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Bear market? Ten stocks worth investing in

Jitendra Kumar Gupta | July 21, 2008

The previous six months has seen stock valuations of domestic companies take a huge knock, thanks to macro headwinds like rising inflation rate, high crude oil prices, input costs pressures, global uncertainties and a weak rupee.

The swing in market sentiment has been so rapid and deep, that a majority of market experts and research heads say that "today, fear has taken over the fundamentals".

And, this is also a reason that some of the well-known and high growth companies are trading at attractive valuations, with some quoting at below their fair value.

But, what does this mean? As rightly put by Warren Buffet, the legendary investor, "Be fearful when others are greedy and greedy when others are fearful". The current situation indicates that its time investors start reading into the second half of Buffet's remark.

In a bid to identify investment worthy stocks, which are available at attractive valuations and exhibit characteristics like sound business fundamentals and strong earnings visibility, we spoke with experts including research heads of leading brokerage houses to know their views about the prospects of these companies.

While the list of stocks turned out to be long, we fine-tuned the same and considered stocks that were most preferred and importantly, capable of delivering robust returns.

Aban Offshore [Get Quote]

In light of rising global crude oil prices, drilling oil from the deep water has become an alternative and feasible option. This, however, has also led to increasing demand for offshore drilling services.

As a result of this, the day-rates for different offshore drilling equipment and services have gone up significantly and the availability of rigs has reduced drastically.

This is despite the fact the numbers of rigs added during FY09 were the highest. The favourable change in the industry has also meant better days for the companies in this space, like Aban Offshore, one of Asia's largest oil drilling equipment and services providers. The company operates about 16 jack-ups, three drill ships and one semi-submersible ship.

Apart from higher demand, the company will also benefit from re-pricing of its existing assets at higher day-rates as contracts come up for renewal, besides substantially ramping up of its asset base through organic and inorganic initiatives.

The company is estimated to maintain a strong revenue growth of about 70-80 per cent over the next two years. Analysts say that if its Singapore-based subsidiary, Aban Singapore gets listed, it would help the company raise some funds that may be used to reduce debt (on its own books) raised for the acquisition of Sinvest, and unlock value for its shareholders.

The stock is trading at attractive valuations viz. at a one-year forward PE of just 7 times its consolidated FY09 earnings.

Bharti Airtel [Get Quote]

Bharti Airtel, which commands about 24 per cent market share of the Indian mobile industry, will be the key beneficiary of the fast growing subscriber base.

India's mobile subscriber base is expected to touch 500 million by FY10 from 300 million currently, translating into an annual growth of over 30 per cent, mainly on account of rising affordability.

Also, the company has amongst the most extensive networks in the country covering 71 per cent of the country's population, which Bharti aims to increase to 80-85 per cent by March 2009.

Besides the growth from its core business, the embedded value in the company's tower businesses is equally worth a mention. The combined value of the tower business of Bharti Infratel and Indus Towers is estimated at Rs 165-170 per share of Bharti.

Going forward, even as the core business continues to grow at a healthy pace, new offerings like DTH and IPTV (to be launched soon) and foray into markets including Sri Lanka, should boost growth rates further.

Analysts expect Bharti's consolidated topline and bottomline growth to range 25-30 per cent (annually) during FY09 and FY10. At Rs 748, the stock is trading at a PE of 17 times and 14 times its estimated FY09 and FY10 consolidated earnings, respectively.

HCC

Hindustan Construction Company [Get Quote], a leading construction company, has presence across diverse segments including transportation, hydro and nuclear power, irrigation and water supply, marine projects, utilities and urban infrastructure.

The company's diverse portfolio of projects along with higher spending towards infrastructure makes HCC one of the better investments among companies in this sector.

Also, diversification has not only helped in managing growth, it has also helped sustain high margins.

Amitabh Chakraborty, president - equity, Religare Securities, says, "The rising contribution from the power, water and irrigation segments has helped the company to improve its operating margins from 9.1 per cent in FY07 to 11.9 per cent in FY08".

Besides, in real estate business, it plans to develop 186 million sq ft of land on 14,000 acres of land in Maharashtra. Out of this, the 12,500-acre Lavasa-based Township (near Pune) is HCC's flagship realty project, which will be developed in phases over 12�15 years.

However, considering the prevailing uncertainty in the realty market, the stock has been hammered down. Analysts believe that there is excessive negative sentiment built up in the stock price, which is why the stock is trading at discount to its fair value.

Fundamentally, rising infrastructure spending in the country should drive the growth in HCC's core business. A strong order book of Rs 9,560 crore, which is 3.1 times its FY08 revenues, provides visibility. Any improvement in the sentiment towards the real estate sector should provide further fillip to the stock.

