Re-enter the markets at every correction
The overwhelming response that the Coal India IPO – India’s largest-ever share sale – received has further strengthened the view that the markets may remain strong in the days to come. This is despite the striking similarities with January 2008 when the Reliance Power IPO got an unprecedented response preceded by a sharp rally in the stock markets due to heavy FII inflows coupled with the uncertain global scenario. However, Coal India failed to get the kind of response Reliance Power did from the retail investors.
The market reaction to the corporate results for Q2 has been lukewarm. It might be due to the fact that the markets ran up sharply in September in expectation of a robust performance. The corporate results have also brushed aside the concerns reflected by the sharp decline in IIP to 5.6 per cent in August compared to the revised figure of around 15 per cent for July 2010. However, with slow credit growth and the investment cycle not picking up, the momentum remains an area of concern for market-watchers.
Buoyed by the prospect of strong growth the Indian economy is likely to achieve, FIIs have by now invested a record $24 billion (Rs 1.07 trillion) in Indian equities in this year alone. According to analysts, this is in view of the second round of monetary easing likely to be announced soon by the Fed that may witness some more upside for the Indian markets. The latest Global Financial Stability Report of the IMF points to a secular shift in asset allocation in favour of emerging markets that is likely to be a long-term trend and will be far more sustainable. Also, it is not just the institutional investors, the retail investors have also been increasing their bets on emerging markets that may get a further boost if the Indian government gives the go-ahead for direct entry of foreign retail investors to its markets.
Inflation, particularly food inflation, and increasing current account deficit that is expected to touch 3 per cent of GDP during this fiscal remain the two major areas of concern for the Indian economy. This, coupled with steady appreciation in the rupee, increases India’s vulnerability to external shocks that may lead to sudden reversal of flows. However, the foreign exchange reserves of $265 billion provide a reasonable cushion to the economy. Despite this, Finance Minister Pranab Mukherjee, in his address at the IMF and World Bank Group Development Committee Meeting, cautioned that the developing countries have exhausted their policy buffers built over the years and will not be able to show the same resilience in the face of another shock.
Markets are trading at more than 18 times the estimated earnings for FY 2010-11 compared to the average of 12 times for emerging markets. Analysts are also watching the ongoing currency wars and their likely impact on India.
Markets are trading at more than 18 times the estimated earnings for FY 2010-11 compared to the average of 12 times for emerging markets. Analysts are also watching the ongoing currency wars and their likely impact on India with their fingers crossed. However, in view of the low retail participation and the domestic funds waiting for a healthy correction, the downside may be limited. The in-principle approval of a proposal for investing some of the EPF corpus in the stock markets is widely welcomed by the market players. Despite all this, small investors are advised to continue booking profits to re-enter at every sharp correction.
Ahmednagar Forgings
(CMP Rs 152)
The company, owned by the Amtek group with a majority 62.57 per cent stake acquired in 2002, is the largest forging manufacturer in the small and medium component segment and is engaged in manufacture of high precision closed die steel forgings and auto components primarily for the automotive sector and also for the defence and railway industries. Major customers include Fairfield Atlas, Cummins, King Automotive Systems, Letchworth, Zelter GmbH and Hennef.
In a scenario wherein auto ancillary stocks have moved up sharply and many have got overvalued, the stock is yet to participate in the rally. The company has shown a steady improvement in turnover, profits and EPS over the past several quarters. The TTM EPS of Rs 17.33 discounts the CMP by a PE of just 8.75 as against the industry PE of 42. With a Book Value of Rs 142, the P/BV is just one. Its market-cap to sales and operating profit ratios are just 0.2 and 0.91, respectively. Since the company has a substantial unutilized capacity and the auto boom is likely to continue, powered by strong domestic demand, the company should post an EPS of around Rs 22-25 for the full year (July-June 2011) giving a discounting of just around 6. The share is reasonably undervalued and can be accumulated with a 1- to 2-year time horizon to get very decent returns. The stock is a potential bonus candidate also.
The author is retired as Professor from the University of Delhi in 2024. He is an alumnus of IIM Indore and holds a PhD from the Delhi School of Economics. An investor activist and former member of various SEBI committees. He taught Capital Markets and Investment Banking at leading business schools of India.
