Friday, May 15, 2009
Value Mid-caps for Investment at Current Prices:
1) Videocon Ind. (Rs.90-125)
2) Gitanjali Gems (Rs.45-75)
3) Alok Industries (Rs.12-16)
Concept of Value Buying:
Speaking about just a couple of months back, there were many Mid-caps on the block which could be termed as pure 'Value' Picks from long-term investment perspective. However, since then, benchmark index Sensex has moved up about 45% from around 8000 levels to 12000 in a very short span of time. As expected, a large part of this rally was driven by Index heavy weights; while the performance of a large part of the mid-cap universe was quite a laggard when compared to a stupendous appreciation in valuations of selected large-cap stocks.
In fact, over here, it could as well be said that some selected mid-caps have completely ignored the ongoing market rally and are still very near to their 52 week lows. However, there may be specific reason for each of such counters as to why the market participants have conferred the under-weight rating for which these stocks missed-out on participating in the market rally in a substantial manner.
The reasons could differ from company to company. It could be sharp recession in US for export-oriented companies heavily dependent on Western countries or it could also be intense competition from around the globe for others. On the other side, for domestic demand oriented companies, it could be slowdown in demand for their goods or services on the back of consumer mentality of curtailing expenditures for the time being during the slowdown period. We would discuss more on this under-performance of some mid-caps in the later half of this posting.
Tapering of Momentum from Large-cap to Mid-caps:
Unless a majority of the mid-cap universe with sound fundamentals does the catching-up game in terms of valuations, we would gradually witness tapering of the current rally amongst large-caps in favour of mid-cap counters where there is still a cushion of 'Valuation Gap'.
At some point of time, even if the current momentum is to survive, the rate of appreciation amongst large-caps would cool-down and slowly pass-on the baton to mid-cap counters. When such a phenomenon of rally tapering from large-caps to mid-caps would take place, the markets are expected to take a breather and settle into range bound movement.
Value Picks among Mid-caps:
Over here, it is important to note that most of the mid-cap stocks have almost doubled from their 52 week lows. But, even so, the area where these mid-caps lagged in comparison to their counterparts from the large-cap space is 'Valuations'. Even as most of the leading mid-caps have doubled, their valuations are still not as stretched as some of those index heavy weights. In this posting, I'll discuss about prospects of three such mid-caps where the rate of appreciation or for that matter even valuations are relatively lower as compared to other mid-cap counters.
Videocon, Alok & Gitanjali Gems:
Gitanjali Gems: Firstly, among the three value mid-caps mentioned above, the risk of downside is relatively lower in case of Videocon and Alok Industries as compared to Gitanjali Gems simply due to the fact that the stock has doubled in a span of 2 moths. Gitanjali Gems is a top-most leading player in the branded gems and jewellery market of India. It is one of the leading players in the jewellery retailing business with leading brands like Nakshatra. The company has also expanded into US which is one of the biggest jewellery retail market. The company has also recently expanded into Lifestyle products like international designer brands, watches, leather accessories, cosmetics, etc.
Glittering Value: The stock price of the company has appreciated more than 100% from its 52 week lows on the back recent Buy back announcement by the management. But, still the stock quotes at not so expensive valuations. Even though this stock has appreciated more than double from its lows, I have included the stock as it is way off from its all-time highs of Rs.450 and quoting at a Price to Earning multiple of 4.5 times.
Steady Sailing: As this posting is related to long-term investment in the stock, we will have a look at the trend of past performance of the company to have a rough idea about the stability and growth of the company's historical performance. Going back to F.Y.2004-05, the company's Sales was Rs.1350 crore. It gradually increased to Rs.1620 crore for year F.Y.2005-06, Rs.2220 crore for the year F.Y.2006-07 and Rs.2650 crore for the F.Y.2007-08. The same trend is also visible in the front of Net Profits for the company. This trend of increasing sales & profits clearly suggests that the company has a very good demand for its products domestically & internationally.
Concerns: However the above information is relating to the period when the current global rot and slowdown was not as pronounced until F.Y.2007-08. The global recession got more pronounced in the later half of the Calender year 2008. So, it is important that we put a spot light on the performance of the company in light of the results of various quarters of F.Y.2008-09 as well.
The company's Sales for the quarter ended December 2007 was Rs.575 crore. The company's corresponding sales figure for the quarter ended December 2008 are at Rs.550 crore only, a figure lower by Rs.25 crore than a year ago period. This clearly suggest stagnation of fresh demand for its products hit by global slowdown. However, the company's sales were relatively higher in the quarter ended March 08, June 08 and Sept 08 at around Rs.700-800 crore for each of the three quarters. But, even still, it reflects stagnation of demand which previously used to grow Q-on-Q.
