Opportunity for long-term investors

STOCK DOCTOR

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Opportunity for long-term investors

THE fact that the announcement of big ticket reforms like FDI in retail, Cabinet approval of the Company Law Bill, restructuring of the AI loan by the RBI and signs of moderation in inflation failed to cheer the markets indicates how depressed the market sentiment is. The reason may be traceable not only to the depressing international scenario with weak global risk appetite but also the deteriorating fundamentals of the Indian economy.

The expectation that the gloom in the West will turn out to be a boom for us is fast disappearing due to the investors’ apprehension of widening fiscal deficit that is likely to far exceed the government’s projection of 4.6% with growth likely to take a severe beating. The fiscal deficit for the year can go past 5.5% with real GDP growth slowing to less than 7%, prompted by already slipping IIP numbers. The impact of the widening deficit is already being reflected in the rapid depreciation of the rupee that is going to make matters worse regarding inflation, interest rates and growth. The steady fall in exports, rising imports, declining capital inflows, rising subsidy burden and contracting revenues have all been adding to the woes of the government. The RBI may not even pause regarding the rate hikes unless the international scenario turns disastrous.

Poor risk management of corporate India can further lead to heightened

volatility in stock prices in the days to come, accentuated by large

quantities of pledged shares.

All this will get reflected in poor corporate results in the quarters to come, as indicated by the steep downgrades of earnings by all the leading analysts. Poor risk management of corporate India can further lead to heightened volatility in stock prices in the days to come, accentuated by very large quantities of pledged shares, FCCBs and foreign currency loans in the books of Indian companies. So what happened with Bilcare may well happen with many other stocks. The redemption pressure on funds is compelling them to book profits wherever they can and they are preparing for anticipated future redemptions so long as the European crisis is not getting resolved.

The market is therefore likely to remain bearish for at least another couple of quarters. Lack of depth and investors’ unwillingness to take a call due to continuing uncertainty and expectation of more bad news flowing in can see stocks declining sharply even with small bouts of selling. The overall risk for the markets are higher than they were at the time of the Lehman collapse due to the sheer impact of the possible default by several nations, the sums involved and the difficulties in handling the scenario emerging out of it all. The domestic situation is also worse than what it was in 2008, looking at the political, economic and corporate scenarios. Some of the sectors are struggling to keep afloat and may have serious repercussions for the financial system of the country.

Such a scenario offers an excellent opportunity to those interested in building a long term portfolio of quality stocks. Investors are advised to look for quality mid cap stocks that have been severely beaten down with those companies that have robust business models, are not leveraged, and are run by quality managements who have not pledged their shares. g

Stock Shop

BY RAKESH BHARDWAJ

Orissa Minerals Development Company (OMDC)

(CMP Rs 37,000)

OMDC, a government-managed company, has six mines with reserves of 206 million tonnes of iron ore and 44 million tonnes of manganese ore. A re-assessment expects the reserves to double. Though currently not in operational stage, it is expected that two mines will get operational before December-end whereas the issue of one mine will be taken up by the Environment Ministry in the same month. The mining leases of all the mines are expected to be in place by April 2012.

OMDC is an indirect subsidiary of the second-largest steel PSU, RINL, which doesn’t have a captive raw material base and thus OMDC fits perfectly into the scheme of things. A stock split and bonus could be in the offing, which will help in realizing the true value of OMDC’s shares. The fact that the stock split was deferred at the board meeting on November 18 led to a crash in the stock price, offering an excellent opportunity to grab the stock to all long-term investors. OMDC is trading at EV/ton of $1.8, whereas the largest miner, NMDC, is trading at EV/ton of $6.

The author has no exposure in the stock recommended in this column. gfiles does not accept responsibility for investment decisions by readers of this column. Investment-related queries may be sent to editor@gfilesindia.com with Bhardwaj’s name in the subject line.