Mid-cap Review: Alok, PFC, Kalindee & Videocon

Mohit has posted a query in the 'Comments' section regarding Fundamentals, Trading and Investment perspective on some good fundamental Mid-cap stocks like PFC, Kalindee, Videocon and Alok Industries.

Bulls,
Can you write something or suggest some stocks which are good at current valuations or say if you can give some buying range for long term stocks. What are your views on Alok, PFC and Kalindee Rail on CMP from trading and long term view. Thanks.

Closing Prices as of June 17, 2009:
Videocon CMP: Rs.175/-
Kalindee Rail CMP: Rs.176/-
Alok Industries CMP: Rs.23/-
PFC CMP: Rs.196/-

Speaking about long-term Value proposition of Alok, Kalindee, PFC and Videocon - all of these 4 stocks (mid-caps) seem to be a good bet even at current valuations when contemplated from long-term perspective.


Determining Value in Optimistic & Pessimistic Phases:

For these 4 mid-cap counters, what we have seen till now is their stock price performance from Sensex 8000 to 15000 journey, the period of journey which can be co-related with the times of crisis and global slowdown. We're yet to see these stocks run on steriods like other mid-cap counters, which could be witnessed in the next leg of big rally.

But, gradually, as the economy comes out of the crisis and credit problems, the stock prices of these 4 mid-caps counters shall reflect more exuberance in the next leg of the bull rally from here. In times of optimism, the basis of determining valuations is different from that of pessimistic times. During pessimism. investors factor in the company's debt ratio, forex management, cash flows, promoter pledging of shares among many other factors.

During optimistic times, investors tend to be more occupied with fundamentals and earnings of the company and most of all Prospects of the company going forward rather than micro-factors which come under surveillance during bearish phases. So, the next leg of the rally, could be more return accruing in these four lagging but healthy mid-cap stocks.

Going Slow:

However, I am of the view that markets are a bit over-heated in medium-term perspective. So, it will correct substantially- if not now than at some point post-budget period. So, one can buy these stocks in a staggered approach rather than going in for bulk quantity, if the perspective is for long-term investment.

I may be wrong on my view towards markets and it can keep on moving higher even after Budget, but i need to hold some specific view for markets rather than going view less- and hence i take a stand that markets are a bit over-heated in the short-term and Budget would be the decisive event for the markets next big movement direction.

Trading Perspective:

From Trading perspective also, all the 4 can be bought (especially Kalindee & PFC) around current levels with strict Stop Losses for your trades. Stop Loss for Videocon could be around 145 levels, Kalindee could be around Rs.135 levels, PFC could be around Rs.160 levels and for Alok it could be around Rs.18 level. These Stop Losses are only for Traders and not Investors.

Staggered Approach:

Coming to the point of Ranges for Accumulation of these stocks, i would like to Again repeat that.... You should not have in mind the 'ranges' to buy for these stocks. Because that would ideally mean you're looking to TIME the entry into these stocks. And, there is no certainty that you will get these stocks at your desired prices. May be, it would be a better idea to re-view or hold such ranges for stocks which are extremely over-heated and you could wait for these stocks to correct substantially to start accumulating. Selective large-caps shows the tendency of being over-heated.

So, best approach would be to divide every Rs.10 that you wish to invest in to 3-4 parts and invest them on larger dips as the correction kicks-in. From VALUE perspective all the 4 mid-caps are still lucrative in terms of their stock prices. All are good fundamentals stocks and will provide very handsome returns during the next big rally. You must have patience to wait out until another such rally happens.

(Note: My forward looking statements in this posting for these 4 mid-caps does not mean to convey that they're roaring Buys at current prices. Just that their stocks prices could still be value yielding from current prices in the long-term horizon. One should remember, that if markets correct substantially in future, these stocks wont be able to show any contrary trend to the markets and even they will correct. May be, their correction would be limited to some extent based on the value in these stocks.)

Investors can also add Gitanjali Gems, Indiabulls Real Estate and Time Technoplast to the list of 4 mid-caps mentioned above for the long-term Value Investment perspective.

