Investment tips: How to pick potential stocks:

After the correction, the markets have almost reached the bottom. Perhaps, this may be the ideal time to add some new stocks to your basket. Here are some popular stock-picking strategies:

Bottom up investing

Here, the investor filters stocks of companies that have inherently strong fundamentals . Companies are evaluated for strength and efficiency of the management team as well. The ability of the management team in strategic decision-making and building value is a significant contributor to a company's growth.

In a bottom up investing approach, it must be noted that the investor picks a company's stocks based on its performance and fundamentals and not on performance of the sector. Historical performance of the company and its growth prospects also help assess it.

This approach is usually considered a narrow strategy where the broader economic climate and industry performance is not factored in. Investors believe that these companies are fundamentally stronger than the others in the sector, based on their past performance and efficiency of operations. Hence, external factors are believed to have little influence in the stock picking.

Some analysts feel the broader sector trends could impact future performance of the company and not analysing them could blur the decision-making process.

Top down investing

In this method, investors analyse the broader market before narrowing down to individual stocks. GDP, health of the economy and market, interest rates, inflation , geopolitical scenario and global factors are first studied. This is unlike the bottom up method where fundamentals of individual stocks are first analysed before taking into account the expansive global economy.

Next, sectors where investments are prudent to make are identified. Finally, individual stocks from these sectors are identified based on fundamental and technical analysis. An extensive analysis of individual stocks is made by the investor.

A top down approach helps determine the overall market condition and economic climate. It helps build a diversified portfolio with exposure to numerous sectors that are performing well.

In the bottom up approach where investors narrow down on the stocks before considering the economic climate, the possibility of over-exposure to equity is high. A top down approach, on the other hand, could fail if the analysis of the overall economy goes wrong.

Picking bargain stocks at lows could be quite a challenge . Careful analysis and study can help you sail through turbulent times. 

 

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FINANCIAL TIMES

 

Are we headed for another Slowdown?

- By Asad Dossani, Author, The Lucrative Derivative Report  

The latest spate of economic data is worrying. GDP growth is now at its lowest level since mid-2009, at 6.9% per year. Industrial production has fallen for the first time since 2009, one of the main contributors to the falling GDP growth rate. Inflation has seen a small fall, but still remains above 9%. Finally, the rupee has suffered a fall of over 20% against the dollar since April of this year.

The poor economic performance is not limited to India; it is occurring around the world. For example, in China, GDP growth has also at its lowest level sine 2009. The Eurozone countries are likely to enter recession next year due to the ongoing negative effects of the debt crisis. Financial markets around the world are suffering from high volatility and large falls due to the ongoing crisis. 

Given that growth in India is falling, and growth around the world is falling, is there anything that we can do to reverse the trend? It will help to look at what has caused the slowdown in India's growth. Mostly we are interested in knowing if it is due to internal factors that we can change, or external factors that we have little control over.

One of the negative drags on GDP growth has been the worsening current account deficit. First, exports have been falling. This should not be a huge surprise, given that the countries we export to are experiencing economic problems. Second, imports are rising. This is due to a weaker rupee and higher commodity prices. In both instances, external factors are the primary culprit, and from a domestic policy perspective, there is little we can do.

The other negative drag on GDP growth has been falling industrial production. In the previous month, industrial production suffered a 5% annual fall. Industrial production accounts for around one-quarter of the economy's total production, so this figure is obviously very important. Industrial production has not seen a fall of this magnitude for a very long time.

If we look deeper into the falling industrial production figure, the main standout is capital goods production. Capital goods production was down 25%, and this is extremely worrying. Capital goods are investment goods, so any fall in this will directly lead to a future fall in production.

This leads to the question of what can be done to help the situation. When it comes to industrial production, this is primarily a domestic issue, so the correct policy should help the situation. First, we should probably assume that the current government can do nothing, given their weakness and recent history. This leaves policy in the hands of the RBI.

As we know, the RBI has been relentlessly raising interest rates over nearly the last two years. This has been done to combat higher inflation. This policy had some success early on, but recently has faltered. Over the last 1 year, inflation has remained steady at around 9%. At the same time, the GDP growth rate has been consistently falling.

