Hotels is trading at a P/E of 78. This is despite the fact that EIH is known for lesser capital dilution compared to its peers. The advantage of lesser capital dilution is that its growth is fuelled by only internal accruals and not through more money from stakeholders. As a result, its return on capital employed is much higher than Indian Hotels. So, at current levels even EIH could be a good buy for investors.

Further the country’s largest non-basmati rice producer Lakshmi Energy and Foods is trading at P/E of 8, while industry P/E is 10.5. This is regardless of the fact that the company’s performance in the quarter ended December 2009 was above the market expectations. Recently, it has ventured into power generation from biomass and selling of branded rice to retail, thereby safeguarding itself from the cyclically of the sector. No doubt, the stock is not adequately priced at current valuations, which means retails investors can take exposure to the stock.

As it seems from the analysis, not every battered stock is a good bet at current levels. Investors should exercise caution and invest wisely in those companies, which are going to show some recovery in fundamentals.