Stocks to scoop up when the market falls

The stock market may be poised for a significant correction. Keep your powder dry. Look to buy these stocks at lower prices

Indian stock markets have remained stuck in a narrow range for some time now, as if undecided on the correct direction in which to move. While the economy as a whole is putting its best foot forward, the bulls look tired. Since January this year, when the Sensex opened at 17,473, the bellwether index has ebbed and flowed-touching a low of 15,652 in February and hitting a high of 18,475 in August. The Sensex is now hovering around the 19,900 mark. We had advised readers earlier not to have huge expectations from the equity markets this year, against the backdrop of the spectacular 88% rally of the preceding 12 months. We had cautioned, "...if stocks keep rising in the second year, they would do so in a much more muted fashion... The market will go through multiple twists and turns during the year and, in the end, may deliver small gains." The gains over the past 8 months in the Sensex? Just 3%.

So where will the markets go from here? At current valuations, the market is quite expensive. The Sensex is now trading at a price-earnings (PE) multiple of nearly 21. Various fundamental and macro factors suggest that the market is now ripe for a correction. For one, corporate India churned out disappointing numbers for the June quarter, belying the market's expectations. While revenues of the top 100 BSE companies witnessed a strong 22% aggregate growth, operating profits barely budged an inch, rising by a mere 1%. This fell short of the market's expectations; it was anticipating a 20% growth in operating profit for the entire FY10-11. The latest quarterly performance may not bode well for the rest of the year. It is obvious that, since profit growth is lagging so far behind revenue growth, companies are reeling under severe cost pressures.

If India Inc continues to display such indifferent results heading into the second quarter of this fiscal, it may be a strong enough cue for investors to lose confidence and offload, for now.

Another strong indicator of the downside risk to the market is the current huge position in the equity futures segment at the National Stock Exchange (NSE). The open interest in the equity futures at NSE recently zoomed to Rs68,200 crore. With this, the ratio of total traded value of open interest in stock futures and index futures has crossed 70:30 - the level it had reached before the market's freefall in 2008 - clearly underlining the risk of a correction. In the recent past, whenever the ratio of open interest in stock futures and index futures has crossed 70:30, the NSE Nifty has usually corrected by around 10%-12%. The Nifty had corrected 10.16% (around 534 points) on 15th January, when the ratio had crossed this level. It happened again on 26th April, when the Nifty slumped by 9.71% (around 1,722 points) after the ratio touched 70:30 again.

Also, the India Volatility Index (VIX), which captures the expected market volatility over the short term, recently slipped to a low of 16.15 - its lowest on a closing basis since its launch. Volatility rarely goes up in a rising market, especially in a strong bull market; it usually coincides with a fall in the market.

For all these reasons, we believe that the market is set for a drop of at least 10%-12%, (see box) translating into a correction of around 1,800-2,000 points. This is the very opportunity most investors would be looking for - to enter the market and get great deals at bargain prices. Here are a few such stocks which are worth considering once the correction takes place. Apply the standard stop-loss of 20% below purchase price or from the highest daily closing price, if the stock has rallied more than 50%.

Stocks for a Rainy Day

Textiles may be boring bets but they have given terrific returns, if bought at the right price. We had earlier recommended Shri Lakshmi Cotsyn in October 2009. The stock is up 54%. Some select textiles stocks are still good bets. Indian domestic consumption of textiles is growing fast, at 15% annually, and is driving the revenues of companies like TT Ltd (TTL). Additionally, textiles companies garner substantial money from exports. TTL is the flagship company of the 58-year-old TT group, a household name in textiles with its popular TT brand. Earlier known as Tirupati Texknit, it is now a vertically integrated textiles manufacturer, mainly producing cotton, yarn, fabric, garments and accessories.