Disclaimer: All data, content and/or reports posted by Viral Rajnikant Dholakia on this site are only for information and educational purpose of visitor/readers of this blog. It does not constitute to be a recommendation/offer/advice to buy or sell assets/securities in any form. Individuals/organizations are requested to take an informed call by consulting their Financial Advisor before acting on any matter/data published on this blog. This blog does not warrant of any kind of accuracy, adequacy and completeness of data, ideas or thoughts published in it. This site and Viral Rajnikant Dholakia assumes no responsibility or liability or loss or damage of any kind/nature for your trading and investment decisions and its consequent results.

Tring!... Tring!... Tring!...

Time is Ripe to Exercise Caution

Tring!... Tring!... Tring!... No, its not a School Bell. Well, not even a Telephone Ring. Than What? May be, an Alarm Bell.

Actually, I just want to convey that stock markets don't ring such 'bells' before they start correcting. They do not provide warning bells stating that, "This is enough mate. Now, pack your bags & stay away from markets." We ourselves have to catch the market signals the cues of which can be in various diferent forms, not necessarily explicit in nature.

Yes! Be cautious... Read this post till last to understand what I mean to say. We may already be in the last stage of the ongoing 'Mini' bull phase which has followed directly from the lower tip of bear market phase. The momentum is strong. Stock are flying high resembling the exuberance of the tip of any bull phase. The momentum may last a bit longer. But, who knows till when? Can you time the exit at the right moment? Not really!... you have to exercise caution & strategise your part-exit plan.

Current Market Scenario:

1) Large-caps are quoting at Expensive Valuations.
2) Mid-caps already catching up & Some even Fully Valued.
3) Small-caps have been moving up from Circuit to Circuit.

Exuberance Levels: High, with Sensex gaining 80% in 3 months.
Nearest Event: Budget & Corporate Results after 1 month.

Part 1: Denial Mode

First the markets recovers from the depression with an all round pessimistic mood and sentiment. Usually, Insurance companies, especially the Bid Daddy L.I.C., keeps munching equity stocks at such times. It plays an important role to support markets at lower levels with the mandate from the Centre. At such time, investors are in denial mode to buy, they think markets will further move down. Then the markets further recover all of a sudden leaving most investors in the lurch. There is a feeling of being left out due to such unexpected rise. They still don't buy aggressively as mood is largely negative.

During this stage, all the counters from different market capitalization are largely under-valued & in over-sold territory.


Part 2: Feeling of being Left Out:

Just as the rally grows into larger proportion investors jump in expecting another big up move. No, the markets still don't go down from there. It rises further to give the feeling of optimism to the cash waiting on side lines. Investors pump-in yet another bout of funds to capture the bullish trend. Regarding Mutual funds, they are the wiser people who entered during the first or second round of euphoria. Foreign funds usually enter aggressively when markets show some signs of positive recovery.

By this stage, Large-cap counters are not under-valued. Though, mid-caps & small-cap are relatively under-valued and in the grip of pessimism.


Part 3: The Real Exuberance

During this stage, the real exuberance is witnessed in terms of buying. Straight gains are made day after day. Positive cash inflow is continuously witnessed with every passing week. Large-cap counters become fully valued during this stage. Still, there is further room for up side in them on the back of momentum.

Mid-caps are the flavour of the season during this stage of market ruled by sheer momentum and exuberance. Small-caps gradually find their feet and they rise the fastest with a series of up circuits on the bourses. Large-cap counters usually rise at a slower pace but their up ward momentum is not completely lost.


Part 4: The Final Countdown:

The last phase of the exuberance is characterized by Analyst visions going forward into future for the company's prospects and earning potential. Large-cap counters start being valued on not current year valuations, but 1 or 2 years down the line. This is the first and perhaps the last sign to exercise complete caution.

During this stage, Mid-caps catch up with their lag to large-cap counters. This stage witnesses participation of the retail traders more actively with the perspective of making some quick gains from the market momentum. Small-caps, usually, are in up circuits with unavailability of sellers on the bourses.

The extra exuberance in the last stage is often forged and supported with new 'logic' that are put forward by the Analyst community such as 'Decoupling Theory', 'Upgraded Fundamentals', 'Strong Potential for the Economy' and so on. The momentum of the last few weeks is attempted to be stretched as much as possible.

Prolific Gains, witnessed in individual stocks, to the extent of whooping 10-15% are notched on an almost daily basis. The proportion of returns which usually take 1 year in Debt instruments like FD, PPF, etc. are usually acquired in time as short as few countable sessions from equity markets. Till when can such times last?


