Indian Equity Markets - Outlook and Stock Recommendation

Equity markets were unsettled during the second quarter as investors faced two challenges: a deflationary crisis in global credit markets and the inflationary thrust of soaring food and energy prices around the world. Neither challenge has been ‘resolved’ and the implications of each are likely to set the tone of financial markets during the second half of the year.

Mounting inflation threatens to complicate an already challenging situation by constraining consumers’ spending power, eroding corporate profit margins and encumbering the operations of the world’s central banks. Pricing pressures should abate as economies slow.

There is every prospect of a period of sluggish economic activity as the end of the ‘cheap money’ era coincides with an escalation in the global prices of energy and food. However, the long suffering investor should persevere. Threats are obvious but, as sentiment in markets deteriorates, changes in economic and financial landscapes are likely to present attractive opportunities for investment.

It is nearing a year we have been asking our investors to book money out from markets and sit on cash (Our Nov'07 article asking investors to book profit from the market: http://profitfromshortterm.blogspot.com/2007/11/what-to-do-this-diwali.html). We are one of the few market analyst who predicted the market fall at the beginning of the credit crisis. Our recommendation portfolio during this period has delivered a positive growth of 2% as compared to a negative 23% return by the sensex. Neyveli Lignite, Orchid Chemicals, Novartis India, Rallis India, TNPL, Chennai Petroleum have been the star portfolio performer beating the sensex return.

Is it a right time to re-enter stock markets?

Further credit market crisis cannot be ruled out and this converging into a full blown recession looks a high probability. Albeit to this with the recent correction seen in Indian markets quiet a good number of stocks looks undervalued. We are advising our investors to sit on partial cash and invest in frontline stocks with a long term outlook. We also have picked five stocks from the small and Mid cap space that has a potential to deliver extra ordinary returns over the course of next 3
years.

Large Cap Picks

1) Mahindra and Mahindra Ltd (CMP Rs. 572/-)
2) Jaiprakash Associates (CMP Rs. 156/-)
3) Indian Oil Corporation -IOC - (CMP Rs. 396/-)
4) Sterlite Industries (CMP Rs. 618/-)
5) HDFC Bank (CMP Rs. 1215/-)

Mid Cap Picks

1) Chennai Petroleum (CMP Rs. 254/-)
2) Ruchi Soya (CMP Rs. 78/-)
3) Shriram Transport (CMP Rs. 335/-)
4) Gujarat Mineral Development Corporation Ltd - GMDC - (CMP Rs. 247/-)
5) Hindustan Construction - HCC - (CMP Rs. 91/-)

Small Cap Picks

1) Abhishek Industries (CMP Rs. 14/-)
2) Tata Metalinks (CMP Rs. 138/-)
3) Novartis India (CMP Rs. 294/-)
4) Deepak Fertilizers (CMP Rs. 91/-)
5) Hitachi Home & Life Solutions (CMP Rs. 110/-)

A Question of Answers - Mail replies

I am holding SAIL at Rs. 230/- and Gujarat Ambuja Cement at Rs. 118/-. Do you see any recovery in short term?

With cooling commodity prices, I would stay away from metal stocks in the current market. Cement inspite of predicted decrease in Infrastructure growth looks positive.
Investors can take fresh long position in sugar stocks with surging sugar prices. Stocks like Sakthi Sugars and Triveni Engineering looks good.
With falling prices of zinc and lead one can look for fresh investments in battery manufactures like Eveready and Amara Raja.

Are you taking any fresh look into your earlier recommended stocks?

Yes. We are positive on Tamil Nadu Newsprint Limited (TNPL), JK Lakshmi Cement, Rallis India and Orchid Chemicals from our earlier recommendation.

With Neyveli Lignite almost available in half the price from it's peak is it advisable to take a fresh position into this stock?

New power additions are not progressing satisfactorily. Also the current quarter results are way below expectation. Will wait and watch for couple of more quarters.

I have brought Alembic at Rs. 42/-. Is it a worth hold for long term?

