35136643 - The Hunt for Value India

8/6/2019 35136643 - The Hunt for Value India

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TheHuntforValueStock market veterans say that time may be right to look forlow-price-high-value stocks. Here’s how to go about it.RACHNA MONGA

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Chandrakant SampatInvestor

“Value can emerge only if

there’s capital formation acrossthe economies”On the markets: I am staying away from this mar-

ket. I have stayed away from it since 2004. I am

keeping 70 per cent of my

assets in cash and thebalance in stocks. There

is going to be a big

change of regime.

Capitalism will not be the

same again. The notion of

having free markets may

cease to exist.

What now?Value can emerge if

economies are able to

earn more than the

current cost of capital,which is not happen-

ing now. Today, we

are only seeing capi-

tal being transferred

from one hand to

another hand.

Chetan ParikhDirector, Jeetay Investments

“Prices won’t collapse or touch groundzero except in the unlikely situation offinancial system collapsing”On the markets: Stocks are trading at a price that is like

buying a risky bond at a high and uncertain income stream. But

this price discount isn’t in isolation. It’s the price you pay for the

underlying fundamental value of the company.

What now?If you don’t buy stocks now, then it may be difficult to jump on

the bandwagon when the sentiment changes for the better. If you

can get a better value elsewhere, then why not sell at a loss and

get into something which offers better potential?

TIME TO BUY India’s top value investors evaluate the market and investing strategy.

P H O T O G R A P H S B Y U M E S H G

O S W A

M I



C

RICKET AND THE STOCK

market are hogging theheadlines these days, theformer for its highs and

the latter for its lows. Andboth hold the promise of greaterexhilaration for the average Indian.So, while the Indian cricket teamlooks like recording its biggest everTest series win against the Aussies,the incessantly falling stock mar-ket is creating excellent buying op-portunities for investors despite thegut-wrenching uncertainty.

Indeed, the carnage on DalalStreet has been unprecedented.

Large-cap stocks have lost 57 percent, mid-caps 69 per cent and smallcaps 73 per cent from their peaklevels in January. Investors whotook the plunge in the stock marketseither directly or through mutualfunds two years ago feel cheated

as stock values aredown to their twoyear-lows. Thewealth created

over the lasttwo yearshas gone upin smoke.People arerunning forcover and tak-ing shelter inother asset classessuch as gold and fixeddeposits. Nobody knowswhen all this will end.

But ironically, it’s the severityof the fall that has made stocks thatmuch more alluring. They are nearlyas cheap now as they were fiveyears ago when markets were justentering the longest bull-run in theIndia stock market history. The

price to book value—the basicvaluation parameter that

is obtained by dividingthe book value of a

company by its stockprice—of the large-cap stocks that makeup the Sensex andthe Nifty, has nowfallen to its May 2003

levels. The mid-capstocks and the Top-100

companies by market cap-italisation are also trading at

price to book values that are closerto their 2003 levels.

India’s top value investors seeenormous opportunities at presentfor picking stocks at a huge dis-count. “It’s the uncertainty andpanic that causes good prices toemerge as investors tend to overre-act to every news flow. My sense is

Parag ParikhChairman, Parag Parikh Financial Advisory Services

“Opportunities don’t come everyday.But people are nursing their wounds”On the markets: The markets were in (such) a state of

frenzy that (they) couldn’t carry on for long. We did not

allow clients to take risks that would wipe out their

capital. This has a lot to do with behavioural finance.

What now?The current market situation does offer better value. But

the human mind only sees the present and goes with the

herd, and tends to ignore the value on offer. The loss

aversion in the market is huge simply because

everybody else is doing the same.

Bharat ShahCEO & Managing Partner, ASK Investment Managers

“Those who can see value aren’t

participating because they cannotstomach a temporary downturn”On the markets: The current state of the markets ismuch like what Warren Buffett described the US

stock markets as in 1974—“Like an

oversexed guy in a harem.” I can see value

all around. It’s bizarre to see reasonable

businesses now trading at P/E multiples of

merely 2-4. Also, I can’t recollect the last

time we saw a market-cap to GDP ratio of

about 0.55 times.

