Stock Picks for the week

ACC 
RESEARCH: ABN AMRO 
RATING: SELL 
CMP: RS 399 

ABN Amro has cut ACC’s earnings and downgraded it to ‘sell’. ACC seems financially well-placed with moderate expansion plans, but its earnings outlook has weakened, since the industry may see excess supply for at least two years, which will lower cement prices. FY09 cement demand growth YTD, at 6.6%, is below expectations, due to the stress in credit markets and delays in capex. So demand estimates for FY10 and FY11 fell by 200 bps each to 8%, which exposes the industr much longer to surplus supply. Restructuring over the past five years has seen ACC exiting non-cor businesses. The company, which had high gearing in the last business cycle (1997-03), now seems in a stronger financial position. ABN estimates it will have a debt-equity ratio of just 7% even after financing its entire planned capex of Rs 3,700 crore over the next three years. This will raise its capacity by 9.6%, slightly ahead of the expected demand growth. ACC looks cheap, trading at a cement enterprise value/mmt of $61 (vs replacement cost of $110), but ABN sees more downside to its earnings, given the overhang of excess supply. 

HINDUSTAN CONSTRUCTION 
RESEARCH: HSBC 
RATING: UNDERWEIGHT 
CMP: RS 40 

HSBC Global has reiterated its ‘underweight’ rating on Hindustan Construction Company (HCC). It has factored in a dividend payment of Re 1 per share, implying a dividend yield of 2.2%. Thus, the total potential return on investment in shares over the next year is -1.8%. HSBC considers the share price to be volatile. For Indian stocks, HSBC considers the average cost of equity to be 11%. A volatile Indian stock with a potential total one-year return of 10 percentage points on either side of 11%, i.e. 1-21%, merits a ‘neutral’ rating. As the potential total one-year return on HCC is less than 1%, HSBC reiterates its ‘underweight’ rating on the stock. A key upside catalyst for the stock is sharp increase in order inflows and reduction in leverage, resulting in lower interest costs. A sharp drop in execution volumes along with demand slowdown remain key downside risks to HSBC’s valuation. 

POWER GRID CORPORATION 
RESEARCH: CITIGROUP 
RATING: SELL 
CMP: RS 74 

CITIGROUP has maintained its ‘sell’ rating on Power Grid Corp (PGCIL) with a target price of Rs 69. PGCIL’s shares have outperformed the Sensex, post its IPO. Despite correcting more than 55% from its peak, it is not in the value zone yet. They are trading on par with NTPC, which appears unjustified. The key upside risks are: 1) Favourable CERC regulations for FY10-14E; 2) Faster-than-expected project execution; and 3) Higher non-core business profits. PGCIL has the potential to generate 14-17% returns on its regulatory equity base, compared with NTPC’s 14-22%. NTPC under-reports its profit/net worth. PGCIL matches depreciation under the tariff with reported depreciation, whereas NTPC’s depreciation under the Company Law is higher than under the tariff. PGCIL’s target price of Rs 69 is set at 1.8x FY10E P/BV from 2.2x earlier — a 10% discount to the target P/BV multiple for NTPC. PGCIL’s H1 FY09 reported PAT, at Rs 700 crore, was down 15% y-o-y. But this is largely due to forex fluctuations and a pass-through in tariffs. 

BANK OF BARODA 
RESEARCH: INDIABULLS SECURITIES 
RATING: HOLD 
CMP: RS 268 

INDIABULLS Securities has reiterated its ‘hold’ rating on BoB. The bank reported an average performance in Q209, even as its asset quality improved. It expects interest income to grow by 16% in FY09, against 31% in FY08, as the growth rate of advances is likely to fall to 23% in FY09 vis-à-vis 28% in FY08. In addition, the expected fall in yield on investments will affect interest income. Advances may be under pressure due to the global financial crisis and slowdown in the domestic economy. Over 20% of the loan book is accounted for by real estate and SMEs, which are prone to default in the current domestic scenario. BoB’s net interest margin (NIM) increased by a mere 4 bps sequentially to 2.8%. NIM is likely to be under pressure in the coming quarters due to increased cost of deposits, though RBI has lowered its key policy rates. With increased risk-aversion, BoB may shift the mix of interestearning assets from high-yield, risky advances to safer, low-return investments. This is likely to reduce the average yield, further pressurising NIM. 