Exercise Discipline & Control:

During this stage, caution should be exercised with utmost discipline, patience and perseverance. Investors would find the situation extremely terrible of being missed-out by huge extent. They have to control the urge of entering the markets at such moments. Traders should apply Strict Stop losses to their each and every trade. If they don't do so, markets will retract in a big way some time or other & at such times traders will be left with their trading favourites which shall eventually turn into papers when their value goes down. When the value starts falling, traders won't feel like exiting their positions at nominal gains or even losses.

The above does not mean to convey that a huge correction is on the anvil. Nor does it mean to say that the markets won't go up any more. It simply is a cautionary posting to put the readers of this blog on a 'Warning' note that valuations are no more cheap as may be 3 months ago. On that note, even a small correction of 10-20% should not be ruled in coming times. The momentum can take markets up- to surprising & unexpected levels, but the crux of the matter is that you won't be able to time out during such exuberant times with ease. Greed takes over from the fear factor during such times of euphoria, from which you have to save yourself swiftly.

Same Old Evergreen Strategy:

The last stage is the hogged by the moment of uncertainty. There is lack of clarity as to what the next big leg of trend would be. Whether markets will stay afloat or give up substantial gains? During such scenarios, my first posting of this blog related to 'Strategy for Investment' would come healthy.

This time, you have to follow 'Sell in small qty on Every Rise' and not 'Buy in Small qty on every Dip'. Minimize your risk with every rally. Accumulate cash with every bout of sell-off you exercise on incremental rallies. The main benefit of using this strategy is, you cut your risk to the extent you sell. But if markets rise, you still tend to benefit from the rally as your major portfolio still remains invested and that you have sold only a fraction of your stocks and portfolio. The money and opportunity that you lose from any potential rally is far less than the benefit that accrues to you for your remaining 'invested' portfolio.

Dated: May 28, 2009
POSITIONAL TRADING CALL:

Reliance Capital (CMP 945)
Buy in 2 Small Tranches:
1st Buy around CMP 930-950/-
2nd Buy around Rs.860-880/-
Stop Loss: 845/- (Closing Basis)
Target Expectation: 1060-1125

High Risk Trading Call:

Ind Bull Real-estate (CMP 215)
Buy Around 215-220/-
Stop Loss: Rs.190/- (Closing Basis)
Target 1: 248/- Target 2: 280/-

Disclaimer: All data, content and/or reports posted by Viral Rajnikant Dholakia on this site are only for information and educational purpose of visitor/readers of this blog. It does not constitute to be a recommendation/offer/advice to buy or sell assets/securities in any form. Individuals/organizations are requested to take an informed call by consulting their Financial Advisor before acting on any matter/data published on this blog. This blog does not warrant of any kind of accuracy, adequacy and completeness of data, ideas or thoughts published in it. This site and Viral Rajnikant Dholakia assumes no responsibility or liability or loss or damage of any kind/nature for your trading and investment decisions and its consequent results.

Mid-caps vs. Large-caps

A query has been posted in the 'Comments' section by Antriksh Patel on the behaviour of stocks from different Market Caps viz., Mid-caps and Large-caps. The query is relating to why mid-cap tend to give superior returns as compared to large-caps.

Hi Viral,
Nice article once again. I eagerly wait for your articles to come.
One query related to stock market behavior - "Why do the mid-caps tend to give better gains then the large-caps; what is the logic behind this behavior. I have observed that the large - caps have hardly doubled whereas mid caps has multiple 3 to 4 times. I can't understand this."Kindly throw some light on this.

Thanks,
Antriksh Patel

The Bigger First:

There is a belief that Mid-caps usually out-perform Large-caps by a big margin. But there is a rider to this notion. Usually, mid-caps out-perform large-caps during times of extreme exuberance and optimism. The rally in mid-caps can not bloom in a great way until such times of confidence and drama as we're witnessing right now. Whereas, on the other hand, large-caps are foremost to lead the rally when there is change of sentiment from pessimism to optimism. The benefit of first flight to safety is usually reserved for large-caps with sound fundamentals during recessionary times.

A large-part of the market pie, in the initial period of change of sentiment, is savoured by large cap stocks in form of rally in these counters where fundamentals and financial positions are strong and sound. Once this rally graduates into such a mode that the valuations of the large-caps looks expensive, there is a shift in market attitude. They tend to shift their money from large-caps to mid-caps where the valuations might have lagged & there is some degree of safety on terms of stock valuations.

