Rakesh Jhunjhunwala on how to pick the right stock

If you’re a proponent of value investing, which involves buying stocks that offer value when they’re cheap and holding on to them till they achieve their potential — Warren Buffet style — here are tips from India’s own Buffet, Rakesh Jhunjhunwala, that you may use.

— Jhunjhunwala’s advice to investors is not to look for companies that would give profits but understand factors that help in creating profits. “Don’t emphasise too much on analysis of profits,” he says. “Profits are created due to various stages of circumstances. I always look at how large is the opportunity for that business in the sector.”

He recalls how he bought Praj Industries, a bio-ethanol company that gave him large returns. “When I bought Praj, we thought there would be a humongous demand for ethanol. The opportunity was huge but it was not recognized.”

IT bellwether Infosys, he said, benefited because of the internet revolution. “Nobody knew about Infosys in 1993 but Infosys could become Infosys because the opportunity for the internet went through the roof.”

“When opportunities come, they can come through technology, marketing, brands, value protections, capital, etc. You need to be able to spot those.”

— “Then I look at scalability of a particular company that I choose in a sector,” Jhunjhunwala says. “A friend of mine asked me: should I invest in a small cap or largecap? I said we must invest in the smallcaps, which will be the largecaps. The biggest challenge of investing is that you should recognise whether organization has the ability to scale.”

Jhunjhunwala says he makes an investing decision by understanding how a company’s profits may grow in the next four-five years, and by that account, its price-to-earnings and valuation. “If I succeed in making the right call, then after four-five years, I do a proper re-examination of the business model and accordingly reallocate capital because the business model can undergo change. Intense competition could emerge in that sector,” he says. “This is when I examine the earlier opinion I had made when I first bought, whether those assumptions still were valid.”

— How should you spot a good company? “You can have an idea by looking at companies’ capital raising. Are they distributing profits, are they using the surpluses in the right manner,” he says. “For me, quarters don’t matter. There can be always be an aberration in one quarter when the company has less profits. You should examine the reason for it and whether it can revert back on its growth.”

— Choices of asset classes is important too, says Jhunjhunwala. “If you bought gold in 1970 and sold it in 1980. you bought the Nikkei Index in 1980 and sold it in 1989 and then bought the Nasdaq [till before the dotcom bust], you would have made 33% compounded returns in three decades,” he says. “Warren Buffet rode the entire wave of those different asset classes.”

— “Value investing is relevant in all circumstances. But thought processes and principles are dynamic and not static. Be open to change,” he says.

— Don’t get carried away short term market trends, he says. “In 1999, people used to buy Himachal Futuristic, Global Tele, Pentasoft, I used to buy Shipping Corporation and Bharat Electronics because I saw long-term value,” he adds. “Never get carried away by aberrations, recognize and respect them but do remember that the market corrects its aberration though it takes time.”

Experts say mkt momentum to continue, advise sectors

Indian stock markets have completed a classic rebound. After the National Stock Exchange’s 50-share Nifty recently touched a 15-month high of about 5,150 levels, a sharp sell-off saw it retracing to about 4,550. From thereon, throughout last week and today, stocks rose rapidly and the Nifty is now perched atop the 5,000 level. Was the short-term correction that took place was a blink-and-miss? Will the momentum continue? How should you, as an investor/trader, position yourself?

“Even as many investors are saying the markets are not worth these prices,” says Sajiv Dhawan of JV Capital Services, “There is enough buying and enough appetite at lower levels and any trend follower would obviously be long at the moment.”

Dhawan says he does not see any short-term trigger for a 5–10% correction. “There is no negative news anywhere, global markets are performing well, liquidity is there, apart from interest rates, which are likely to go up probably next year.”

Valuations of Indian stocks are high, says David Pezarkar, Head - Equities, Shinsei Asset Management (I) Ltd. However, he adds that the amount of leverage seen in the market — “the sign of an impending reversal,” — is not high yet.

The rally that took place between the Parliamentary elections outcome in May and now has “sanely” chosen stocks that were good on earnings, he says. “The broader indices are up by 10–11%. But among the midcap stocks, half the stocks have fared well while the other half have not. “The stocks that have done well are the ones, which have either surprised positively in terms of earnings or the outlook has improved.”

