Wednesday, June 3, 2009

The dark horses

In every game there are dark horses and the stock market is no exception. In the 2004-07 bull run, it was the mid-cap and small-cap stocks which outperformed the broad market. In this backdrop, we selected five stocks from the mid- and small-cap space that are not leaders in their respective businesses, but have built up a specialisation. The companies selected are from the sectors facing rough times, but each has the potential to ride out the depression.

Manappuram general finance
It’s a unique, non-banking finance company with lending based on gold as collateral rather than cash flow. Since it lends to the lowincome group, to some extent it qualifies as a micro-finance firm. The average size of the loan disbursed by the company is less than Rs 20,000. If you think gold as an asset class has a future, bet on this Kerala-based company. With 11 tonnes of gold as security and virtually no non-performing assets (NPAs) on a loan book of Rs 800 crore, the company now plans to merge with itself one of the promoter group companies. The group company is in a similar business of lending against gold with assetsunder-management of Rs 400 crore and has also raised capital in the recent past. The merger will enhance the merged entity’s assets and balance sheet.
Current Market Price (CMP): Rs 113.95

Mundra port
A key private sector player in ports, Mundra’s all-weather facility with a deep draft (17-32m) and West coast location (better rail connectivity) gives it an edge by way of customers. It has long-term agreements with leading companies like Indian Oil Corporation, Tata Power and Adani Power. The port is also seen as a hub for car exports by majors like Hyundai and Maruti Suzuki. All these factors make a stable cash flow for the company in the future. But a slowing economy in the short term raises some questions about its profitability.
CMP: Rs 385.85

Elecon engineering
As a heavy engineering company, Elecon should have been affected by the current slowdown. But its unique advantage is that most of its business comes from the government. Elecon makes coal handling equipment used in power plants. The company has an order book of over Rs 1,800 crore, with most of the jobs due to be executed over the next two-and-a-half years, keeping its earnings growing. Plus, most of the orders are based on fixed price contracts. The falling prices of inputs like steel will further help improve Elecon’s profitability. However, high interest cost brings some concerns for Elecon.
CMP: Rs 36.25

Rain Commodities

Don’t race them today

  • Each of these companies is in a badly affected sector

  • Fall in their stock price is more than what their fundamentals call for

  • But all of them have unique business models or are in niches

  • So they could do well in the recession

    • And they could be among the biggest gainers once the economy looks up
If you think demand for aluminium and cement will increase in the near future, then Rain Commodities is the stock to look out for. Its main product is calcined petroleum coke (CPC), which is used in manufacturing aluminium. It also makes cement. Being a global player in the CPC business, and with its plants outside India, it should do better once the global economy looks up. With a large number of aluminium plants scheduled to come up in West Asia and China in the next four-to-five years, demand for its product will increase steadily. In cement, while profitability has been affected in line with the industry trend, dispatches have been higher. The only question mark over its future profitability is the slowdown in the metals and cement industry.
CMP: Rs 66.50

Shree Renuka sugars
It has a model unique in the sugar industry: instead of setting up a sugar plant with its attendant hassles, it acquires plants or takes them on lease. This has helped it increase its capacity very fast, keeping capital expenditure low. Sugar prices had been on the decline for the last two years but are expected to firm up in the 2009-10 season to around Rs 18,500 a tonne and so improve the margins of sugar factories. But the advantage in favour of Shree Renuka is that it pays cane prices that are linked to sugar prices, subject to the floor of statutory minimum price. This ensures stable margins in sugar business throughout the industry cycle versus fluctuating profits of Uttar Pradesh-based sugar mills which have fixed prices.
CMP: Rs 79.50

*Prices as on Jan. 30

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