Turnaround Candidates

Despite volatility, the Sensex is testing higher levels and is up by almost 94 per cent from the lows it reached in March this year. Investors too are making the most of this opportunity by sticking to fundamentally strong counters and keeping the investment strategy simple. But, on second thought, doesn’t it also make sense to be different from the rest and still chalk out a different investment strategy and pick stocks that the markets have ignored due to the companies currently incurring losses, but having potential to catch investors’ fancy sooner rather than later.

In keeping with this strategy, we, at Dalal Street Investment Journal, have selected turnaround candidates from a host of loss-making companies. It might sound a bit odd, but it does make sense at this point of time to go for such companies which despite odds are thinking out of the box to pull themselves out of the quick sand and turn themselves profitable. The ‘Turnaround Candidates’ story is an annual exercise for DSIJ, where we find such hidden gems which are currently making losses but have the potential to turn around during the year and give better returns to the investors. It is easier to pick such stocks when the economy is on the upturn and everything is hunky dory, but in a gloomy scenario when the uncertainty increases, selecting such stocks becomes tougher.

The one trend that we have seen since 2004 is that the number of loss-making companies has declined drastically after the economy started to pick up pace. It should be noted that there were about 1082 loss-making companies in 2004. This number came down by 30 per cent to 755 companies in 2005 and further fell by 38 per cent to 469 companies in 2006. In 2007, when the economic growth was at its peak, the loss-making companies fell to just 249 companies. But it was in 2008 that economies across the world, including India, felt the jitters of the global financial crisis. Result: the number of loss-making companies increased to 349. While the global economy is yet to come out of the woods completely, many would expect this number only to increase. On the contrary, what’s heartening to know is that India Inc has showed strong resilience in FY09 and this number has actually declined by as much as 50 per cent to just 173 companies! If we dissect the 2009 numbers further, we see that the loss-making companies have declined drastically in the B group, S group and – to our own amazement – the Z group! Thus, while in B group the number of loss-making companies has come down to 69 from 128 companies previously, in the S group the number has fallen to 7 from 18 previously and in Z group the number is a mere 5 from 124 previously (refer table). This, according to us, is quite an achievement considering that FY09 has not been too kind on India Inc. Besides, we also believe better cost management initiatives and the amendments to the AS 11 could be the reason for this drastic drop in loss-making companies in FY09.