The Hindu Business Line : How to make gains from the pains

For discerning investors, who understand the intricacies of the market, such dumping of stocks of companies that are otherwise fundamentally sound, provide a great buying opportunity since they know that it would be a question of time before the stocks bounce back

R. Yegya Narayanan

Coimbatore, Aug. 24 The steep decline in stock prices since the year’s high in January and the continuous volatility in the markets are unsettling the nerves of investors who are left wondering as to whether it makes sense to invest in the market now. The time tested advice of investment gurus is to buy when others are selling and do the reverse when the contrary happens. But this is easier said than done!

If one looks at the history of the Indian stock markets in the last decade or more, there have been numerous instances of stocks of strong and high performing companies being hammered on negative news flow that had little to do with the fundamentals of the concerned companies. This could be because of some Government action, the legal hurdles the company faced, the perceived shrinking of the markets of the companies, potential competition from associates turned competitors and so on.

The sudden negative perception of the companies’ future made the investors jittery and they resorted to panic selling of the stocks leading to slump in their prices. But for discerning investors, who understand the intricacies of the market, such dumping of stocks of companies that are otherwise fundamentally sound provide a great buying opportunity since they know that it would be a question of time before the stocks bounce back.

Windfall gains

A peep into the history of Indian markets shows that a many of the present day blue chip companies such as ITC, Ranbaxy, Dr Reddy’s, Hero Honda, TVS (Suzuki) Motor and more recently Orchid Chemicals, Mundra Port, Suzlon Energy etc had come under the hammer because of some reports involving the companies. The list is by no means exclusive and there is no guarantee that this phenomenon would not repeat itself in the future. But investors who are nimble enough to seize the opportunities and who are unnerved by the temporary adverse factors surrounding the stocks may make windfall gains.

Long back, in case of ITC, it was the excise duty related issue that led to large scale selling in the counter. But the stock was able to tide over the temporary bearishness and from being a tobacco product manufacturer, ITC has evolved into a versatile player in the hospitality/paper products/ and FMCG space as well. In case of Hero Honda and TVS Motor, it was the perceived adverse impact of the their technology partners entering the two-wheeler sector on their own that led to large selling in those counters. Both the Indian companies, particularly Hero Honda, have come up trumps.

Ranbaxy stock has off and on been subjected to hammering for different reasons but had been able to bounce back. In the latest instance, after the announcement of being sold off to a Japanese drug company and an open offer to be made at a hefty price of Rs 737 per share, reports of action by the US Justice department in mid-July saw frenzied selling in the counter and the share price dropped from around Rs 530 to Rs 409 in a matter of days providing a good opportunity to long term investors to get into the stock. The share closed at Rs 522.55 in the NSE on Friday, far lower than the buy back rate yet better than the lows recorded in July.

Recently Amtek Auto Ltd announced merger with its group company Amtek India Ltd and the merger ratio is 44 shares of Amtek Auto for every 100 shares of Amtek India. But Amtek Auto shares that were ruling around Rs 222 (FV Rs 2) in mid-July have come down by about 20 per cent since then to around Rs 181 now. Amtek Auto had said that the amalgamation would result in ‘emergence of a strong and focused consolidated entity to manage the business more advantageously and thereby increase in the profitability and shareholders’ net worth’, giving an indication of the management’s confidence about its future.

Bet on management

What message do these examples send to investors?

Mr Hitesh Agrawal, Head-Research, Angel Broking, Mumbai, said “correction in stocks of fundamentally strong companies owing to some one-off adverse news, which could impact the company in the short-term, always provides investors an opportunity to do some bargain buying”. This was because companies with proven management would often be able to address the short term negative factors. But he had a word of caution. Investors, while making value buying, should keep in mind that the company has a proven track record and should be patient as companies may take time to tide over the problem at hand.

Referring to the recent Orchid Chemicals issue, he pointed out the that the stock corrected more than 50 per cent in a few trading sessions in March 2008 on reports that its promoters had raised stake in the company through margin funding, but for some reasons their calculations went awry. But after Ranbaxy group got into the act, the share bounced back smartly. In case of Suzlon Energy, which had acquired REpower in early 2007, though the market hammered the stock as it felt the price paid for acquisition was high, it was able to give good returns to the investors subsequently.

(Suzlon was again in the news in mid-July with some media reports that the company had to pay Rs 590 crore to some customers. After Suzlon clarified that the figure was the ‘accumulated provision’ on its balance sheet’, the share price recovered.

Even when news of Tata Steel acquiring Corus was out, the stock shed nearly 30 per cent of its value but since then it has more than doubled, he added. In case of Mundra Port and SEZ Ltd, it was the court injunction against construction activity at the SEZ (which was later vacated) that led to a widespread selling in the counter and the share hit a low of Rs 388.15 on July 2. Since then it has recovered to Rs 575 levels now.

Mr Agrawal said short- term pressures could lead to correction and/or underperformance by stocks but it was` during such times that long- term bets on stocks provide above average returns to investors’. He felt that banking and auto stocks were ‘reeling under the pressure of high interest rates and it is only a matter of time that these would outperform the markets over the next few years’.

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