“As long as foreign institutional investor (FII) flows continue to remain robust, there is no reason to be extremely bearish,” he adds.

Stocks/sectors that may outperform

“The sectors where valuations are stretched or those which have outperformed may be muted ahead,” Pezarkar says. “It is likely that certain sectors like maybe auto or banking will not continue to outperform. These may move in line with the markets,” he says, adding that the public sector banks looked more vulnerable due to rising interest rates, high government borrowing and risk on increasing non-performing assets. “Capital goods, which have been relative underperformers over the past six months, should see better traction going ahead.”

The outlook on the metal sector is also metal, opines K Ramchandran, CIO, Karvy Private Wealth. “Metals will take a breather sooner than later,” he says, adding, “It is a cyclical kind of business, which depends largely on the demand coming from China.”

“I do not see a breakdown in metal stock prices but definitely I think it will take a breather and the upmove going forward will be a little more measured,” he says.

What is the view on Suzlon Energy, a stock that trades on huge volumes, but has, in the past six months under-performed due to various debt concerns? “It remains a trader’s stock,” says Dhawan. “The target is maybe 5-10% higher from the current levels over the next few days but it is not a stock that I would be buying with any real conviction and even if it went to Rs 75-80, I would look to exit trading positions and from an investment perspective, probably still avoid.”

“It is definitely the one that can give you much higher levels over a period of time but I think there have been enough problems and issues on the stock over the last year, which should drive away a lot of serious investors because they have had their fingers badly burnt.”

Nifty may hit new high this week

The activities of foreign institutional investors (FIIs) with long build-up in the Nifty futures and short-covering in stock futures during the week ended September 13 augur well for the market. The Nifty is expected to hit a new high in the coming week if it crosses a crucial resistance at 5,060. On the downside, 4,940 is a healthy support level and, below that, 4,860 is the crucial support level. The Nifty rose over four per cent during the week largely due to short-covering from foreign investors in the Nifty and stock futures.

According to a technical analyst at Sharekhan Research, the hourly oscillators are in sell mode, giving negative divergence. The Nifty has made a triple top above 5,000, so going forward, it becomes important for the index to surpass this level to gain strength. If it is unable to do so, then it may fall. The Nifty may move above the 5,100 level on the back of short-covering by FIIs and a fresh long build-up in the Nifty futures.

The Nifty November futures, which traded at a discount in the previous week, closed with a 5-point premium to the spot and added 792,000 shares in open interest (OI), mostly through buy-side trades.

An unwinding of short position was seen in the 4,500-5,000 strike calls as traders expected strong support for the index around 5,000. The 5,100 and 5,200 call options added considerable open interest last week, mostly through buy-side trades.

The OI in the 5,100 call has increased from 1.88 million shares on November 6 to 3.32 million shares on November 13. Similarly, the OI in the 5,200 call increased from 1.97 million shares to 2.75 million shares. This indicates that traders expect the Nifty to move above the 5,200 level soon.

Strong support is seen building up at the 5,000 level as open interest for the 5,000 put has increased from 1.33 million shares to 4.62 million shares. The support level is expected to move to 5,100 if the three-fold rise in OI for the 5,100 put is any indication.

Analysts' corner

IVRCL INFRASTRUCTURE
Reco price: Rs 347.55
Current market price: Rs 367.4
Target price: Rs 446
Upside: 21.4%
Brokerage: Macquarie Research

IVRCL's second quarter numbers were in line with expectations. IVRCL revenues grew by 11 per cent in H1 FY10, much lower than the full-year guidance of 30–35 per cent. However, the management stands by its guidance, given that H1's revenue booking was hampered by slow execution of its projects in Andhra Pradesh due to elections.

Some of these projects will start contributing to revenues from Q3 onwards. IVRCL was L1 on few large projects in Maharashtra this quarter, which should contribute to revenues in H2 FY10. The company expects to grow its 2009-10 revenue by 30 per cent. The management had guided for 9.5–10.0 per cent margins for full year (2009-10), whereas the in-house estimates margins to be 9.7 per cent.