Videocon & Alok Industries: On the other hand, it can be said Videocon & Alok has almost missed the seat in the bus ride from Sensex 8000 to 12000.All the 3 mid-caps are hit in someway or other by the Global Slowdown. On one side, the counter of Videocon is hit by lower tendency of consumers to spend on electronic goods during severe slowdown which is expected to gradually revive as the world economy stabilises and recovers over longer duration.
Alok Industries: Alok Industries is a very good pick to invest from the lagging Textile sector. It is one of the few stocks which has shown robust business model & performance as compared to other textile players on a consistent basis. On the other side, the stock of Alok Industries is still quoting at 87% discount to its life highs of Rs.105/- on the back of high Debt-Equity Ratio and increased competition from other cheaper destination sources.
This vertically integrated textile company has presence in 3 broad categories viz., Textile, Retail (H&A Stores) & Realty. The company has expanded its textile business in last few year both domestically & internationally. The company is also involved in distribution of textile products to the US supermarket chains. In near-term, the company is likely to benefit from depreciated rupee value at Rs.50.
Financial Performance of Alok: The company has a robust business model with increasing trend in its Sales for the last 5 years of comparison. The company's Sales for F.Y.2004-05 stood at Rs.1225 crore followed by Rs.1420 crore, Rs.1830 crore, Rs.2160 crore and Rs.2965 crore for the F.Y.2005-06, F.Y.2006-07, F.Y.2007-08 and F.Y.2008-09 respectively. This indicates a good demand for the company's products even whilst the ongoing global slowdown.
However, the Net Profits of the company has not tagged its course along with the trend of rising Sales along the last 2 years indicating pressure on its margins. Though, a part of this pressure on margins can also be attributed to the increasing cost of interest year after year on its debt position.
Major Concern for Alok Industries: The major area of concern for Alok Industries is it's high Debt-Equity Ratio. Though, with the recent Right issue by the company, the high debt ratio is likely to moderate to some extent. However, most of the company's interest liabilities for its long-term debt is subsidized under textile promotion scheme.
Financial Performance of Videocon: Videocon has been witnessing declining profit & sales since the onset of the ongoing slowdown. The company has been reporting declining net profits post March-June 2008 quarter. The fall in profits is even more alarming since Oct-Dec 2008 quarter to date.
Comparing its latest results for the quarter eneded January-March 2009 with its profits in the corresponding quarter in the previous financial year... the net profits have come down from Rs.251 crore in the quarter March 2008 to Rs.73 crore in the quarter March 2009.
The sales & profits of the company are adversely impacted by the current slowdown. However, the company has taken various steps to diversify its business right from Consumer electronic goods to Oil & Gas business. The company shall retain the lost ground as and when the recovery is visible in the economy over the longer duration as and when the consumers are willing to shell out more from their pockets.
Evaluating Downside Risks in case Markets Corrects:
Before concluding this post, we have to take a round-up about the prospects of the stock price movement of these 3 value picks in case markets take a 'U' turn from here or crash sharply to re-test its previous lows.
Gitanjali Gems can come down much aggressively as compared to Alok and Videocon in light of the fact that the stock has doubled up in last couple of months. Though, the down side looks reasonably capped on the back of buy back announcement by the company above the three digit mark which is a substantial premium to its current price. Also, the down side may be limited on the back of the company's strong fundamental standing as one of the few leading players from the Niche segment of emerging organized space of jewellery and retail branding. Investors can accumulate this stock in the range of Rs.45 to Rs.75 depending on the market fluctuation and opportunities.
The down side for textile player Alok Industries is also expected to find a cap around its Face value of Rs.10 and its Right Issue price of Rs.11. Whereas, over longer duration with a slight recovery in leading western countries and to some extent even domestically, the demand for products manufactured and distributed by Alok Industries is expected to remain robust and well diversified. Interested investors can accumulate the stock in the range of Rs.12 to Rs.16 on dips.
The downside support for Videocon Industries is placed around Rs.80-90 in the Medium term horizon. The stock is already closing below its book value and has strong downside cap around Rs.80 where its 52 week lows are placed.
Six other Stocks that could be considered for Value Buying on 15-20% Dips from Current prices:
1) Everest Kanto (Rs.90-120)
2) Patel Engineering (Rs.120-160)
3) Aditya Birla Nuvo (Rs.360-440)
4) Glenmark Pharma (Rs.120-150)
5) Bank of India (Rs.180-220)
6) PVR (Rs.60-80)
Note: Currently, Nifty is trading in a new range of 3150-4250 after a 5 month consolidation in the old range of 2500-3150. Whenever markets revert back to around Nifty 3150-3250 levels in future, the upper ranges mentioned for the above 6 stocks may be tested. At such times, long-term investors can start accumulating these Value mid-cap. However, more quantity to be bought only on larger dips as and when the lower range of the bands are reached near to.
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