Bridging the Valuation Gap:

The rally from large-caps tapers to mid-caps thus bridging the ‘Valuation Gap’. But, for this to happen, most of the large-caps must be fully valued or to the extent that such big counters deserve to be rated at. Later on, as market participants find it hard to justify more sanguine valuations for these large counters, the large-caps become stable at their higher-end and the markets enter the consolidation zone or may be even a small correction.

Gradually, investors start flirting where the valuations are in 'Comfort Zone' i.e., in battered Mid-caps but with good fundamentals & performance. From then, the 'Circular Flow' among Mid-cap starts where the trend of rally in mid-caps circulates among themselves from one clutch of mid-caps to another thus attempting to make the rally more inclusive & universe in nature.

Small & Sweet:

Generally speaking, Mid-caps are those companies who are relatively in early stages of business as compared to large-caps. Many mid-caps may also be involved in fast growing businesses or even special Niche segments of the market with unique product/service offerings. These companies may also have fast growth potential on the back of smaller business volume and relatively smaller base of their balance sheet size.

All these factors tend to come in final calculation while determining the company’s growth rate and its stock valuation. And, lastly, market stability and exuberance also plays its part in the last say about stock price valuation in mid-cap counters.

Volume Game:

Where as, Large-caps are usually past this phase and are into big volume game and may not exhibit the same rate of appreciation in growth as may be mid-caps with smaller base of balance sheet size. A small company, which operates on a relatively smaller balance sheet size, can grow at the rate of a few numbers of times (example, double or triple). Where as, a large-cap company grows in terms of few Percentage number of growth (example, 30% or 40% growth) on its already high base of balance sheet size.

Law of Gravity:

Whatever goes up, has to come down. During times of pessimism, the Mid-cap stocks are the ones which take severe beating in comparison to large-caps. Those very same reasons which lead to a steep rise in stock prices of mid-caps can come at play to support the reasoning of the slump in their stock prices during pessimistic times. Smaller balance sheet size would facilitate relatively lower leverage to tap sources to raise capital during times of crises. During such times, the financial performance of mid-cap companies can witness sharp fluctuations on account of volatility in incoming orders for their businesses, ability to raise funds, flight of capital from equity investments, etc.

However, if the fundamentals of some selective Mid-caps are really strong and sound from all perspectives like growth potential, financial standing, corporate results and governance, ability to raise funds, operation in Niche segment of business line, high growth potential, etc., they can as well depict stableness & low fluctuation as may be attributed to Large-caps stocks. That's not all, they can as well provide superior returns during up turns as compared to large-caps and still exhibit strength on the downside during slowing times.

In short, investment in mid-caps provides potential to grab high returns with the rider of high risk involved in them if the bet does not fall right & the company faces problem in shift engagement and continuation of its normal business activities, especially during hard times.


Small-cap Call : Investment + Trading

Kalindee Rail Nirman (Engineers) Ltd.

Value Buy Zone: Rs.125-140 (CMP Rs.138)
Short-term Target: T1 Rs.158/-, T2- Rs.180/-
Time Frame: 45-60 days; Rationale: Rail Budget
Medium-term Target: T1 Rs.180/-, T2 Rs.230/-
SL for (Short-term) Traders: Rs.120/-


Disclaimer: All data, content and/or reports posted by Viral Rajnikant Dholakia on this site are only for information and educational purpose of visitor/readers of this blog. It does not constitute to be a recommendation/offer/advice to buy or sell assets/securities in any form. Individuals/organizations are requested to take an informed call by consulting their Financial Advisor before acting on any matter/data published on this blog. This blog does not warrant of any kind of accuracy, adequacy and completeness of data, ideas or thoughts published in it. This site and Viral Rajnikant Dholakia assumes no responsibility or liability or loss or damage of any kind/nature for your trading and investment decisions and its consequent results.

Trading Strategy: Buy on Dips, Support will Come!

'Buy on small Dips' Strategy mentioned above is meant only for Traders & not for Investor fraternity. Time for 'Value Picking' is a bit behind us. The current euphoric rise only warrants trading bets & not investment bets at this point in time. However, even investors will get opportunities at a later period. Wait for it.

