The season of lights is just a week away and it is time to get on with the festivities, clean up the books and also pray to Lakshmi, the goddess of wealth and prosperity. And, she has not been kind this season as the equity markets have more than halved in a short period of ten months. This Diwali one could actually see a rather subdued mood as compared to the exuberance seen last year.
Viewing it from one angle it can be said that this is the ?pain? of investing in the equity markets. From another, this could actually be an opportunity to pick-up bargains and fill-up your portfolio with stocks that are available at ?deep value? as analysts would call it. And there is a lot of value available now. When quizzed a couple of weeks ago by FE on the level at which value would start emerging, ace investor Marc Faber said that at 10k Sensex levels, he would see value emerging in India. Now that the benchmark index is in the four digit zone, the value story becomes stronger.
A study carried out by FE reveals that the out of the BSE 500 scrips, around 22% of the companies were quoting below their book value. The 12 month forward price earnings is in single digits and the growth prospects, albeit low, are much better than their global peers.
Deep value
This, then, could well be the deep value Deepavali where investors could go in for picking stocks. While it is important to have a high level of cash or near cash component in your portfolio, not picking up bargains and waiting to time the market could actually be risky. As Warren Buffet would put it, ?Those investors who cling now to cash are betting they can efficiently time their move away from it later. In waiting for the comfort of good news, they are ignoring Wayne Gretzky?s advice: ?I skate to where the puck is going to be, not to where it has been.? A puck is the substitute for a ball in ice hockey.
According to an ICICI Securities report, ?Global indices witnessed the steepest ever weekly fall of 16-20%, reflecting the ongoing turbulence in financial markets. This has significantly shaken investor confidence and depleted risk appetite. Consequently, valuations have taken a severe beating. While predicting the bottom is not feasible, we believe that such an event offers many excellent businesses on ?sale?.? Indeed there is a Diwali sale on.
Similar views are expressed by HSBC equity research, they say, ?Stocks are likely to remain under pressure for a couple of quarters, but the bear market may turn around in 2H09. We highlight telecoms and capital goods as a way to combine defensiveness and growth. Our Sensex target for 2009 end is 15,000.?
Sifting ideas
Now, like any Diwali sale, while going bargain hunting, not all of the wares available are real value. Hence, the sifting process is very important. Peter Flavel, global head – private bank, Standard Chartered said at the recently concluded Reuters Wealth Management Sumit, ?We have a golden rule in the group – we only invest in things we understand. If we don’t understand it, we don’t touch it.? And this holds true when seeking truly valuable deep value stocks.
There have been several stocks, especially in the real estate sector that saw picking up equity at hefty premiums that have inflated their reserves. Now, with the prices correcting, it could appear that they are quoting at a steep discount to the book value. And since they have not had a long-run in the market, and the management has not been tested for bear market survival, it would be a risky proposition to buy into these. There will be several such companies which will fall by the wayside as they did after the correction in the mid nineties.
Hence, the ability to survive the slowdown becomes the most critical parameter for picking deep value stocks. And here, financial strength comes out as the biggest parameter to pick ?deep value?, reckon analysts. Companies with low debt burden and ample reserves should be the obvious choices here. Access to cash and strong cash flows are the parameters you would want to look at carefully as this. Here there are several picks to be made, especially in the banking and FMCG sector.
Many public sector banking stocks have taken a beating merely due to the market sentiment. Some of these have strong access to funds, have been prudent in lending and have clean books.
Then again, the ability to survive the slowdown will require having a strong product mix that is insulated from a slowdown. And here, the FMCG and the pharma sector have a natural defensive hedge as they have the ability to pass cost rises to the customers, and still no see significant demand let down. This might not be the case with the consumer durables and the automobile sector. Even in the case of FMCG companies, the ability to pass on cost hikes is a critical factor that investors should look at.
Here, the telecom sector?s ability to see earnings growth despite margin pressure is considered attractive by the analysts and with the introduction of 3G services just around the corner, the sector will look at more volume growth.
Even some of the engineering sector companies would be able to ?deep value? propositions. Some of them like BHEL and L&T are spotted to be few of the favourites here as they have strong order book positions and even if some orders face slowdown, they have enough cash generating opportunities. And, after being the cynosure of the investor?s eyes in the past one year, the share price has been beaten down with sever vengeance, that is not warranted by their fundamentals, says a fund manager with a leading domestic fund. Little wonder that both of these scrips feature in the list of shares lent by FIIs for covering short positions.
Battered heroes
And then there are the other battered heroes as well. An analyst sites the case of ICICI Bank. He says that when you buy into ICICI Bank you not only get the bank itself, but also an opportunity to participate in India?s largest financial conglomerate through its subsidiaries. It?s subsidiaries like ICICI Lombard, ICICI Prudential Life, ICICI Prudential Asset Management and ICICI Securities are leaders in their line of businesses and can fetch heavy premium when they are demerged.
The sum of the part or SOTP valuations, where the value of these subsidiaries was aggregated into the parent?s share, the amount was pegged at Rs 1,800, the analyst adds. Now, there is no reason for the company to quote below Rs 500, given that it adorns such jewels and also given that the earnings growth might not be as strong as earlier and there are concerns over the quality of some assets.
There are others who also site the Reliance Industries as one of the likely members of the battered heroes category. The company has been witnessing immense selling pressure, probably due some amount of promoter selling to rationalise its holding as well, but the fundamental factors remain strong, reckon analysts.
But even here, investors need to be careful about picking up stocks that have ample liquidity. Usually small- and mid-cap companies have been witnessing tremendous volatility and this destabilises the management plans in the long-run and therefore the value proposition seen by you can be shattered.
Ready for shopping
And after you have isolated the usual suspects, it would also be a great opportunity to look at some emerging themes to pick on the front runners for tomorrow. Clearly, the rural- India theme appears to be an attractive proposition to look at.
The reasoning is that the impact of a slowdown will be more pronounced for the urban population and rural India will see improved earnings and this will mean that companies catering to these markets would stand to gain. According to an IIFL report, ?The marginal improvement in economic well-being and per-capita incomes of a large part of the 700 million rural population is now palpable in rising rural demand, a fact corroborated by a number of companies. We advise investors to play this theme, especially considering the inelasticity of rural demand to high interest rates.? This is one ride you would not want to miss out.
Moreover, the current meltdown, could actually be a boon for those who stayed away and missed the three year surge. Well, the chance has come back to hitch on, if you had missed the bus, reckon experts. Also, for those who have experienced the worst of the meltdown, this Deepavali could be a good time to clean up the portfolio and start afresh by locating deep value.