On an SOTP basis, HCC's fair value is pegged at Rs 165 per share, comprising of core business at Rs 98-110 per share and Lavasa project at Rs 34-40 per share. Adjusted for Lavasa and other real estate projects, the stock trades at 9 times it's FY09 estimated earnings and 6 times FY10 earnings.

IDFC [Get Quote]

The country's infrastructure needs should only rise as the economy grows bigger. Even at current projections, the opportunity is huge. The proof: the Eleventh Five Year Plan indicates that $500 billion worth of investment will be required for creation of new infrastructure space, which in turn is positive for companies like Infrastructure Development Finance Company, a leading infrastructure financing institution.

The company's infrastructure lending business is expected to grow at CAGR of 37 per cent during FY08-FY10. While interest spreads could see some pressure, better fund management should help offset some of this.

Additionally, non-interest income should continue to contribute about 47 per cent of total income during FY08-FY10, driven by consistent increase in asset management fee, income from its principle investment book and growth in IDFC-SSKI (broking and investment banking) business.

IDFC has also entered into an agreement to acquire 100 per cent stake in Standard Chartered AMC.

Overall, the net interest income is expected to grow at CAGR of 28 per cent during FY08-FY10, with net interest margin expected to hover at 3 per cent.

"Looking at its business growth and expertise in infrastructure financing, we believe the stock is undervalued and provides an investment opportunity for decent return in medium term," says U R Rao, head of research, ULJK Securities.

At Rs 105, the stock is trading at 16 times its FY09 estimated earnings and 12.5 times FY10 earnings. The research house has puts a price target of Rs 160 per share.

L&T

Thanks to the slower growth in industrial production and capital goods output in the recent past, Larsen & Toubro (L&T), too, has seen its share price being hammered down. This offers an opportunity to buy into the country's largest engineering and construction player, which is among the best plays on India's infrastructure and industrial capital expenditure (capex) boom.

Also, the benefits of its diversification into power equipment, shipbuilding, defence equipment and railways are yet to pay, and help sustain growth in the long-run.

"Flush with cash flows from high oil prices, the Middle East region is likely to achieve infrastructure spend of $1,000 billion. L&T has not fully exploited the opportunity in the region due to constraints of resources. In case of slowdown in India, the company can derive more growth in Middle East," says Anil Advani, head Research, SBICAP Securities.

These factors and a strong order book of Rs 52,700 crore, the company is expected to maintain its growth at about 35 per cent over the next two years. Any value unlocking from its IT and Finance subsidiaries (expected to be listed separately) would further add to the shareholders wealth.

Regards valuation, at Rs 2,357, the stock is trading at 22 times its estimated FY09 consolidated earnings and 17 times FY10 earnings, which is not very expensive historically.

On SOTP basis (factoring valuations of different businesses and subsidiaries), analysts have estimated a fair value of Rs 3,000-3,200 per share.

Maruti [Get Quote] Suzuki

India's leading passenger car company, Maruti Suzuki is available at half the price compared to its 52-week high of Rs 1,252 per share seen in October 2007.

Historically, the share price of Maruti has been trading in the PE band of 13-17 times. But, thanks to the market turmoil, it is now trading at just eight times its FY09 estimated earnings.

The correction was partly on account of concerns over the rising input cost (for the company) and, high crude oil prices and interest rates (for its customers).

Analysts believe that though concerns remain in the near term, the stock should get rerated in the long run on account of benefit accruing from new launches, including WagonR Duo, Zen Estilo, Diesel Swift and SX4.

Also, with the ongoing expansion at Manesar plant, exports are expected to go up. The company will manufacture small cars for supply to its parent's customers in global markets.

Estimates indicate that Maruti will be exporting about 100,000 units to its parent, Suzuki Motor Company of Japan, while another 50,000 units would be supplied to Nissan Motor Company. The expansion of its capacities should also help company to maintain its margins, helped by economies of scale.

Along with the benefits of new launches and the expansion, the company's target of selling one million cars in the domestic market by FY2011, translates into a volume growth (for domestic market) of 12 per cent over next three years.

Overall, the company is expected to grow at decent pace. Investors can use the current market conditions to gain from the stock's re-rating once the macro concerns ease out in the future.

Opto Circuits India [Get Quote]

Opto Circuits, too, is seen as a good investment, with the stock having fallen by over 45 per cent since it high in January 2008, thereby rendering its valuations attractive at 13 times FY09 estimated earnings and 9 times FY10 earnings.

The company manufactures healthcare products in the invasive and non-invasive segments. Historically, the company has been growing at 47 per cent during the last five years ending FY08, mainly on account of a series of organic and inorganic initiatives.

Given the strong growth across segments, the company is expected to grow at about 57 per cent during FY08-10, while its net profits could grow at a 45 per cent.

