Eventually, underwriters had to buy the majority of shares. Hindalco Industries, an Aditya Birla Group company, saw just half its Rs 5,000-crore rights issue subscribed to. Tata Motors of Tata Group, too, had the same fate.
The reason? Market prices of these stocks fell much below their offer price in the rights issue, removing the investor incentive of buying. Tata Motors and Hindalco are not the only companies to have seen such a battering.
As we go to press, about 380 out of 600 companies with a market cap of over Rs 250 crore (Rs 2.5 billion), have lost more than 50 per cent of their value since January. The Sensex and the Nifty have also lost close to 60 per cent. It is carnage on markets. But, in the rubble, you will find some gleaming diamonds, available at a quarter of what they were worth until a few months ago.
The Indian market has become a victim of a global meltdown. What started as credit crisis in the US has spilled over to the global financial market. Bears are out in full force, with their usual weapon of panic and fear, and have virtually captured every market--from Wall Street to Dalal Street.
If all you saw over the last four years was unbridled enthusiasm, now all you can hear is negativity. The Indian market started witnessing selling pressure from January this year. As the credit crisis started deepening in the West and liquidity became scarce, foreign institutional investors (FIIs) started selling stocks in all the markets, including India.
Anticipation of heavy selling from the FIIs prompted domestic investors to get out. FIIs continue to dump Indian stocks--they have sold stocks worth Rs 52,000 crore, or $12.90 billion, in our markets since January. Apart from the FII play, expectation of slower growth of the economy and corporate earnings, due to deteriorating global outlook and high domestic interest rates, contributed to the market's downfall. Read on. . .
What next? International Monetary Fund (IMF), in its October 2008 report, World Economic Outlook, said that the world economy is entering a major downturn in the face of the most dangerous shock in mature financial markets since the 1930s. It has marked down global growth to 3 per cent for 2009, the slowest since 2002.
The Indian economy is also expected to slow down. The Reserve Bank of India (RBI), in its mid-term review of marcoeconomic and monetary developments, published a professional forecasters' survey, which suggests that the Indian economy will grow at 7.7 per cent in FY09, compared to 9 per cent in FY08. Earnings growth has also started to show a declining trend.
Earnings guidances are being revised downwards, liquidity has become scarce, markets have fallen above 60 per cent, and FIIs continue to sell. In short, the overall condition has turned against equities. So, should you be out of equities?
Outlook Money advised caution when the market was on a dizzying ride--the Sensex was up at around 21,000. Now, as the Sensex crashes to 9044.51, we are breaking out of the pessimistic babble to tell you that this is a good time to start buying stocks.
The current crisis is being termed as once-in-a-lifetime by the Western press. If the crisis is once in lifetime, so are the challenges and opportunities. And as an investor, you should grab the opportunities.
The question you may ask is whether the market will fall further? It surely can. But you need to remember that it's always difficult to catch the bottom. The market may fall further before stabilising, but start buying now. Investors entering at this stage need to hold on to their stocks for the long term.
If you are a short-term investor, stay out of the market at this stage. Buying long-term assets with short-term capital is never a good idea.
Valuations have come down significantly, even for fundamentally sound companies. We are giving you eight such options--take your pick and invest for at least three years. Invest systematically to take advantage of any further price fall.
Methodology: The companies that have been considered for selection are the ones with a market capitalisation of at least Rs 250 crore. Among them, companies with year-on-year (y-o-y) net sales and net profit growth of more than 10 per cent for the last three years and the last two quarters were retained. From this list, only companies that were able to maintain or increase their operating profit margin (OPM) and operating cash flow in the last three years were kept.
Bank of India (BOI)
BOI is perhaps the fastest growing public sector bank in India. Its operating profit and net profit in FY08 grew 53.81 per cent and 78.90 per cent y-o-y, respectively.
For the last nine quarters, including the quarter ended September 2008 (Q2 FY09), its net profit grew at 50 per cent plus y-o-y, which indicates its sustained growth. Because of its strong presence in the industrialised states of Maharashtra and Gujarat, BOI has given advances to more productive sectors than its public sector peers.
It has reduced its dependency on low-yielding treasury income and has focused on interest income and income from fees. Its gross non-performing assets have gone down from 3.72 per cent in FY06 to 1.68 per cent in FY08.
Overseas operations contribute around 20 per cent of its business. The overseas branches help BOI raise deposits at rates lower than the domestic rates. It has some exposure to derivatives instruments overseas, but all of them have highly-rated Indian companies as underlying.
Bharti Airtel
Bharti Airtel is riding high on the overall growth of the telecommunication sector in India. Mobile penetration in India is still around 26 per cent, which leaves an enormous opportunity for growth. In this growing and competitive market, Bharti has been on top, in terms of subscriber base since May 2006.
It has maintained both y-o-y net sales and net profit growth at around 40 per cent in the last nine quarters. The margins have declined due to stiff competition, but the volume growth from the untapped rural market compensates that.
