Investment Strategy

Investment Strategy

Red flags

A guide to spotting trouble before taking the plunge into the equity market

An investor buying a house does a lot of research and bargains with the developer to get the best price. However, an investor buying shares does not even spend half the time scrutinising the financials of the company. The reason is the size of the investment.

As matter of fact, this is one of the major reasons for the woes of the small and retail investors in the stock market. This phenomenon can be termed as the side-effect of micro trading. Due to dematerialization, investors can buy even one share. Small individual investors can be seen buying huge quantities of shares trading in single digits.

If the investor divides his investment over several stocks, he becomes even more negligent about due diligence. The end story is that the investor’s gain or loss becomes a game of probability. The equity market is like a lottery for such investors.

A market correction results in erosion of the wealth of such investors. They then walk away, never to return, cursing their luck. However, at the heart of the problem is lax due diligence.

The S&P BSE Sensex touched an all-time highs in March 2015, while the S&P BSE Mid-Cap and Small-Cap indices reported historic highs in April 2015. Over the last year, the Sensex has scaled new peaks at regular intervals. Besides, the rally is broad-based, except for a handful of sectors.

The market mood is far from being termed as madness. Valuations based on price to earnings (P/E) ratio continue to remain close to historical averages. At present, the Sensex is at a P/E of 22.1. Going forward, the Sensex may scale greater heights if the government manages to deliver on promised reforms, prices of crude oil remains subdued, stability is established in Europe and the US Federal Reserve opts for gradual and snail-paced hikes in interest rates.

Investors should tread cautiously in the present market conditions. Whatever may be the corpus available for investment, due diligence should be thorough. If investors have no time for in-depth study of stocks, the mutual fund route to equities is a better option. Other alternative is to stick to frontline large caps about which plenty of information is available. Ideally, investors should have an exhaustive check-list to explore stocks for investment. The list should be referred to on a regular basis while scanning companies for investment.

Stay away from penny stocks. Generally, stocks trading below their face or par values are termed as penny stocks. As these stocks are available in single digits or lowly double digits, small investors are attracted to them. Certainly, this is recipe for self destruction. Investors should care for quality rather than quantity while exploring stocks to make fortune. Buy less but buy quality is the crucial takeaway.

Of the 2,918 stocks that traded on 7 July 2015, 127 were priced less than Re 1. Another 551 were available in single digits, that is, between Re 1 and less than Rs 10.

Avoid T and Z group stocks. Delivery of stocks is compulsory while buying or selling stocks clubbed in the T group by stock exchanges as part of surveillance measure. Intra-day trades are not permitted in the T group stocks. This is essential to curb market abuse and manipulation. The Z group companies are those that have failed to comply with the listing requirement or to resolve investor complaints. There are over 1,000 companies classified under the T category and 1,400 companies under the Z group on the BSE.

Low promoters’ equity stake is another red flag. In India, there are only a handful of professionally-managed companies with nil or negligible promoter holding. The promoter holding and the interest of promoters in a company are directly co-related. Thus, as a rule of thumb, higher the promoter holding, better are the chances that the promoters will take interest in the functioning of the company. Otherwise, these companies could be used for all sorts of illicit activities such as manipulation and money laundering. This is particularly true of small-cap companies (see box: Regulatory rap).

Consistently low delivery volumes despite surge in trading volumes and/ or share price could point to speculative interest in a stock. Also, such stocks could be subject to price rigging and manipulation. Low trading volumes with a sharp surge in the share price is another key indication of manipulation. A stock hitting upper or lower circuits for several consecutive sessions could signify market abuse. Also, wild swings in the volume could be owing to presence of operators at the counter.

No institutional presence for a prolonged period of three or five years or even more is a warning sign. Here, institutional investors refer to mutual funds, insurance companies, private equity, wealth management firms and sovereign funds.

Mutual funds strictly avoid penny stocks. Also, institutional investors stay away from companies with dubious track record of corporate governance. In fact, there are a number of mid caps with no mutual fund holdings. One of the reasons could be of past sins haunting the stock. Institutional investors have long memory compared with retail investors.

Absence of institutional investors in companies with reasonable size of turnover, profit or market capitalization may not be just a warning. It could be a cess pool for small and retail investors. There are 129 firms with turnover exceeding Rs 1000 crore in the latest financial year but without mutual fund holdings. There are many loss-making companies reeling under debt in this long list.

However, this should not be taken as mutual funds staying away due to for poor financials. There are 420 companies that have reported profit in excess of Rs 5 crore in the latest financial year. Mutual funds have no holdings in 75 companies with market capitalization of over Rs 1000 crore. In all, there could be significant reasons for mutual funds to stay clear of certain reasonably big companies.

However, this is not a hard and fast rule because institutional investors could stay away from certain small-cap for technical reasons. For instance, mutual funds prefer liquid stocks where entry and exit is easy and, thus, avoid stocks with low trading volumes, which could be owing to a smaller equity base.

Basic documents should be available with ease including annual reports, quarterly results and the shareholding pattern. This information is filed by companies with the stock exchanges. A significant delay in submitting annual reports and quarterly results should be treated as a danger sign.

Next, investors must glance through the statutory auditors’ report and annexure to the audit report. Any adverse comments, observations and qualifications should be taken into consideration while exploring stocks for investments. The audit reports can provide valuable insights and could reveal the real picture. A frequent change in statutory auditors could be a sign of trouble. In such cases, statutory auditors may not have been comfortable with the management and, thus, could have put in their papers.

