Growth and value picks?

GUEST COLUMN/ TORCH-LIGHT

These are tough times for the market. The uncertainty over electoral results, coupled with fears of a possible adverse spin-off of a hike in US interest rates, has dampened the year-long party at the bourses.

At least, so it seems, for the time being. However, market 'sentiment' is fickle, and it would be imprudent to rule out a 360 degree turn overnight.

It is fashionable to blame our electoral system or Greenspan for all the woes at the Indian bourses, but step aside for a minute and think: Weren't valuations stretched when the BSE Sensex touched an all time high of 6,200 plus points in January this year ?

Though nothing can be ruled out in equity markets, the predictions of the BSE Sensex scaling 8,500 points by the end of the year now seem a trifle too tall to achieve.

Of course, even the most conservative estimates in January bordered around 7,500 points for the year-end. Will at least that level be scaled ? Well, time will tell.

An interesting phenomenon I noticed during the first four months of this calendar year at our bourses is the blurring of the distinction between growth and value stocks.

Let us zero in on two growth stocks, Petronet LNG (PLL) and TV Today Network (TTNL), whose price charts suggest that they are being traded more like value stocks.

PLL entered the market on March 1, 2004, with a book-built public issue of 26 crore equity shares of Rs 10 each with a price of Rs 13-15 per share.

It has been jointly promoted by BPCL, Gail, IOC and ONGC to set up facilities for import and re-gasification of liquefied natural gas (LNG).

Commercial activities have been underway at the company's plant in Dahej in Gujarat. The cost of the project has been estimated at Rs 2,567 crore and it is being met through a debt-equity mix of 70:30.

The biggest plus for the company is the cost-plus contract system it has in place. Its input side has been closed out through a mutually beneficial contract with Ras Gas II of Qatar while its output side has been assured through pay or offtake contracts with three of its promoters - Gail, IOC and BPCL.

The proximity of the project to the HBJ pipeline network of Gail is another plus. It is also worth noting here that Gaz De France, a prominent global player in the segment is participating in the project as a strategic investor.

On the flip side, the fact remains that Ras Gas II is the sole supplier to PLL and any disruption in the relationship could have serious repercussions for PLL.

Then, the winds of liberalisation blowing across India suggest that the kid-glove treatment in the form of guaranteed off-take by the parent PSUs might not last indefinitely.

Another potential area of threat is the likelihood of a very large MNC player emerging as a serious competitor. Finally, the project is a capital intensive one, and though negotiated lowering of interest costs will be the order of the day, PLL is still some way off from a conventional break-even.

PLL's discovered price was Rs 15 per share and it was one of the few stocks to suffer the ignominy of dipping below the issue price before value buying at lower levels sent its price soaring again.

Interestingly, in a pattern depicting a value stock, the price again dipped, suggesting selling at higher levels. But is PLL a value stock or growth stock ?

TTNL forayed into the capital market with a book-built public issue of 1 crore equity shares of Rs 5 each and a simultaneous offer for sale by existing shareholders of 45 lakh equity shares of Rs 5 each.

The price band for the IPO was Rs 80-95. The promoter group, Living Media, enjoys fair brand equity nationwide, but its IPO revolved around the 'Aaj Tak' Hindi news channel.

Its meteoric increase in viewership has placed it at the forefront in that segment and TTNL now hopes to leverage the same. Its nascent English news channel 'Headlines Today', however, has not been a runaway success.

Notwithstanding its utility to help push a combined package advertising rate in Southern India, it has the potential to be a drag on TTNL's growth story.

Whereas 'Aaj Tak' has undoubtedly emerged as a market leader in its segment, there are several other channels that have begun to nibble away at its market share.

Furthermore, once Doordarshan, the sleeping giant, gets its act together, there could be a churning in the segment. That this churning is not a matter of conjecture is evident from recent TAM viewership numbers for Doordarshan.

For a company like TTNL, which pegs its fortunes on advertising revenues based on viewership, this is a risk factor that cannot be ignored.

On the financial front, TTNL has come through the initial cost curve unscathed and is now in a position to actually ride the revenue curve. The management team is a crucial parameter while evaluating a new economy company and here, TTNL scores well.

Overall, the positives outweigh the negatives and the fact that FIIs were being kept out of the IPO-bidding process on account of Fema rules keeps a window open for the possibility that they might enter the fray at a later date when the restriction will be relaxed.

The discovered price in this case was Rs 95 and the company's stock listed at an abnormally high level of Rs 225 plus, yielding almost a 150 per cent listing gain.

Aggressive selling thereafter has brought the share price of the company closer to its issue price at around Rs 125. At this level, perhaps it may appear palatable to both, value and growth investors.

In turbulent markets of the kind that we have witnessed since the turn of the calendar year, investors need to be clear whether they are backing a stock as a value pick or a growth story and strategise accordingly.

Two of the commonest stories one hears at the bourses is of a missed selling opportunity or of regret over early selling of a stock that then goes on to be the biggest gainer of the decade.

In such scenarios, clarity on whether a stock is being backed as a value pick or a growth story inevitably proves to be the crucial difference.

(The author heads Lotus Strategic Consultants, Mumbai, and can be contacted at ceolotus@hotmail.com. Disclosure: He has no outstanding interest in the companies discussed here.)