Its processing units are located at Gajroula (Uttar Pradesh), Avinashi, Dharapuram, Dharampur and Tirupur (Tamil Nadu), Gondal and Rajula (Gujarat) with installed capacities of 60,000 metric tonnes per annum (mtpa) ginned cotton, two million kg knitted fabrics and 55,824 spindles as on 31 March 2010. It also has wind mills generating 3.75MW of electricity for captive use in Tamil Nadu and Gujarat. The company is planning to increase its presence in the 'clean energy' segment through a major foray in clean power generation in the coming years. Major export destinations for its products include Indonesia, Malaysia, Turkey, China, Mauritius, Egypt, Brazil, Europe and USA. The company expects to achieve about 40% growth in turnover and much higher profits for this fiscal. This marks a turnaround in the fortunes of the company which struggled during the slowdown of 2008-09. It has placed higher emphasis on domestic sales, reduced exposure to commodities business like raw cotton fibre, and focused on brand building and value-added products. It has also tied up with all major organised retail chains to establish its presence. Its financials have improved in the recent quarters. Over the past five quarters, sales and operating profit have risen 57% and 116%, respectively. Its operating margin stands at 10% but RoE is impressive at 27%.

Increased prosperity of Indians is leading to higher consumption and investments. As Indians look to borrow money to buy durables and put money in investment products, Indian financial services companies will do well, providing loans and channelling investments. One of the best known finance companies is Bajaj Finserv Lending (BFL). It started its operations by financing two-wheelers of Bajaj Auto. Over time, it has expanded its operations to finance consumer durables also. It now finances two-wheelers and other consumer durables, extends personal loans, small business loans, finances construction equipment, and provides loans against securities. It started construction equipment finance and loans against securities in June 2010.

The total size of construction equipment credit market is approximately Rs15,000 crore, dominated by banks and select non-banking finance companies (NBFCs). The infrastructure segment is a growth area and BFL should do well. Loans against securities is a Rs5,000-crore business which is dominated by private banks and NBFCs. It is not growing rapidly and BFL will take some time to gain a foothold in the business against established players.

With the substantial pick-up in auto sales volumes, the company's disbursements have grown at a rapid pace. Its loan book last year grew a whopping 87% to Rs4,585 crore compared with that in FY08-09, led by a 267% growth in mortgage-based lending. Two-wheeler loan disbursements grew by 74% in FY09-10, thanks to strong growth in two-wheeler demand throughout the country. With receivables of Rs4,026 crore, BFL is one of the leading, diversified NBFCs in the country. Its asset quality has also improved considerably-non performing assets (NPAs) have declined to 1.8% from its year-ago level, when they aggregated 4.5%.

BFL's strategy of focusing on 'mass affluent' customers and major dealerships has begun to yield significant benefits through lower operating costs and improved risk performance. The June 2010 quarter performance was impressive. Its revenues and operating profit surged 57% and 205%, respectively. The five-quarter average sales and operating profit growth stand at a robust 54% and 220%, respectively. Its operating margin is decent at 17%.

The tyre industry is expected to clock 7%-8% growth in this fiscal, thanks to strong volumes in the automobile industry. TVS Srichakra is one of the leading two- and three-wheeler tyre manufacturers in India rolling out over 11 million tyres per annum. It is one of the major suppliers to all leading original equipment manufacturers, namely, TVS Motors, Hero Honda, Bajaj Auto and Yamaha Motors and has a strong network of over 2,050 dealers and 23 depots to cater to the after-sales market. The company is a global player, exporting to USA, Europe, Africa, South America and South East Asia. For the export market, it manufactures industrial pneumatic tyres, farm & implements tyres, skid steer tyres, multipurpose tyres, floatation tyres, etc. It has a state-of-the-art manufacturing facility at Madurai in Tamil Nadu, spread over an area of 2.5 lakh sq m.

Last year, the company set up another plant in Pantnagar, Uttarakhand. As per the latest available figures, the company has an installed capacity for 12.21 million automotive tyres and 12.86 million automotive tubes.

During the June quarter, the company registered 43% growth in sales and 31% jump in operating profits. Over the past five quarters, its sales and operating profit growth have averaged 26% and 63%, respectively. Operating margin is around 9% and RoE is robust at 35%.