Thus, the RBI's policy of raising interest rates has done little to help the inflation probably, and has likely contributed to falling growth. Industrial production is heavily impacted by interest rates, because large investment projects require considerable borrowing to fund them. Thus, higher interest rates have reduced investment.

The best policy for the RBI going forward would be to ease monetary policy and lower interest rates. A policy of raising interest rates over the last year has worked poorly, and now we are seeing the consequences of this. At a time when the global economy is slowing down, the RBI should do what it can to keep growth in India at high levels. Lowering rates would be a good start, as it should improve borrowing and investment. 

Wockhardt: Improvement continues

It  has announced its second quarter results for 2011-12 (2QFY12). The company has reported 18.1% YoY growth in sales and a profit of Rs 1,275 m this quarter as against a loss of Rs 975 m in 2QFY11. Here is our analysis of the results.

Performance summary

• Net sales grow by 18.1% YoY led by strong operating performance from the US and domestic business.
• Operating margins (EBITDA) rise 570 bps (5.7%) to 29.1% due to a fall in raw material and staff costs.
• The company reports net profits of Rs 1,275 m this quarter as against a net loss of Rs 975 m in 2QFY11. The poor performance in 2QFY11 was due to the exceptional loss. On excluding the exceptional items and forex losses, net profits increase by 90%. 

What has driven performance in 2QFY12?

• Wockhardt's sales grew by 18.1% YoY for the quarter with growth coming from phenomenal increase in the US and the domestic market. US business grew by 84% YoY led by growth from new launches in the last quarter. This growth was also supported by its existing products which grew nearly 49% YoY. Wockhardt added 4 ANDA approvals from the US FDA in this quarter, totaling to 84 approvals. The domestic business (~22% of sales) also showed a healthy growth of 13% YoY, which was much better than other competitors. The domestic market share stood at 2.04%. Sales for the European region were weak with UK sales growing by 3.6% YoY only.
  
• Operating margins rose 570 bps to 29.1% due to a fall in raw material and staff costs. This was due to trimming of operations at Negma in France where the profit margins were very small.
  
• The company reported net profits of Rs 1,275 m this quarter as against a net loss of Rs 975 m in 2QFY11. The poor performance in 2QFY11 was due to the exceptional loss. Excluding the exceptional items and forex losses, net profits increased by 90% when compared to the same quarter last year.
  
• Wockhardt's current debt level is around Rs 37.9 bn making its debt to equity ratio at 2.6 times. Though it is quite high, it is lower than that in FY11. The company restructured its debt obligation with secured lenders and is now expected to pay its debt starting 2015.
  
• On the sale of its nutritional business to Danone, the court has directed Wockhardt to clear the FCCB holders' installments and has given a go-ahead to divest the nutritional business. The payment of Rs 850 m, Rs 300 m and Rs 1,000 m is to be done by the end of December 2011, January 2012 and March 2012 respectively.
  

What to expect?

At the current price of Rs 350, the stock is trading at a multiple of 7 times our estimated FY14 earnings. In the domestic market, Wockhardt has created a strong presence by expanding its reach across India. The company has shown a phenomenal growth in the US market in the last few quarters and is expected to show a good growth ahead. However, the European market is facing problems with key markets de-growing substantially.

Since the last couple of quarters, the management has stopped discussing its business with the investor and analyst community. The company seems to be coming out of the woods but is trading at a huge discount to its peers. This is due to its high debt and the problems with FCCB repayments. Till these get resolved, we advise investors to remain cautious while investing in the stock.

The Ups And Downs Of Investing In Cyclical Stocks

Courtesy :Investopedia



 Imagine being on a Ferris wheel: one minute you're on top of the world, the next you're at the bottom - and eager to head back up again. Investing in cyclical companies is much the same, except the the time it takes to go up and down, known as a business cycle, can last years.

