To Buy Or Sell; Equities Decoded In These Days Of Volatility

The equity markets did not bring in much hope so far during the current calendar year. While investors and experts across the globe have been talking about a possible global recession amid relentless weak crude oil prices, softened Chinese economy and big banks globally not doing well, the equity markets are looking volatile and scary for the investors. India is no much exception.

Indian stock markets also have reacted in tune with the global markets and benchmark indices crashed 13.6 per cent in 2016 i.e. Sensex has lost 3,131 points or 13.6 per cent and Nifty has lost 965.4 points or 13.8 per cent. In fact, over the last 11-month period, since it hit the 30,000 mark in March 2015, the Sensex has fallen over 23 per cent as global weakness weighs heavy over the strength of domestic broader economic fundamentals. Fresh concerns over rising non-performing assets (NPAs) of the public sector banks in India have also recalled the trauma of 2008 to the investors, the ill-fated year of global economic crisis.

Continued market turmoil could weigh on global growth leading to major risk aversion and currency depreciations in the emerging markets. Therefore, International Monetary Fund (IMF) has cut world growth forecasts for the third time in less than a year. The IMF which now expects the world economy to grow at 3.4 per cent in 2016 and 3.6 per cent in 2017 - cited a sharp slowdown in China trade and weak commodity prices for its downgrades.

We have analysed BSE 500 stocks which show that 275 companies traded their nearest to 52-week low within 10 per cent and 30 companies traded their nearest to all time low. In such kind of a market situation many investors have this question-which stocks to buy and which ones need to be sold.

Believe it or not, a majority of investors choose the stocks that have traded at 52-week low because they believe that it will in the long run make it come up to those levels again. This is the common mistakes done by the investors. Many investors are also trying to do average taking the advantage of the falling prices. However, investors’ goals should be buying good scrips at a reasonable price. Buying companies solely because their market prices have fallen will get one nowhere.

If there is enough gap in the intrinsic value and current price, along with a margin of safety then invest in these stocks. Make sure you don't confuse this practice with value investing because we also don’t know where the bottom is and it could be a falling knife. If you pick ill stock financially then you may get sliced.
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DSIJ tried to decipher the fears of global slowdown on Indian stock markets and pulled up a few stocks from BSE 500 fundamentally strong and currently available at reasonable valuation. Some stocks are still under stress and should avoid at current market price.

Stocks to Invest

As per our studies, the following stocks are now currently available at reasonable valuation and we expect upside from the current level in FY17.

Dewan Housing Finance

Dewan Housing Finance, LMI focused (Low & Middle Income) third largest home loan and housing finance company in India (after LIC Housing Fin and Indiabulls Housing Fin) with assets under management of over Rs. 66,000 crores, as posted good result for the first nine months of FY16. The company’s net profit grew by 17.54 per cent to Rs 539.53 crore and Net Interest Income (NII) grew by 19.92 per cent to Rs 1,335.87 crore. Going ahead, management is confident of maintaining similar AUM growth rates going forward as well and they have outlined a target of reaching Rs 1 lakh crore AUM by FY18. With government focus on housing for all by 2020 – 2022, lots of projects are seen coming up for LMI and affordable housing category, especially houses between 15 lakh to 40 lakh have attracted huge demand.

Century Plyboards

Timber products have a large addressable market and consumer preference in this segment is shifting to branded products. Century Plyboard (India) (CPIL) is India’s largest plywood manufacturer with around 23-30 per cent share of India’s organised plywood sector and a market share of around 6-7.5 per cent in the overall market. For nine months of FY16, the company reported 24 per cent in net profit of Rs 127.54 crore and revenue growth of 4.17 per cent at Rs 1,203.72 crore. Core operating profit grew at Rs 17.5 per cent at Rs 208.9 crore along with operating margin expanded 197 bps at 17.36 per cent. Housing for All & 100 Smart Cities are crucial driver for growth of the plywood industry. We believe Century Ply is well poised with new capacities and increased distribution reach to ride this wave and grow faster.