RELIANCE INDUSTRIES 
RESEARCH: MERRILL LYNCH 
RATING: BUY 
CMP: RS 1,127 

MERRILL Lynch has retained it ‘buy’ rating on Reliance Industries (RIL). Its refining margin has consistently been higher than the benchmark Singapore complex refining margin. Analyses suggests RIL’s superior refining margin is due to its ability to refine heavier crude than Dubai. Compared to the last refining downturn, RIL is set to benefit more in FY10-FY11E from its ability to refine heavier crude. Reliance Petroleum’s (RPL) refinery, which is expected to start operations soon, can process even heavier crude than RIL and has a superior product slate. The average discount of Arab heavy to Dubai since FY01 is $2.4/bbl. The discount has sustained at over $5/bbl even in the past six weeks, despite the slump in oil prices. Merrill Lynch estimates RPL’s refining margin at $12.9/bbl if it were to operate in Q3 FY09, vis-à-vis Singapore margin of $7.3/bbl. It will produce more gasoline than RIL. Gasoline cracks have always been at a premium to naphtha and LPG cracks. Merrill Lynch feels that a weakening in diesel and gasoline cracks is the main risk to RPL attaining such high margins when it begins operations. 

STEEL AUTHORITY OF INDIA 
RESEARCH: EDELWEISS 
RATING: REDUCE 
CMP: RS 63 

SAIL has a saleable steel capacity of 13 mt. But with no major capacity expansion over the next two years and moderate demand scenario, incremental volume growth is seen at 0.6 mtpa in FY09E and may decline by 0.4 mtpa in FY10E on production cuts. SAIL’s average volume-based growth till FY10 will be more muted than that of Tata Steel and JSW Steel. The company is targeting completion of modernisation-cum-expansion by end-FY11, which is set to hike its saleable steel capacity to 23.1 mtpa, up 78% from FY08 levels. It will also improve the company’s productivity and refine its product mix. While the project will put SAIL in the global league, its timely completion looks daunting. Due to its scale and operational vastness, SAIL is best-positioned among its peers to gain from Indian steel consumption growth in the next two years. But in the absence of tangible volume growth, slow demand growth for steel, exposure to tight coking coal market, highest susceptibility to government norms on prices, and potential delay in expansion plan, Edelweiss expects SAIL’s margins to be under pressure in the next two years.

Citibank problems on a rise

The speculated departure of beleaguered Citigroup CEO Vikram Pandit might just be a sign of things to come. The Economist said Pandit had not ‘‘ grabbed the as firmly as many had hoped’’ . It added, ‘‘ Unless more is done quickly to tackle Citi’s current problems, not to mention its structural ones, heads may roll at the top in Citi, not just at the bottom.’’ 

Pandit is not the only Indian-origin financial guru — being celebrated not too long ago — facing the gun. Also under fire in Washington DC is Neel Kashkari, the Bush administration’s head of the Office of Financial Stability, which includes the ‘‘ Troubled Asset Relief Program (TARP),’’ to oversee the $700-billion bailout aimed at arresting the US economy’s precipitous slide arising from the mortgage crisis. Last week, Kashkari faced a blistering attack from lawmakers — one of whom suggested he was a ‘‘ chump’ ’ — for giving government handouts to companies like AIG whose executives were feasting on bonuses and taking exotic vacation on taxpayer money. 

Also in the hot seat is Karthik Ramanathan, the Bush administration’s acting assistant secretary of treasury who oversees issues involving treasury financing, public debt management, and federal regulation of financial markets among other subjects. He too was roasted at a Congressional hearing last week as US lawmakers come under increasing pressure from constituents getting the short end of the economic meltdown. 

Earlier in the year. Citigroup’s Pandit revived the slogan ‘‘ The Citi never sleeps’ ’ to restore confidence in the financial giant. But with the behemoth seemingly heading into a coma, what began as a dream run for Indian financial whizzes is turning into a nightmare. 

How to make money from Indian Stock Markets

How to make money?

High volatility, sharp rallies, unexpected market direction, extremely fickle sentiments and high influence of the international markets — these are but a few of the stock markets tantrums in the past few months. Some analysts expect this bear-run to continue for some more time. The million dollar question now is, “How to make money?” It’s not an easy task in the bear markets. Market strategies have to be well thought out; those that worked in the past may not work this time. There is no single strategy that can give you profits, but a combination of tactics and ploys that will win you this ‘Investment Game’. We would now look at 10 strategies that may be used in isolation or in combination to come out with a winning plan that will make money in market:

Accumulate fundamentally good stocks

Thriving on chaos, it’s a panic situation and many fundamentally strong scrips are experiencing a bear hammer. A good way to judge if the stock is under valued is if it is quoting near its 52 week low. A stop loss at the 52 week low would be desirable to restrict downside risk.

Price Volume data

If you are an active trader and open to taking short term positions. A thorough tracking of the price volume data will be worth your while before entering sectors and stocks where a significant rise in volumes is being accompanied by a positive price movement. These trading calls can sometimes make you earn a fast buck.

Sell out of money calls of stock


Sell out of money calls of stock that you hold Markets are likely to remain range bound for sometime. This strategy restricts the upside potential but generates good, consistent returns in a bear market.

