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Monday, June 30, 2008

Some of the Best stocks below Rs. 100

Where to shop when you have just 100 bucks. Here is the list of companies which showcase robust financials and belong to the universe of firms that trade at a price below Rs 100

“Psychology is probably the most important factor in the market — and one that is least understood.”

SO BELIEVES David Dreman, the guru of contrarian investing. His statement testifies itself more often than ever in times of panic in the stock market. A slump in the market may augment manifold the impression of every bad news on the investor’s psyche. This may result in a lower risk-taking ability, while placing bets in the market.
Though at ET Intelligence Group, weclosely track the stock market and provide insights on trends and future expectations, psychology and that too, market psychology, is not our expertise. But it becomes not only an interesting exercise, but also an essential one to tap into the way investors shape their thinking during times of turbulence.

This week, ETIG presents a list of companies which have performed exceptionally well over the past three years based on a stringent set of parameters. Though this may appear to be a regular exercise from ETIG’s stable, it is unique as it takes into account only those companies whose stocks have been trading at a price below Rs 100. The reason behind drawing up such a list in the first place was to address the issue of declining risk appetite of investors who feel battered by the recent crash in the stock market. But what does it have to do with the stocks that carry a price tag of Rs 100 and below?
The general perception is that stocks of blue-chip companies, which trade at prices in three and four digits, are expensive in terms of absolute numbers. Though their ‘expensiveness’ is backed by healthy business fundamentals, investors often turn their back on these heavyweight scrips during tough times. This is because it requires a sizeable kitty to buy a good number of shares of these companies. For instance, to accumulate 100 shares of a scrip that trades at Rs 3,500, one may have to shell out Rs 3.5 lakh. In happier times, it may not be a tough call for a retail investor to go for the kill. However, during market adversities, an investor may feel apprehensive about the same bet.

In contrast, a scrip that costs, say, Rs 50 may call for a lower sum of investment and may appeal more for the same reason. This feeling of ‘buying cheap’ becomes prominent when times are bad. To help investors zero-in on the space populated by stocks that cost less than 100 bucks, ETIG carried out an exercise involving over 1,400 stocks. These were then put through a stringent criteria to select 10 stocks that fit the bill. Do read the methodology we put to use in order to get the list out.
While these companies trade at a price below Rs 100, they boast of an enviable track record. Here, we present the list of 10 companies that met our criteria.
The companies that have made it to our list are from various sectors. There are four companies from the IT sector and two from electrical machinery. The list also contains two bearings companies.

Interestingly, six out of 10 companies in our list are currently trading at a price-toearnings (P/E) multiple of less than 10. Further, the stock prices of two companies in the list have fallen more than 50% over a span of one year. The period encompasses the current fall in the market.
We ranked the companies based on their FY07 revenues. On top was Kolkata-based storage battery maker Exide Industries. At Rs 2,085.5 crore, its FY07 net sales grew by 35.6%. This is the fastest rate of growth in the past three years. Sales further grew to Rs 3,606 crore in FY08. It has a debtequity ratio of 0.52 and generates an over 20% return on capital employed (RoCE).

Berger Paints is the second company on the list. It is among the top few paint manufacturers of India. Apart from offering a range of paints, it also provides customised home painting solutions. At a 31% RoCE, the company has a low debt-equity ratio of 0.4. With a P/E multiple of 12, it is cheap when compared to the industry average of 24. However, its net profit margin is comparable at 7%.

Teledata Informatics, which currently trades at Rs 15.9, is the third biggest company in our list. It provides software solutions to utilities and education sectors and also offers network communications solutions. The company has been recording robust financials. However, its valuations have undergone a substantial decline over one year. The company, which was trading at a P/E of about seven times its trailing 12 month earnings, now trades at a P/E of about one. It needs to be mentioned that the company demerged its business late last year. Teledata’s stock has fallen by about 71% in a year, the sharpest for any company in our list. Other software companies that secured a berth in our list were Aftek, Aztecsoft and Visesh Infotecnics. Apart from these companies, bearings companies NRB Bearings and ABC Bearings also feature in our list. Each of them makes ball and roller bearings. Each of them makes ball and roller bearings. Out of the two, ABC Bearings has a higher RoCE, yet it is currently trading at a lower valuation in terms of P/E. But there is a caveat emptor. Do not mistake this list for stock recommendations. Do a little bit of your own calculations and assess your risk appetite and only then take a plunge into these stocks. As they say, past performance is no guarantee for future returns...

M E T H O D O L O G Y

AMONG 1,500 companies that were trading at a price below Rs 100, we selected companies with net sales of more than Rs 100 crore and profit after tax (PAT) of at least Rs 10 crore. We then looked for companies with robust financial performance. We started off by eliminating all those companies that had recorded less than 15% growth in net sales and PAT in any of the past three years. Further, we filtered companies on the basis of debt-to-equity ratio and return on capital employed (RoCE). While a high debt-to-equity ratio indicates that a company may not be able to generate enough cash to satisfy its debt obligations, a low leverage ratio increases a company’s potential to raise funds. Hence, we selected companies which had a debtto-equity ratio of less than 1.5. In order to carry sustainable operations, it is necessary for a company to operate at an RoCE which is well above its cost of capital. Only those companies with an RoCE of more than 15% could make it to the next stage. The final criterion was to do away with all companies whose three-year average net cash flows from operating activities was less than 50% of their reported cash profit.

Source : ETIG (Economic times)

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