Tamil Nadu Newsprint and Papers (TNPL) is well placed in the paper manufacturing sector, with capability to manufacture writing and printing paper by using low cost bagasse having 46 per cent of capacity. In the last month the company has commissioned its Rs 1,650 crore multi-layer board plant in the in Tiruchi district of Tamil Nadu. The greenfield facility with a capacity of 2 lakh tonnes a year will make high-end, multi-layer double-coated board for use in the packaging industry. It will add to its existing paper production capacity, taking the total to over 6 lakh tonnes a year. In nine months of FY16, the company’s net profit at Rs 158.3 crore, rose by 62.6 per cent Y-o-Y. The company's revenue at Rs 1,683.9 crore, registered a growth of 17.54 per cent Y-o-Y. Operating income grew by 19.1 per cent to Rs 397.2 crore with margins expanded by 31bps at 23.6 per cent.

JK Tyre & Industries, leading auto tyre manufacturers in India, reported 55.13 per cent growth at consolidated net profit of Rs 347.03 crore and consolidated revenue marginally de-grew by 6.63 per cent at Rs 5,204.53 crore. Core operating profit reported growth of 28.5 per cent at Rs 871.95 crore along with operating margin expanded by 458 bps at 16.75 per cent. The company’s debt may to gradually decline by 2017 with the help of strong operating cash flow. Kesoram’s tyre segment acquisition would help it expand capacity in truck and bus radials, besides a foray into the two-wheeler and three-wheeler tyre segment. Higher proportion of radial tyres improves realisation and consequently profitability. As far as valuation is concern, the stock price is traded at around 4 times of its price to earnings ratio with an earning of Rs 19.97 per share on TTM basis which is much cheaper compare to its peers.

Stocks to Avoid

As per our studies, we expect more price correction in the below mentioned stocks which may not see any further upside from their current level in FY17.
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AIA Engineering

AIA Engineering is a solution provider and supplier of wear resistant and allied components for applications in cement, power, mining, aggregate manufacturing and other industry segments. The company has reported a disappointing during the first nine months of FY16 due to slowdown in the global mining industry and uncertainty on a recovery in the near future. On another side the company has already commenced the first phase of capacity expansion of 80,000 tones in Q3FY16 whereas the second phase will be coming in second half of FY17. Therefore, EBITDA margins may impact in FY17 as AIA will market new capacities at competitive prices to penetrate new mines and clients globally. To considering the above facts, we don’t see the upside in this counter in the next one year.

Ipca Laboratories

Ipca Laboratories, fully-integrated pharmaceutical company, reported muted set of earnings in the first nine months of FY16. In 9MFY16, the company’s net profit decline 78 per cent of Rs 53.76 crore and revenue de-grew by 10.8 per cent at Rs 2,191.29 crore. Revenues de-grew mainly due to 22 per cent growth in export formulations to Rs 1,089.63 crore. Core operating profit declined 46 per cent at Rs 260.59 crore along with operating profit margin contracted by 792 bps at 11.9 per cent. FY16 has been more or less washed out due to USFDA warning letter, lower institutional business, currency fluctuations in emerging markets and slow growth in domestic market due to restructuring. There is no point to invest in this stock long as the USFDA overhang is not resolved.

Alstom T&D India

Alstom T&D India, transmission and distribution major, reported net loss of Rs 18.20 crore for the quarter ended December 31, 2015 due to delayed sales impacted by Chennai flood and higher material costs/expenses in some contracts as well. For nine months of FY16, the company reported de-growth of 28.4 per cent of net profit of Rs 47.65 crore and its revenue by single digit of 5 per cent at Rs 2,472.01 crore. Its core operating profit decline 15.75 per cent at Rs 177.62 crore along with operating margin contracted by 177 bps at 7.19 per cent. The market continues to be difficult due to lack of new investments from private sector and increasing bank non-performing assets (NPAs) which impact the cash flows from the customers. Therefore it is better to avoid this stock.

Crompton Greaves

Engineering conglomerate Crompton Greaves posted a consolidated net loss of Rs 107.03 crore in the quarter ended on December 31, 2015 as compared to net profit of Rs 274.3 crore for the quarter ended December 31, 2014. The company’s consolidated revenue declined by more than 14 per cent to Rs 2,068 crore and the operating profit declined to Rs 9 crore in Q3FY16 from to Rs 63 crore in Q3FY15. Consequently, the net profit after adjustment for exceptional items was substantially down to Rs 96 crore in this quarter. The company’s focus has been on restructuring for some time now and the outlook remains tepid, as reflected in the soft order book picture. Therefore, we recommend our readers to avoid this stock.