IVRCL's order book stands at Rs 15,000 crore and it is looking to participate aggressively in the road sector. Moreover, the irrigation sector orders inflow is likely to pick up from provincial governments. IVRCL's net debt/equity ratio at 0.7x, allows room to add leverage and as there are no investment requirements toward the current BOT/real estate projects, funding availability is not a concern for new projects. IVRCL is trading at 13.7x FY10E and 11.1x FY11E earnings adjusted for subsidiary valuations. Maintain outperform.

---

PUNJAB NATIONAL BANK
Reco price: Rs 864
Current market price: Rs 885.95
Target price: Rs 830
Downside: 6.3%
Brokerage: Citi Investment Research

PNB's strong deposit franchise and good September quarter results are outweighed by historically peak valuations (1.6x 1-year forward price to book); aggressive loan growth, especially mid-market segment and its relatively higher sensitivity to rising rates.

PNB has delivered robust September quarter earnings which were over 31 per cent y-o-y. Also 26 bps q-o-q NIMs improvement to 3.64 per cent also helped maintain profitability. PNB's management remains confident of maintaining the above industry growth (25 per cent now). A decline of 8 per cent q-o-q in NPL's and higher coverage of 91 per cent, ensures no meaningful pressure on asset quality. PNB's deposit franchise remained strong with 39 per cent CASA mix.

However, PNB's NIMs are likely close to peaks, reflect higher risk appetite (21 per cent wholesale funding, aggressive 64 per cent y-o-y growth in SME) and are vulnerable to rising rates. Bad loans and restructured loans at 6.1 per cent remained above peers and could be a source of risks. The stock has outperformed the Sensex over the last three months, and is trading at 20-30 per cent premium to peers. The stock is trading at 1.5x 1-year forward price-to-book. The brokerage downgraded the stock to sell from buy.

---

THERMAX
Reco price: Rs 538
Current market price: Rs 546.85
Target price: Rs 550
Upside: 1%
Brokerage: Ambit Capital

Thermax's order book at the end of September quarter stood at Rs 5,058 crore, up 19 per cent y-o-y buoyed by a few large orders in the power sector that were bagged in H1 FY10. Some of the new orders awarded to Thermax are of 18 to 30 months execution duration vis-a-vis the average execution period of 6 to 8 months at present. Thus, new orders will increase the average execution cycle, leading to higher revenue visibility.

Standalone revenues dropped by 15 per cent y-o-y to Rs 680.4 crore versus a 25 per cent decline in Q1 FY10, thus indicating improving execution. The environment segment, which reported a 33 per cent y-o-y drop in revenues, continues to pull down the growth rate. The brokerage expects a pick-up of y-o-y growth in revenues from Q3 FY10 onwards.

EBITDA margins continue to be flat at 11.6 per cent now and were the same, a year ago due to efficient cost rationalisation measures undertaken from beginning of 2008-09. Expect the company to maintain margins for 2009-10 at 12.7 per cent. At Rs 538, Thermax is trading at 24.2x FY10E and 18.6x FY11E earnings. Maintain hold.

---

MAX INDIA
Reco price: Rs 181
Current market price: Rs 179.95
Target price: Rs 270
Upside: 50%
Brokerage: IDFC SSKI

Max India reported a consolidated loss of Rs 10 crore for September quarter 2009-10 as against a loss of Rs 225 crore in Q2 FY09. Bulk of the recent quarter's total losses pertains to the life insurance business.

Max New York Life (MNYL), its insurance business, has reported gross premium of Rs 1,080 crore for September quarter, up 26 per cent y-o-y. Improving productivity of distribution network, business from ULIP products and metro cities continue to drive growth.

MNYL's conservation ratio continues to be well above its average over the last few years. Over the next 6 months, MNYL intends to focus on better utilisation of the existing branch network.

In 2009-10, the company expects that it will require Rs 200-250 crore of incremental capital. In line with MNYL's growth trajectory, the peak equity commitment is likely to get revised downwards from the current Rs 3,600 crore.

The long-term growth prospects of the life insurance industry are positive, and expect a change in the FDI/FII regulation as and when it happens to act as a trigger. Also the recovering capital markets would bolster premium growth and could thereby boost earnings. On the back of an improving growth prospects and high conservation ratio relative to peers, the brokerage assigned a 15 times NBAP multiple to MNYL. Maintain outperformer.

