'Tis a rich wind...

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It's a truism that long-term investors prefer bear-markets. It's not quite true. That's only because of the psychological tension attached to holding stocks when prices are falling.

It's definitely true that it is easier to find decent buys in bear-markets. When prices are depressed, value is easily apparent. It's easier to zero in on desert flowers, which outperform a falling market.

In a bull market, even when you identify good businesses, it's difficult to stomach the going prices. And, in bullish scenarios, where everything is going up, it's difficult to isolate stocks, which possess genuine value.

Major pricing irrationalities abound in bull markets. These can make even hardened investors scratch their heads and wonder if there's something wrong with the analytical models.

Here's a classic example. Suzlon Energy has made billionaires out of promoter, Tulsi Tanti and his siblings. The October IPO was massively over-subscribed at Rs 510; everybody bought into the story of alternative energy. The stock controls Asia's largest wind-turbine generator capacity. Tanti and siblings own roughly 77 percent of Suzlon.

The 47-year-old Pune resident's net worth was recently assessed at about $3.7 billion by Forbes. At Rs 900 per share, Suzlon's market value is around Rs 23,000 crore. The stock has shot into the top 20 companies in terms of market capitalisation.

It reported Rs 300 crore of net profits in the first half of 2005-06 on net sales of Rs 1,400 crore. Annualise that and we get a diluted EPS of about Rs 23. Hence the stock is trading at about 39-40 times its current earnings. IPO allottees have already reaped a bonanza.

You may think this is fair, given very decent net margins and decent growth projections. Suzlon did Rs 1,942 crore turnover in the whole of 2004-05 and the half-year revenues of Rs 1,400 crore thus suggest that this will be very comfortably exceeded in 2005-06.

Despite the high costs of wind generation, there seems to be a bright future. Suzlon has a full order book. Implementation of the Kyoto Protocol makes it an export-play and business abroad is growing. However, wind energy is inherently low PLF.

Also, the industry has painfully long working capital cycles. If interest rates harden, an inventory turnover of 90-days and debtor turnover of 128 days would definitely hurt.

There is no exact peer. But let's take a look at power equipment manufacturers like Bhel and ABB. Bhel showed net profits of Rs 593 crore on net sales of Rs 4,902 crore in the first half of 2005-06. It had an annualised EPS of Rs 31.7 and trades at Rs 1,450, which is around 45 times its annualised current earnings.

It has a trailing EPS of Rs 39 and, unless there's a big pick-up in second-half profits, it will show a trend of declining profits on some topline growth.

ABB is trading at 2,012. It has registered a nine-month EPS of Rs 29 "" that annualises to about Rs 39. So the current PE is about 51. The profit growth in this stock will be positive though not as strong as it is in Suzlon.

Now, I thought Suzlon was expensive at Rs 510. And, if Suzlon is worth a discount of PE 40, given its excellent growth and prospects, surely Bhel and ABB should be worth far less?

Bhel has stagnation problems apart from contending with lunacy from the Left Front on the disinvestment issue. ABB has tepid growth though this will pick up in 2006 and 2007. Both these stocks are priced higher than Suzlon!