Seems to me yes. Pharma sector looks to be a good bet in the current market. Alembic looks good with strong presence in domestic market. We are also positive on Orchid Chemicals and Novartis India.

I have huge position in textile stocks like Arvind mills and Alok Industries? Can I book losses or hold it?

I am not sure about Arvind mills. Alok seems to me a good bet from a longer term. I think government control on curbing cotton exports is set to benefit domestic textile firms.

Can I buy Teledata Informatics, Phoenix Mills at current level?

Sorry I am not tracking both of these companies.

A portfolio for your retirement savings

"Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria". Legendary investor John Templeton one of the contrarians believed that the best bargains are available when the investing public is fearful. Not to mention another contrarian investor Warren Buffet whose key to investment success is to be greedy when others are fearful and fearful when others are greedy.

The current financial year saw Indian markets bull run coming to a halt and the financial markets correcting almost 40% from it's peak. Lot of pessimism is surrounding the market regaining it's lost glory with crude oil trading way above the three digit mark and the inflation number touching 2 digit mark. People are surprised to see bank deposits giving two digit return after a gap of almost 7 years. High inflation weakens investor sentiments as it slow downs industrial growth and also brings down the mega expansion plan the Indian corporate world is undertaking.

Taking a optimistic view of tomorrow we have selected 10 stocks which is set to benefit from the India growth story. We have picked these companies with strong balance sheet, corporate governance, business model, Good dividend yield and it's market position. Investors with a horizon of 3 to 5 years can consider investment in to the below stocks.

1) Shipping Corporation of India (SCI) - CMP Rs. 230/-
2) Indian Oil Corporation (IOC) - CMP Rs. 400/-
3) Hindustan Construction Company (HCC) - CMP Rs. 87/-
4) Ashok Leyland - CMP Rs. 28/-
5) Bharti Airtel - CMP Rs. 799/-
6) Bharat Heavy Electrical Limited (BHEL) - CMP Rs. 1679/-
7) Tata Steel - CMP Rs. 630/-
8) Rural Electrification Corporation Ltd (RECL) - CMP Rs. 87/-
9) Oil and Natural Gas Corporation (ONGC) - CMP Rs. 996/-
10) LIC Housing Finance - CMP Rs. 321/-

Detailed recommendation to follow for the above stocks. Due to time constraint we were not able to post recommendations regularly. We have lot of unanswered e-mails from our subscribers which we are trying to attend at the earliest convenience. We will try to clear the e-mail backlog soon.

Ruchi Soya - An Healthy Investment

Ruchi Soya is one of the largest agribusiness companies in India. Ruchi is one of the largest producers and suppliers of vegetable oil and Soya food in India. Ruchi is also the highest exporter of soya meal and lecithin from India and it's brand Nutrela being the largest selling Soya food brand in the country. Ruchi currently has capacities of 2 MTPA of refining and over 2.6 MTPA of crushing spread over 12 strategic locations.

Ruchi Soya distribution reach covers around 5,83,000 retail outlets which includes strong brand portfolio such as Nutrela, Ruchi Gold, Ruchi Star, Mahakosh, Sunrich. As of Dec' 07 edible oil accounts for 72% of the revenue, Followed by Soya products 17% and vanaspati 9%. Ruchi currently accounts for 19% market share of edible oil business in India. Currently branded portfolio accounts for 29% of the business.

The company is the highest exporter of Oil meals from India with it's export presence in most of the south east Asian countries, Middle East and Europe.

Positives

1) Ruchi has entered into national tie-ups with celebrated players like Pantaloon retail, Subhiksha, Reliance Retail, Aditya Birla Group for sale of it's product through the growing modern retail outlet in India.

2) Soya being one of the best source of Vitamins and Proteins, Ruchi is well positioned in growing wellness and health food products. The company is planing to introduce Soya based flours like multi blend flour and also 100% soya flour. Ruchi is also diversifying into mustard products.

3) The company recent venture in to protein drink N'rich is expected to add on to the topline going forward. Apart from the branded products the company is also a manufacturer for pantaloon's private label - Fresh and Pure.

