Chance to buy into beaten-down stocks

Realty, banking and infrastructure stocks are trading at attractive valuations after the recent correction.

The correction in the markets over the last one week, which knocked about 4 per cent off the Sensex and double that off the BSE Midcap and Smallcap indices, offers an opportunity for investors to add some of the beaten-down stocks to their portfolio, believe money managers. Though the markets recovered 1.2 per cent today after posting losses over the last few weeks, analysts believe the Sensex, which is trading at 14 times the FY12 earnings, is attractively valued. Phani Sekhar, fund manager PMS at Angel Broking, believes there will be a recovery as the markets have started looking attractive.

The two sectors that bore the brunt of the sell-off were realty and banking and finance. While the BSE Bankex lost 4 per cent, the Realty index was down a steep 14.5 per cent over the last week. While most analysts are bearish on the realty sector owing to debt, working capital and demand concerns, they recommend investing in the banking and infrastructure space. Sekhar says the reaction was knee jerk, especially in the banking sector where the system for lending continues to be quite robust.

Ajay Parmar, head of research, Emkay Global, believes with risk appetite falling and investor confidence dented, it is better to wait for such corrections and invest at lower levels. However, Mahesh Patil, co-head equity, Birla Sunlife Mutual Fund, says the current fall has given an opportunity to buy stocks of fundamentally sound companies with good managements to benefit when the markets bounce back.
 

VALUE FOR MONEY
Company	P/BV	P/E	CMP	Chg* %
Adani Enterp.	5.93	41.78	636.54	-15.33
Bank of India	1.73	13.06	455.75	-6.18
BGR Energy Sys.	5.83	21.35	690.60	-2.17
Central Bank	1.66	7.02	185.95	-16.18
D B Realty	1.69	20.45	198.00	-41.74
Hind.Construct.	1.86	0.00	40.04	-31.32
Indbull.RealEst.	0.58	72.86	141.69	-21.06
JP Associates	2.73	51.12	107.30	-14.40
JSW Energy	3.36	16.71	96.70	-13.54
LIC Housing Fin.	2.57	13.31	948.10	-26.68
Money Mat.Fin.	1.84	9.46	344.30	-50.32
Oberoi Realty	3.05	19.35	270.39	-1.48
Orbit Corpn.	0.92	8.74	72.25	-27.13
Punjab Natl.Bank	2.11	9.42	1177.90	-9.96
Suzlon Energy	1.00	0.00	46.25	-11.48
Unitech	1.43	21.79	61.00	-12.54
Note: Trailing 12 months consolidated , * % Change over 22/11/2010,  CMP: Current market price, Source: Capital Line

Banking
Banking and finance stocks have fallen 3-26 per cent since mid-September due to concerns over exposure to the scam-tainted microfinance, telecom and real estate sectors. Analysts believe these events will not affect the systemic loan growth and asset quality materially, as most of these loans would be backed by real assets. However, the valuation multiples of public sector banks (PSBs) would be under downward pressure in the near term, leading to some derating in this space.

Analysts believe, in a worst case scenario, the impact on NAV would be an average of 16 per cent for PSU banks and up to 20 per cent on the share prices from current levels. While banks/finance companies may become cautious about lending; the loan origination, approval and credit appraisal process in the banking system will be strengthened. Experts believe LIC Housing Finance (LICHF) could be exposed to the greatest risk as it has the highest exposure (11 per cent ) to corporate real estate loans, as against Punjab National Bank’s (PNB) and Bank of India’s (BoI) small exposure of 8.2 per cent and 4.1 per cent, respectively.

Also, LICHF’s CEO was arrested whereas from PNB and BOI, the officials were less senior, limiting the overall impact. Brokerages continue to prefer HDFC Bank (sound risk management practices), ICICI Bank (strong growth expected), Bank of Baroda (strong asset quality) and are steering clear of midcap PSBs currently.

Realty
Analysts are divided on the investment call for the sector. While some such as Parmar of Emkay Global believe investors should avoid the sector not just because of the issues with some players but also in terms of the difficulty in raising loans and higher interest rates, Religare analysts believe frontline real estate stock prices, which have tanked 18-42 per cent over the month, reflect unwarranted pessimism in the markets.

The research firm believes that even if there is a 15 per cent price fall and 100 bps increase in interest costs, most companies will be able to meet their cash flow requirements. With the stocks trading at a 21.67 per cent discount to their NAV and given the correction, DLF, Unitech, Sobha Developers, Oberoi Realty and Godrej Properties are preferred bets, the last three carrying little or no debt.

Other sectors
In the construction space, HCC is in the limelight because of transactions with Money Matters and environmental issues for its township project Lavasa. Analysts say in the near term, this could hamper any fund raising, such as the IPO. Analysts remain positive as the stock reflects these concerns and is trading at Rs 40, which is close to the valuation of its core business at Rs 30-35 per share.

Lavasa and other assets are valued at Rs 35 per share. On JP Associates and Adani Enterprises, analysts prefer a wait and watch approach. The BGR Energy stock spurted up after the management denied any involvement with Money Matters. Analysts believe the sell-off was unwarranted and they remain positive on the company’s outlook. The stock has recovered significantly from the lows and currently trades at about 15 times the FY12 estimated earnings. Suzlon’s share prices too have got hammered due to its earlier transaction with Money Matters. However, analysts do not see much of a downside from the current levels, given the low valuations.

With contributions from Jitendra Kumar Gupta & Sheetal Agarwal