A part of this growth will come from by its subsidiary EuroCor, which is engaged in the design and manufacture of cardiac and peripheral stents. The estimated size of the global market for its products is pegged at $8 billion, and growing 15 per cent annually.

Opto's other business segments include medical electronic and monitoring products such as optical sensors, electro-medical equipment, security systems and pulse oxymeters manufactured.

"The company's unique chip design capabilities, USFDA approved products and strong relationship with customers, have led to a 51 per cent revenue growth in the past," says Amitabh Chakraborty.

Also, the company recently acquired US-based Criticare Inc for $70 million to strengthen its position in the non-invasive space. Along with this, the analysts also estimate that its invasive business would grow at 55 per cent during FY08-10, on the back of a strong product portfolio as well as a series of products to be launched in the near future.

Besides good fundamentals, the research houses like its business model, where the company is a niche player in the medical equipments commanding high margins along with high entry barriers.

Sintex Industries [Get Quote]

Sintex is a strong play on the domestic consumption story. The company's popularity improved sharply after its foray into the plastic water-tank segment. While it is still a leader in the business, it has also moved into and emerged as a leader in many value-added plastic-based products.

These include new concepts like prefab and monolithic construction, which notably are growing at a fast clip. Analysts expect these businesses to grow at about 70 per cent, driven by strong order book of Rs 1,500 crore (65% of FY08 sales) and growing demand for quick and affordable mass housing solutions.

Additionally, the company has also emerged as a strong player in the auto and electric plastics product segment, after making several acquisitions in these businesses in FY08. The full impact of these acquisitions will be visible from FY09 and is expected to contribute about 27 per cent of consolidated revenues.

Driven by larger product portfolio, geographical diversification, higher domestic demand and benefits of its acquisitions, the company is estimated to grow over 50 per cent in consolidated earnings. At Rs 291, the stock is trading at attractive valuations of 10 times and 6 times estimated FY09 and FY10 consolidated earnings, respectively.

Thermax

Thermax was among the stocks that have fallen sharply due to the slow down in the industrial capex seen recently. High input cost also impacted sentiment, leading to a 60 per cent fall in its share price where valuations at 13 times its FY09 estimated earnings and 11 times FY10 earnings are proving to be attractive.

Importantly, except for these short-term blips, the company's fundamentals continue to hold ground. The company's order book of Rs 2,637 crore (Rs 26.37 billion) provides revenue visibility of about two years.

The company has also taken several initiatives, which should help sustain growth in years come. Thermax operates in a specialised segment within the engineering sector, catering to the needs of a number of industries. Also, the company is leader in small and medium-sized industrial boilers, heaters, and captive power plants in the energy sector.

Notably, the company will gain from its entry into higher capacity boilers, which are used by power utilities. It recently signed a 15-year agreement for sub-critical boilers up to 800MW with Babcock and Wilcox. The company has already completed the first phase of 3,000MW boiler facility at Baroda and the second phase is expected to be complete by October 2008.

In this direction, the company has already announced its largest order win ever, valued at Rs 820 crore (RS 8.2 billion) for the supply of a coal fired boiler to a captive cogeneration plant of a refinery.

While the margins may remain under pressure as 70-75 per cent of its order backlog is on a fixed price basis, these are already reflecting in the share price. Such issues are being taken care off with the company immediately securing inputs for new orders.

TV18

Stocks from the media sector are finding favour among many research houses post the market correction. Television Eighteen India [Get Quote] (TV18) is India's premier 'Business News' broadcaster and leading content provider in the electronic media space. It owns and operates business channels CNBC TV18 and CNBC Awaaz and has several strategic investments in the internet business such as moneycontrol.com, which is among Asia's largest financial portals and commoditiescontrol.com.

The company's existing businesses have been doing well; news operations has witnessed a CAGR of over 54 per cent for the last three years, while the web and news wire business are currently in an investment phase.

Its internet subsidiary, Web18, operates different businesses like travel, technology, movie bookings and financial news. While TV18 holds 85 per cent in Web18, revenues are still small, but offer good scope for growth over the longer term.

On the existing and new businesses, the company's revenues are expected to grow at over 37 per cent over the next 2-years. However, its ability to replicate its success in its foray into print and digital media needs to be watched.

The company has already started the process and is acquiring 53 per cent stake in Infomedia. The acquisition will provide the company access to the yellow pages directory business and, several special interest magazine segments.

Shahina Mukadam, head equity research, IDBI Capital Markets, says, "In the medium to long run, benefits would also accrue from its JV with Forbes (English business magazine), Jagran Prakashan [Get Quote] (Hindi business daily) and global media giant Viacom for a strategic alliance across television, film and digital media."



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