Buy out of money puts and sell out of money calls of Nifty

This strategy helps to protect downside risk of portfolios when there is uncertainty about the future direction of the markets. This strategy can also generate profits if Nifty falls rapidly and there is panic in the markets as we saw in January, March and then in June this year. Selling calls would help you in financing the cost of the puts.

Sell deep out of money calls and puts near the expiry

Selling calls and puts which are deep out of money can provide you with a limited profit when sold near the expiry date. Only time value exists in these options but to earn limited profit you have to block money in the form of margins and though a rare chance but you could end with an unlimited loss. This, needless to say, is not a very good strategy for risk averse investors.

Trading in Futures

For short term and active traders it may be better to trade in futures instead of buying stocks and holding in depository account.This is because one has to wait for delivery to come on T+2 so as to sell those stocks. Eg. If somebody bought 100 shares of Reliance on 10th August 2008, then he has to wait till 13th August 2008 to sell them back to the market, otherwise there exists a risk of auction in case of short delivery.


Book profits, when you can

This is a bear market. Buy and hold strategy is not likely to work. It is better to book your profits as and when you earn. This is not the time to be greedy.


The 'Options' option

For risk averse investors it is better to trade in Options in order to minimise risk.Buy calls of stocks or Nifty if you are bullish on some particular shares or the market as a whole in the short term. Conversely buy puts of stocks or Nifty if you are bearish. Unlimited profits can be earned by incurring limited cost with no risk in this strategy.


Money calls and Puts

If the markets are volatile a useful strategy is to buy both At Money calls as well as puts. Whichever direction the markets take in the short run, you are quite likely to make good returns in the short run.

Over trading can spoil the party

Do not overtrade and take extra risks. Remember cash is king in uncertain times. You are likely to continue getting panic situations going ahead, where cash can be very gainfully deployed. Based on the risk appetite and investment capacity one may use the above in different permutations or combinations. To conclude these strategies are not cast in stone but one has to be flexible and take into consideration the prevailing market scenario and the future outlook that is emerging from the analysis.
By Ashish Kapur, Chief Executive Officer, Invest Shoppe India

Stock Pick - Hero Honda Ltd

Double-digit inflation and high interest rates are not new for the 25-year-old two-wheeler manufacturer, Hero Honda Motors. The company has been able to wade through such tough times in the past and become a leading player in the domestic two-wheeler market (current market share: over 55 per cent). When the domestic motorcycle industry declined by 12 per cent in 2007-08, Hero Honda posted positive numbers (4 per cent growth in sales). For the latest quarter of the current fiscal, its topline grew by 35.60 per cent compared to the corresponding period last year—impressive given the credit crunch in the industry.

Its strengths include strong distribution network, new models, and focus on all segments of the market, including the rural vertical. Besides, the company enjoys a debt-free balance sheet.

Business performance. Hero Honda is strong in both urban and rural markets. Its key brands continue to drive volumes across segments. The company is increasing its presence in the premium segment with brands such as Hunk and CBZ X-treme that target urban youth. For the festive season, it has already launched four new models and more launches will be seen over the next few months.

While the overall rural penetration of two-wheelers is still low (10 per cent), the company has made inroads into the growing rural and semi-urban markets to increase sales. It is formulating region-specific modules.

To address financing issues, Hero Honda has tie-ups with regional retail financiers like Shriram Transport Finance and Fullerton India Credit. It also has agreements with Grameen Bank, co-operative banks and microfinance companies that are present in smaller towns and villages and have small loan portfolios.

The company has also expanded its distribution network by over 50 per cent over the last two years to 3,000 outlets (touching 3,500 this year).

Financial performance. Where other auto players posted moderate sales growth, Hero Honda did more. Its quarter-on-quarter (q-o-q) sales for the latest quarter increased by 12 per cent while Bajaj Auto’s grew by 6 per cent. Despite the overall credit squeeze, volume grew 28.50 per cent during the September 2008 quarter against previous year’s quarter. Its net profit grew by 50 per cent to Rs 306.30 crore. Hero Honda’s operating margin increased to 13.24 per cent in the same period from 12.39 per cent last year.

Hero Honda has been a debt free company for a few years now. The unsecured loan of Rs 132 crore from the Haryana government is interest free on account of sales tax deferment.

Valuation. Hero Honda has a strong brand name, sound fundamentals and impressive figures over the last few quarters. The recent cut in cash-reserve ratio and repo rate, which could lead to lowering of lending rates, may support volume growth. Softening in commodity prices will help maintain operating margin growth. Its net profit margin is likely to improve as the benefits from lower excise liabilities and tax savings from its capacity in Uttarakhand (started production in April 2008) have started trickling in. Excise duty as percentage of gross sales is lower at 10.24 per cent for the last quarter as against 14.43 per cent in September 07 quarter.

