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The stockmarket continues to be volatile after the Sensex touched a low of 15,332.42 on 22 January 2008, a drop of over 25 per cent from the top. It was a harsh reminder to investors to stay away from stocks whose fundamentals do not justify their prices. So, looking at fundamentals, as it always does, Outlook Money went bottom-fishing.
We kept sub-Rs 250-crore market cap companies out and came up with a list of around 900. Then we eliminated companies that had not grown their net profits by at least 15 per cent year-on-year (y-o-y) in each of the last six quarters. After discounting for valuations and some quantitative factors, and omitting stocks already in our portfolio, the following are the five we came up with.
1. Amara Raja Batteries
The Amara Raja Batteries is one of India's largest makers of lead acid storage batteries for both industrial and automotive applications.
In the industrial segment, it is a preferred supplier for major telecom service and equipment providers, oil and gas majors, and the Indian Railways. Buyers of its Amaron batteries are the who's who of automotive companies - Ashok Leyland, DaimlerChrysler, Ford, Honda Siel Cars, Hyundai, Maruti, Tata Motors and others. ARBL also exports both industrial and automotive batteries to the Asia-Pacific region, Africa and the Middle East.
The Indian automotive industry in seeing slow sales because of high interest rates prevailing since around April 2007. Despite that, ARBL is growing fast due to strong demand in the industrial sector.
In the auto space, the Amaron batteries' growth in volume was up 50 per cent in financial year 2007. In the December quarter, sales went up by 110 per cent y-o-y, while net profits were up 206 per cent.
We believe interest rates in India have peaked. So, any downward revision will only help the company. Despite a sharp correction in the broader market, this stocks continues to maintain its upward trend backed by solid fundamentals.
2. Bank of India
A public sector bank, it has 2,644 branches in India. Its large credit business is handled by its corporate banking function. Export credit is available at 270 branches. Operations of 2,618 branches are fully computerised. Bank of India has also moved 1,019 branches and 31 extension counters to its core banking solution.
In the quarter ended December 2007, it doubled its net profits over the previous year on an income rise of 40 per cent. Other incomes were up 72 per cent while other operating expenses went down by 13 per cent. Its percentage of net non-performing assets almost halved to 0.62 from 1.14 in the corresponding quarter of the previous year. In the last one year, its stock has gained over 80 per cent, but we believe that it is still grossly undervalued as it is available at a price to earning ratio of 10.
Besides, it is available at 2.5 times book value, much lower than those of some of the prominent private sector banks. This multiple is 7.70 for Axis Bank and 4.88 for HDFC Bank.
3. Infosys Technologies
Arguably India's hottest software company, Infosys lost 30 per cent of its market cap in 2007, partly on fears of margins thinning because of the appreciation of the rupee. In January, it saw a rise in buying interest as the market felt this stock has been oversold and has bottomed out at around Rs 1,400.
The rupee appreciation, too, could not stop Infosys from growing at a healthy clip. In the December-2007 quarter, sales rose around 16 per cent and net profits 24 per cent. It added 47 new clients and 11,683 employees during the same period. Also there is no indication of IT budget cuts in other markets.
Buyers are still resisting picking up this stock as there is uncertainty over where international stockmarkets, especially the US, are headed. But the company's management is confident about its future. It is hedging against currency risk and diversifying business.
But, it is also cautious that any wild swing in exchange rates could create problems. Instead of a large one-time investment spread out the purchase with a long-term view.
4. Kavveri Telecom Products
The company makes hardware products and provides solutions to telecom companies. It is India's largest manufacturer of antennas and radio frequency components with capacities of 100,000 and 10,000 units a month, respectively.
It also makes cables and connectors, repeaters, and solar products. Its clients' list includes BSNL, Bharti Airtel, Reliance Communi-cations, Idea and Tata Indicom.
The company has grown by over 150 per cent y-o-y for the last six quarters. In the December quarter, its sales rose 274 per cent over the previous year and net profits 206 per cent. In January 2008, Kavveri bought wireless telecom equipment maker Spotwave Wireless Canada, and bagged a $100,000-order for Vodafone's European operations.
Moves like the government releasing more spectrum, new players joining the telecom fray and more investment in the sector, bodes well for the company. The stock has been a clear outperformer in the last year. It has gained 350 per cent and is still available at almost 17 times earnings.
5. Tata Consultancy Services
Along with Infosys, this is the other IT stock to now become affordable. The stock, as others in the IT pack, was under selling pressure and fell from around Rs 1,300 in February 2007 to Rs 800 in January 2008. It now trades at around Rs 899.95.
Its profitability growth has slowed down from 43 per cent y-o-y in March 2007, to 24 per cent in December the same year. The December quarter, however, saw its sales grow 22 per cent y-o-y.
The company added 54 new clients, with the biggest contract being a $1.2-billion full-services deal with The Nielsen Company. Meanwhile, on 30 January, Diligenta, a subsidiary, bagged a $100-million contract from Sun Life Financial, Canada.
Like Infosys, TCS, too, has fallen out of favour because of uncertainty in the stockmarkets worldwide and rupee's appreciation. But the stock seems to be at, or close to, its bottom; so the downside is little. That apart, some experts feel a global economic slowdown will create cost-control pressures that will see more work outsourced to India. The investor can take advantage of that opportunity as well.