Remember, markets always keeps giving chances, just that you have to grab it with both the hands. Investors have to hold their breath for some time unless the excess euphoria & valuations are driven-out. Markets will test the patience of investors, as every dip will be bought in from here on. Traders, on the other hand, have to move-on with strict Stop Losses for their tardes irrespective of market levels. There is plenty of opportunities and rationales for the traders to commit themselve to fresh trades even from here.

There is a query from Jamesvaikom in the 'Comments' Section regarding suspicion and a feeling that even Mid-cap stocks are gaining weight in terms of valuations and that even they are showing weakness in the recent market consolidation.

Sir,

I think now even mid caps start showing some weakness. I think it is time to book profit even in mid caps and sit on cash. I think buy on dips after strong rally may be like catching falling knife. what is your view.

Sensex has unilaterally raised from the trough of 8000 levels to a whooping 14000 levels in a small duration of past 2 months time. Most of the large-caps are no more in the 'Comfort Zone' in terms of Valuations. In fact, many mid-caps have gradually shown steep rise to the extent of 15-25% in every passing session. This even as benchmark indices are cooling-off its heals after a big band Range expansion of 20% rise in one session.

Nifty had made an intra-day top at 4500 levels on May 19, 2009. This high was sustained for hardly half hour before profit booking smartly kicked-in. The closing for the day was around 4300 levels. Since than the markets are consolidation what with most of the heavyweight stocks in the index looking far more over-priced in very near-term horizon.

What Next?

What next could be the course of the markets from here? Markets are in a hibernation mode and in an Accumulation zone. Nifty has corrected to 4200 levels as on day's closing.

At current situation, most of the Equity Mutual Funds are holding large chunks of Cash deployable in the equity markets. The post-election rally from Sensex 12000 to 14000 was like a 'Lull' in which no body could participate as it was based on a thin Volume of approximately Rs.3000 crore. Most of FII or MF or Retail Investors missed this gap of 2000 point Sensex rally created on May 18, 2009, on the back of surprising Poll outcome.

Mutual Funds, which are sitting on record Percentage of deployable Cash ranging from 10-25%, will be looking to enter the markets in a slow manner on every dip. All market dips will prove as a boon for these fund houses to infuse money into the markets to reduce their chances of under-performance to indices, in case markets continue to move forward until announcement of upcoming Union Budget.

Along the way, as we have already started witnessing Mid-cap momentum, it is a clear reflection of increased Retail participation in the small counters where usually large institutions remain cautious and away from being too aggressive at.

Mid-Caps Faltering?... Not Really!

Mid-Cap shall show signs of weakness or tiring out during the Sessions when makets fall sharply. Though, they may regain their lost sheen & recover their Momentum as soon as Benchmark Indices settles in a small Consolidation Range within next few Sessions. However, it is recommendable to keep an eye on the 'Valuations' of the stock specific mid-caps before indulging aggressively into each one of them.

Although, there could be a puzzling rider to above discussed strength in Mid-caps. The rally in mid-caps could be a 'Pass-on' game. Some mid-caps may gain momentum, and the positive rub-off may be passed on to other category of mid-caps. Thus, a large universe of mid-caps could catch fire and value to engross and elevate the momentum play.

What with important event like Budget as a next destination, market participants and punters are very much likely to bet on stocks and sectors which are likely to benefit from crucial Budget spending, reforms & initiatives. The Budget related punting has already started. At the same time, markets will also have its eyes open wide and clear as to which crucial portfolio at the centre are being mopped by which prominent leaders.

Sectors that are expected to be in lime light are PSU stocks led by chances of Disinvestment, Banking Stocks led by chances of Reforms, Capital Goods and Infrastructure stocks led by increased spending on Indian infrastructure, Power stocks led by quickening of Power reforms, Education sector stocks led by government's commitment towards Education & most importantly Agricultural stocks led by boost to Irrigation and Agri Projects and spending.

Adjustment of Valuations over Medium-term :

From Medium-term, markets are likely to be over-stretched at this point in time. But, in short-term the momentum is strong and infusions of cash from fund houses at every lower levels are likely to offer downside support to the markets around Sensex 13500-13000 levels at worst.

However, as discussed in above paragraph, over medium-term horizon the valuations certainly look expensive. So, that will be adjusted over next 2 months time depending upon the outcome of Budget and all-important Corporate Results. Gradually, markets as a whole, will adjust its valuations depending upon the final hearing in Corporate Results & actual Performance.