What Are Cyclical Stocks?Identifying these companies is fairly straightforward. They often exist along industry lines. Automobile manufacturers, airlines, furniture, steel, paper, heavy machinery, hotels and expensive restaurants are the best examples. Profits and share prices of cyclical companies tend to follow the up and downs of the economy; that's why they are called cyclicals. When the economy booms, as it did in the go-go '90s, sales of things like cars, plane tickets and fine wines tend to thrive. On the other hand, cyclicals are prone to suffer in economic downturns. (For more on the business cycle, see Recession: What Does It Mean To Investors?)

Given the up-and-down nature of the economy and, consequently, that of cyclical stocks, successful cyclical investing requires careful timing. It is possible to make a lot of money if you time your way into these stocks at the bottom of a down cycle just ahead of an upturn. But investors can also lose substantial amounts if they buy at the wrong point in the cycle.

Comparing Cyclicals to Growth StocksAll companies do better when the economy is growing, but good growth companies, even in the worst trading conditions, still manage to turn in increased earnings per share year after year. In a downturn, growth for these companies may be slower than their long-term average, but it will still be an enduring feature.

Cyclicals, by contrast, respond more violently than growth stocks to economic changes. They can suffer mammoth losses during severe recessions and can have a hard time surviving until the next boom. But, when things do start to change for the better, dramatic swings from losses to profits can often far surpass expectations. Performance can even outpace growth stocks by a wide margin.

Investing in Cyclicals
So, when does it pay to buy them? Predicting an upswing can be awfully difficult, especially since many cyclical stocks start doing well many months before the economy comes out of a recession. Buying requires research and courage. On top of that, investors must get their timing perfect.

Investment guru Jim Slater offers investors some help. He studied how cyclical industries fared against key economic variables over a 15-year period. Data showed that falling interest rates are a key factor behind cyclicals' most successful years. Since falling rates normally stimulate the economy, cyclical stocks fare best when interest rates are falling. Conversely, in times of rising interest rates, cyclical stocks fare poorly. But Slater warns us to be careful: the first year of falling interest rates is also unlikely to be the right time to buy. He advises that it's best to buy in the last year of falling interest rates, just before they begin to rise again. This is when cyclicals tend to outperform growth stocks.

Before selecting a cyclical stock, it makes sense to pick an industry that is due for a bounce. In that industry, choose companies that look especially attractive. The biggest companies are often the safest. Smaller companies carry more risk, but they can also produce the most impressive returns.

Many investors look for companies with low P/E multiples, but for investing in cyclical stocks this strategy may not work well. Earnings of cyclical stocks fluctuate too much to make P/E a meaningful measure; moreover, cyclicals with low P/E multiples can frequently turn out to be a dangerous investment. A high P/E normally marks the bottom of the cycle, whereas a low multiple often signals the end of an upturn.

For investing in cyclicals, price-to-book multiples are better to use than the P/E. Prices at a discount to the book value offer an encouraging sign of future recovery. But when recovery is already well underway, these stocks typically fetch several times the book value. For instance, at the peak of a cycle, semiconductor manufacturers trade at three or four times book value.

Correct investment timing differs among cyclical sectors. Petrochemicals, cement, pulp and paper, and the like tend to move higher first. Once the recovery looks more certain, cyclical technology stocks, like semiconductors, normally follow. Tagging along near the end of the cycle are usually consumer companies, such as clothing stores, auto makers and airlines.

Insider buying, arguably, offers the strongest signal to buy. If a company is at the bottom of its cycle, directors and senior management will, by purchasing stock, demonstrate their confidence in the company fully recovering. (For more on how to research insider activity, see Keeping An Eye On The Activities Of Insiders And Institutions.)

Finally, keep a close eye on the company's balance sheet. A strong cash position can be very important, especially for investors who buy recovery stocks at the very bottom, where economic conditions are still poor. The company having plenty of cash gives these investors more time to confirm whether their strategy wisdom was a wise one.

Conclusion
Don't rely on cyclicals for long-term gains. If the economic outlook seems bleak, investors should be ready to unload cyclicals before these stocks tumble and end up back where they started. Investors stuck with cyclicals during a recession might have to wait five, 10 or even 15 years before these stocks return to the value they once had. Cyclicals make lousy buy-and-hold investments.

Rupee depreciation – Who will benefit?