Risks

1) Government current measure to curb inflation by cutting import duty on edible oil.

2) Falling Oil prices in the international market.

At the current market price of Rs. 91/- the stocks trades at around 8 times it's FY09E EPS of 11. The earnings are considerate of the government recent impact to cut import duty. Investor with medium to high risk profile can consider investment into this stock with a horizon of 12 months and a target of Rs. 130/-. Ruchi currently operates in a low margin segment and any further duty cut by government can severely impacts it's margin unless they are able to procure raw materials at a lower cost. This remains a key risk to our recommendation.

West Coast Paper Mills Ltd

West Coast Paper Mills manufacturers writing, printing, wrapping and packing papers. West Coast paper division currently has an installed capacity of 1,63,750 MTPA. FY2006-07 the production at their capacities were running over 100%. West Coast also has a telecom cable manufacturing plant which produces armoured and aerial typed of Optical fiber cables and JFTC cables used in telecommunication network. Currently paper constitutes 96% of the revenue and the remaining by the cable division.

West Coast Paper Mills currently enjoys 7% market share in the domestic paper market. The telecom division of West Coast enjoys 4% market share. Some of the major clients for the cabling division includes BSNL, Reliance, VSNL, CATV among others.

The company currently exports 7 to 8% of its paper products to around 25 countries mainly to middle eastern and african countries. The export order book for the cabling division stands at Rs. 5 crores for FY08.

Positives

1) West Coast is investing around Rs. 1,100 crores in Expansion whereby it is increasing its pulp and paper capacity from 1,63,750 MTPA to 3,20,000 MTPA. The benefits of this project is expected to be realized in FY2009-10.

2) Over a period of 5 years, the company contrives to have 18,000 acres under management for its raw material supply. These initiatives are expected to meet about 25% of its raw material requirement.

3) West coast is leader in production of MICR/Non-MICR cheque paper and Ledger Paper.

4) Step down of excise on paper and its products in the 2008-09 budget.

Negatives

1) High debt leverage for the ongoing expansion program to impact the bottomline due to high interest cost.

2) Paper consumption is directly tied to the GDP growth. Any deterioration in GDP growth can dent the performance of the company.

3) Any further increase in raw material prices which the company is not able to pass on to the end customer. This can happen due to the inflation control program launched by the government.

At the current market price of Rs. 65/- the stock trades at around 4 times it's FY08E EPS of 16. Investor with medium risk profile can consider investment into this stock with a horizon of 18 months and a target of Rs. 118/-. With the government primary thrust to education and the booming textiles and manufacturing exports the demand for paper products is expected to remain strong. With rising raw material prices we expect the topline of the company to be flat until the expected capacity expansion is in place. At the same time with the operation efficiency initiatives taken by west coast we expect the Operating margins to remain robust and deliver a bottomline growth of 20% y-o-y.

A Question of Answers - Mail replies

I am holding Tata Motors at an average price of Rs.815. Do you see any recovery possible in near term?

Kudos to Tata Motors for making the world most luxurious car brand come under the Indian portfolio. Having said that tata's have surely got a brand image but only to harm it's bottomline. The acquisition is a difficult to be turnaround with the terms and conditions these acquisition has been negotiated on. I would wait for atleast 3 quarters to see how things move on the integration front. As of now we have a Sell on tata motors. Their domestic brands are as well losing market share to hyundai, maruti etc.

I would rather bet on Mahindra and Mahindra in automobile sector for a term of 2 years. This brand is gaining good global presence. Again with high inflation rate and a possible rate increase the outlook of automobile sector looks very gloomy at this point.

Your views on Abhishek Industries and vesuvius India?

Both are one of the few market leaders in the business they operate in.

On Abhishek Industries

I would say Invest in this stocks if you have patience and also believe in the company. Abhishek is definitely one of my favorites. The company as such has seen a strong topline growth of around 20 to 30% y-o-y. The bottomline has been dented mainly due to high interest cost and depreciation due to the huge capex the company is undergoing.

