Personal Finance: Trapping the old-e stocks

PERSONAL FINANCE: OLD-ECONOMY
Trapping The Old-e Stocks

Old-e companies are planning to re-invent themselves and investors would do well to look at the stocks of these traditional companies.

By Roshni Jayakar

It's a rush for the most frequently used letter in the language. And it is inspired by the eternal quest for valuation. Thus, when Dhirubhai Ambani announced a slew of ice initiatives during Reliance Industries' 26th AGM on June 13, investors scrambled to buy RIL shares. Over the day and the one that followed, the company's scrip was amongst the 10 most traded ones. The stock price touched a high of Rs 346, 0.2 per cent higher than the price it had opened on June 13.

What happened to RIL wasn't an aberration. It was a continuation of a market trend evident as long ago as two months back when Sterlite Industries announced the demerger of its telecom business into Sterlite Telecom, and the amalgamation of MALCO into itself. And when the Tata Electric Companies announced its foray into communications and broadband in early June.

Indeed, not a day goes by without an announcement from an old-e company about its new-e plans. Says Brian Brown, 40, Managing Director and Head (Equities), Salomon Smith Barney: ''Old Economy companies have advantages in terms of cash flows and a strong balance sheet to support and launch new businesses and e-initiatives.'' Nor is this a quintessentially Indian phenomenon. In the US, when GE announced a major foray into e-Commerce, but also took strategic stakes in several new-e start-ups, investors could, in the future, accorded a higher valuation to GE, courtesy its new-e holdings.

That raises a critical issue for much-sinned-against Indian investors. Do they invest in the stocks of those old-e companies adapting to the surge economy? Or do they dismiss announcements about forays into broadband and last-mile access, as initiatives spurred by the herd mentality? After all, India Inc. is known for its predilection to do what is fashionable: be it power in the early 1990s; telecom in the mid 1990s; and infotech in the late 1990s. Explains Dhiraj Agrawal, 31, CEO, Sharekhan.com: ''I have my doubts whether such initiatives per se makes them (old economy scrips) attractive stocks. Time and again, it's been proved that focused investments have given better returns.''

True, but it's hard to resist the temptation posed by the scrips of these companies. Their prices are low; their PE multiples ridiculously so. Have no doubts. By any conventional measure, these scrips are inexpensive. The critical question though doesn't concern this, but the ability of their new-e initiatives to transform the scrips of these companies into growth demons. There the verdict is a trifle discouraging. Says Shyam Bhatt, 29, Fund Manager, Tata Mutual Fund: ''The growth rates of companies that announce e-initiatives won't reach the levels of New Economy stocks. But some of Old Economy stocks are showing dynamism in exploring growth opportunities.'' The investor-import of that blow-hot, blow-cold assessment? They won't be star performers, but there is scope for an increase in the valuation of some of these companies. Adds Jigar Shah, 26, Head of Research, KRC Securities: ''The valuations of a number of the Old Economy stocks have suffered because of an absence of growth. The growth that has been eluding some of these companies could now come back.'' With a slew of old-e plays available cheap, a few companies moving tentatively into the new economy could (you'd better believe it) be great investment options.

What should you pick?

Investors would do well to look for traditional companies in the transformation mode. Like ABB, which is all set to change from a power generation and distribution company to a knowledge-driven software solutions one. Or the newly created Sterlite Telecom, which, apart from looking after Sterlite's optic fibre business, proposes to provide network management services to the corporate and the household sector. Or, they could look at utilities. Across the world, utilities are leveraging their existing infrastructure to carry voice and data. For instance, GAIL, which owns and manages pipelines that serve as the gas-backbone of India, has plans to build a broadband network. These, though, are almost akin to pure new-e plays.

Investors with a partiality for old economy stocks, then, should look for those companies seeking to use the Net and Net-based technologies to lower their costs and improve their efficiencies. RIL is in the process of e-nabling its supply chain; the Gramophone Company of India sells music on-line through www.saregama.com; and FMCG major Hindustan Lever is striving to achieve both supply-and demand-side benefits by using the Net. Says a Mumbai-based broker: ''Given the domain knowledge of these so-called Old Economy companies, they could give these New Economy companies a run for their money if they put their minds to it.'' Significantly, the companies that will find it the easiest to invest huge sums of money in e-nabling their operations are Old Economy companies. The State Bank of India, for instance, has plans to invest between Rs 400 and Rs 500 crore in computerising and e-nabling its operations.

So, in your anxiousness to track ice stocks (and invest in them), don't overlook the stocks of old-e companies that are seeking to re-invent themselves. Some transformations work.

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