---

HINDUSTAN UNILEVER
Reco price: Rs 283
Current market price: Rs 273
Target price: Rs 290
Upside: 6.2%
Brokerage: Enam Securities

Hindustan Unilever (HUL) reported net revenue of Rs 4,200 crore (up 5 per cent y-o-y), EBITDA of Rs 650 crore (up 17 per cent y-o-y) and adjusted PAT of Rs 560 crore (up 29 per cent y-o-y) in the September quarter of FY10. HUL's revenue performance was below expectations while PAT growth was higher due to tax write backs.

Growth of personal products remains strong (13.4 per cent y-o-y, largely volume-led) with PBIT margins improving 200 bps. Though HUL's hiked its promotional spends, lower overheads aided EBITDA margin expansion by 166 bps to 15.3 per cent.

HUL's overall volume growth fell to 1 per cent (2 per cent in Q1) largely due to slowing growth in soaps and detergents despite the initiatives taken by the management.

HUL has managed to improve margins driven by improved sales mix and stringent cost control. This will drive a 165 bps EBITDA margin expansion to 16.5 per cent in FY10E. However, a slowdown in volume growth coupled with a higher tax rate will dampen earnings growth to around 10 per cent y-o-y in FY10E. Given the volume underperformance vis-a-vis peers coupled with market share losses, current valuations seem to be in a fair range. At Rs 290, the stock is trading at 24x FY11E EPS of Rs 12.

Mid-term picks by Antique Stock Broking

Great Eastern:

Latest Quotes | Charts | News/Announcements | Quarterly Results | P&L | Price History

BUY

MARKET PRICE: Rs 255.50

TARGET PRICE: Rs 304

A seasoned management team, which has seen many shipping cycles, strong cash reserves and conservative leveraging, optimum mix of time and spot charters across and reasonable valuations. Emergence of its offshore division should trigger rerating of the stock.

Sterlite Tech:

Latest Quotes | Charts | News/Announcements | Quarterly Results | P&L | Price History

BUY

MARKET PRICE: Rs 304.10

TARGET PRICE: Rs 405

World Class scale, cutting-edge technology, comprehensive product profile, strong management team and proven execution capabilities. With capital expansion in the power and telecommunication infrastructure segments inevitable, the company is best poised to secure business.

Opto Circuits:

Latest Quotes | Charts | News/Announcements | Quarterly Results | P&L | Price History

BUY

MARKET PRICE: Rs 209.40

TARGET PRICE: Rs 295

A formidable product range, cost-effective and technology-based player with emphasis on proprietary technology. An enviable track record of successful inorganic growth and geographical diversity of revenues add a degree of comfort.

Balrampur Chini:

Latest Quotes | Charts | News/Announcements | Quarterly Results | P&L | Price History

BUY

MARKET PRICE: Rs 147.95

TARGET PRICE: Rs 162

One of the most operationally efficient players backed by optimal integration (cogen and distillery) and a strong management team. Also, absence of any further capex along with strong operational cash flows would further strengthen its balance sheet.

Prakash Inds:

Latest Quotes | Charts | News/Announcements | Quarterly Results | P&L | Price History

BUY

MARKET PRICE:

TARGET PRICE: Rs 432

Expanding capacities of sponge iron and billets coupled with commissioning of iron ore mine would substantially reduce costs and improve margins. Moreover, its expansion of power capacities will aid in improving the operational parameters in the form of assured revenues as well as reducing costs.

ET Bureau

Antique Stock Broking has suggested the following five stocks as the mid-term picks.

DISCLAIMER: The views expressed in these pages are from brokerages, analysts and fund managers. Readers should seek professional investment advice before acting on any recommendation. ET does not associate itself with the choices. Check out the ET Code of Ethics at www.economictimes.com

Mid-term picks by Prabhudas Lilladher

Yes Bank:

Latest Quotes | Charts | News/Announcements | Quarterly Results | P&L | Price History

BUY

MARKET PRICE: Rs 269.85
TARGET PRICE: Rs 288

Its high fee-generating business model due to strong presence in advisory, transactional banking and debt syndication gives it an edge over its peers. Due to higher growth and earnings visibility, we have revised our FY10E and FY11E earnings upward by 9% and 11.7%, respectively.