Healthy financials with track record of consistent profitability but no dividends could be an indication of weak health. Worse, the books of accounts could be manipulated to attract gullible investors. Investors could find companies paying token or nominal dividends to draw a picture of robust health. In such cases, investors should check the cash flow statements, with focus on the operating cash flows.

To put things in perspective, there are 649 companies that have reported profit in each of the last three financial years but have not paid any dividend in this period. Of these, 255 firms are trading in single digits. Moreover, 391 companies have market capitalization of less than 25 crore. Is something fishy about these stocks?

Unnecessary corporate actions should be a cause of concern. Corporate actions could be merely for creating hype around the stock and push the prices to the upper levels. These corporate actions could be de-mergers, stock-split and bonus issues.

There is no reason for a stock trading in double digits or low triple digits to go for stock-splits. Further, announcing and issuing bonus shares without adequate reserves and profitability could be to boost the stocks price. Bonus issue in reality is akin to a stock-split. Despite this fact, many individual investors get excited when bonus issues are announced.

The seemingly beneficial de-merger of a small company splitting its businesses into two and offering shares of new companies could attract investors in hoard. But why should a small company go for a de-merger? This could be a trap to deceive investors.

Avoid unsolicited advice on stocks or so called tips via SMS (short messaging service). The web and SMS have emerged as an inexpensive means of spreading information among investors. Technology has its own pros and cons. Stock market regulator Securities and Exchange Board of India (Sebi) has came down heavily on the business of spreading tips via SMS. Though the volume of SMS has come down, the business of providing tips continues on the Internet.

Companies with limited trading history should be avoided. Largely, these are firms that have raised funds in recent past through initial public offering. Such stocks require greater attention and scrutiny. Such companies carry higher risk as the management and their credentials are still not established in the market. Street-smart promoters raising money from the market and siphoning it for other activities is not uncommon. With the market at an all-time high, the primary market could bounce back to life. If this scenario emerges, the credentials of promoters should be examined thoroughly.

Companies with consistent trading record over the years should be preferred. Companies that are compulsory de-listed or suspended from trading during intermediate periods should be avoided.

Next, pledging of shares by promoters is not an encouraging sign. The promoters could be trading in their own stocks by using their shares as collaterals. It is in the interest of the promoters to keep their companies healthy to avoid offloading of pledged shares by the lenders. Clearly, there is a conflict of interest at play. This is because promoters will make every attempt to keep stocks at elevated levels by means fair or foul.

Abnormally low valuation could be a honey trap for investors. There are 531 companies with price to book value (BV) of 0.33 or lower. This means these companies are available at one-third of their BVs or even less. Why are these companies trading at such dismal valuations? Of these 531 stocks, 388, or 73%, are trading in single digit, a danger zone. Ideally, investors should avoid temptation to explore their dream stocks in the midst of scrap. Quality comes at a price.

Also, investors can check certain alert ratios such as price to sales ratio, which is determined as market capitalization upon turnover. An abnormally high ratio is a clear pointer to trouble. Among the T group stocks, there are three companies with price to sales ratio in excess of 500. Invariably, this means each rupee of sales is valued at 500 times! Further, there are nine stocks trading in single digit, with price to sales ratio exceeding 100.

Similarly, companies trading in single digit or lowly double digits and commanding an abnormally high premium over their BVs could indicate manipulation.

Companies can even create artificial price benchmarks that innocent investors will take for granted. This factor is difficult to discover. Intelligent promoters of small-cap companies go for preferential allotment at higher prices compared with the prevailing market prices to artificially create higher price benchmark.


SOURCE: CAPITAL MARKET

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What To Do With Banks

What To Do With Banks

Time to junk the concept of universal banking and turn to niche banking to ring-fence risks

One of the stumbling blocks to the revival of the Indian economy is the poor health of public sector banks, which own more than 72% of the assets and 77% of the deposits of the industry. Not surprisingly, the finance minister has to keep reiterating the government's intention to infuse fresh capital into PSU banks. This is to restore confidence in the system, which is apparently to serve the small saver but has been twisted and bent to cater to crony capitalists. The banking industry has been the problem child not only of India but of the global economy, going back to the Great Depression. The Glass-Steagall Act was passed in the US in 1933 to limit commercial banks' securities activities, clearing the way to demarcate savings and lending institutions and investment banks. The idea was to protect the risk-averse depositors from the leveraging associated with dealing in securities. The scope to make big profit from accepting funds at lower rates and lending at higher rates is limited. Expanding physical presence to garner a big share of the market requires huge capital. In contrast, there are bumper gains to be made from advisory services and dabbling in the debt and equity markets on a relatively lower base. The M&A wave in the US in the 1990s saw commercial banks acquiring stake or tying up with securities firm for that much-needed bump to the bottom line. The Gramm-Leach-Bliley Act of 1999 repealed the provisions restricting affiliations between banks and securities firms, sowing the seeds for the blowout of the too-big-to-fail banks in 2007-2008 as exotic derivatives were deployed to top the league tables, ignoring capital adequacy.

