The Hindu Business Line : Seize the opportunities, but tread with caution

The recovery in stock prices this week has been almost as swift as the collapse that preceded it. To most investors, that sends out only one message: Buy into stocks at every decline. Yes, with the corrective phase trimming stock valuations almost across the board, there are a larger number of buying opportunities today than was the case a couple of weeks ago. But investors should exercise caution on the following counts while scouting for “buy” options in this market:

One, recent events have certainly proved that “decoupling” theory or not, the Indian stock market remains highly vulnerable to interruptions in foreign fund flows.

As no one can predict the direction of these flows, investors should brace for volatile phases and possible risk to their capital.

Market valuations, though cheaper than a couple of weeks ago, remain higher than long-term averages (see related story on Page 15). This cautions against investing a large lumpsum in the market or in individual stocks at this juncture. It also strengthens the case for adhering to a fixed equity allocation in your portfolio and taking periodic profits.

Second, while seeking investment opportunities, it may be better to look for stocks with strong moorings in fundamentals and good earnings prospects over a two-three year time frame.

Avoid chasing stocks that can deliver quick gains. Though momentum stocks (such as those from the sugar and fertiliser pack) that took a drubbing have recorded a swift recovery, they remain vulnerable to any fresh wave of profit-booking.

Three, uncertainties about the US economy suggest that companies and businesses focused on domestic themes may be the safer investment options at this juncture.

Stock ideas

Here are a few stock ideas, from across the market capitalisation range, for investors with a 2-3 year horizon.

It may be best to accumulate these stocks in lots, taking advantage of any further market volatility. Each of these companies relies mainly on domestic drivers for growth, has limited scope for negative earnings surprises, and has seen a material decline in PE multiples over the past month:

Petronet LNG : Driven by spot cargoes sourced for the the Dabhol project, Petronet is working at about 130 per cent capacity at its existing regasification plant in Dahej. The Dahej plant’s capacity will be doubling to 10 million tonnes by the end of this calendar year.

Worries remain in the medium term on the impact from Reliance’s domestic gas but the large unmet demand for gas in the country adds comfort.

Earnings grew 54 per cent in the third quarter and after the last week’s fall, the stock is available at a trailing price earnings multiple of 11; down from 16 earlier.

Marico : With a clutch of strong brands in FMCG segments such as hair care and edible oils, Marico is seeking higher growth through entry into new niche segments, overseas acquisitions and a ramp up in service offerings (skin care and fitness). These translate into strong earnings prospects for the next 2-3 years.

The company reported a 55 per cent growth (inorganic as well as organic) in earnings in the nine months ended December 2007. The recent reversal in stock price has trimmed the PE multiple for the stock from about 25 times expected earnings for 2008-09 to 20 times, a discount to peers.

CMC : The market decline has trimmed CMC’s PE multiple from about 20 to about 12 times its estimated FY09 earnings. CMC’s key business lines- customer services and system integration- handle IT solutions and manage turnkey projects across the entire gamut of IT infrastructure components.

CMC also has an ITES division, which handles back-office processes and an education and training division, which provides IT education services to college graduates and corporate professionals.

System integration and educational training are its relatively higher margin offerings. With an increasing contribution from system integration projects, opportunities from Government spend in IT infrastructure and synergies with TCS, CMC is well placed for revenue/margin expansion.

Sun TV : Sun TV turned in a splendid performance in the third quarter. Although the performance is not strictly comparable to the corresponding previous quarter, due to the merger of Gemini and Udaya channels, there is visible traction on advertisement rate hikes (one more round of hikes to be effective February) and subscription income.

That it continues to rule the top 100 shows suggests that concerns on the competition front, might have been overdone. Valuations are now more attractive, with the stock trading at 19 times FY09 earnings, as compared to 23, prior to the correction.

BEML : With metro rail projects likely to be rolled out in many cities, BEML’s presence in metro rail business offers huge potential for upside in earnings. Having already secured orders to supply coaches to Delhi Metro Rail Corporation, the company may now be well placed to supply metro coaches to similar projects in other cities.

Besides, the company’s unique exposure to construction and mining opportunities also presents significant potential for revenue growth over the long-term. Despite a sedate December quarter, the sharp decline in company’s PE multiple from about 33 times its expected FY09 earnings to about 26 times, presents an opportunity to accumulate the stock.

A.K.

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