Hero Honda’s increasing dividend and high dividend yield (2.3 per cent) is good news. The stock has also outperformed the BSE Sensex since January this year. At the current market price, it is trading 13.03 times its trailing 12 months’ earnings. Park here with a long term-ticket.

Investment in Gold

Gold gives liquidity in bad times. The need of the hour is to spread awareness about the yellow metal's virtues--FPSB India & Outlook Money's Gold Roundtable

Among all asset classes, gold is the only one to have weathered the current rough and tumble of the global markets. Given its importance in the current scenario, the Financial Planning Standards Board India (FPSB), along with Outlook Money, organised an interactive session on ‘Gold as an Asset class for Investment’, in Mumbai on 21 October. The welcome address by Ranjeet S. Mudholkar, principal advisor, FPSB, set the ball rolling.

“Indians are yet to recognise gold as an alternate investment asset which works well in bad times,” said T.C. Nair, whole-time member, Sebi.

Marcus Grubb, managing director (investment research and marketing), World Gold Council (WGC) said, “Gold’s real value lies in the fact that it offers a sure and steady means of protecting wealth.” Ajay Bagga, chairman, FPSB, said, “Gold needs to be seen as a monetary asset for it to deliver the virtues of liquidity.”

Ajay Mitra, managing director, WGC India, said, “Gold remains the most universally accepted and time-tested asset class. Its value in terms of real goods and services that it can buy has remained remarkably stable.”

Mudholkar added that gold ETFs and gold mutual funds were an effort towards encouraging it as an investment class. Sudip Bandyopadhyay, CEO, Reliance Money said: “Better awareness will ensure that the culture of investing in gold gets better.”

The participants agreed that including the yellow metal in the portfolio would improve its overall performance. They said that there was a need to find solutions to augment the accessibility of gold products.

How Safe Are Your Liquid Funds?

If you think that liquid funds are absolutely safe and protect your capital at all times, then think again. On 8 October, three liquid-plus funds, Mirae Asset Liquid Plus (MALP), DSP Merrill Lynch Liquid Plus and Templeton India Ultra Short Bond funds gave one-day negative returns. MALP was the worst hit as it lost 0.4 per cent that day. While a day’s loss may not sound catastrophic for any other fund, in the case of liquid funds it grabs headlines because many large investors and companies park their surplus cash in these funds for a day or a week or a fortnight. To make matters worse, some schemes limited redemptions. On 15 October, ABN Amro MF limited redemptions on few of its fixed maturity plans (FMP) to Rs 1 lakh per folio. What went wrong?

Bad assets... >>
After a series of reports about the illiquidity of the underlying assets in which many liquid, liquid-plus and especially fixed maturity plans (FMP) had invested in and their questionable credit quality, large investors who were already facing tough times and a cash crunch began withdrawing money from these schemes. Soaring short-term bank fixed deposit (FD) rates did not help MFs, as these investors pulled money out from these schemes and invested in bank FDs.

In this melee, not just the culprit FMPs, but even those that had comparatively cleaner portfolios were affected as well. As a result, many investors who withdrew from FMPs made a loss on their investments because they did not get the indicative yield they were told—albeit unofficially, as MFs are not allowed to assure returns—as they withdrew much before the scheme’s maturity. MFs arrive at indicative yields based on the assumption that investors will stay till maturity. But such yields go for a toss when MFs have to make a distress sale to generate cash to meet redemptions. Add to them the exit loads that most FMPs impose on pre-mature withdrawals, and investors who got out last month, in all likelihood, made a loss during exit.

While Outlook Money was among the first to warn readers of such assets in which many FMPs invested (See ‘Are Fixed Maturity Plans A Ticking Time Bomb?’, 10 September 2008), the rot runs deeper.

In addition to investing in illiquid real-asset papers, many liquid and liquid-plus funds have also invested in instruments called pass-through certificates (PTC). These are essentially loans issued by banks to borrowers that are then bundled off as securities and sold off to buyers such as mutual funds. Assume a bank issues a five-year loan XYZ at an interest rate of 10 per cent. Since it would take five years for this bank to recover the loan, it sells off this loan to, say, a mutual fund at 7 per cent. The bank would earn the spread (difference in interest rates) of three per cent (10 per cent minus 7 per cent). The MF would pay the lumpsum to the bank, which in turn would get back the principal amount (that it had originally lent to XYZ company) upfront. Interest payments that XYZ company would keep paying to the bank, in the meantime, would be forwarded (after deducting the spread) to the MF.

PTCs are quite toxic if the loan originator (XYZ company in this case) is a low-rated one. MF sources say that even if the original borrower is a top-rated company, there are no buyers these days for PTCs that MFs may want to sell, to raise cash to meet redemptions. On account of slow economic growth and poor result forecasts, there appears to be a perception about the companies’ ability to repay loans. So, PTCs are illiquid these days.

