India stock exchange – Top stocks for volatile times

One of the many reasons why every investor should read Wealth Insight is that apart from the extensive data, critical advice and expert insight that make up the magazine, we also try to put forth investment worthy ideas that can be evaluated and implemented by you – the investor. Last month, we told you about the stocks that fund managers bought when the markets were crashing; our analysis threw up nine tough stocks for a tough market.

This time around, we’ll tell you which stocks reported a smart recovery in the past two quarters. But first our modus operandi. We began with all the 6215 listed Indian companies.Out of these, we selected the top 1000 companies on the basis of market capitalization (30-days average, as on 14 May, 2008) and ran a query on 545 of them which had declared their fourth quarter numbers for FY2008. This list was further filtered to find those companies, which had been struggling since December 2006 but had staged a recovery a year later – December 2007 onwards.

To find these companies, we evaluated the EPS of each company over the past five quarters. EPS gives you the amount of company’s profits that are attributable to each outstanding equity share and is obtained by dividing the net profit figure (excluding preference dividends) by the number of outstanding shares.

After evaluating the EPS, we found that there were 21 companies that had seen a constant decline in EPS from December 2006 to September 2007. But out of these 21, seven companies have been able to bounce back in the past two quarters of December 2007 and March 2008. These seven companies have reported a significant earnings turnaround and consecutive growth in EPS. These companies have obviously done something right and would probably make a good investment. So let’s take a close look at each of them…

Sterlite Industries (India)

Sterlite is India’s largest non-ferrous metal and mining company (on the basis of net sales) with operations in aluminum, lead, copper and zinc.

It is a subsidiary of Vedanta Resources Plc. – a London based diversified metals and mining company, which has a 57 per cent stake in Sterlite.

Sterlite is also listed on the NYSE. It holds a majority stake in other Indian companies like Hindustan Zinc, Bharat Aluminum and Sterlite Energy (100 per cent). It has plans to participate in coal-based power generation projects through Sterlite Energy and aims at a capacity of 10,000 MW in five years. The company is in its final stages of setting up its 2,400 MW coal based power plant in Orissa and even has plans to come out with Sterlite Energy’s IPO.

On the financials front, the company reported a weak set of numbers in the March and June quarters in 2007, which lead to its EPS decline. However, in its latest Q4 numbers announced for FY 2008, Sterlite reported a 46 per cent rise in profits on a q-o-q basis.

The stock had a major run-up on the bourses from September to November 2007 and has also grabbed the attention of fund managers. It was held by only 50 funds in August 2007, but is now a part of 107 equity diversified funds (as per the April portfolios).

Mahanagar Telephone Nigam

More commonly known as MTNL, this state-run telecom major has faced stiff competition from private players. The company, which operates from only two metros, Delhi and Mumbai, has seen deterioration in its growth in recent times.

The company has two wholly owned subsidiaries – Millennium Telecom at Mumbai and Mahanagar Telephone Mauritius Ltd at Mauritius, which helps MTNL in its new planned business stream of International Long Distance (ILD) calling.

Though the telecom sector is one of the fastest growing sectors in India, MTNL has seen its telephony market share decline in the recent past. However, MTNL is doing the best it could by introducing new value added services like broadband and IPTV (internet-protocol-based television) in addition to its fixed line and GSM services. It also has plans to offer TV channels on cell-phones apart from initiating its ILD calling business for which the license is awaited.

Recently, there has been a sigh of relief for this lifeline of Delhi and Mumbai, as the company reported better earnings after quite a few quarters of declining profits. The PAT figure for Q4 FY2008 stood at Rs 219 crore, up 8 per cent on a q-o-q basis. MTNL’s EPS has gradually risen to Rs 3.49, a good jump from its EPS of Rs 1.5 in September 2007. Mutual funds too have increased their holdings to the stock in the past five months and the stock is currently a part of 22 equity diversified funds.

Jindal Stainless

Jindal Stainless (JSL) is India’s largest stainless steel manufacturer having manufacturing facilities at three locations – Hisar, Vizag and Orissa.It is the flagship company of the USD 6 billion Jindal Group and manufactures different ranges of flat steel products to serve the domestic and international markets.

The company recently signed a joint venture agreement with an Indonesian mining company – Antam to develop a nickel smelting and stainless steel plant in Indonesia from early 2009. JSL already has a stainless steel cold rolling complex in Indonesia and this project is a step towards becoming a global industry leader.

The company also has major expansion plans in the pipeline to expand its manufacturing capacities in the coming years. It plans to spend around Rs 6000 crore over the next two years to fulfill these plans.

JSL reported a decline in its domestic and export income in the period between December 2006 and September 2007.

