In a scenario where hope for the return on money is fast replaced with the hope for return of money, the investors appear disillusioned. They have been asking me questions such as, how low the markets will go, will they retrace to levels they have fallen from, and is this the right time to buy and so on. No body can, for sure, say as to how low the markets will go, but it appears that we are not far away from the bottom. For the second question, the answer in a lighter vein is yes, they will soon be past 21000, provided all major indices of the world are combined together.
The last question has no simple answer and needs understanding of the present and future global scenario and how the Indian economy responds to it. There is no doubt that world economy is headed for recession which is bound to slow down the Indian economy too. The Asian Development Bank in its report on Outlook 2008 has recently downgraded the India’s GDP growth estimates to 8 percent for 2008-09 and 7 percent for 2009-10. However, some of the Indian agencies and experts have given lower estimates than this.
But, to the extent that we have a large domestic economy, our exports being less US centric and our banks being fairly insulated thanks to the conservative policies of RBI, we are likely to suffer far less than many others. And it is also due to our regulators that we have been able to avoid the chances of any entity going burst. In a lighter vein, it is due to our regulators that we might have had black Mondays, Tuesdays, etc. but never had a black Saturday and Sunday.
We may not see bank insolvencies of the kind witnessed elsewhere, but our large current account deficit is certainly a cause for worry. Massive sell off by FIIs has taken a heavy toll on the Rupee. Further outflows and falling share prices can put serious financial strain that will ultimately get reflected in corporate balance sheets.
This year, so far FIIs had sold Indian stocks worth about 20 percent of their net buying of US $ 67 billion, till date. If the sale of just 20 percent can lead to an erosion of 50 percent in Indian markets, what will happen if they sell further because each sale now will have larger impact. And they are selling not because of some serious problem with our economy, but because of the problems faced by them in their own countries. Domestic investors are selectively buying, but it is feared that if selling by FIIs does not stop, even they may turn sellers due to increased redemption pressure caused by panic in the markets.
The present state of credit squeeze may create serious problems for Indian businesses having implications on employment, incomes, expenditure and ultimate contraction of demand. However, the impact may be limited due to the limited exposure of Indian population to stock markets. The regulatory efforts to address liquidity concerns carry the danger of inflationary pressures resurfacing.
The prices may have fallen steeply and one may be tempted to believe that stocks are available cheap. But valuations need to be looked taking future in mind which appear to be not too rosy. But those who look for the bottom are likely to miss it. Those who start buying selectively are most likely to reap rich rewards when the markets bounce back. And, the bounce back after such events is always sharp and takes the investors by surprise.
The investors can therefore start with defensive sectors such as pharma and healthcare, FMCG, PSUs relating to utilities, defence and so on. Avoid cyclical industries for the time being.
Opto Circuits
(CMP Rs. 140)
The company is engaged in designing, developing, manufacturing and marketing of high margin medical electronics devices and medical monitoring products. The company operates in two segments namely Health and Information Technology. The Group has operations in India, the United States, Germany, Singapore and Dubai.
Over the past few years, Opto has created shareholder-value by focusing on inorganic growth by acquiring companies like Advanced Micronic Devices in 01, Palco Labs and the thermometer division of HUL in ’02, Mediaid in ’03, EuroCor in ’05, and recently Criticare Systems in ’08.
The company has produced excellent financial results showing 80% rise in net profit in FY08 over FY07 while net sales increased by 86%.. It is one of the rare companies to have announced bonus and dividend for the last 7 consecutive years. The company announced 7:10 bonus and Rs 5 dividend for which November, 4 has been fixed as the record date
Opto has always traded at a premium to the market due to high growth, healthy margins and upside from potential acquisitions. But with the recent market fall and overhang of large ownership by FIIs, the stock price has corrected more-than-warranted, making it attractive. The EPS for trailing 12 months discounts the current price by a PE of less than 10. With huge demand for company’s products including sensors and stunts and ample opportunities in non-invasive medical diagnostics business, the stock is a strong buy.