As per the September-end portfolio of liquid and liquid-plus, some schemes (see The Top 10: Investments In Pass-through Certificates) have invested significant chunks in PTCs. There’s little transparency here, as in the absence of the regulator’s mandate, most MFs do not publish details of these PTCs. ICICI Prudential MF was the first, and till date the only MF, that publishes details of its PTC investments. Not just the PTCs, but some short-term funds, including FMPs, suffer from poor credit quality. The problem is compounded here since most FMPs do not disclose their portfolios regularly.

Funds, especially liquid-plus funds (liquid-type funds that have a mark-to-market portfolio component of more than 10 per cent; their maturities are therefore higher than that of liquid funds) with longer maturities got hit too; it’s harder to find buyers for longer-dated securities when liquidity is tight.

... And low liquidity >>
The problem of the rush on redemptions was compounded by the lack of liquidity in the system on account of several reasons. These had resulted in banks also withdrawing their funds from liquid and liquid-plus funds earlier. The rush on redemptions compelled liquid funds to sell their most liquid assets at throwaway prices that resulted in losses. Fund sources say that although Sebi allows MFs to borrow up to 20 per cent of their corpus from banks to meet their redemption pressures, money was not available.

Even fixed maturity plans (FMP) saw a rush for redemptions on the back of news reports of bad assets held by them. Although the October-end corpus figures are yet to be disclosed, market reports suggest that liquid and liquid-plus funds have already seen redemptions of around Rs 50,000 crore in October.

Regulatory help >>
On 14 October, the Reserve Bank of India (RBI) allowed MFs to take loans from banks to meet their redemption proceeds by directly pledging their certificate of deposits (CDs: these are one of the short-term and liquid instruments that debt funds invest in) for a period of 15 days. This was a reversal of an earlier central bank stand, wherein banks were neither allowed to grant loans against CDs, nor to buy back their own CDs before maturity.

But this relaxation, it seems, came a little late because out of the Rs 20,000 crore that’s been made available to funds, MFs have utilised only Rs 8,800 crore up to 24 October. “Since the panic redemptions had already landed up at the mutual fund's doorstep before RBI came out with its rule, MFs had already sold most of the certificates of deposits by then,” says Ashish Nigam, head, fixed income, Religare Aegon MF. Later, on 18 October, Sebi eased the guidelines for valuing debt securities as well.

What to do >>
Understand that even if liquid funds are less risky than other MF schemes, they still carry risk. No MF is risk-free.

Though liquid funds are not volatile to the interest rate scenario because their assets are not marked-to-market (Sebi mandates only instruments more than six months maturity to be marked-to-market; liquid funds hold scrips with less than six months' maturity), they do turn volatile at times. Liquid funds have to mark-to-market their instruments when they sell them and then book a profit or a loss at that time. And if there’s a liquidity crunch or a huge redemption pressure—like the one we’ve seen so far in October—they could be forced to sell instruments at panic prices, resulting in a loss, even if the scrips being sold are of a good quality, like Mirae Liquid Funds’. Despite having a high-quality portfolio (highest credit rating, no PTCs and only CDs), Mirae schemes incurred losses.

MFs also have a clause in their offer documents to initiate staggered payments in case of panic redemptions and, thereby, its inability to generate enough cash to meet the redemptions. ABN Amro MF merely used this provision in its FMPs at the time of redeeming them.

Look at average maturity >>
But you could look at a few things, including the average maturity of your liquid funds. The lower the maturity, the safer is your fund, because scrips of lower maturity are easier to sell and are also less volatile compared to those with higher maturity. Funds with lower maturities are conservative and give lower returns than those with higher maturities, but in volatile times, their downside is limited.

choose large funds >>
Stick to larger liquid funds, preferably with a corpus size of more than Rs 1,000 crore. Although panic redemptions in times like these hit almost all funds, the larger ones are comparatively less badly hit. Even a few large investors who withdraw from small-sized liquid funds can leave a much bigger impact.

examine Credit quality >>
Check out your liquid fund’s credit quality. Monthly portfolios of existing schemes (if you are investing in liquid and liquid-plus schemes) are available on the MF’s website. Alternately, you can ask your agent to obtain for you a monthly factsheet and have him take you through the portfolio’s credit quality if you are unable to decipher these details yourself.

Avoid schemes that have a large holding in assets below an AA or an equivalent credit rating (OLM’s threshold; see The Bottom 10: Holdings In Poor Quality Paper) or in PTCs. “The lower your liquid funds’ portfolio quality, the harder it is for them to sell their scrips to fund redemptions," adds Amit Trivedi, proprietor, Karmayog Knowledge Academy, an MF training institute.