However, post that, JSL has reported a domestic sales figure of Rs 1496 crore in Q4 FY2008, a marginal growth of 4 per cent on a q-o-q basis. JSL’s EPS though is far away from its December 2007 figure, and has recovered in the last two quarters. Equity funds have considerably increased exposure to the stock. Combined together, equity diversified funds account for over 22 lakh shares of JSL, a more than threefold increase from the 7 lakh shares held a year ago.

Polaris Software Labs

Polaris Software Lab is one of India’s leading IT companies which provide global financial services solutions.

It is an expert in outsourcing services in the Banking, Financial Services and Insurance (BFSI) sector and is the only company in India which is fully focused on the BFSI sector. Polaris offers specialized outsourcing services in corporate/core banking, consumer finance, investment banking and risk and treasury.

Recently, to provide ongoing product development and support services, the company entered into a strategic partnership with City Networks, a global software services provider for the treasury, securities and derivatives markets.

In October last year, Polaris launched a software testing laboratory, PACE in Australia which helps the company meet the growing demands of its clients in Australia, New Zealand and Hong Kong.

Back home in India, Polaris faces tough competition from I-Flex, Infosys and TCS who also offer financial services products. Perhaps, Polaris’ expertise and focus on the BFSI space could help the company in the coming years.

Talking about numbers, Polaris has seen a significant cut in profits over 2007. Equity mutual funds have reduced their exposure to the stock in the last 12-months, but the company is slowly recovering since December 2007.

Lanco Industries

Lanco Industries started off as a pig iron and cement manufacturing company in 1991. However, the company struggled to carry on its businesses in the initial years and was in a way rescued by Electrosteel Castings Limited when both companies entered into a strategic alliance in the month of December 2002. After the alliance, the company first reported profits in 2003.

Consequently, Lanco’s capacity to produce pig iron and ductile iron (DI) pipes has significantly increased. The company also manufactures foundry grade pig iron and portland slag cement, though it main business is to manufacture DI pipes (these pipes are generally preferred for water supply, sewerage and transmission applications). Last year, in March 2007, the company also installed a 12 MW captive power plant to generate electricity of 79.2 MU annually. The company already had a large value addition chain starting from iron ore to DI pipes and setting up of this plant has further strengthened its value chain.

Going ahead, the growth in demand of DI pipes offers a positive outlook for the company. After a disappointing set of numbers from March to September 2007, when its sales and profit figures were hit, the company reported robust results for the quarter ending December 2007 when sales jumped by 28 per cent (q-o-q basis).The trend has continued and Lanco has reported a whopping 70 per cent rise in profits in its recently declared results for Q4 FY 2008 (q-o-q basis). Though the stock is not a part of any equity diversified fund currently, it surged by over 200 per cent in the period between Aug ’07 and Jan ’08.

CCL Products (India)

CCL Products is a small company which commenced operations in 1995. It is engaged in the manufacturing of various types of coffee and is a 100 per cent export oriented unit.

The company has marketing collaboration with some of the highly reputed and experienced companies engaged in the coffee business in UK and the USA.

On a y-o-y basis, the company’s net sales have been growing at a steady pace of 34 per cent annually in the past four years.

CCL has seen a significant rise in EPS in the past two quarters of FY2008. In fact, in the quarter ending March 2008, the EPS figure stood at Rs 14.77, a 100 per cent growth over its previous quarter.

However, equity mutual funds have decreased exposure to the stock in the past one year.

The stock was held by five funds a year ago but is now a part of only one fund, namely Franklin India Prima. The stock price too has taken a major hit in the past and has decreased by over 63 per cent since January 2007.

UTV Software Communications

UTV started off as a TV content company in 1990, but has slowly transformed into an entertainment production and distribution house with pan-Asia operations. It currently has three business verticals – content (movies, television), interactive (animation and gaming) and broadcasting. The company has eight subsidiaries which take care of its different business verticals.

In 2006, UTV entered into a strategic alliance with Walt Disney when the latter acquired a 13.7 per cent stake.

Walt Disney also acquired a 100 per cent stake in UTV’s 24-hour kids channel Hungama TV. Recently in February ’08, the company announced that Disney is increasing its stake to 32.1 per cent. The deal, once it goes through, would be the largest strategic deal ever by a foreign investor in the Indian media and entertainment space.

The company also tied up with 20th Century Fox in 2007 for the co-production of a Hollywood flick. UTV is the only Indian company to have partnerships with top international media majors like Fox and Disney in such a short span.

After reporting a loss in the quarter ending September 2007, UTV has come out with a good set of numbers in its latest results.

UTV’s net sales have surged by 170 per cent for the quarter of March 2008. The EPS too saw a significant jump from Rs 0.39 to Rs 1.86 in the March 2008 quarter. All equity mutual funds exited the stock in January 2008 but re-entered the very next month. The exposure to the stock by funds has been considerably increased since then.


~~ Stock Picks and Stuff from JJ ~~

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