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10 stocks you may invest in
Priya Kansara & N Mahalakshmi
 
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August 21, 2006

Foreign investors are back with a bang on the bourses as concerns about the course of interest rates and oil prices have receded somewhat. In the current quarter till date, FIIs have made net purchases of Rs 4,300 crore (Rs 43 billion) in the cash market.

Even in among emerging markets, India has attracted maximum interest. This is a marked shift from the June quarter, when FIIs were net sellers in the cash market to the tune of Rs 6,291 crore (Rs 62.91 billion). Ironically, an analysis of the FII holdings for the June quarter - based on the data available so far - reveals that they have been buying more than selling.

Of the 449 stocks in which they had more than one per cent stake at the end of the June quarter, FIIs cut their positions in 198 stocks, maintained their holdings in 28 stocks and hiked their stakes in 223 stocks. Besides, there are three key findings:

FII purchases don't matter much: When sentiment is bearish, all stocks go down. It does not matter whether somebody is buying, at all, or not. May be because the purchases are too few in numbers to counter the general pessimism that nags the market. So, even those stocks in which FIIs had hiked their stakes saw their prices decline 14.35 per cent, on an average.

However, stocks where FIIs reduced their stakes recorded a sharper fall of around 19.76 per cent. It may be worthwhile to mention here that in some stocks the stakes have gone up on the back of conversion of warrants and, hence, this might not have had a direct impact on the stock prices unlike secondary market purchases.

Companies like Anant Raj Industries [Get Quote], Era Construction, Granules India [Get Quote] and Valecha Engineering [Get Quote], for instance, made preferential allotments to FIIs.

Performance is quite another thing: Paradoxically, the performance of stocks during the past quarter defied conventional logic that selling by foreign institutions leads to a crash in stock prices. June quarter numbers reveal that buying and selling by foreign investors have not impacted stocks similarly.

Stocks did not really plunge because foreign investors sold aggressively. For instance, although FIIs halved their exposure in Mahindra Gesco from 26.73 per cent to 12.96 per cent, the strong bullish undercurrent in real estate stocks resulted in a 30 per cent gain in the stock.

Similarly, AIA Engineering [Get Quote] continued to put up a decent show ending the quarter with a 6.44 per cent gain despite FIIs having offloaded more than five per cent stake. Stocks have not risen, in the same breadth, just because foreign investors hiked their stakes.

Several stocks lost substantially despite FIIs hiking their stakes significantly. Mc Dowell, for instance, slumped 48.32 per cent, while Valecha Engineering dived 45.04 per cent.

Mid-caps are a favourite hunting ground: Even as the market is inching closer to its all-time high and selection of stocks becomes increasingly difficult and critical as common in every bull run, mid-cap stocks are well on their way up yet again.

One factor that has been working behind the scene is the fact that the average market cap of all the stocks in which FIIs hiked their stakes was Rs 2,400 crore (Rs 24 billion), while that of those stocks where FIIs slashed their exposure was almost treble at Rs 7,000 crore (Rs 70 billion).

Another fact: most of the companies in which FII shareholdings have increased come under the engineering, construction and IT sectors, which are currently doing pretty well.

There is a caveat to this analysis though, and it is a big one: There is a lot of suspicion surrounding the genuineness of investors hiding behind FIIs.

Since there is no data available on the amount of money that has come into these stocks through participatory notes - a route notorious promoters use to channel investments into their stocks in order to manipulate prices - these numbers need to be taken with a pinch of salt.

From the universe of stocks that have seen significant FII activity, we draw out a list of 10 stocks you could consider for investment. All of these stocks are attractive buys considering that their fundamentals are still intact and, in some cases, valuations are very attractive following the recent correction.

One decisive factor behind FIIs reducing their exposure to some stocks was high valuations. Since FIIs have been early entrants in the rally this time around, they have also been booking profits more periodically. But after the recent fall, several stocks are looking attractive once again.

Stocks dumped by FIIs

Infrastructure Development Finance Company [Get Quote]: IDFC has seen the biggest sell-off by FIIs. Their stake has declined by a whopping 26 per cent. The company reported a subdued performance in the March 06 quarter with a sharp decline in profitability and its valuation of 2.5 P/BV looked a little stretched. No wonder its stock was down by 18.5 per cent by the end of June.

"Now, it is quoting at attractive levels and is reasonably valued," says Sandeep Nanda, head of research, Sharekhan. The company has performed well in the June quarter with a robust increase of 56 per cent in loan book and 20 per cent in profitability and zero net NPAs.

IDFC offers infrastructural financing services like guarantees, debt-syndication, and advisory services on project and financial structuring for projects like energy (power generation & distribution), telecommunication and transportation (roads, ports & airports).

Analysts feel that the stock holds good potential to perform due to increased infrastructure activities. The stock trades at 2x its P/BV for FY07E after recovering smartly with a gain of 20 per cent in about a month.

EMCO: Shriram Iyer, head of research, Edelweiss is surprised at the decline of FII holdings despite good growth prospects. The company is amongst the leading players in the transformer segment in India and has the third largest market share after BHEL and ABB.

The huge capacity generation programmes and emphasis towards transmission and distribution augur well for EMCO. The company is venturing into power generation business by setting up a 125 MW merchant power plant. Nanda is not so enthused on the company's new foray as he believes that it should focus on its key operations - the transformer business.

Emco has an outstanding order book of Rs 400 crore (Rs 4 billion) and the company is well placed with further orders of Rs 430 crore (Rs 4.3 billion) in the pipeline. The company will also be raising its transformer capacity by 50 per cent to 15,000 MVA by Feb 2007 and further to 20,000 MVA by Jan 2008. At 10x and 8x for FY07E and FY08E respectively, the stock is attractively valued.