Two negatives to the companies

1) Rupee appreciation and a possible US recession
2) High interest rate would adversely affect its bottomline due to its huge debt leverage.

I would advise investors to use any fall from the current level as an opportunity to enter into Abhishek and take advantage of its aggressive capex returns.

On Vesuvius India

Vesuvius India is one of the largest manufacturers of refractories which is used in the steel Industry. With huge capacity expansion in the domestic steel sector the order book is expected to remain strong for Vesuvius. Moreover Vesuvius is almost doubling its unshaped refractories capacity and this is expected to be done by FY09. Add on to this the company is debt free which makes it a nice hedge to the rising inflation and interest cost. The stock at current market price of Rs. 208/- trades at around 13 times it's trailing 12 months EPS of 16 which provides a room for around 30% return in and around a year.

I have been following your blog continuously and you have been having a bearish view of the market for almost 6 months now. With most of the stocks correcting more than 40% has your view changed on the Indian Markets?

The global outlook still looks negative with the US seems to be already in a recessionary phase. As of Indian markets are concerned I would be cautious and go for stock specific buying. I would look for undervalued stocks with strong fundamentals. I will still hold some amount of Cash in hand for the worst.

With the Inflation rate touching 7% and a possible rate hike in place it is advised to Invest in companies with fewer debt in place at the same time having good business model to sustain with.

Thanks for your recommendation on Neyveli Lignite, I made a hefty profit on that stock. At the same time I had brought JK Lakshmi Cement on your recommendation and it is down almost 40% from my purchase price. What is your view on that?

I am still holding JK Lakshmi cement and positive on this stock from a term of 18 to 24 months. True the correction has really hurt the stock to a larger extent but the business fundamentals still look solid.

You seem to be too much positive on Orchid Chemical. After the promoter sale their holding has come down to almost 14% now. Do you not see that as a negative sign?

I don't think so. The promoters of Infosys are holding only 16% in the company. This does not make Infosys a non promoter friendly company. Still as I reiterated earlier there has been some negative news on Ochid and to add on to this lot of liquidity has been floating on the market. I feel time will heel the Investors negative bias on the company and Orhcid will regain it's lost glory.

Stocks that can double from current level

Hitachi Home & Life Solutions (India)

Hitachi Home & Life Solutions (India) Ltd., a subsidiary of Hitachi Home & Life Solutions, Inc., Japan, is headquartered in Ahmedabad, Gujarat, the company's manufacturing facility at Kadi is among the seven Hitachi room air conditioner facilities worldwide. The Indian plant also exports Hitachi room air conditioners to the SAARC, Middle East and other tropical countries in addition to catering to the Indian market.

It has a nationwide sales, distribution and service network. It has 14 Branches, 250 Sales and Service Dealers, more than 800 Showroom Dealers and 350 Service Points. Hitachi currently has a market share of around 45% in the Indian split AC segment market. Apart from air conditioners the company also sells Chillers, Refrigerators and Washing machines in the Indian market. The Refrigerators and Washing machines are imported and were introduced during the financial year 2005-06. These products are well received and expected to have a annual growth of 35%.

At the current market price of Rs. 110/- the stock trades at around 6.4 times it's trailing 12 month EPS of 17. With new product range and Increasing domestic and Infrastructure spending we expect the demand for Hitachi products to continue and expect the company to clock a annual turnover growth of 30 to 35% for the next two years. Investor with medium risk profile can enter into this stock with a target of Rs. 195/- over the next 12 to 18 months.

Ramsarup Industries

Ramsarup Industries manufactures low relation precast steel wires, galvanized wires and TMT bars. The company caters mainly to power and Infrastructure. Power transmission sector accounts for around 40% of ramsarup revenues and the rest from construction and infrastructure.

At the current market price of Rs. 143.65/- the stocks trades at less than 5 times it's expected FY08E earnings. With repeat orders from the existing client tele and the expected capacity expansion in place we expect the revenues to grow at an annual rate of 35 to 40%. We recommend the stock to investors with medium risk appetite and a possible target of Rs. 295/- with a horizon of 18 to 24 months.