Sure, Hindustan Lever is a great company and so is Infosys Technology. But the former is now trading at 50 times 1997 earnings, and the latter is available only at around a discounting of 55. In the cold light of day, they would both have to maintain superlative growth rates over long periods to justify investments at the current rates.
These two blue-chips are just examples of the herd mentality that affects all categories of investors. No one would disagree that HLL and Infosys are great companies and lead in their respective industries. But a good investment is not only made with the health and future prospects of the target company in mind. It has to be bought. Many investors seem to forget about the value-for-money concept. When too many people end up identifying and chasing the same investments, the price shoots up and ultimately it becomes over-priced.
The consistently successful investor prefers not to play "follow the leader", but heads against the market in his attempts to find undiscovered value. An average to middling company which has a decent track record and has seen its stock price battered down could give juicier returns than a high-priced blue-chip.
With a recession running into its third year, there are actually many good company _ erstwhile leaders and former stock market darlings available for a song. The Smart Investor has identified some such scrips. These have taken a beating because of negative news available about the company or the industry.
Most investor have preferred to ignore these counters and they have gone out of fashion as the industry or company scenario has turned grim and results have shown a dwindling bottomline or even red on the profit and loss account.
However, one type of investor just waits to hear bad news. Any news with a negative impact could help push down the price and render an opportunity to take positions. These investors have a contrarian view of the market which distinguishes them from the others.
To a large extent a contrarian does not go against the market flow just to be different, but he has some strong specific reasons which induce him to doubt market sentiment or simply look deeper. Of course the contrarian is obviously playing for big stakes since he is buying companies with known problems. But he is looking for the positive factors and we believe that such positive balances exist in the scrips below. However the use of the investor's own discretion is extremely vital in such cases.
Ashok Leyland
In the first four months of 1998-99, Ashok Leyland's heavy commercial vehicles (HCV) sales have dropped 13 per cent to 6,853 vehicles. During the same period its LCV sales have more than halved from 380 vehicles to 161 vehicles.
Last year it had posted sales of Rs 2020.62 crore and a net profit of Rs 18.41 crore in March 1998.The company's sales have fallen further in the first quarter to Rs 367.83 crore while it posted a loss of Rs 33.2 crore. With no respite expected for the commercial vehicle sector in the near future, the scenario could worsen. All this has seen the scrip plummet to a bottom at Rs 24 from where it has currently recovered to Rs 28.
Though the future still looks hazy, Ashok Leyland could prove a good buy at current levels. The more so, as all the negatives have been factored into the share price.
While the company cannot help the current scenario in the industry, it is taking internal measures which will help when things turn. To tackle the recession, it has initiated various cost-cutting measures focussing on three areas _ material cost, operational cost and asset-reduction.
The company has pre-paid loans aggregating Rs 25 crore during the current year. During the last financial year it had pre-paid loans aggregating Rs 60 crore with FIs and debt worth about Rs 35 crore with banks. Apart from this efforts are also on to reduce raw material inventory.
The company has also commissioned management consultants AT Kearney to revamp its supply chain management system. All this is expected to result in savings of about two per cent of expenditure.
Further, Ashok Leyland is making in-roads into the export market. With the help of its Italian collaborator, Iveco, the company has managed to enter markets abroad. Finally, in the domestic market Ashok Leyland, has gained market share in certain segments at the expense of leader Telco. In the first quarter of 1998-99, Its market share in the M&HCV segment incresed to 36.46 per cent from 25 per cent last year.
Arvind Mills
After touching a high of Rs 140 in July 1997, the Arvind Mills scrip has seen a downtrend right up to Rs 30 levels and has since recovered to Rs 36. Arvind's vulnerability to fluctuations in cotton prices is one primary reason for the current bearish trend. The company is facing one of the toughest periods in its recent past.
Rising prices are not the only factor that will affect the company's prospects, Arvind has been dealt a double blow, by sluggish export demand for denim which has also led to a lower realisation. A fall in demand from the US and European markets have pushed down realisations. Further, steep devaluation's in south east Asian currencies have further hurt realisations.
Any benefits that could accrue from the depreciation of the rupee have been partially offset by the decline in denim prices. To make matters worse, no significant increase in denim prices are expected in the near future as demand will continue to remain low with large capacity additions leading to supply further outstripping demand. In the absence of high volumes, the company's earnings will also be affected as it has commissioned a 40 million meters denim expansion which will lead to higher cost.
Though the negatives currently outweigh the positives, it has some inherent strengths. Arvind is the third largest manufacturer of denim fabric in the world. Around 55 per cent of its production is exported to nearly 108 countries and is used by many world-class companies.