If you are investing in FMPs, make sure you read the offer document. Some FMPs clearly say in the offer documents that they will avoid low-rated scrips. Look out for such portfolio credit-quality related statements in the offer document.

stay invested >>
If you have already invested in an FMP belonging to a pedigreed fund house, do not panic. When FMPs give you an indicative yield you’re most likely to earn, they arrive at these calculations assuming that you’d stay invested till maturity. But when faced with panic redemptions, especially in times like these when buyers are few and far between, FMPs are forced to sell their scrips in a hurry and at throwaway prices. This negatively impacts your yield and you are most likely to incur a loss, especially since exit loads are levied for premature withdrawals.

For fresh investments, stick to pedigreed FMPs and then only if you are willing to wait till maturity. In fact, recent news reports indicate that Sebi is contemplating banning early withdrawals from FMPs. “The fixed income segment still remains attractive. However, do not get greedy and avoid going for FMPs that necessarily give higher indicative yields. Particularly, look at safety and consistent returns,” adds Nigam.;

Stocks you can buy now and add on declines

The two most respected names of corporate India, Tata and Birla, failed to raise money from the stockmarket through their respective rights issues (a rights issue is when a listed company offers shares to existing shareholders at a price, which is usually less than the market price of the listed stock). Eventually, underwriters had to buy the majority of shares. Hindalco Industries, an Aditya Birla Group company, saw just half its Rs 5,000-crore rights issue subscribed to. Tata Motors of Tata Group, too, had the same fate. The reason? Market prices of these stocks fell much below their offer price in the rights issue, removing the investor incentive of buying. Tata Motors and Hindalco are not the only companies to have seen such a battering.

As we go to press, about 380 out of 600 companies with a market cap of over Rs 250 crore, have lost more than 50 per cent of their value since January. The Sensex and the Nifty have also lost close to 60 per cent. It is carnage on markets. But, in the rubble, you will find some gleaming diamonds, available at a quarter of what they were worth until a few months ago.

The Indian market has become a victim of a global meltdown. What started as credit crisis in the US has spilled over to the global financial market. Bears are out in full force, with their usual weapon of panic and fear, and have virtually captured every market—from Wall Street to Dalal Street. If all you saw over the last four years was unbridled enthusiasm, now all you can hear is negativity. The Indian market started witnessing selling pressure from January this year. As the credit crisis started deepening in the West and liquidity became scarce, foreign institutional investors (FIIs) started selling stocks in all the markets, including India. Anticipation of heavy selling from the FIIs prompted domestic investors to get out. FIIs continue to dump Indian stocks—they have sold stocks worth Rs 52,000 crore, or $12.90 billion, in our markets since January. Apart from the FII play, expectation of slower growth of the economy and corporate earnings, due to deteriorating global outlook and high domestic interest rates, contributed to the market’s downfall.

What next. International Monetary Fund (IMF), in its October 2008 report, World Economic Outlook, said that the world economy is entering a major downturn in the face of the most dangerous shock in mature financial markets since the 1930s. It has marked down global growth to 3 per cent for 2009, the slowest since 2002. The Indian economy is also expected to slow down. The Reserve Bank of India (RBI), in its mid-term review of marcoeconomic and monetary developments, published a professional forecasters’ survey, which suggests that the Indian economy will grow at 7.7 per cent in FY09, compared to 9 per cent in FY08. Earnings growth has also started to show a declining trend.

Earnings guidances are being revised downwards, liquidity has become scarce, markets have fallen above 60 per cent, and FIIs continue to sell. In short, the overall condition has turned against equities. So, should you be out of equities? Outlook Money advised caution when the market was on a dizzying ride—the Sensex was up at around 21,000. Now, as the Sensex crashes to 9044.51, we are breaking out of the pessimistic babble to tell you that this is a good time to start buying stocks. The current crisis is being termed as once-in-a-lifetime by the Western press. If the crisis is once in lifetime, so are the challenges and opportunities. And as an investor, you should grab the opportunities.

The question you may ask is whether the market will fall further? It surely can. But you need to remember that it’s always difficult to catch the bottom. The market may fall further before stabilising, but start buying now. Investors entering at this stage need to hold on to their stocks for the long term. If you are a short-term investor, stay out of the market at this stage. Buying long-term assets with short-term capital is never a good idea.

Valuations have come down significantly, even for fundamentally sound companies. We are giving you eight such options—take your pick and invest for at least three years. Invest systematically to take advantage of any further price fall.

Methodology. The companies that have been considered for selection are the ones with a market capitalisation of at least Rs 250 crore. Among them, companies with year-on-year (y-o-y) net sales and net profit growth of more than 10 per cent for the last three years and the last two quarters were retained. From this list, only companies that were able to maintain or increase their operating profit margin (OPM) and operating cash flow in the last three years were kept. The remaining stocks were examined individually based on qualitative and quantitative measures.