PI Industries is into agri-inputs, contract research and manufacturing services (CRAMS) for fine chemicals, polymers and engineering services. Founded in 1947, it was earlier known as Pesticides India and was renamed PI Industries in 1993 to reflect its new diversified businesses. Key products in agri-inputs include crop protection, specialty products, plant nutrients and seeds. One of the leading companies in CRAMS, the company has long-term tie-ups with leading chemicals companies across the globe for newly invented products. Its manufacturing facilities spread over 90,000 sq m are located at Udaipur (Rajasthan), Panoli (Gujarat), and Jammu (Jammu & Kashmir) with captive power generation facilities. It offers a one-stop shop for all customer requirements in fine chemicals ranging from process evaluation, bench-scale trials, kilo lab, pilot plant to commercial manufacturing for various multinational companies from Japan, USA and Europe. In the polymers segment, the company offers engineering compounds of a large number of polymers as also a large range of customised grades and special grades like high heat-resistant and impact-modified grades. It has also developed expertise in product development for automobiles, electrical & electronics appliances, white goods and other industries.

Impressed with PI's prospects, in November 2009, Standard Chartered Private Equity invested Rs50 crore. The company's sales and operating profit growth over five quarters have averaged 17% and 31%, respectively. Operating margin has averaged 16%. In the June quarter, sales grew 14% while operating profit was up 5% over the corresponding quarter last year.

Softening pulp prices and revival in demand for paper have boosted the volumes and margins of paper companies like Tamil Nadu Newsprint & Papers Ltd (TNPL). Established by the government in the early 1980s, its product range includes business stationery, classical writing, computer stationery, newsprint, premium printing and quality printing. TNPL has the largest bagasse-based plant in the world, which will have an installed capacity of 400,000 tonnes per annum (tpa) by October 2010. The addition of 155,000tpa capacity involves installation of a state-of-the-art paper machine, backward integration of chemical bagasse pulp elemental chlorine free (ECF) bleach plant and a new high pressure multifuel boiler at a total outlay of Rs1,000 crore. The company is a market leader in stationery and the largest exporter of wood-free paper. TNPL had implemented farm forestry and captive plantation in 37,556 acres and 2,735 acres, respectively, up to March 2009. It has planned to increase the plantation area by about 15,000 acres every year to reach the target of 100,000 acres by 2012-13. TNPL also plans to install a captive de-inked pulp line of 300tpa capacity at a capital outlay of Rs174 crore, a project expected to be completed by December 2011. TNPL's June quarter performance was stellar. Its sales and operating profit zoomed 62% and 77%, respectively, over the corresponding quarter last year. Its operating margin has averaged a healthy 29% over the past five quarters. Expect a jump of 40% in net profit for 2011 and another 30%-40% next year.

Symphony Comfort Systems (SCS) is the world's largest manufacturer of portable air-coolers. Its range of products includes portable coolers, desert coolers, air-conditioners, ventilation fans, room heaters, water heaters and water purifiers. The company has a sizeable presence in the export market which reduces the seasonality factor of its business in the domestic market. Its products are exported to over 25 countries including Dubai, Burundi, Namibia, Bahrain, Nepal, Senegal, Oman, Sudan, Saudi Arabia, Tanzania, Switzerland, Sri Lanka, etc. In order to establish its products in European countries, SCS successfully obtained CE certification for two of its models, viz., Sumo and Mini Kaizen. It has, over the years, built on its core strengths to become a leader in air-coolers. The company has a world-class facility located at Thol, near Ahmedabad (Gujarat). SCS is looking to expand its distribution network within the country to cater to the rising demand for air-coolers. It recently acquired a 49% stake in Singapore-based Sylvan Holdings, which has a majority holding in Mexico-based IMPCO, a manufacturer of a variety of industrial and small coolers. This investment is expected to benefit SCS through strategic market penetration with an increased range aided by IMPCO's established relationships with renowned and well-known large-format stores. Over the past five quarters, the company's sales and operating profit growth has averaged 119% and 233%, respectively. Its operating margin has also averaged a strong 21%. RoE is spectacular at 84%.

(This article is based on secondary research. The report is for information only. None of the stock information, data and company information presented herein constitutes a recommendation or solicitation of any offer to buy or sell any securities. Investors must do their own research and due diligence before acting on any security).