The market seems to have shrugged off the Greek and Hungarian crises while resuming its upward journey to reach within kissing distance of the psychologically important Sensex level of 18,000. A strong corporate performance for the year 2009-10, especially for the Q4, bumper 3G connection proceeds and satisfactory progress in the disinvestment programme are expected to provide considerable relief to the otherwise precarious fiscal deficit position. The positive outlook on the reforms agenda of the government that sent a signal in the form of a hike in fertilizer prices and the likely freeing of petroleum product prices have been taken very positively by the markets.
The concerns relating to inflation are also downplayed with oil prices running at comfortable levels and the expectation of a reasonably good monsoon. The capital inflows seem to have stabilized with the India story again gaining growth. All this has bolstered confidence in some sections of the government as well as the analyst community who have started talking of the growth rate accelerating to 9 or even 10 per cent – which for some very sound reasons may not be achievable.
Despite all these positives, investors should follow a cautious approach with the markets having run up a lot since most of the positives appear to have been discounted. The Sensex is currently trading at 16 times the estimated profits for the fiscal 2011. In the present environment, it will be too much to expect on an expansion in the price earning (PE) multiple. Hence, for the markets to rise from these levels will require an increase in corporate earnings and that too at a rate more than what the market expects. However, looking at the analysts’ opinions, most of the upgrades appear to have factored in.
Also, a deeper analysis of the Q4 results of corporate India reveal that it was mainly the savings in material costs and interest expenses that boosted corporate earnings, especially of manufacturing concerns. Earnings growth in the current fiscal could therefore be modest. The persistently high food inflation raises the risk of general inflation remaining high since food items account for a very large proportion of the household consumption. With the sharp recovery in growth leading to high capacity utilization, concern regarding pressures building up on the inflation front is quite high.
The current account deficit for the fiscal 2010 has already widened to 3 per cent of GDP. The already high loan deposit ratio of the banking system coupled with lending for 3G and advance tax may lead to considerable tightening with every rise in credit growth. The sharp rebound in the economy has made the asset prices go closer to the peak levels of the pre-crisis period. Ultimate fiscal consolidation by stimulus withdrawal may cap the growth in GDP and increase in corporate earnings. Any decline in capital inflows due to a worsening global scenario or rise in oil prices and the like may give a big shock to the markets by adversely impacting the domestic investment cycle and investor confidence. Abundant caution is therefore advisable before taking any investment decision. Investors should make their portfolio shock proof by getting rid of junk or risky stocks and replacing them with value picks.
Nakoda Limited
(CMP Rs 13)
Formerly known as Nakoda Textile Industries Ltd, the company has drawn up an ambitious plan to make investments of Rs 1,500 crore during the next three years to significantly expand its capacities in the polyester yarn segment and consolidating its operations by further integration following a multi-pronged strategy of backward integration, forward integration, expansion of base capacity and exploring overseas opportunities for inorganic growth. The company has made forays into power and has already commissioned a 6.75 MW wind power plant in Tamil Nadu. It expects total sales of Rs 1495.3 crore in CY10, Rs 1727.60 crore in CY11 and Rs 1763.60 crore in CY12 and net profit of Rs 41.95 crore in CY10, Rs 61.4 crore in CY11 and Rs 65.2 crore in CY12.
The CMP discounts the trailing twelve months’ EPS of Rs 3.92 by a PE of just 3.4 as against the industry average of 5.4 and has a Price to Book Value of less than 1 with a dividend yield of good 2.6 per cent. The company has shown a steady increase in its profitability during the last several quarters sequentially. With the first expansion plan about to be completed the profitability will further improve, making the stock a very attractive buy. An investment with a time span of two or three years can give very decent returns with practically no downside risk.