IVRCL Infrastructure:

Charts | News/Announcements | Quarterly Results | P&L | Price History

BUY

MARKET PRICE: Rs 370.35
TARGET PRICE: Rs 437

The current order book and L1 projects stand at Rs 15,000 crore and Rs 4,500 crore, respectively. The order book is dominated by water-related projects at 70%. The order intake stood at Rs 2,200 crore. We have kept our estimates for FY10 unchanged, assuming a back-ended growth in H2FY10.

Motilal Oswal Financial:

Latest Quotes | Charts | News/Announcements | Quarterly Results | P&L | Price History

BUY

MARKET PRICE: Rs 167
TARGET PRICE: Rs 230

Motilal Oswal declared results only marginally below estimates. The revenue growth was mainly led by equity broking and investment banking, while fund-based income lagged. Asset management continues to tick along well due to steady inflows in the PMS schemes. However, broking revenue still rose by 8.3% Q-o-Q due to a sharp increase in yields.

L&T

Latest Quotes | Charts | News/Announcements | Quarterly Results | P&L | Price History

BUY

MARKET PRICE: Rs 1,593.75
TARGET PRICE: Rs 1,863

L&T’s foray into railways, shipbuilding, fertiliser, nuclear, defence and aerospace would see strong order inflows. The order book of Rs 80,000 crore (approx) at 2.4 times FY09 earnings may provide strong revenue and PAT CAGR of 23.5% and 17.6%, respectively, from FY09-11E.

Reliance Infrastructure:

Latest Quotes | Charts | News/Announcements | Quarterly Results | P&L | Price History

BUY

MARKET PRICE: Rs 1,101.90

TARGET PRICE: Rs 1,438

Reliance Infrastructure’s bidding for pipeline in the next few years is more than Rs 1 trillion. R-Power holding gives it a stake in the largest private sector power generation story in India. The current EPC order book stands at Rs 196.2 billion against the 1FY10 order book of Rs 200 billion.

ET Bureau

Prabhudas Lilladher has suggested the following five stocks as the mid-term picks.

DISCLAIMER: The views expressed in these pages are from brokerages, analysts and fund managers. Readers should seek professional investment advice before acting on any recommendation. ET does not associate itself with the choices. Check out the ET Code of Ethics at www.economictimes.com

Mid-term picks by India Infoline

Bank of Baroda:

Latest Quotes | Charts | News/Announcements | Quarterly Results | P&L | Price History

BUY

MARKET PRICE: Rs 557

TARGET PRICE: Rs 666

BoB reported a 60% YoY growth in net profit for Q2 FY10. Its loans and deposits grew 4.4% on a QoQ basis. Margins improved 26 bps sequentially to 2.6% due to a sharp 7.2% QoQ improvement in CASA deposits. Repricing of some high-cost deposits will enable BoB to expand its margins. Global operations continues to remain profitable.

Dhampur Sugar Mills:

Latest Quotes | Charts | News/Announcements | Quarterly Results | P&L | Price History

BUY

MARKET PRICE: Rs 133

TARGET PRICE: Rs 150

The sugar sector is in the midst of its strongest cyclical upturn in the past 15 years, with September ‘10 closing stock expected at less than 2.5 months worth of consumption. Dhampur Sugar is likely to process 0.2 mt of imported raw sugar in the current crushing season. We recommend ‘buy’ due to attractive valuations of 7.5 times 1-year forward earnings.

Infotech Enterprises:

Latest Quotes | Charts | News/Announcements | Quarterly Results | P&L | Price History

BUY

MARKET PRICE: Rs 258

TARGET PRICE: Rs 306

Infotech’s niche character and rich clientele provide it with a better revenue visibility than similar-sized peers. Its top 5 and top 10 clients have grown by robust 37% and 45%, respectively, in the past six quarters, despite a global recession. Company has a strong fungible balance sheet with cash & equivalents at Rs 360 crore, a 30% of market cap.

KPIT:

Latest Quotes | Charts | News/Announcements | Quarterly Results | P&L | Price History

BUY

MARKET PRICE: Rs 97

TARGET PRICE: Rs 115

KPIT delivered robust Q2 FY10 results with strong volume growth and significant margin improvement. The management is more certain about near-term revenue growth and expects a stable Q3 FY10 topline despite lower number of working days. Revenue growth is expected to pick-up from Q1 FY11 driven by the auto electronics segment.

