Stocks-Sector to watch out for in the upswing

The market correction has brought a lot of companies to reasonable valuations. There are now many companies quoting at valuations where there’s less risk and a lot of value for the long-term investor. ET Big Bucks crunched numbers for BSE A and B1 group companies to find attractively-priced companies.
The steep fall in valuations now means that there are close to 300 companies in this lot of around 650 companies which have a P/E less than 12 times trailing consolidated earnings. Some of these are from the mid-cap IT space. This is an area which was expected to outperform in FY07. Let’s check some of the valuations here.
NIIT Technologies quotes at 11 times FY06, but if we adjust for cash, then it quotes at 7 times. This company also has a dividend yield of 4% at current prices. Unless future profits fall sharply, there can’t be a great downside at current prices.
Mastek quotes at around 13 times FY06 earnings. MphasiS BFL, which was acquired by US major EDS, quotes at less than 12 times FY06 earnings. 3i Infotech quotes at 13 times. Most of the software companies should grow at upwards of 20% for FY07. This suggests that there could be upsides from this lot. Even a software major like Satyam Computer quotes at 15-16 times trailing earnings.
The entire lot of shipping companies is quoting at low valuations. However, the profitability scenario in this sector is under pressure. Yet, given the low valuations, investors with a long-term view may consider some of the top companies.
PSU Shipping Corporation of India (SCI) is quoting at two times FY06 net profits. Its dividend yield is over 8%. Shipping profits can be very volatile; for example, FY03 net profit of SCI was Rs 246 crore, yet there is considerable downside support at current levels.
There are isolated cases with various businesses. Chemical company Foseco is quoting at a dividend yield of around 5%, and a discounting of around 12 times. Foseco is a zero debt, MNC company. Its performance record in the past four years is reasonably stable, though it posted losses in FY01 and FY00.
A more stable company quoting cheap is BASF. Its share price is now around Rs 170 levels, from Rs 280 levels a few days ago. BASF is now at 11 times trailing and 3.5% dividend yield. FY06 results were okay, with sales up 3.6% and net profits up 19%. Like many MNCs, this company is almost zero debt and conservatively run.
Chennai Petroleum trades at close to 7 times trailing and a dividend yield of around 10%. This is cheap by most standards. The ongoing oil price turmoil has kept prices of some of these refineries at low levels. Current price of around Rs 150 level is a one-year low, and close to levels around two years ago, when the BSE sensex was less than 6000.
Poultry company Venky’s India is now at 8 times trailing with a dividend yield of over 3.5%. The company’s profits were hit in Q4 ’06 due to the bird flu scare, and it declared a Rs 4.5-crore loss. However, that is now past; poultry prices and demand have recovered, and the company could soon return to profitability.
Lanxess ABS, another German MNC, is quoting at 10 times trailing profits, and a dividend yield of around 2.5%. This is not much, so the downside support may not be as strong as in some of the cases mentioned above, but the company has just expanded capacity and is poised for decent growth.
A whole host of auto ancillary companies became cheap in the crash from 12800 levels, though there has been some recovery over Thursday and Friday. Omax Auto, for instance, came down to a low of Rs 65 last Wednesday, but has since recovered to Rs 70 levels.
It was last seen at these levels in August ’03, when the sensex touched 3900. It also hit that level in May ’04, when the market hit lower circuit. The sensex was then at 4800 levels. Omax saw a peak share price of Rs 174 in this rally. So, it has lost most of its gains in the rally. At current price, it has close to 3% dividend yield and quotes at around 10 times earnings. Pricol’s case is similar.
It quotes at 11 times trailing, and 3.2% dividend yield. It was at these levels in December ’03, when the market was at 5600 levels. Pricol’s net profit fell 21% in FY06, but they are still twice the FY03 levels, and sales are 50% higher.
While many pharma companies have underperformed the market in the past two years, and were further battered in this fall, some of them still don’t have adequate downside protection, as they quote at more than 12-15 times and have low dividend yields.
GlaxoSmithKline Pharma appears to be an exception. At current levels, it has a dividend yield of close to 3% and quotes at around 14 times trailing.

While stock markets have tanked over the past month, the growth trajectory of corporate India seems to be on track. Leading companies in sectors like engineering, automobiles, petroleum and software are expected to bring out numbers that display strong profitability in the coming year. The earnings for the 30 stocks which comprise the sensex are expected to increase by 16-18per cent in FY07. Among the major sectors, capital goods and engineering companies are expected to account for the biggest jumps in earnings during FY07. Earnings growth estimates for power equipment companies such as Bhel range from 25-35per cent for the coming year. Engineering & construction companies are projected to record a 25-30per cent rise in earnings. Companies like Bhel and L&T have substantial order backlogs and, hence, there is a higher degree of visibility in sales and future earnings. The earnings growth is expected to be modest for oil and gas companies. While profitability of oil marketing companies has been hit by high crude oil prices, ONGC and Reliance could post a modest increase in profits during the year. Reliance may benefit from higher gross refining margins in some of its major markets, particularly the US. While Reliance is present in petrochem and petro-retail, refining continues to account for the bulk of its sales and profits. ONGC’s profitability is expected to improve on two accounts, a capped subsidy burden and improved production over the last year. In the auto sector, the commercial vehicle segment is expected to show strong performance on the back of infrastructure spending. The top auto companies, Maruti and Tata Motors, are expected to clock a jump of about 15per cent in profitability. Projections for the first quarter remain robust because the market itself is expanding. Operating margins could flatten as expenses relating to product, brand and distribution all weigh in for the quarter. While the sector has shown strong sales so far during the first quarter, further performance is tied to the monsoons. Earnings growth for the software sector is expected to be in the range of 25-30per cent. The steel sector could also spring up a surprise as prices are on the upswing and have seen a recovery of $100/tonne since the start of this year.