Emkay Global Financial Services has come out with its report on rupee depreciation. According to the research firm Divis Lab to benefit the most, followed by DRL , Cipla & Sun Pharma .

Aurobindo Pharma :

• 73% of revenues come from international sales which will have a positive impact on revenues of 10% in H2FY12E & 5% in FY12E
• Company has not taken any forward covers which will have a positive impact on EBITDA of 63% in H2FY12E & 35% in FY12E
• Company has forex loans of US$600mn which will result in increase in total liabilities by Rs4.2bn in FY12E
• Overall increase in PAT is limited to just 3% in H2’12 & 2% in FY12 due to MTM loss of Rs2bn in H2 & Rs4bn in FY12E

Cadila Healthcare :

• 64% of revenues come from international sales which will have a positive impact on revenues of 10% in H2FY12E & 5% in FY12E
• Company has USD190mn in forward covers. EBITDA will increase by 12% in H2FY12E & 6% in FY12E
• Company has forex loans of US$122mn which will result in increase in total liabilities by Rs1bn in FY12E
• Overall PAT is expected to decline by 11% in H2’12 & 6% in FY12 led by MTM loss of Rs1.2bn in H2 & Rs2.7bn in FY12

Cipla :

• 56% of revenues come from international sales which will have a positive impact on revenues of 7% in H2FY12E & 4% in FY12E
• Company has not taken any forward covers which will have a positive impact on EBITDA of 14% in H2FY12E & 7% in FY12E
• Company has forex loans of US$60mn on its books
• Overall PAT is expected to increase by 15% in H2’12 & 8% in FY12

Divi’s lab :

• 91% of revenues come from international sales which will have a positive impact on revenues of 12% in H2FY12E & 7% in FY12E
• Company has not taken any forward covers. Rupee depreciation will have a positive impact on EBITDA of 37% in H2FY12E & 21% in FY12E
• Overall PAT is expected to increase by 37% in H2’12 & 21% in FY12

Dr. Reddy’s Lab :

• 80% of revenues come from international sales which will have a positive impact on revenues of 7% in H2FY12E & 4% in FY12E
• Company has taken forward covers of US$775mn and has done the cash flow hedging which will limit the upside for EBITDA at 14% in H2FY12E & 8% in FY12E
• Company has forex loans of ~US$200mn and 60% of its receivables are fixed in nature
• Overall PAT is expected to increase by 16% in H2’12 & 9% in FY12

Glenmark Pharma :

• 72% of revenues come from international sales which will have a positive impact on revenues of 13% in H2FY12E & 5% in FY12E
• Company has not taken any forward covers which will have a positive impact on EBITDA of 19% in H2FY12E & 9% in FY12E
• Company has forex loans of US$350mn which will result in increase in total liabilities by Rs1.55bn in FY12E
• However, overall PAT is expected to remain flat in H2’12 & FY12 led by MTM loss of Rs751mn in H2 and Rs1.6bn in FY12

Ipca Labs :

• 53% of revenues come from international sales which will have a positive impact on revenues of 7% in H2FY12E & 3% in FY12E
• Company has taken forward covers worth $150mn @ of Rs48.5/$ as a result gain in EBITDA will be 34% in H2FY12E & 15% in FY12E
• Company has forex loans of US$129mn which will result in increase in total liabilities by Rs201mn for H2FY12E & Rs446mn in FY12E
• Overall PAT is expected to remain flat in H2’12 and FY12 due to MTM loss of Rs632mn in H2 and Rs950mn in FY12E

Jubilant Life Sciences :

• 69% of revenues come from international sales which will have a positive impact on revenues of 11% in H2FY12E & 5% in FY12E
• Company has not taken any forward covers which will have a positive impact on EBITDA of 33% in H2FY12E & 14% in FY12E
• Company has forex loans of US$403mn which will result in increase in total liabilities by Rs1.2bn for H2FY12E & Rs1.6bn in FY12E
• Overall PAT is expected to decline by 18% in H2’12 & 8% in FY12

Lupin :

