The markets have shed a lot of flab and future direction is still unclear. International factors such as the impending US slowdown, the appreciating yen and the growing US deficit, uncertainties in the Chinese stock market, and rising crude prices have started showing impact on the Indian market.
There are concerns on the domestic front as well. With inflation at a near two-year high, the government’s main effort seems to be to tame it by resorting to a massive squeeze in liquidity through increase in interest rates and CRR. This has taken a heavy toll on interest-sensitive sectors such as banking and financial services, housing and construction, automobiles, consumer durables, and so on. With the rupee touching a nine-year high and hovering at Rs 42 a dollar, export-oriented sectors like IT have taken a severe beating. With Wipro, Infosys, TCS and Satyam accounting for substantial weightage in the sensex, it too has suffered.
The drubbing of the ruling party in recent elections may compel it to resort to more populist measures which may not be good for the market’s long-term health. It seems to have effectively shelved reform with the word not finding a mention even once in the Union Budget of 2007. This is also the time when monsoon-related uncertainties start surfacing.
In this scenario, an investor should stick to the age-old strategy of playing the long-term game and avoiding short-term temptations. With the great Indian growth story still intact, making money is not just about taking risk or avoiding it. It is about managing risk prudently. So, look for sectors which are relatively safe such as power, hospitality, pharmaceuticals, media, logistics, food-processing, and so on and try to spot the stars of tomorrow – be it in value unlocking or hyper growth. I recommend two stocks – one a value unlocking one and the other a high growth one. Both could be multi-baggers.
Vindhya Telelink – CMP Rs 95
An M P Birla Group company, promoted by Universal Cables Limited and MPSIDC, it is mainly engaged in manufacture and supply of jelly-filled and optical fibre telecom cables to BSNL, MTNL, Bharti, Reliance, Tata, Railways, Defence, SAIL, NTPC, etc. The firm expects robust growth in its business due to increased thrust on e-governance and rapid growth in broadband connections.
Its turnover of Rs 153 crore in the financial year 2006 was higher by almost 50 per cent compared to Rs 104.5 crore the previous year. Profits also showed robust growth of more than 200 per cent from Rs 0.42 crore to Rs 1.30 crore.
However, the sales and profit figures are not the reason to recommend the stock to long-term investors. It is the hidden value that the company has in the form of investments in subsidiaries and other group companies. With a book value of almost double the current market price (CMP), the market value of these investments is estimated to be worth many times the CMP. Moreover, with the increase in dividend tax to 15 per cent and introduction of exchangeable bonds to facilitate unlocking of cross-holdings by such companies, the value in the stock is waiting to unlock sooner rather than later.
Polyplex Corporation – CMP Rs 111
This is the fourth largest and lowest cost producer of PET film in the world. The last three quarters were the worst for the company due to high crude prices. However, of late the prices have come down. In the coming quarters, the company’s profitability is likely to witness a massive jump. With its Thailand unit doing exceedingly well, the stock is in for a re-rating. Moreover, the stock – priced at less than half its book value – is available at a price which is near its lowest price in the recent past.
Disclaimer: The authorhas very limited exposure to the stocks recommended in the column of this and previous issue with a long-term perspective.
Errata: In the previous issue, the estimated value of NIIT’s holding in NIIT Tech (and not NIIT) is valued at more than Rs 200 per share of NIIT.