And, that will be the moment of 'Reality Check' for the Indian Stock Markets. Till than, i hope, that the Party Continues... Please note, I may go wrong in predicting all the above said Analysis. But, now that markets have shown a clear cut upside breakout post-poll results, Traders ought to latch on to this 'short-term' bullishness with a trade on the long side. Next, the decisive tide will flow-in, when rest of the factors like Budget outcome and Corporate Results will start dictating the fundamentals, not before a month long time.

Disclaimer: All data, content and/or reports posted by Viral Rajnikant Dholakia on this site are only for information and educational purpose of visitor/readers of this blog. It does not constitute to be a recommendation/offer/advice to buy or sell assets/securities in any form. Individuals/organizations are requested to take an informed call by consulting their Financial Advisor before acting on any matter/data published on this blog. This blog does not warrant of any kind of accuracy, adequacy and completeness of data, ideas or thoughts published in it. This site and Viral Rajnikant Dholakia assumes no responsibility or liability or loss or damage of any kind/nature for your trading and investment decisions and its consequent results.

Mid-cap Mania: Videocon Target Achieved

Momentum Tapering from Large-caps to Mid-caps:

In my posting dated May 14, 2009, it was clearly mentioned that the current market rally will gradually taper in favour of mid-caps as large-cap stocks are increasingly getting over-valued at upper levels. Comparatively, mid-caps are big under-performer in terms of Valuations and that the 'Valuation Gap' needs to be filled to some extent.

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. (Posted on May 14, 2009)

This will see most of the large-cap stocks cooling their heals around current levels. This will also lead to a small consolidation pattern in Nifty and Sensex as major market movers cool-off. But the momentum will shift to mid-caps for some period of time unless there is consolidation among large-cap counters to some extent.

However, some selective PSU, Infrastructure, Education and Agricultural related stocks will continue to remain in limelight irrespective of the large-cap or mid-sector they fall in. This selective out-performance is expected to on the back of prospects of stable government at centre which would lead to some positive reforms, divestment, boost to infrastructure spending, etc. as may be likely announced in the upcoming Union Budget which is 35-45 days away from now.

Videocon Industries: Target Achieved

Videocon Industries: Buy Videocn in the range of Rs.105-120 with a quick target of Rs.150-160 with in few sessions. Strict Stop loss for this diversified conglomerate should be placed at Rs.90. CMP Rs.122.
(Posted on April 24, 2009)

The stock did not make any substantial move even on markets rising continuously since Sensex 8000 levels. The stock had under-performed big time since market recovery a couple of months ago. Traders were time and again reminded in my subsequent postings to persevere with the trading call with a strict SL of Rs.90/- where the stock rests at a strong support zone.

Finally, the stock has made a move post-election results now that mid-cap mania has just started. The first target of Rs.150/- is achieved on intra-day basis just as I am writing this post over here. Anyways, the idea, over here, is not book full profits in Videocon as the momentum may have just started in the counter. I would like to recommend traders to book profits in Videocon on below mentioned criterions:

Criterion for Traders depending on their Risk profile:

Low Risk Traders: Book 70% Profits @Rs.150/-
Medium Risk Traders: Book 55% Profits @Rs.150/-
High Risk Traders: Book 40% Profits @Rs.150/-

Book profits depending on the category you fall in and ride the upside momentum in the ongoing mid-cap momentum. For all traders the Trailing SL strategy to be used at Rs.125/- instead of our original SL of Rs.90/-. This will ensure that even if the stock reverses its gains, traders could still exit at nominal profits @Rs.125/-.

Disclaimer: All data, content and/or reports posted by Viral Rajnikant Dholakia on this site are only for information and educational purpose of visitor/readers of this blog. It does not constitute to be a recommendation/offer/advice to buy or sell assets/securities in any form. Individuals/organizations are requested to take an informed call by consulting their Financial Advisor before acting on any matter/data published on this blog. This blog does not warrant of any kind of accuracy, adequacy and completeness of data, ideas or thoughts published in it. This site and Viral Rajnikant Dholakia assumes no responsibility or liability or loss or damage of any nature for your trading and investment decisions and its consequent results.

Value Picks: Mid-caps for Long-Term

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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