• 69% of revenues come from international sales which will have a positive impact on revenues of 10% in H2FY12E & 5% in FY12E
• Company has taken US$200mn in forward covers. EBITDA will increase by 26% in H2FY12E & 13% in FY12E
• Company has forex loans of US$160mn which will result in increase in total liabilities by Rs1.1bn in FY12E
• However, overall PAT would improve marginally by 4% in H2’12 & 2% in FY12 led by MTM loss of Rs1.6bn in H2 & Rs2.4bn in FY12E

Ranbaxy Labs :

• 83% of revenues come from international sales which will have a positive impact on revenues of 13% in Q4CY11E & 13% in CY12E
• Company has taken forward covers of US$700mn. EBITDA will have a positive impact of 32% in Q4CY11E & 15% in CY12E
• Company has forex loans of US$122mn which will result in increase in total liabilities by Rs2.4bn in Q4CY11E
• Overall PAT is expected to decline by 78% in Q4CY11E & increase by 15% in CY12E

Sun Pharma :

• 67% of revenues come from international sales which will have a positive impact on revenues of 14% in H2FY12E & 7% in FY12E
• Company has not taken any forward covers which will have a positive impact on EBITDA of 13% in H2FY12E & 6% in FY12E
• Company has no forex loans - Overall PAT is expected to increase by 13% in H2’12 & 6% in FY12

Torrent Pharma :

• 52% of revenues come from international sales which will have a positive impact on revenues of 5% in H2FY12E & 2% in FY12E
• Company has taken forward covers worth $200mn @ of Rs48/$ and had done cash flow hedging, as a result gain in EBITDA will be only 7 in H2FY12E & 3% in FY12E
• Company has forex loans of US$80mn on its books
• Overall PAT is expected to imcrease by 9% in H2’12 & 4% in FY12 as all the losses will be taken in the balance sheet
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  http://www.moneycontrol.com/mccode/news/article/article_pdf.php?autono=634025&num=0

Decline of Rupee - A boon for pharma?

For the last couple of weeks, the steep decline in the value of rupee against the dollar and some other European currencies has continuously made headlines. The European sovereign turmoil coupled with political inaction and rising fiscal deficit in India have been some of the reasons why the Rupee has fallen so steeply. So severe has this fall been that Rupee is now trading at a multi-year low and has been the worst performing Asian currency. Rupee has fallen from levels of Rs 46-47/US$ to Rs 53 currently. And given the economic scenario currently, a further fall in the Indian currency cannot be entirely ruled out.

While creating export opportunities, the quick decline in Rupee has also created challenges for some businesses. For the pharmaceutical sector, falling rupee brings good news for exporters in the medium term. However, it also brings many challenges. Here are some of them:

Existing hedging contracts to limit revenue boost: The size of the Indian pharmaceutical industry is estimated to be around US$ 20 bn, with exports accounting for nearly 45% to 50%. The decline in the Rupee should thereby help the pharma exporters earn higher realizations. However, most large companies have locked (hedged) their export sales in advance when the rupee traded at Rs 46-47 against the US dollar. Hence, the decline in Rupee will not bring any cheer for these companies in the short run. If the rupee remains at this level for a couple of months, the benefits will then start accruing for large pharma companies.

Raw material imports to be costlier: A depreciating Rupee surely helps pharma exporters get better realisations in the long run. However, if the imports are considered, benefits from exports will partially get offset by costlier imports. Indian pharmaceutical industry fulfills 70% of its raw material requirements through imports from other countries. Imports from China are highest at US$ 4 bn per year with the rest from other countries. Most bills are settled in dollar terms and the recent decline in the Rupee will mean imports will get costlier in the near term.

Higher interest on foreign loans: Quite a few companies in the Indian pharma industry have exposure to foreign currency convertible bonds (FCCB). As this is a foreign currency loan, the repayment liability arising out of this can be much higher due to decline in the Rupee against the dollar. It will also impose a higher interest outgo every quarter (provided it is not zero coupon) requiring companies to make provision for mark-to-market losses. This then puts a severe strain on profits.

Renegotiation of existing contracts: As the US and European pharmaceutical markets may see a slowdown due to their economic problems, there could be price pressure on their suppliers including India. On the backdrop of a weaker Rupee, overseas buyers may renegotiate some of their existing contracts and thereby impact the higher expected realization of Indian companies.