What now?Prices can still go down

further because of a

sentimental backlash. But

look at it this way. In a

situation where credit andasset markets were

squeezed, only the equity

markets provided liquid-

ity. There is a real

value lying around

and if you don’t buy

in these times, itmeans you don’t want

to invest.



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THE VALUEHUNTER’S GUIDEFive reasons why you should do avalue check before jumping in.

■ A depressed stock price doesn’t

guarantee value. Price is what you

pay and value is what you get

■ A low price to earnings or priceto book value ratio is just one of

the indicators of hidden value

■ Special situations or events can

lead to one-time value unlocking,

but financials of the company will

tell you if there is a long-term

value in store

■ Historically, stock prices tend to

hover nearer to the mean. At

present, the market P/E is at

undervalued levels

that unless there is a completebreakdown of the financial system,markets will soon bottom out,” saysChetan Parikh, Director of JeetayInvestments and an ardent followerof Warren Buffett and his invest-ment principles. He believes thatthe prices at which stocks are avail-able today are as good as buying arisky bond with a high but uncertainincome stream. He has a word of caution, though: “Price by itself hasno meaning. You have to look at theunderlying value in the companyvis-à-vis its market price.”

Bharat Shah, CEO & ManagingPartner at ASK Investment Managersand a former mutual fund man-ager, echoes Parikh. He says: “Itisn’t as if the fundamentals of com-panies have deteriorated. But whenirrationality takes over, then finding

the bottom becomes mere guess

work.” It’s bizarre to see reason-able businesses of decent sizes, prof-its and reasonable track record be-ing available at earnings multipleof two to four times, he adds.

But not all value investors aregung-ho about valuations. “I amstaying away from this market. I

have stayed away from it since 2004.I am keeping 70 per cent of myassets in cash and the balance instocks. There is going to be a bigchange of the regime. Capitalismwill not be the same again. Thenotion of having free markets maycease to exist,” says octogenarianChandrakant Sampat, a well-knowninvestor with a sizeable followingin the investment fraternity. He be-lieves that value can only emerge if there is capital formation acrosseconomies and they are able to earnmore than the current cost of capital.

Look for True ValueValue picking doesn’t mean buy-ing stocks that have seen the steep-est falls. Many stocks have sufferedbecause foreign institutionalinvestors, which held large stakes in

them, resorted to distress selling

DEEP VALUE STOCKSHere are a few stocks that could offer value for money.

Valuation Benchmark

Company Price (Rs)* 1-yr target Upside (%) Current Historic Gap (%)

TV Today Network* 61 95 56 EV/E 2.8 8.1 -65

INVESTMENT RATIONALE: Maintaining leadership in Hindi news genre; subscription revenues to drive future profit growth

Glenmark Pharma 482 738 53 P/E 13.4 17.3 -22

INVESTMENT RATIONALE: Great management, almost certain 40 per cent EPS CAGR through 2010-11

Shree Cement 480 692 44 EV/te 32 49 -35

INVESTMENT RATIONALE: Fair value at conservative EV/te of Rs 2,688; still at discount to peers

Grasim 1,500 2,104 40 EV/E 3 4 -25

INVESTMENT RATIONALE: Cement at significant disount to peers, robust volume growth likely

Cairn India 183 260 43 DCF NA NA NAINVESTMENT RATIONALE:Trading at implied long-term crude price of $53/bl versus estimates of $75/bl

HDIL 134 179 34 DCF NA NA NA

INVESTMENT RATIONALE: Factoring in only three high visibility projects; trading at book value of 1x

OBC 168 220 30 P/BV 0.66 0.94 -30

INVESTMENT RATIONALE: Trading close to historical lows despite stable earnings outlook

Tata Steel 305 390 28 EV/E 3.5 3.9 -11

INVESTMENT RATIONALE: Steep valuation discount to global and domestic peers, reducing leverage,impressive ROE

Source: ICICI Securities’ report dated October 15, 2008 * Stock prices as on October 14, 2008EV/E: Enterprise value to earnings P/E: Price to earnings EV/te: Enterprise value per tonneDCF: Discounted cash flow P/BV: Price to book value ROE: Return on equity

*Living Media, the parent company of Business Today, is the majority shareholder and promoter of TV Today

R A M E N S A R K A R



bt money

that has pulled down their stock

prices, but that doesn’t mean that

their business prospects have wors-

ened. However, many other stocks

have fallen simply because they

were genuinely overvalued.