Bank of India (BOI)

BOI is perhaps the fastest growing public sector bank in India. Its operating profit and net profit in FY08 grew 53.81 per cent and 78.90 per cent y-o-y, respectively. For the last nine quarters, including the quarter ended September 2008 (Q2 FY09), its net profit grew at 50 per cent plus y-o-y, which indicates its sustained growth. Because of its strong presence in the industrialised states of Maharashtra and Gujarat, BOI has given advances to more productive sectors than its public sector peers. It has reduced its dependency on low-yielding treasury income and has focused on interest income and income from fees. Its gross non-performing assets have gone down from 3.72 per cent in FY06 to 1.68 per cent in FY08. Overseas operations contribute around 20 per cent of its business. The overseas branches help BOI raise deposits at rates lower than the domestic rates. It has some exposure to derivatives instruments overseas, but all of them have highly-rated Indian companies as underlying.

Current market price (Rs): 222.65 PE: 4.51
	fy06	fy07	fy08
Net sales y-o-y growth (%)	16.53	27.14	38.26
Net profit y-o-y growth (%)	106.28	60.12	78.9
Return on equity (%)	14.84	20.35	24.38
EPS (Rs)	14.39	23.04	38.26

WHY BUY

FASTEST growing public sector bank

FOCUS on efficient fund use and cost cuts

improvement in quality of assets

Bharti Airtel

Bharti Airtel is riding high on the overall growth of the telecommunication sector in India. Mobile penetration in India is still around 26 per cent, which leaves an enormous opportunity for growth. In this growing and competitive market, Bharti has been on top, in terms of subscriber base since May 2006. It has maintained both y-o-y net sales and net profit growth at around 40 per cent in the last nine quarters. The margins have declined due to stiff competition, but the volume growth from the untapped rural market compensates that. It has outsourced its non-core operations to focus on brand building and increasing subscriber base. In January 2008, it hived off its infrastructure business into a new subsidiary, Bharti Infratel, which will share the capital expenditure burden with other telecom players.

Current market price (Rs): 615.05 PE: 16.97
	fy06	fy07	fy08
Net sales y-o-y growth (%)	42.08	58.47	44.45
Net profit y-o-y growth (%)	66.19	100.5	54.82
Return on equity (%)	33.42	42.54	39.67
EPS (Rs)	10.62	21.27	32.9

WHY BUY

growth in telecom industry will translate into company growth

PE at historic low. It gives an opportunity to buy this bluechip stock

Emami

Emami has created a niche in the market by bringing products for its consumers that combine modern production techniques and ayurvedic principles. Its brands such as Boro Plus, Navratna Oil and Fast Relief are leaders in their respective categories. Its recently launched brand, Fair & Handsome, created an altogether new market. In the last eight years, its net sales and net profit registered 19 per cent and 23 per cent CAGR, respectively. Its OPM also improved over this period due to better pricing of products and cost management. The return on equity, which increased from 10.36 per cent in FY2000 to 35.78 per cent in FY08, also reflects its rising profitability. Emami is reaching deep inside rural India, which will lead to volume growth. Modern lifestyle has increased the risk of chronic ailments and consumers will demand natural products backed by research.

Current market price (Rs): 244.25 PE: 15.89
	fy06	fy07	fy08
Net sales y-o-y growth (%)	37.48	71.43	13.17
Net profit y-o-y growth (%)	67.66	33.55	40.7
Return on equity (%)	14.99	23.47	35.51
EPS (Rs)	8.07	10.78	14.92

WHY BUY

leader in most of its product categories

focus on retail and distribution will drive growth from both rural and urban India

HDFC Bank

HDFC Bank has seen a y-o-y net profit growth of over 30 per cent for the last 34 quarters and has maintained a high OPM of around 60 per cent during the same period. Maintaining the same momentum, it has reported a net profit growth of 43.29 per cent and OPM of 62.61 per cent in Q2 FY09. The bank’s merger with Centurion Bank of Punjab has not shown any significant impact till now, but it is expected to yield robust growth for the company in the future. Banks will start showing mark-to-market gain on their bond portfolio with interest rates expected to go down in the coming quarters.

Also, funds have dried up in the global markets—this will increase demand for credit from domestic banks. This means stable business in the future.

Current market price (Rs): 945.60 PE: 21.24
	fy06	fy07	fy08
Net sales y-o-y growth (%)	44.67	48.55	52.15
Net profit y-o-y growth (%)	30.83	31.08	39.31
Return on equity (%)	17.65	19.43	17.73
EPS (Rs)	27.81	35.74	44.87

WHY BUY

consistent performance over long term

business more stable compared to peers

attractive valuation against growth

Indraprastha Gas Ltd (IGL)

The government’s thrust on environment is putting more compressed natural gas (CNG) buses on road and rising fuel prices are prompting people to fit CNG kits to their cars. This is boosting IGL’s CNG distribution business. Households and commercial establishments now prefer piped gas supply to conventional LPG cylinders as it is convenient and safe. This means a huge revenue jump for IGL’s piped natural gas (PNG) distribution business.