The subsequent forced merger by the government of weak and strong financial organizations has resulted in a handful of institutions dominating the US's banking space. Though capital requirement has been enhanced and proprietary trading scrapped, prospects of a systemic failure have increased due to the small numbers. In India, PSU banks replicate efforts, manpower and capital to expand into each other's territory to chase customers. Their bottom lines are influenced by income derived from non-banking activities. Their assets are prone to turn sour because credit sanctions are not always commercial transactions. Mergers can create a few capable banks with scale. The issue is if the alliance should be based on balance sheet strengths and weaknesses or geographical presence to achiever wider reach. Core banking is making brick-and-mortar existence redundant. Interestingly, this leads to two crucial questions. Should banks be viewed as FMCG companies, vying for attention on the basis of brand loyalty acquired through superior service? Or are banks going to become e-commerce entities delivering the basic needs efficiently? FMCG stocks are favored for consistent payouts, while Internet startups are enjoying huge valuations despite making losses because of the potential. Banks combine the best and the worst of both.

Just as the FMCG sector is no longer viewed as evergreen due to dependence on monsoon to drive rural growth as the urban market has flattened out, PSU banks are burdened with the cost of reaching out to the lowest denominator. Like e-retailers who are prone to categorize themselves as tech companies rather than slot themselves with retailers in the real world enjoying poor discounting, banks are embracing technology for the ease of doing business and increased penetration. Unlike cyber malls, however, their valuations factor in the non-performing assets rather than the huge unbanked population as India urbanizes. The second dilemma is if India should go back to the era of institutional lenders confined to corporate clients rather than encourage universal banks. 

The regulatory framework for banks operating in various niches will differ. Investors will be able to pick stocks in the sector suiting their profile. The discounting due to the thin margins earned by attracting and lending money will be mediocre compared with those for bottom lines supported by trading income. Yet as the business of savings banks will pivot on the credit track record of retail borrowers, they will be viewed stable and safe. 

Investment banks will focus on maximizing treasury opportunities and big-ticket players will be specialists in devising innovative ways of raising capital, thereby rewarding risk-takers. VC and PE funds are meeting the needs of startups. Microfinance and SME lending institutions can take care of the small borrowers. The proposed Mudra Bank is aimed at the unorganized sector. Thus, clubbing banks as per the markets they cater to, with different capital requirement, will lead to better monitoring and containment of risks.

Changing to become better

Some companies are reducing debt, restructuring, undertaking organic and inorganic expansion, diversifying and resuffling the top deck to fast-track growth

Investors complain that they find it difficult to know when to enter and exit the market. The investment strategy of buy low and sell high is overly simplistic to be true. No one knows what is the high and what is the low of a stock. Many figures float around such as 52-week high and low, five-year high and low and even all-time high and low.

Apart from absolute price, discounting is another factor that investors look at to take exposure to a stock. Investors often track highs and lows of valuations in terms of price to earnings ratio (P/E), price to book value (P/BV), dividend yield and so on to take investment calls. Again, this is highly subjective and depends on market conditions.

In a prolonged bull-run, valuations can touch unimaginable levels. This mean investors looking at highs and lows of valuation ratios will hardly gain from a long bullish phase. This is because such investors might prefer to exit based on high valuations early in the bull-run. Similarly, if the bear phase persists for multiple years, investors might prefer to stay away from the market despite pathetic valuations.

In short, whether it is absolute price or valuations, the business of buying at the lower level and selling at the higher level sounds good in theory but is not practical.

As a matter of fact, the stock market is always puzzling. It discounts possibly everything under the sun and that, too, on a real-time basis. Information flows into the market from numerous sources. In a way, each investor participating in the market is a source of information.

Eventually, market sentiments will drive the market and decide the fortunes of a majority of stocks. The phrase rising tide lifts all boats is appropriate for the bull phase of the market. The probability of stocks moving north is on the higher side in a bull market. Thus, there is no need to break one’s head about where to invest. On the contrary, in a bear market, it is difficult to spot winners.

Whether it is a bull or a bear market, there are winners and losers at any point in time. One can easily come across investors cribbing about past mistakes owing to a variety of reasons such as not entering the market at the lower level or exiting too early at the start of a bull-run or not booking profit at record high level, buying company A instead of B and so on. The fact of the matter is it is essential to scan the market on a continual basis for investment and keep investing.

Instead of timing the market, be in the market all the time. This does not mean one should not book profit or exit a loss-making position. It means investment is a 24x7 business. No break is allowed.

Sentiments, greed and fear are short-term phenomena. A trend will emerge influencing the market and subsequently vanish. Ultimately, it is the quality of a stock and its performance that will eventually deliver results over the medium to long term. This has been proved time and again and will hold in future as well.

At present, there are risks as well as opportunities. On the upside is the postponement by Morgan Stanley Capital International (MSCI) of shuffling the MSCI Emerging Markets Index by including the Chinese A class shares, which are also referred as mainland Chinese stocks. The possibility of their inclusion had spooked the Indian market as this would have increased the weight of Chinese stocks in the index, resulting in outflow from other emerging markets including India. However, MSCI has postponed the decision on restructuring over the issue of access to the Chinese market.

On the downside is the worry about a possible spike in interest rates by the US Federal Reserve (Fed). This time, the Fed seems to be serious about a rate hike, which could be a reality as early as September 2015. This is among the biggest worries at the moment. Any increase in interest rates will puncture the liquidity-driven rally in stocks across the world. Even the International Monetary Fund (IMF) has requested the Fed not to increase interest rates till calendar year (CY) 2016. In June 2015, the IMF has revised downwards the US economic growth estimate for CY 2015 to 2.5% from 3.1% projected by it in April 2015.

This apart, there is talk in the market that the global bond bubble is about to burst. Market experts believe that bonds are highly overvalued at US$ 76 trillion. Around one-fourth of all the government bonds in Europe have a negative rate of return. This abnormality gives credence to market talks.