Thus, a declining Rupee and that too at a steep certainly has an impact on India Inc, and the pharma sector is also not immune from the same. At the end of the day, those companies which have followed appropriate hedging strategies and have lesser amount of foreign debt on their books will have an edge over their peers especially when there is increased volatility in the forex market.

The changing face of steel industry

Steel stocks have crashed and have fallen out of favor with investors. The BSE-Metal index has fallen by 38% over the past one year. India steel stocks have been under pressure on account of concerns over global economic growth as well as internal issues such as the ban on iron ore mining in Karnataka. The domestic steel consumption grew by just 2.8% in the first half of FY12 and is expected to grow less than GDP this year. This will be just the second time in the past 10 years that growth in steel consumption in India has lagged GDP growth. In the light of these events, we have identified several trends emerging in the sector which might change the dynamics of the steel industry in India in the next couple of years.

• Domestic overcapacity will bring in new challenges - India is likely to add around 30 m tonnes of new capacity over the next 18 months. This would make India net exporter of steel from current net importer. As a result, domestic pricing mechanism will slowly but certainly shift to export parity from import parity currently. This will lead to decline in Indian steel company’s margins.
  
• Product differentiation - Faced with new challenges, Indian companies will need to walk the extra mile to remain relevant in the longer term. Product differentiation, for example, will be necessary. While this may not ensure sustainable margins, it will be of utmost necessity to ensure customer stickiness. In this regard, foreign technological tie-ups and Joint ventures recently signed are a step in the right direction, but most are yet to be tested for success.
  
• Changing raw material situation - As easy access to cheap captive raw materials is now a thing of the past. Acute shortage of both coal and iron ore has led to disruption in supply. The ban on iron ore mining in Karnataka has further aggravated the situation. With raw material situation increasingly becoming more complex, focusing on conversion cost and technology will become that much more important.
  
• Survival of sponge iron industry at stake - The domestic sponge iron industry is largely concentrated in the unorganized sector and has thrived all these years on the back of subsidised coal linkage from Coal India. Production shortfalls, coupled with priority accorded to power utilities, are making coal sourcing an increasingly difficult proposition for non-power consumers such as the sponge iron industry. Coal linkage to the sponge iron industry has already been cut to around 50% (from 80% two years ago). Furthermore, with volumes in the e-auction market stagnating and more power utilities flocking to this market, this coal sourcing window is also becoming increasingly difficult for sponge iron producers. Margins for sponge iron producers also get impacted as the spread between domestic thermal coal (used by them for steel making) and imported coking coal (used by large blast furnace based mills) contract. With thermal coal prices rising in India and international coking coal prices coming off, sponge iron producers would find themselves in a tight spot. As the 24 m tonne sponge iron industry fights a survival battle, there is a window of opportunity for large mills to capture market share.
  
• Increased focus on sales through retail outlets - A strong consolidation theme is already reflecting in a sharp increase in retail sales of all large players. For example Tata Steel reported 46% YoY growth in its retail sales for long products in 1HFY12. While JSW Steel reported 41% YoY growth in 1HFY12 in steel tonnage sold through its retail marketing venture "JSW Shoppe". JSW Shoppe sales now account for 25% of its domestic sales. JSW has rapidly expanded its Shoppe concept and now has 315 retail stores (up from 50 stores in FY09). Other companies such as Essar Steel are also planning significant growth of retail outlets to reach the last mile. This indicates steel marketing in India is in for a paradigm shift and it would lead to market share gains for large steel companies at the expense of unorganised sector.

Conclusion

Indian steel producers have started to adapt to the changing macro economic situation and are focusing more on customers. For example, in Europe, Tata Steel works with an automotive customer 2-3 years before a product launch to understand the client’s requirement. On the other hand SAIL has signed a flurry of deals with international companies like Kobe steel and Posco for technology up gradation. Overall, we believe creating product stickiness will be the key going forward, and these joint ventures are making a step in the right direction to shorten the process of moving up the curve.