It has outsourced its non-core operations to focus on brand building and increasing subscriber base. In January 2008, it hived off its infrastructure business into a new subsidiary, Bharti Infratel, which will share the capital expenditure burden with other telecom players
Emami
Emami has created a niche in the market by bringing products for its consumers that combine modern production techniques and ayurvedic principles.
Its brands such as Boro Plus, Navratna Oil and Fast Relief are leaders in their respective categories. Its recently launched brand, Fair & Handsome, created an altogether new market.
In the last eight years, its net sales and net profit registered 19 per cent and 23 per cent CAGR, respectively. Its OPM also improved over this period due to better pricing of products and cost management. The return on equity, which increased from 10.36 per cent in FY2000 to 35.78 per cent in FY08, also reflects its rising profitability. Emami is reaching deep inside rural India, which will lead to volume growth.
Modern lifestyle has increased the risk of chronic ailments and consumers will demand natural products backed by research.
HDFC Bank
HDFC Bank has seen a y-o-y net profit growth of over 30 per cent for the last 34 quarters and has maintained a high OPM of around 60 per cent during the same period.
Maintaining the same momentum, it has reported a net profit growth of 43.29 per cent and OPM of 62.61 per cent in Q2 FY09. The bank's merger with Centurion Bank of Punjab has not shown any significant impact till now, but it is expected to yield robust growth for the company in the future.
Banks will start showing mark-to-market gain on their bond portfolio with interest rates expected to go down in the coming quarters.
Also, funds have dried up in the global markets--this will increase demand for credit from domestic banks. This means stable business in the future.
Indraprastha Gas (IGL)
The government's thrust on environment is putting more compressed natural gas (CNG) buses on road and rising fuel prices are prompting people to fit CNG kits to their cars. This is boosting IGL's CNG distribution business.
Households and commercial establishments now prefer piped gas supply to conventional LPG cylinders as it is convenient and safe. This means a huge revenue jump for IGL's piped natural gas (PNG) distribution business.
IGL has been enjoying consistently high OPM--over 40 per cent--for the last 21 quarters. As a result, its return on equity has remained higher than 30 per cent in all the financial years, starting 2003.
Even if it is not able to sustain such high margins in the long term, the volume growth will more than compensate for any dip. It is unlikely to face any gas supply constraint as it gets it on a priority basis as directed by the government.
The IGL stock has limited its fall to 21 per cent as against Nifty's 54 per cent in the last 12 months. It is currently trading at seven times its earnings.
KS Oils
It leads the edible oil market in the north and north-eastern part of India through brands in mustard oil, refined oil and vanaspati. Its share in the Indian mustard oil market is 7 per cent, when 75 per cent of mustard oil is sold loose.
Among brands, it has captured 25 per cent of the market. The company has also entered north and central India with an aggressive branding effort and greater retail push.
Its net sales in FY08 was Rs 2,044 crore, implying 91.08 per cent growth over the previous year, backed by volume and high edible oil prices. Its y-o-y net sales growth in the first quarter of FY09 remained high--at 91 per cent over the previous quarter, though the margins were flat.
KS Oils has secured its raw material supply by acquiring 50,000 acres of palm plantations in Indonesia, which will protect it from any price fluctuation in oil seeds.
Also, this kind of backward integration will help improve the margins over sales.
MphasiS
MphasiS derives its revenues from application services, infrastructure technology outsourcing (ITO) and business process outsourcing that span industry verticals, such as banking and financial services, healthcare, transport and manufacturing.
In Q2 FY09, Mphasis reported an impressive y-o-y sales growth of 54.59 per cent. It significantly improved the OPM by 273 basis points over the last quarter and, therefore, registered higher PAT growth of 128.74 per cent during the same period.
All its three business segments are registering healthy growth with its ITO business growing at 113 per cent. MphasiS is trying to reduce its dependence on the US, which contributed 67 per cent to its revenue in FY08.
The current crisis in the financial sector may impact its revenue, but it will also throw up new opportunities as ailing banks will go for greater outsourcing in order to cut costs.
Titan Industries
Titan watches have built a strong brand and its diverse product range caters to masses as well as the premium segment, which is its success formula.
Titan Industries' jewellery business, under the brand Tanishq, too, commands leadership position in the organised retail segment. It is going to smaller towns and rural areas under the brand Gold Plus.
In Q2 FY09, Titan Industries' net sales and net profit rose 53 per cent and 88 per cent y-o-y, respectively. In the last six years, Titan and Tanishq recorded a compounded annual growth rate (CAGR) of around 13 per cent and 40 per cent, respectively.
Risks to business growth are low. Watch penetration in India is well below 30 per cent. Growth will continue and margins should improve as it sells more watches through its exclusive Titan showrooms, which is more profitable than the dealership model. Rise in gold prices could slow down jewellery sales.
But, at higher prices, consumers will become more quality and value conscious and should go to organised stores, such as Tanishq, that guarantee quality, diverse range and standard pricing.