In the European Union, Greece seems to be a perpetual spoiler. Negotiations between Greece and the international creditors continue without much success, with both sides playing endless mind games. The creditors are not convinced with the reforms undertaken by Greece. This could mean Greece moving closer to default and a step closer to eventual exit from the European Union. This could spook global financial markets and result in turmoil as well.

In India, economic growth and corporate earnings are not in sync. The Reserve Bank of India (RBI) early June 2015 lowered the economic growth forecast from 7.8% to 7.6% for the fiscal ending March 2016 (FY 2016). Even this prediction seems to be on the higher side considering the ground reality and business confidence. The turnover of around 4,000 companies crawled 1%, while profit declined 1.8% in FY 2015. The 30 companies constituting the S&P BSE Sensex reported a 2.2% decline in adjusted profit and sales grew a mere 2.3% last fiscal. This is against the expectation of double-digit growth expected in the bottom line.

In its first cut in interest rate in the current fiscal, the RBI reduced the repo (lending) rate to 7.25% from 7.5%. Banks borrow from the RBI at the repo rate. However, despite the shaving, the concern is the central bank revising the inflation projection up to 6% by January 2016 from 5.8% in April 2015. Invariably, this means it might defer interest rates cuts. Lower interest rates are necessary to lift demand for goods and services.

A possible drought could add to inflation worries. The India Meteorological Department has revised down the southwest monsoon forecast from 93% to 88% of the average rainfall for the June-September period. The possibility of deficient monsoon has already dampened corporate spirits. Monsoon has arrived late. But the recent downpour has lowered the possibility of drought. In response, the market has witnessed a recovery.

Reforms are not happening at the expected pace and scale to lift the standards of living of a significant portion of the 1.2 billion people, which represents a huge business potential. Foreign portfolio investors (FPIs) are pulling out money from the market. FPIs net sold US$ 903.9 million of equities in May 2015, while they net sold US$ 449.4 million in the month till 25 June 2015 from the domestic equity market. The rupee at 63 (25 June 2015) against the US dollar is on shaky ground. It could plunge further if the US dollar remains in demand and firm in global markets. If FPI offloading continues, it will put additional pressure on the rupee.

Market conditions remain uncertain, making investors jittery. Investing in equities seems to be way too risky. Despite these problems, India remains a bright spot on the global map. Its economic growth is far better compared with the developed world. Thus, remaining away from the market is not the solution.

In this scenario, it is better to adopt a stock-specific approach. Importantly, the stock-screening criteria should become more stringent. In fact, several company-specific developments are taking place that can significantly boost business.

Many companies are focusing on reducing debt in response to business slowdown and pressure on the bottom line. A few firms have already reduced debt by a considerable quantum. Such companies can now concentrate on their businesses rather than worrying about the debt burden and interest outgo.

Also, companies have gone for restructuring to streamline their businesses and turn profitable or improve their profitability and cash flows. The reorganization could have been undertaken with various objectives such as to better utilize financial resources, create greater accountability and responsibility, raise funds and strengthen the balance sheet. Besides de-merger is another visible corporate action in response to market expectation.

There are industry-specific events, too, that can have a favorable impact on demand, which will generate greater quantum of revenue for companies. Indeed, company- specific events can be influenced by industry-specific factors.

For instance, the government is all out to encourage domestic manufacturing of defense equipments under the Make-in-India campaign. Action is already visible, with a few domestic companies forming joint ventures with foreign players with relevant expertise in defense equipment for domestic production. Investors can map industry happenings and their influence on companies. Such stocks can be termed as action stocks. These companies can be scanned for investment.

Capital Market picked 16 companies based on various company- and industry-focused parameters (see table: Action stocks). These include de-mergers, corporate restructuring, expansion plans, joint ventures and collaborations, debt reduction, strategic equity investments, financial equity investment, mergers and acquisitions, foraying into new geographies, business diversification by entering new industries or businesses, change in the top management and ambitious revenue targets.

Basically, investors will be betting on the transformation to translate into better sales and profit. For this, investors need to understand the rationale behind the move and, if convinced, pick the companies for investment.

Biocon, the country’s largest biopharmaceutical company, might witness some action in the current fiscal. Subsidiary Syngene International filed a draft red herring prospectus with the Securities and Exchange Board of India in April 2015 to seek approval for an initial public offering (IPO). This will be offer for sale is to offload around 11% of the holding in Syngene. Along with subsidiary Biocon Research, Biocon owns 84.5% of Syngene. The value unlocking will help to fund research and development programs including the pipeline of biosimilars and novel biologics including oral insulin at various stages of development.

Syngene offers contract research services including discovery and development of novel molecular entities across industrial sectors including pharmaceutical, biotechnology, agrochemicals, consumer health, animal health, cosmetic and nutrition companies. Bangalore has a team of 2,000 scientists and laboratory and manufacturing facilities.

Global pharmaceutical players such as Bristol-Myers Squibb, Abbott Laboratories and Baxter International have long-duration partnerships with Syngene, which reported revenue of Rs 707.7 crore in FY 2014 and Rs 617.5 crore in the nine months ended 31 December 2014. A new facility is being set up in Mangalore to make molecules for innovator companies in the pharmaceutical, agrochemical and other industrial sectors.

Clients of the maker of biologics, biosimilars, differentiated small molecules and affordable recombinant human insulin and analogs has a rich pipeline of biosimilars and biologics are spread over 85 countries.