According to Jeetay’s Parikh,

350 stocks are quoting below their

book values, or at a price to book

value ratio of less than one. Theprice to book value is a key param-

eter for identifying a stock’s inherent

value. Value can also be determined

by looking at whether the company

is generating sufficient cash to help

it sustain the downturn; whether

its sales and profits are showing a

consistent growth and whether it

has a high dividend yield and a track

record of paying regular dividends.

A company may have inherent

value if it holds a significant in-

vestment in another unlisted com-

pany that may go public anytime

and that could unlock value for

the former; or if it owns large tracts

of land whose market value is not

reflected in the balance sheet. An

indication of a possible exit by a

large institutional investor who

came in during the initial phase of

growth could possibly increase the

valuations for minority investors; or

an indicat ion of demerger of

unprofitable business units could

bring out the hidden value.

ASK’s Shah says he also looks

at a company’s corporate gover-

nance norms and the ability of its

management to allocate capital ef-

ficiently. “There have been instances

when a company’s management has

displayed poor capital allocation

skills. It didn’t have an understand-

ing of how to allocate across variousbusinesses in an efficient way. As

money was easily available, people

became footloose about the way

they allocated it,” he says. While

screening stocks, he looks at a com-

pany’s sources of income rather than

its assets, its earnings visibility, abil-

ity to sustain growth, and the size of

its bottom line (it should be Rs 75

crore or above to qualify as a long-

term contender in his portfolio).

Jeetay’s Parikh says that in a

tough market such as the current

one, he also checks out the actions

of the promoters—any dumping of

their stakes in a bad market may

not be a good sign.

Parag Parikh, Chairman of Parag

Parikh Financial Services, a

Mumbai-based broking and port-

folio management firm, believesthat cash-rich companies and those

that are consumers of commodi-

ties will be favoured in this mar-

ket. He also recommends stocks

with high dividend yield. “It helps in

overcoming investors’ bias towards

a fixed deposit as they can substitute

the high fixed deposit rates with

the high dividend yields,” he says.

Brokerage firms, too, are rec-

ommending stocks based on their

“value proposition”, instead of their

earnings estimates as they did earlier.

On October 15, ICICI Securities rel-

eased a report titled The Sale Is On,

which recommends seven deep

value stocks across media, pharma,

cement, oil and gas, real estate,

banking and metals sectors. A CLSA

report of October 6 talked about

“bedrock analysis”, which considers

the worst-case scenario for earn-

ings and stock valuations and arrives

at a bedrock value of top stocks

under its coverage.

Benjamin GrahamBuffett’s late mentor andau-thor of Security Analysis andThe Intelligent Investor

■ Focus on today’s assetvalues and not unreliableearnings forecasts

■ Think like a business ownerand don’t overpay

■ Special situation investingis not correlated withthe market

Warren BuffettCEO, Berkshire Hathaway

■ A sound management

■ The incentives ofthe promoters

■ Focus on earningscapability

■ Know the busi-nesses youare investing in

Phil FisherLate author and stockinvestor

Scuttlebutt approach:

Listen to thebusiness grapevineand get hooked intothe company’secosystem to get anidea about itsstrengths. Check withsuppliers, end-usersof the company

Charlie MungerVice Chairman,Berkshire Hathaway

■ Keep a checklist ofwhat you are lookingfor in the company—for example, does ithave a competitiveadvantage, and so on

■ Use mental modelto understandbusinesses andthe price

GURU SPEAK Key takeaways from legendary investors.



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35136643 - The Hunt for Value India