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Downturn lends a host of opportunities

B G Shirsat and Samata Dhawade

The current downturn on the stock market has thrown up vast opportunities for long-term investments.

Shares of 170 companies, available at attractive levels, are traded at price to earnings ratios much lower than two years back.

Bucking the market movements, these sample companies have been able to report a sustained rise in the bottomline for the past three years.

The aggregate PE ratio of these companies has slipped under 10 to much below their two-year floor. The PE has more than halved from 23.62 last year and 13.90 in 1998-99.

However, there is a caveat here. The low PE cannot be the only yardstick used to judge them as for some companies, the high earnings-per-share is a result of huge other income. The adjusted PE ratio looks much swollen if one excludes the other income component from net profit.

The current PE is calculated considering the trailing twelve-month EPS for the quarter ended December 2000, to the market price as on April 12, 2001.

While for previous two years, the ratio of yearly EPS to prices at the end of the corresponding fiscal has been considered. The reworked PE is calculated after adjusting the net profit for other income.

BPCL, the public sector petroleum major, which trades at PE of 6.84 times, seems a good bet. Its traditional strengths of strong marketing and distribution networks would see it advantageously placed compared with competitors in a deregulated environment.

Grasim, the cement major, is another one to have bucked the trend. Again, firm cement prices and the company's decision to cut production will see it wind up on a good note. Grasim's net profit has increased to Rs 2.81 billion for trailing twelve months ended December 2000 from Rs 2.33 billion for year ended March 2000.

Pharma major E Merck has been able to put on a good show on the basis of strong fundamentals. Despite this the stock has been trading a PE ratio of 17.62 times, down from 47.65 times two years back.

Its stronghold in vitamins and diversification to other high-margin products such as cardiovasculars would add to the company's kitty.

Aluminium majors, Hindalco and Indian Aluminium have been riding on strong order-book positions for the last four quarters. In expectation of better metal prices, Hindalco, which is trading at a PE of 8.14 and Indian Aluminium, at a PE of 5.23, look very attractive.

Britannia, has been a steady performer with steady bakery and dairy products performance for past few years. Aggressive marketing and product innovation has helped the company to be on a strong footing.

West Coast Paper, benefiting from the upturn in prices during the previous calendar year, is also expected to put on a good show based on order-book position, despite stagnant paper prices.

Hindustan Lever and Reliance Industries are fundamentally very strong companies and therefore, have been able to do well.

Interestingly, BSES, the power distribution major, which has a PE of 8.21, could see a net loss if one excludes other income from the bottomline for the period.

Similarly, Bajaj Auto, the two-wheeler major that has been able to sustain a higher EPS of Rs 43.02, has an inflated PE due to higher other income. Other income for the period was Rs 3.72 billion while the net profit was Rs 4.35 billion.

Others among the automobile sectors such as Escorts and Mahindra & Mahindra have seen a much swollen bottomline helped by other income.

The bear hug at Tata Tea is based on an expected slowdown in tea prices, while below-average performance has put Oriental Hotels on the rough path. Again, the bottomlines of both the companies have been propped by other income.

The lubricants major Castrol has reported good net profit but margins have been under pressure. Sluggish demand from the automobile sector, which accounts for 75 per cent of its sales, has dented its prospects.

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