Greenply Industries is working on a mega expansion plan. Outsourcing of product requirement will be increased to 30% from 20% over two years to improve the return on capital. Land has been acquired in the Chittoor district of Andhra Pradesh for setting up a medium-density fiberboard (MDF) unit as the capacity utilization level of the existing facility has touched 90%.

The project, to cost around Rs 600 to Rs 650 crore, will be equally funded through borrowing and internal accruals. The plant is expected to go commercial by FY 2019.

The wood-based products supplier of plywood and allied products and MDF is the largest player with 30% market share of the domestic organized plywood market and 30% of the domestic MDF market. The decorative business was demerged and listed in November 2014.

The target is to clock growth in revenue of 10-12% in the current fiscal. The margins are expected to improve 70 to 100 basis points on account of better product mix and cost control.

Max India is in the process of demerging the existing businesses into three listed companies. This is an attempt to unlock value. Moreover, investors will be in a better position to access the businesses post split. Upon completion of the demerger, Max India will be renamed Max Financial Services (MFS). MFS will focus on the flagship life insurance business through 72.1% shareholding in Max Life. There are good chances that MFS will emerge as the first Indian listed company dedicated to the life insurance business. This is the most attractive part of the story.

The second entity, Max India, will continue to manage investments in the high potential health and allied businesses comprising Max Healthcare, Max Bupa and Antara Senior Living. These businesses are in the growth phase. The third entity will look after investment activity of the specialty film packaging subsidiary, Max Specialty Films, and will be called Max Ventures and Industries (MVIL). Started in 1989, the specialty packaging films business has been consistently profitable.

As part of the demerger scheme, the shareholders will receive one equity share of MFS (face value Rs 2). Further, the shareholders will receive one equity share of Max India (face value Rs 2) for every one equity share held in MFS and one equity share of MVIL (face value Rs 10) for every five equity shares held in MFS.

ITC, the country’s largest cigarette producer, is looking to diversify the revenue stream. The thrust is on the fast-moving consumer goods (FMCG) segment, and the efforts seem to be yielding desired results. The branded packaged food products has emerged the fastest-growing business in FY 2015. Indeed, the milestone of US$ 1 billion turnover was crossed by the segment by reporting a 12.1% growth in revenue to Rs 6411 crore. The category offers staples, snacks and meals, confections and beverages. The brands include Aashirvaad, Sunfeast, Bingo!, Yippee!, Kitchens of India, mint-o, B Natural, Candyman and GumOn. New product segments will be entered to enhance the product portfolio going ahead.

The aspiration is to become the country’s number one FMCG company by achieving revenue of Rs 1 lakh crore by FY 2030. Besides cigarettes, the largest and most profitable segment, the diversified portfolio includes FMCG, paperboards and packaging, agriculture related businesses, hotels and information technology.

Among the top 10 companies by market value had cash of Rs 7896.2 crore and current investment of Rs 6135.1 crore end March 2015. The debt-free company issued bonus shares in the ratio of 1:1 in August 2010.

Ambitious management talk is soothing to the ears if the firm in question has achieved targets in the past. Additionally, such companies can be held accountable by investors and their performance can be benchmarked against targets set by the management.Motherson Sumi Systems (MSSL) is an overwhelming example in this context. Key targets for the fourth five-year plan completed in FY 2015 were set in FY 2010.

The performance has been good across parameters: revenue (actual US$ 5.5 billion v target of US$ 5 billion), overseas revenue (growth of 84% v 70%), geographical presence (25 countries v 27), return on capital employed (RoCE) (consolidated 26% v 40%) and dividend payout ratio (37% v 40%).

Over the next five years, the intention is to become a US$ 18-billion company by revenue. The ROCE target is 40% and dividend payout ratio of 40%. The company will be adopting dual strategy of organic growth and acquisitions to reach this target.

Established in 1986, the joint between Samvardhana Motherson group and Sumitomo Wiring Systems (Japan) is the largest auto ancillary company in the country and ranked 55th in the world. Among the world’s leading manufacturers of automotive rear-view mirrors is also among the leaders in instrument panels, bumpers and door trims in Europe. There is presence in 25 countries across six continents.

Among the leading commercial vehicle and passenger bus makers, Ashok Leylandreported a financial turnaround in FY 2015, with profit of Rs 133.9 crore as against loss of Rs 164.1 crore in FY 2014. It could be just the beginning as the net profit margin is merely 0.85%. Around 1.05 lakh vehicles were sold in FY 2015, which is lower compared with 1.15 lakh in FY 2013. Invariably, this means there is tremendous scope to improve the financial performance and achieve true turnaround.

The market share of the medium and heavy commercial vehicle (M&HCV) segment was increased to 28.6% last fiscal from 26.1% earlier. Also, the market share in the intermediate vehicle domain rose on the back of new products. Exports volume grew 31.7% in FY 2015.

As per the annual report for FY 2015, considering the expected growth in the industrial, construction and mining sectors, M&HCV sales are likely to keep the growth momentum intact in FY 2015. The Society of Indian Automobile Manufacturers has projected growth of 13%-15% for M&HCVs and 3%-5% for the light CVs in the current financial year. If the projected demand materializes, there might be another year of sterling performance. Debt is intended to be reduced from Rs 9069.9 crore, with debt-to-equity ratio of 2.8 times end FY 2015.