Sanghvi Movers;

Latest Quotes | Charts | News/Announcements | Quarterly Results | P&L | Price History

BUY

MARKET PRICE: Rs 182

TARGET PRICE: Rs 220

Sanghvi Movers is one of the best plays on the increasing infrastructure spend in the country. Huge capacity expansion plans in sectors like cement, steel, roads and rail would propel order inflows. The company plans to expand its lifting capacity to 53,950 mt by FY10. Trading at 7.2x FY11E EPS of Rs 25.3, the stock appears cheap, recommend BUY.

Mid-term Picks by Bonanza Portfolio

Shree Renuka Sugars Ltd:

Charts | News/Announcements | Quarterly Results | P&L | Price History

BUY

MARKET PRICE: Rs 227.65
TARGET PRICE: Rs 254

HCL Technologies Ltd:

Charts | News/Announcements | Quarterly Results | P&L | Price History

BUY

MARKET PRICE: Rs 333.75
TARGET PRICE: Rs 380

Lupin Ltd:
Latest Quotes | Charts | News/Announcements | Quarterly Results | P&L | Price History

BUY

MARKET PRICE: Rs 1317.00
TARGET PRICE: Rs 1680

NTPC Ltd:

Charts | News/Announcements | Quarterly Results | P&L | Price History

BUY

MARKET PRICE: Rs 214.20
TARGET PRICE: Rs 290

BHEL:
Latest Quotes | Charts | News/Announcements | Quarterly Results | P&L | Price History

BUY

MARKET PRICE: Rs 2264.40
TARGET PRICE: Rs 2650

Mid-term Picks by ULJK Securities

Rural Electrification Corporation Ltd

Charts | News/Announcements | Quarterly Results | P&L | Price History

BUY

MARKET PRICE: Rs 226.85

TARGET PRICE: Rs 270

The increased thrust on the power sector provides tremendous lending opportunity for the NBFC. It enjoys a strong NIM of approx 4%, resulting in strong bottom line for the company. It is also planning to come out with an FPO in Q4FY10 which will further enhance its capital base.

IRB Infrastructure Developers Ltd;

Latest Quotes | Charts | News/Announcements | Quarterly Results | P&L | Price History

BUY

MARKET PRICE: Rs 258.35

TARGET PRICE: Rs 294

Surat–Dahisar project will record toll collections worth Rs 2,149.85 million in FY 2010E and Rs 2,271.03 million in FY 2011E. Being the prominent player in road projects, it’s expected to get benefited by huge investment plan during 11th Plan as well as 12th Plan periods.

Mphasis Ltd:

Latest Quotes | Charts | News/Announcements | Quarterly Results | P&L | Price History

BUY

MARKET PRICE: Rs 772.75

TARGET PRICE: Rs 866

On the back of stabilising billing rates, improved utilisation, expecting improvement in order from its parent HP and improvement in ITO markets which contribute 40% of the revenues, we expect decent growth in top line. We expect the EBITDA margins to stabilise 26%.

NIIT Ltd:

Latest Quotes | Charts | News/Announcements | Quarterly Results | P&L | Price History

BUY

MARKET PRICE: Rs 64.50

TARGET PRICE: Rs 90

On the back of the government’s thrust on education and to allocate more funds (targeting 6% of the GDP) helps improve its School Learning Solutions. Improving sentiments in the IT industry supports its Individual Learning Solutions. We believe NIIT will maintain its EBITDA margins at 12.5% for FY11.

Ranbaxy Laboratories Ltd;

Latest Quotes | Charts | News/Announcements | Quarterly Results | P&L | Price History

BUY

MARKET PRICE: Rs 412.65

TARGET PRICE: Rs 550

The drug ban issue with the USFDA is likely to get resolved by Q1-Q2CY10 which will translate into a 15-20% rise in US sales. Considering the likely commencement of sales of the high margin Valacyclovir from CY10 onwards, the company’s EBIDTA margin expansion could be much higher.

Source :
ET Bureau

ULJK Securities has suggested the following five stocks as the mid-term picks.

DISCLAIMER: The views expressed in these pages are from brokerages, analysts and fund managers. Readers should seek professional investment advice before acting on any recommendation. ET does not associate itself with the choices. Check out the ET Code of Ethics at www.economictimes.com