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Monday, December 1, 2008

Investment worthy stocks in this bear market

A list of stocks that meet one of the several prerequisites of being investmentworthy. We have identified stocks whose market value is now lower than cash and other liquid investments net of longterm debt on their books.

It must be noted that this is more an indicative list for investors than a stock idea based on fundamental analysis.

Our objective was to identify those stocks whose market capitalisation (mcap ) has fallen below their on-book liquid investments and cash.

To achieve this, we scanned a list of all the listed companies and selected those companies which reported Rs 100 crore or more in annual revenue in FY08.

This was done to exclude very small companies that may find it difficult to survive in times of an economic slowdown. This left us with 1,465 companies from various sectors.

We combined their liquid investments, including investments in quoted equity (at the current stock prices), debt and mutual funds, and added it to the cash and equivalents, as stated in their latest annual reports.

This gave us their liquid investments, which can be easily liquidated to realise cash. However, it needs to be noted that the data on investments dates back to the latest fiscal year end (or FY08) and does not reflect the current position.

It is likely that companies may have divested their investments recently in light of the turbulence in the financial markets. We then found out how many companies from the list could pay their long-term debt using their liquid investments as calculated above and still have some cash and investments left on their books.


This was a rather stringent criterion used to filter out those companies which may have been showing higher cash and equivalents simply due to loans raised in the form of foreign currency convertible bonds (FCCBs) or external commercial borrowings (ECBs) or any long-term domestic debt.

This exercise gave us the net liquid investments for each of the companies. We then identified those with m-cap lower than the net liquid investments.

Though 43 companies from banking and financial sectors made it to the final list, we excluded them since cash is a significant part of their operations, unlike in case of manufacturing and other services companies. Finally, there were 59 companies which fulfilled our criteria.

The reason behind this rather interesting exercise lies in the turbulent times of today. The economy is expected to slow down. This also means that companies may falter on their rate of growth, going ahead, though we are still waiting for concrete evidence.


Under such circumstances, stocks will be hammered in order to discount the future deceleration in growth.
While doing this, there is a possibility that the stock market may clobber a stock enough to take its price below its intrinsic value. Our study tries to take advantage of this aspect of a bear phase by finding out all such stocks. While the final list includes big and small companies from across sectors, players from the textile and IT sectors figure prominently in the list.

Both sectors together constitute onefourth of the entire list. The list includes four packaging and five FMCG companies. There are 10 companies with more than Rs 1,000 crore in annual revenue in the final line-up .
After arranging the list on the basis of annual revenues, State Trading Corporation of India (STC) leads the rankings (see the table above).

Two jewellery companies — Rajesh Exports and Gitanjali Gems — follow STC, respectively.Others in the list include the BPO arm of Hinduja group, HTMT Global, packaging company Garware Polyester, Hinduja Ventures (which owns a TV cable company In Mumbai) and IT company Aftek.

It also makes sense to identify companies that have marginally higher m-cap compared to their net liquid assets, given the weak trend in the market. A further fall in the m-cap may help these companies enter our list.

To compile the list, we decided to consider those companies whose m-cap is not more than 10% higher than their net liquid investments. Mysore Cements, House of Pearl Fashions and D-Link are some of the companies in this list.
Going by the same logic, if conditions in the stock market improve, then we may see names like Power Trading Corporation (PTC), State Trading Corporation and MRO-TEK exiting from the list.

The exercise is not complete in itself, as it needs to be backed by a proper framework of fundamental analysis. The main purpose here was to come up with a bunch of scrips that look cheaper when considered from the point of liquid assets.

Seth Glickenhaus, a renowned contrarian says, “You make money buying stocks on weakness and stocks in distress. You don’t make money buying stocks when they are in high demand.”
Source: Economic Times

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