V-Guard Industries is looking to increase revenue from the non-south market. Thirty per cent of the revenue of the Kochi-headquartered electric and electronics goods maker came from the non-south market in FY 2014 as against 25% in FY 2013 and 16% in FY 2010. The efforts to diversify revenue streams by geography are likely to continue as the southern market is facing slowdown in demand. Also, the focus will be on expanding the network in existing markets.

The strong brand in the southern region manufactures and markets voltage stabilizers, invertors and digital UPS systems, pumps, house wiring, electric water heaters, fans and solar water heaters. Lately, manufacturing has been taken up of induction cook tops, mixers and grinders and switchgears.

A third wire factory is being set up in Coimbatore in Tamil Nadu, which houses the wire and cable factories. The plant is likely to start production in two years. After their launch in Kerala and later in Karnataka last fiscal, mixer grinders will be rolled out in other southern markets as well. A target of 15% growth in revenue has been set for the current fiscal. Decline in the prices of copper is expected to improve profitability.

Kalyani group company Bharat Forge might be among the major beneficiaries of the government’s renewed emphasis on domestic manufacturing of defense equipment as part of the Make-in-India program. Other focus areas are the railways, power and aerospace sectors.

In October 2014, a long-term partnership was announced with France-based Safran to supply critical high integrity forged and machined components for commercial aircraft applications to the latter’s global affiliates. Both will be exploring other opportunities in the Indian civil and military aerospace. In February 2014, a strategic alliance was entered into with defense and security company Saab to partner and address key Indian army air defense projects.

Efforts are on to de-risk the business model by reducing excessive dependence on the auto segment. The non-auto segment contributed 38% to the consolidated revenue in FY 2015, while the remaining portion came from the auto segment. There are 10 manufacturing plants across four countries. The clientele boasts of 35 global marquee original equipment manufacturers and tier I companies across automotive and industrial applications.

Change in promoters and management might be a crucial trigger for United Spirits(USL). Despite facing bad press owing to the association with Vijay Mallya, currently the chairman of USL and head of the UB group, London-based largest spirits companies in the world Diageo Plc completed the acquisition of USL in CY 2013 from the UB group. The fate of Mallya remains uncertain. However, Diageo has managed to place its men at crucial positions to run the show. Anand Kripalu was appointed as the chief executive officer in May 2014. India’s largest beverage alcohol company’s flagship brands include McDowell’s No.1 Whisky and Royal Challenge. The share of premium brands in the revenue increased to 30% in FY 2015 compared with 27% in FY 2014.

Cleaning up the mess left by the previous management is almost through with appropriate provisioning and write-offs. Now, energies can be concentrated to take the business to greater heights.

There are hundreds of companies that are troubled owing to their highly-leveraged balance sheets and resultant interest burden. In challenging economic and business conditions, this debt not only pinches but might even bring down the entire enterprise. Commercial and passenger vehicle maker Force Motors stands out in this context. The debt-free company had borrowings of mere Rs 10.7 crore end March 2015 compared with Rs 485.7 crore end March 2008. There was cash of Rs 306.8 crore end March 2015 as against Rs 219.6 crore end March 2014.

The manageable leverage makes it possible to face the cyclical nature of the automobile industry. The product range includes small commercial vehicles (CVs), multi-utility vehicles (MUV), light CVs, sports UVs and agricultural tractors.

Turnover has increased 2.5 times over the past five years. Going forward, the thrust is on expanding capacities to sustain the growth momentum and cater to incremental demand. In February 2015, a plan was unveiled to establish a factory at Chakan in Pune to manufacture motor vehicles parts such as engines, gearboxes and axles, with capacity of 50,000 sets per annum. Land is in possession and necessary permissions are being sought.

Conclusion

Valuations of some of the selected companies might be on the higher side. Besides, a few stocks are trading at record levels. This might put off investors. MSSL reported and all-time high of Rs 534 in April 2015 and currently commands a P/E of 46.8. The rally in the stock and premium valuations reflect its healthy performance over the last five years and equally robust targets. Similarly, Greenply recorded a historic high of Rs 1276.8 in November 2014. Again, ambitious expansion plans indicate exciting times ahead.

Valuations might also be elevated on signs of turnaround. This partially explains the P/E of 59.4 commanded by Ashok Leyland and 170.9 by Kokuyo Camlin. However, profitability needs to soar.

For companies such as Ashok Leyland, Bharat Forge, Force and Tata Motors, economic recovery is critical. This is particular true for turnaround stocks. If the demand scenario recovers, it will be icing on the cake. For instance, Ashok Leyland can build on the foundation of the turnaround achieved in FY 2015.

Importantly, investors should appreciate the risks associated with these stocks as most of them have expansion plans in place. For MSSL, inorganic growth is the inseparable part of the growth strategy. However, the target companies or businesses always come at a premium to the market.

Based on a variety of themes, developments and initiatives, these companies are likely to have action-packed years going ahead. In the present scenario of attractive potential not translating into desired results, these actions stocks are worth a glance.

source: capitalmarket

IVP Ltd BUY 60.00

IVP Limited : Company Profile

We introduce IVP Limited, an integral and vital part of the Allana Group, is a leading Manufacturer & Exporter of Foundry Chemicals, Castings, & Allied products, having over Eight decades of Experience in the manufacture and export of a wide range of Foundry Chemicals, Castings and Allied products.

IVP's Foundry Chemicals Division has always dedicated itself to the development and manufacture of a wide range of high quality Foundry Chemicals, to enable Foundries to enhance the Quality of their Castings and improve Productivity levels.

