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Growth
is always assumed to be good, and there is good reason for that.
What good is a business unless it seeks to make its profits get
bigger and bigger, quarter after quarter, year after year and decade
after decade? Profit maximisation is what the whole game is all
about, let there be little doubt. This, in essence, is why news
of growth always gets such a rapturous welcome from businesspeople.
But for investors, news of growth is not always
that simple. This is because it can be interpreted in several different
ways that influence investment decisions. For one, while an economy
may be on a roll, every company need not gain equally, or even at
all, from the general buoyancy so evident all around. Higher commodity
prices, for example, could be good for some firms and bad for others
(such as those firms that use these commodities as inputs). Likewise,
a rise in interest rates could have differing implications for banks,
depending on the nature of the money-making process (some gain from
credit pick up, while others suffer from accompanying declines in
their bond portfolios).
When corporate results come along, it is all
the more important to take a close look at the numbers. Especially
the growth numbers that get bandied about. Some 'growth stocks'
that get tagged popularly as such tend to be overpriced. Some are
firms that have already peaked in their performance, but are selling
high on past growth. To obtain value in such a scenario, investors
have to identify stocks that are not just likely to sustain their
growth, but are undervalued too. Here are some ways to find such
stocks.
QoQ Growth Companies
Take India's famous it companies, for example.
They are consistent in their showing of quarter-on-quarter (QoQ)
growth, and are thus called 'growth stocks'. But the problem is
that everybody who matters knows this, and the market has, therefore,
already priced in the phenomenon. The benefits of the growth, in
other words, are already reflected in the prices quoted on the assorted
stock exchanges.
But it is not the only growth sector in the
economy. The natural question to ask, then, is this: has any such
sector been missed by the market at large? Yes, it turns out, shipping
might be a good QoQ candidate. The past few quarters have been good.
But is this on account of a cyclical increase in shipping rates?
No, says Jigar Shah, Head of Research at KR Choksey Shares &
Securities. Rather, shipping firms are gaining from India's growing
share in world trade, a secular trend, apart from new business in
shipments of LNG (liquefied natural gas). Port privatisation will
be a big boost.
| To obtain value, investors have to identify
stocks that are not just likely to sustain their growth, but
are undervalued too |
"The massive development of port infrastructure
will help shipping companies the way the Golden Quadrilateral helped
automobile companies," says Shah. So, go for leaders such as
Shipping Corporation of India and Great Eastern Shipping. "What
makes them attractive is their current low valuations," adds
Shah.
Turnaround Candidates
Most of the real turnaround (turning from losses
to profits) candidates, as it happens, are from commodity sectors.
This is mostly because of the global increase in commodity prices.
But you must also factor in China's self-induced slowdown and the
fact that many commodity cycles have already peaked. So go for companies
that have started displaying an improved performance after several
quarters of bad news.
The best example for this is Castrol India,
which was able to maintain its positive bottomline in the quarter
ending September 30, 2004, as well. "Though the high crude
prices are a risk associated with it, the return should be good
over a two-to-three year period," says Nimish Shah, Director
and CEO, Parag Parikh Financial Advisory Services.
| The idea is to pick companies that regain
form quickly and return to extraordinary growth in subsequent
quarters |
Low Base Effect Stocks
The main reason for some firms showing slow
growth in this quarter is the 'base effect'. That is, the growth
is not so high only because the previous quarters were so good.
The idea, however, is to pick companies that regain form quickly
and return to extraordinary growth in subsequent quarters.
For example, GlaxoSmithKline Pharmaceuticals.
This is a company that is expected to do well in the next quarter,
having shrugged off a weak phase. Its net profit for the quarter
ending December 31, 2003, was just Rs 15 crore, as against the latest
quarter net profit of Rs 174 crore. With the product patent regime
to be adopted by India in January 2005, research-driven multinational
pharmaceutical firms will benefit vastly, and this company particularly-being
so well established in India. "With greater participation from
the parent-remember, Glaxo does not have the problem of another
100per cent subsidiary-Glaxo is expected to introduce more India-specific
products, just as it did in China," says Murali Krishnan, Director
and Head of Research, Anand Rathi Securities.
Industry-woe Drag Cases
The market is often unfair to individual firms
that are doing well in an industry that is not. Thanks to widespread
industry-wise analysis, the overall woes of an entire sector tend
to drag down the prices of all players in it, including those that
have stayed immune from the sector's broader troubles. The FMCG
(fast moving consumer goods) sector, for example, has been dragged
down because of the 'slow-moving' performance of FMCG behemoth Hindustan
Lever, and a few others. This has hurt FMCG stock prices all across,
including such companies as P&G Hygiene and Health Care, which
has been growing quite well actually for the last several quarters.
With its niche expertise in general health and feminine hygiene,
it is not influenced by other problems associated with the sector
on the whole. Further, its brands Vicks and Whisper still have growth
momentum. Which is why Shah of Parag Parikh Financial Advisory Services
says: "This stock is a good pick for long investors."
Other Income Sufferers
Profit growth figures are profit growth figures.
They count. But they fail to present an accurate picture of the
actual business' health when 'other income' has a big role to play
in the results. For example, the net profit of Neyveli Lignite Corporation
has fallen by Rs 98 crore (or 26 per cent) this quarter only because
of its other income component, which took a Rs 298-crore tumble.
But the company's operations aregoing strong. It has firmed up a
plan for several new power projects (a 1,000-mw project in Tuticorin,
Tamil Nadu, and a 2,000-mw one in Orissa, to name just two) to make
the most of India's power sector liberalisation.
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