Shasun Chemicals: FIIs sold their entire 13.4 per cent stake in this pharma major last quarter. While the company's current growth drivers like contract manufacturing both for APIs and formulations are intact, the acquisition of custom synthesis French major Rhodia Pharma is expected to dent its FY07 profitability.

The industry is going through a tough phase and the management has indicated that it will take two years to turnaround the acquired company. The company reported poor performance in the March quarter with declining sales and profitability.

However the June quarter was relatively better with net sales and profits up by 27 per cent and 44 per cent respectively. Edelweiss Securities has projected a net loss of Rs 29 crore (Rs 290 million) as against an earlier estimated profit of Rs 43 crore (Rs 430 million). The stock has seen a sharp correction and may be accumulated strictly for the long term.

Orchid Chemicals: This company has a track record of equity dilutions thanks to its capital intensive cephalosporins business accounting for 80 per cent of total revenues. The company raised funds through GDR and FCBB issues of $82.6mn in January 2006 and $200mn in the June quarter mainly for debt repayment.

While the equity base has increased, FII holdings have come down. PINC Research is bullish on the company as it is trading at a discount to its peers like Aurobindo and at a reasonable valuation of 11.5x for FY07E.

The company has successfully transformed itself from a bulk drug to a formulations manufacturing company and has filed about 31 ANDAs in the last one year out of which 15 have been approved. The cephalosporins business in US and European markets are growing at a faster rate and Orchid is expected to gain as there are only a few players in the business.

Cummins India [Get Quote]: Analysts feel that Cummins is a good play in the engineering space based on valuations. While its business prospects are bright, the stock trades at 16.7x and 14x for FY07E and FY08E respectively which is at a discount to peers like L&T and Siemens.

CIL, a 51 per cent subsidiary of global power leader, Cummins Inc, is an integrated-engine, equipment and component manufacturer operating in segments like power-generation equipment, commercial vehicles and industrial equipment.

The company is expanding its manufacturing capacities, launching new products and incorporating improvements in its internal operations.

Stocks lapped up by FIIs

Jyoti Structure: Increase in FII holdings in the stock is mainly due to heightened interest in the power sector. Janish Shah, head of research, Networth Stock Broking [Get Quote] is positive on the stock. Opportunities in the form of increased government thrust on improving the transmission and distribution infrastructure of the country is expected to drive future growth.

The company provides designing, fabrication and construction of high voltage power transmission lines (from 33 KV to 800 KV) and substations (up to 400 KV) predominantly focussed on the domestic market. The stock trades at 19x and 13.7x for FY07E and FY08E respectively.

Gitanjali Gems [Get Quote]: The interest in Gitanjali Gems, an integrated diamond and jewellery manufacturer, is mainly due to its aggressive retail foray and brands such as Gili, Nakshatra, Asmi and D'Damas. Analysts are optimistic even as the stock has underperformed since it's listing on the bourses.

With its IPO proceeds, the company is investing in its subsidiaries/associate companies, expanding its manufacturing capacities, and penetrating the retail market besides developing a Special Economic Zone near Hyderabad. It plans to increase its retail area from 120,000 square feet (650 stores) to 600,000 square feet (1,500 stores) in the next two years.

Gitanjali is likely to capture the retail boom due to the hitherto low penetration of branded jewellery in India. Margins will also improve with higher contribution of retailing and jewellery exports. The stock is available at an attractive valuation of 9x and 5x for FY07E and FY08E estimates.

Opto Circuits: FIIs got attracted to the company due to the growth in healthcare equipments. The company is into non-invasive electronic devices, patient monitoring devices and other segments like digital thermometers and cholesterol monitors for the healthcare industry.

It has grown rapidly through the inorganic route by acquiring companies like the German manufacturer of stents, EuroCor for Rs 60 crore (Rs 600 million). The total global market for stents is expected to grow manifold from Rs 27,000 crore (Rs 270 billion) in 2004 to Rs 46,000 crore (Rs 460 billion) by 2008. The domestic market is worth Rs 500 crore (Rs 5 billion).

The company has widened its reach in other countries and increased its product offerings through the acquisition. In Q1FY07, its revenues were up 62 per cent year-on-year at Rs 31 crore (Rs 310 million) and its profits doubled thanks to the improved product mix and better cost management. The stock trades at 21.5x and 15.5x for FY07E and FY08E respectively.

Era Construction: Analysts feel that FII interest in the stock is mainly due to the increased government focus on infrastructure and high earnings visibility. With an order book-to-sales ratio of 3-4 times, valuations are at a discount to its peers.

The stock trades at a P/E of 13.5x and 7x EV/EBIDTA for FY07. By raising fresh capital, the company has been able to bag bigger projects and support higher revenue growth.

Era undertakes diversified construction activities for airports, railways, power projects, infrastructure, institutional & industrial complexes, multiplexes and residential buildings catering to the PSUs, private sector, CPWD, PWD and Asian Development Bank-aided projects.

In addition to cash and EPC projects, Era also plans to add BOT projects to its portfolio. The company plans to enter new segments like small hydel power generation and irrigation segments.

Lloyd Electric and Engineering [Get Quote]: The stock witnessed increased interest as it was trading at a discount (9x for FY07E) to its peers such as Voltas [Get Quote] and Blue Star [Get Quote]. Moreover, it is also a major beneficiary of higher growth in the air conditioning sector due to increased disposable income.



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