IVP Limited : Historical Milestones

YEAR EVENTS 1929 - The Company was incorporated on 5th July at Mumbai. The Company Manufacture vegetable oils & vanaspati Margarine, Plastics Minar Chemicals, Foundry, products, Spark Plugs & Industrial Ceramics.

1930 - IVP commenses operations. production of hardened cooking fat.

1939 - 1,100 Bonus shares issued in the proportion 1:10.

1947 - 6,050 Bonus shares issued in the proportion 1:2.

1954 - 3,025 Bonus shares issued in the proportion 1:6.

1962 - Establishment of Research and Development facilities at the Raey Road Factory

1963 - 3,025 Bonus shares issued in the proportion 1:7.

1964 - Begining of the Factory Chemicals Division

1966 - 4,840 Bonus shares issued in the proportion 1:5.

1973 - 11,616 Bonus shares issued in the proportion 2:5.

1974 - Establishment of Jamshedpur factory for Foundry Chemicals.

1976 - 10,164 Bonus shares issued in the proportion 1:4.

1976 - Establishment of Bangalore factory for Foundry Chemicals.

1976 - Recognition of Research and Development Unit by the Department of Science and Technology, Government of India.

1978 - Diversification into Industrial Ceramics and Spark Plugs with factories at Aurangabad and Hyderabad.

1979 - Establishment of a large capacity Tank farm at the Reay Road Factory in Bombay for bulk storage of vegetables oils.

1979 - Shares subdivided during 1978. 5,08,200 Bonus shares issued in the proportion 1:1.

1982 - 3,38,800 Rights equity shares allotted (Prop. 1:3; Prem. Rs 1.25 per share) on 22.6.82.

1983 - Establishment of a full fledged, modern factory at tarapur in Maharashtra, for Foundry, Industrial and Speciality Chemicals

1983 - The management of IVP Ltd., changed from Forbes Campbell & Co. Ltd. to be the House of Allanas

1984 - The Company revalued its freehold land, buildings, plant and machinery relating to its Mumbai factory as on 31st December.

1985 - 6,77,600 Bonus Equity shares issued in propn. 1:2 and allotted on 9.4.1985.

1986 - During November the company signed technical collaboration agreement with M/s Feldmuhle Aktiengesells Chaft, (Feldmuhle Akg) West Germany for acquisation of knowhow for the manufacture high alumina, Ceramic, textile thread guides using injection moulding technology. The Company enunciated a modernisation-cum-diversification programme.

- Another project was taken up to set up a new unit at Kumbalagudu near Bangalore to manufacture foundry and other industrial chemicals. 

 1987 - The Company issued 2,33,540 No. of equity shares of Rs 10 each at a premium of Rs 10 per share as follows: 1,01,640 shares on rights basis to the existing shareholders of the Company in the ratio 1:20; 1,20,000 shares to financial institutions (UTI), LIC and GIC) and 11,900 shares to employees/workers. 28,385 additional shares were also issued at a premium of Rs 10 per shares to retain oversubscription and allotted as follows: 25,410 shares to shareholders and 2,975 shares to employees.

- The Company proposed to issue equity shares/convertible debentures upto a maximum of Rs 30 crores on a rights-cum-public basis subject to all necessary approvals.

- The Company proposed to issue 68,84,175 bonus equity shares in proportion 1:1.

- 2,61,925 Bonus Equity shares issued (Prem. Rs. 10 per share) in June 1987.

1988 - (15 months) the Company entered into a collaboration agreement with M/s. Industries Magneti Marelli Sp. A of Italy for manufacture of improved types of spark plugs. Also approval was received for technical collaboration, agreement with M/s London & Scandinavian Metallurgical Co Ltd UK for updating its technology in its steel plants.

- It would also enable updating of its ingot casting products such as hot topping tiles, corner pieces etc. and introduce latest products such as Tundish liners, impact pads etc.

1989 - 22,94,725 Bonus Equity shares issued in prop. 1:1.

1991 - The Company had undertaken expansion and modernisation of its industrial ceramics and industrial chemicals division.

- 22,94,725 Bonus Equity share issued in prop. 1:2.

1992 - The Company entered into two technical collaborations for high alumina ceramics with Cerasiv GmbH, Germany, one for the manufacture of high alumina faucet discs, an import substitute item and the second for upgrading and increasing the product range of industrial ceramics division.

1996 - 34,42,088 Bonus shares issued in prop. 1:2.

2001 - Mr. S.N. Bhatri has been appointed Director on the board effective from 29th January.  

