BSE INDIA:Fishing for value stocks in troubled waters

In the current volatility, picking value stocks from among the beaten scrips may be risky. We identify three that you can consider.

NARENDRA NATHAN 

    While the recent volatility has pummelled the broader market indices to 18-month lows, some stocks have fallen to all-time lows. They have breached the 2008-9 levels, when the Sensex hit the 8,000 mark. Should investors buy these stocks, especially since many have crashed by more than 90% from their peak? More importantly, will the returns be good? Before we try to answer these questions, remember that you need to exercise caution while identifying value picks from these beaten down stocks. 
    To begin with, understand that trying to pick such stocks and sectors in a volatile environment is a high riskhigh return game. So, only the investors who have the stomach to withstand such an exercise should go ahead. Besides, investors should only park a part of their portfolios in such stocks. Next, find out why these stocks are where they are, and if the reasons are viable, they will continue to go down in the future as well. 
    The list is flooded with companies that are plagued by multiple problems, which range from the impending FCCB conversion and jailed promoters, to the threat that shares pledged by promoters may come to the market at any time. Therefore, it is safer to stay away from such stocks or pick them up only if you know that the negative publicity has been priced in. The best strategy is to identify stocks that have fallen because of external factors. "Investors should concentrate on stocks that show growth but where the multiples have come down significantly," says Pankaj Pandey, head of research, ICICI Securities. 
    Investors should also be prepared for further damage to this portion of their portfolio in the short to medium term. This is because once a sector/stock loses favour in the market, it may continue to fare badly for some time and the market is liable to ignore the value picks as well."There will be value among many of these stocks, but these are the same stocks that had value two weeks ago as well. Nevertheless, they continued with their downward spiral," explains Ajay Parmar, head, research, institutional equities, Emkay Global. Hence, a better way to choose a stock would be to spread out the investments, ideally over the next 6-12 months, so that you are safely cushioned if the prices continue to fall. This strategy is also applicable in the current situation, especially since the broader market is expected to remain volatile for a few more quarters. 
Stocks worth considering: To make sure we select stocks that have a standing in the market, we considered only those from the BSE-500 or NSE-500, a total of 606 stocks. Of these, currently only 44 stocks are quoting below the 2008-9 level. To ensure a reasonable conclusion after talking to analysts, we only picked the stocks covered by a minimum of five analysts. From these, we finally picked three after running them by analysts once again. 
Everest Kanto Cylinder: This is our best pick from this category because the stock has posted strong results for the first quarter of 2011-12 and is also expected to do well in the coming quarters. It has not only reported a 54% topline growth, but improved its EBITDA margin significantly and reported a net profit of 29 crore compared with a loss of 11 crore. Further, the outlook for the CNG industry is encouraging, that is the demand for CNG cylinders is expected to rise, and a strong player like Everest Kanto should be able to benefit from this. With its capacity expansion plans also on track, the company's earnings should witness a further improvement in the future. India Cements: Though the company has also shown good results in the first quarter with a quadrupled net profit, the stock is languishing due to the problems in the cement industry. A 38% jump in realisation has helped it deliver decent topline numbers in the first quarter, but the fall in its sales volume (a decline of 13% year-on-year) during the quarter due to lower demand in the southern region is a warning sign. At the industry level, cement prices and margins for cement companies are expected to fall in coming quarters. However, with the recent drastic correction in price, most of the negative news has already been factored in. The positive trigger for the stock can either be the commissioning ofits power plants (50MW Tamil Nadu plant and 20MW Rajasthan plant are expected to be operational by December 2011), or unlocking of value from its IPL franchise—Chennai 
    Super Kings. 
    Dishman Pharma: While the net sales profit moved up by a robust 14% on a year-on-year basis, its net profit came down drastically by 45% due to the 68% jump in interest expenses. Despite the average first quarter results, the overall analyst rating moved up because of the price correction, which pulled the valuations to desired levels. Further, the restructuring that Dishman Pharma is undertaking at its Carbogen Amcis division is expected to generate significant savings for the company. While the Carbogen Amcis division (with a 25% reduction in its employee strength) is expected to show a muted performance in 2011-12, it is expected to improve from 2012-13 onwards. Hence, the main trigger for this stock is expected to come in the form of better results in the coming quarters.