IGL has been enjoying consistently high OPM—over 40 per cent—for the last 21 quarters. As a result, its return on equity has remained higher than 30 per cent in all the financial years, starting 2003. Even if it is not able to sustain such high margins in the long term, the volume growth will more than compensate for any dip. It is unlikely to face any gas supply constraint as it gets it on a priority basis as directed by the government. The IGL stock has limited its fall to 21 per cent as against Nifty’s 54 per cent in the last 12 months. It is currently trading at seven times its earnings.

Current market price (Rs): 99.90 PE: 7.48
	fy06	fy07	fy08
Net sales y-o-y growth (%)	15.74	17.9	16.1
Net profit y-o-y growth (%)	14.51	29.98	26.46
Return on equity (%)	30.5	32.33	33.1
EPS (Rs)	7.6	9.85	12.46

WHY BUY

Long-term earnings visibility due to increasing demand

high margins make the business more profitable

KS Oils Ltd

It leads the edible oil market in the north and north-eastern part of India through brands in mustard oil, refined oil and vanaspati. Its share in the Indian mustard oil market is 7 per cent, when 75 per cent of mustard oil is sold loose. Among brands, it has captured 25 per cent of the market. The company has also entered north and central India with an aggressive branding effort and greater retail push. Its net sales in FY08 was Rs 2,044 crore, implying 91.08 per cent growth over the previous year, backed by volume and high edible oil prices. Its y-o-y net sales growth in the first quarter of FY09 remained high—at 91 per cent over the previous quarter, though the margins were flat. KS Oils has secured its raw material supply by acquiring 50,000 acres of palm plantations in Indonesia, which will protect it from any price fluctuation in oil seeds. Also, this kind of backward integration will help improve the margins over sales.

Current market price (Rs): 40.75 PE: 9.49
	fy06	fy07	fy08
Net sales y-o-y growth (%)	34.42	76.02	91.08
Net profit y-o-y growth (%)	351.49	277.9	110.6
Return on equity (%)	42.85	54.01	29.85
EPS (Rs)	18.07	25.95	3.63

WHY BUY

high growth in business maintained

protection from price fluctuation of raw materials through backward integration

Mphasis Ltd

MphasiS derives its revenues from application services, infrastructure technology outsourcing (ITO) and business process outsourcing that span industry verticals, such as banking and financial services, healthcare, transport and manufacturing. In Q2 FY09, Mphasis reported an impressive y-o-y sales growth of 54.59 per cent. It significantly improved the OPM by 273 basis points over the last quarter and, therefore, registered higher PAT growth of 128.74 per cent during the same period.
All its three business segments are registering healthy growth with its ITO business growing at 113 per cent. MphasiS is trying to reduce its dependence on the US, which contributed 67 per cent to its revenue in FY08. The current crisis in the financial sector may impact its revenue, but it will also throw up new opportunities as ailing banks will go for greater outsourcing in order to cut costs.

Current market price (Rs): 40.75 PE: 9.49
	fy06	fy07	fy08
Net sales y-o-y growth (%)	34.42	76.02	91.08
Net profit y-o-y growth (%)	351.49	277.9	110.6
Return on equity (%)	42.85	54.01	29.85
EPS (Rs)	18.07	25.95	3.63

WHY BUY

high growth in business maintained

protection from price fluctuation of raw materials through backward integration

Titan Industries LTd

Titan watches have built a strong brand and its diverse product range caters to masses as well as the premium segment, which is its success formula. Titan Industries’ jewellery business, under the brand Tanishq, too, commands leadership position in the organised retail segment. It is going to smaller towns and rural areas under the brand Gold Plus.

In Q2 FY09, Titan Industries’ net sales and net profit rose 53 per cent and 88 per cent y-o-y, respectively. In the last six years, Titan and Tanishq recorded a compounded annual growth rate (CAGR) of around 13 per cent and 40 per cent, respectively. Risks to business growth are low. Watch penetration in India is well below 30 per cent. Growth will continue and margins should improve as it sells more watches through its exclusive Titan showrooms, which is more profitable than the dealership model. Rise in gold prices could slow down jewellery sales. But, at higher prices, consumers will become more quality and value conscious and should go to organised stores, such as Tanishq, that guarantee quality, diverse range and standard pricing.

Current market price (Rs): 1,004.35 PE: 21.26
	fy06	fy07	fy08
Net sales y-o-y growth (%)	31.32	45.14	43.25
Net profit y-o-y growth (%)	195.07	27.86	59.64
Return on equity (%)	37.09	34.15	21.14
EPS (Rs)	17.63	21.25	35.66

WHY BUY

high growth business with low risk

expanding in new product categories. Rural areas and small towns potential markets