PRODUCTS: Foundry Chemicals : Binders In our foundry range of phenolic resins, we have shell-mold resins and organic non-heating self-curing foundry-use resins in a rich assortment of grades. We can provide shell-mold resins to comply with versatile requirements such as high mechanical strength, quick curing, peel-back resistance, low odor, ease of collapse after molding and low expansion. For non-heating self-curing foundry-use resins, we provide resins compatible with the cold-box system which improve curing speed and save energy. Phenol Base Resins Shell Resin (Novalac) for coated sand manufacturing. Phenolic No Bake (Acid Cured). Phenolic No Bake (Ester Cured). Phenolic Urethane No Bake. Coldbox Resin. Hot Box Resin (Phenolformeldehyde or Furfuryl Alcohol base). Furan No Bake Resin. Applications Shell-mold resins (general purpose use, for main mold component, hollow inner core, solid inner core) and resins for the cold box system.  Special Binders for Refractories Thermo-setting resin characteristics ensure high mechanical strength after drying. Fixed carbon rate is high enough to form very tough carbon bonds. Compatible with various aggregates including graphite. Also has superior mixing and kneading properties. In comparison with tar pitch or the like, there are environmental advantages with minimized hazardous substances. Sp. Phenol Base Resin for Refractor (Liquid and Powder). Applications For various unburned bricks such as magnesia carbon brick, alumina carbon brick, and various burned bricks such as magnesia chrome brick. Refractories for continuous casting such as submerged nozzle and plate. Monolithic refractories, such as mud material, gunning refractory. Foundry Chemicals : Coatings When metal is cast into a sand mould or against a core, there may be physical and chemical reactions which can cause surface defects. Improving the surface appearance of the casting will reduce finishing costs, enabling foundries to sell more castings at better prices. Today we offers the most advanced coatings available. They combine the latest developments in Water-based as well as Alcohol based coatings technologies . Water Based Coatings Alumino Slicate / Graphite Base. It is water based mixed refractory coating for cores / moulds made by shell process. Graphite Base. Coating based on graphite aluminum silicate and iron oxide with water as a carrier liquid and has excellent suspension stability and owing to the refractory composition it is able to prevent the formation of finings and scabs The penetration tendency of cast iron melts is reduced as well. A clean and smooth surface finish can be achieved. This coating is suitable for high to medium cast iron castings Zircon Base. Zirconium based mold /core coating with an aqueous carrier is a special combination of inorganic / organic suspenders and binders results in high solids level which ensures rapid drying possible. The result is an extremely compact, abrasion resistant coating. Zircon / Graphite Base. Zirconium and graphite based mold /core coating with an aqueous carrier is a water-based coating with high solid contents for brushing applications. It maintains an excellent coverage and brush ability. It has got superior suspension property and ensures excellent finishing on heavy iron castings.  Alcohol Based Coatings Alumino Slicate / Graphite Base. It is a ready to use Alcohol based mixed refractory coating for cores / moulds made by shell process Graphite Base. It is a coating based on graphite and magnesium silicates. Alcohol is used as a carrier liquid. Owing to its basic materials it is able to prevent the formation of finings and scabs. The penetration tendency of cast iron melts is reduced as well. A clean and smooth surface finish can be achieved. Zircon Base. It is a coating material based on zirconium. Alcohol is used as carrier liquid. A high zirconium ensures a dense layer and thus an excellent protection against penetrations and mould metal reactions. It also maintains a good adhesive and abrasive resistance. Zircon / Graphite Base. Zirconium and graphite based mold /core coating with alcohol as a carrier coating with high solid contents for brushing applications. It maintains an excellent coverage and brush ability. It has got superior suspension property and ensures excellent finishing on heavy iron castings. Magnesite Base. This is the coating based on a high quality magnesite with Isoproponal as a carrier. The coating exhibits excellent flow properties. The refractory filler system performs best on moulding materials such as Olivine (basic refectories). Mould/metal reactions and penetrations are avoided. Foundry Chemicals : Innoculants & Fluxes It is often necessary to modify the composition of iron or steel melts by adding elements such as carbon or silicon, to remove undesirable constituents such as sulphur or oxygen, or to ensure that the casting solidifies with a specific metallographic structure. To meet these needs we supply a number of products, each formulated to give maximum performance efficiency. Innoculants for Cast Iron Industry We are Manufacturing Special cast iron innoculants for Automotive Industries. Barium based Ferro silicon innoculants. Zirconium / Manganese based innoculants. Strontium based innoculants.  All Types of Non Ferrus Fluxes Metallurgical properties have to be controlled during the production of aluminium castings and other non-ferrous alloys, for example: -- Removing hydrogen (a cause of porosity) using a degassing treatment -- Modifying the metal by the controlled addition of alloying mixtures -- Optimising the crystal structure of the cast metal by grain refining -- Protecting the molten metal from oxidation and removing slag using powder fluxes IVP is at the leading edge of industry efforts to improve the metallurgical performance of castings by rpoviding wide range of metal additives. Cover & Cleaning flux for Aluminum / Copper and their alloys. Nucleants and for Aluminum and its alloys. Tailer made non ferrous fluxes for Aluminuim and Copper alloys for special purpose.

	Quarter ended			Year to Date			Year ended
	201503 (3)	201403 (3)	% Var		-	-	201503 (12)	201403 (12)	% Var
Sales	37.95	37.01	2.54	NA	NA	NA	162.92	145.48	11.99
Other Income	0.28	0.43	-34.88	NA	NA	NA	1.41	1.55	-9.03
PBIDT	4.66	1.36	242.65	NA	NA	NA	12.22	5.64	116.67
Interest	0.13	0.07	85.71	NA	NA	NA	0.53	0.26	103.85
PBDT	4.53	1.29	251.16	NA	NA	NA	11.69	5.38	117.29
Depreciation	0.32	0.30	6.67	NA	NA	NA	1.23	1.20	2.50
PBT	4.21	0.99	325.25	NA	NA	NA	10.46	4.18	150.24
TAX	1.34	0.51	162.75	NA	NA	NA	3.53	1.72	105.23
PAT	2.87	0.48	497.92	NA	NA	NA	6.93	2.46	181.71
Equity	10.33	10.33	0.00	NA	NA	NA	10.33	10.33	0.00

Company paid 20% div 

one can buy on dips for decent appreciation