The domestic market is wide open. The penetration of denim in India is still extremely low. An Indian uses 0.04 metres of denim every year. Whereas the per capita consumption in the US is 2.8 metres per annum. India's total consumption is around 20 million meters. If the local consumption just moves up from 0.04 metres to 0.08 metres, the market will double.
Indian Hotels
From a high of Rs 640 in December 1997, Indian Hotels has currently traded down to Rs 354. The prospects of the hotel industry do not seem to be too bright in the immediate future. This Tata group company runs the very popular Taj and the lesser known Residency (5 star but not Deluxe) and Gateway (budget) chains of hotels.
In the first quarter of 1998-99, most of the leading hotels in the country have seen occupancy levels fall by around 4-10 per cent over last year. This could be accentuated further due to the nuclear tests and unfavourable Budget as there was a loss of business interest.
However, the company has managed to hold its own in the first quarter of 1998-99. Its income has grown from Rs 125.78 crore to Rs 131.53 crore and net profit has risen from Rs 22.68 crore to Rs 24.06 crore. Indian Hotels occupancy rate was about 54 per cent in line with the industry standard.
The company is embarking on a restructuring exercise. To increase efficiency, peg competition and emphasise on individual focus, it intends reclassifying its hotels into three segments; luxury, business, leisure and resorts group. Indian Hotels has also earmarked Rs 108 crore for expenditure on expansions in the current year and Rs 800 crore over the next five years. The company is planning to complete new hotels at Jodhpur and Goa by 1999 and the Falukhnama Hotel in Hyderabad by 2000.
Given the strong brand equity the company enjoys and the fact that it has been able to hold its own in tough times, investment could prove a good bet. Indian Hotels could be a major beneficiaries once the prospects of the industry turn.
SAIL
Investment in the steel sector is strictly no-no currently. But Sail ias traded at just Rs five. Inspite of all its shortcomings the scrip has the potential to double from current levels. Which makes it worth a look since it has the potential to outperform the market on every small rally.
The steel industry in general, and Sail in particular, has seen a situation where there has been little increase in demand while the installed capacities have increased in the last three years. This has resulted in a situation with soft prices and subdued offtakes.
Additionally, imports have also affected business. Further, little increase in actual investment in infrastructure projects have translated into less than anticipated demand for products in the longs segments. All this has resulted in a downwards pressure.
However, Sail is a dominant player and accounts for over 40 per cent of the domestic consumption of steel. Its product mix is highly diversified both in terms of product segments, users segment, as well as geographical distribution. Additionally, Sail's product mix is also favourable with composition of over 60 per cent in favour of higher value-added flat products.
Sail's ability to protect its margins in the wake of increasing competitive pressures would be critically determine its long range profitability. While low cost of production, multiple manufacturing locations, and diversity of markets and product range would lead to sustainable long term advantages, the successful implementation and stabilisation of its massive modernisation programme would be crucial. Ultimately, by virtue of being by far the largest manufacturer of steel in the country, Sail can be looked at.
Bhel
Once a favourite with investors, Bhel lost favour after the slowdown in the economy. As its fortunes to a large extent hinge on the state of infrastructure and industrial development. The scrip touched a high of Rs 475 in August 1997 and slumped to Rs 195 in August 1998. It has currently recovered to Rs 255.
Things are yet to improve according to a recent CMIE study. Seventy seven projects involving investments worth Rs 84,788 crore were stalled in the last one year (August 1997-July 1998). In the same period, total investment in the economy has distinctly slowed down. While at the end of July 1997, total investments in various projects proposed and in different stages of implementation, amounted to Rs 12.57 lakh crore, a year later the amount has dwindled to Rs 12.29 lakh crore.
However, Bhel remains the best bet in power. In 1997-98, it bagged all the power project orders placed under open international competitive bidding in the country. The company derives its strength from its huge infrastructure which makes it extremely price competitive.
On an average BHEL's equipment supply package has a 30 per cent price advantage over its international competitors, even without the 15 per cent price advantage which local firms are afforded in multilateral funded projects. BHEL is the largest electrical and power plant equipment manufacturer in India. Its overall order-booking during the year stood at Rs 5,853 crore which gives it an outstanding orderbook position in excess of Rs 10,000 crore.
Bhel has two divisions - the power and the industry divisions. The power division handles power equipment sales and project execution for utilities. The division's products include thermal, hydel and nuclear power plant equipment. While the industrial division has four basic product lines : captive power plants for industry, transportation products mainly targeted at the railways, defense products and industrial equipment.
