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Stocks / Cover Stories MAGAZINE | NOV 17, 2010

COVER STORY

5 Cool Stocks In A Hot Market
Even with the market on fire, here are a handful of stocks that could give investors good returns in the longer term
KUMAR GAUTAM , RAJESH KUMAR

R etail investors, hoping to make money quickly, typically find it difficult to resist the temptation to buy shares when
the stockmarket is rising. That temptation, anecdotal evidence suggests, is even stronger now than before as many of
them missed the rally over the last year waiting for a correction to enter the market. However, the fundamental problem
with investors in such a market is that they tend to pay too high a price for the estimated growth of the companies they
invest in, assuming, of course, that the companies can deliver according to expectation. Therefore, in conditions like
these, safety of investment assumes greater importance than commonly perceived.

It has been written at length, both in this magazine and elsewhere, that the current rally in the equity market is, to a very
large extent, being driven by liquidity in the global markets. The more money central banks around the world print to
boost their own economies, the greater is the inflow into markets like India. With the market at its current level, most
stocks have seen substantial appreciation and their prices are either on the edge of reason or beyond. One option for the
retail investor trying to enter this market, therefore, is to wait for a correction to enter the market, in other words, try to
time it. To get it right, however, the retail investor would need a liberal helping of luck, even though one school of thought
strongly believes that the stockmarket is likely to see deep cuts.

The other option is to look for value and find stocks with upside left even in this market. But one needs to be careful about
fundamentals and track record. The second exercise is what we have undertaken, and here are five good medium- to
long-term buys.

Jyoti Structures

Strong businesses are built, normally, when challenges are converted into opportunities. It is an accepted fact that
infrastructure is the biggest impediment to achieving the desired double-digit growth in India, and power shortage has
long been responsible for a low level of manufacturing activity. Thankfully, the government is taking the matter seriously
now. Activity in the sector has also gone up significantly with private sector entering the business. To put this in
perspective, India will require additional power supply of 100,000 MW by 2017 and, according to plans, an estimated Rs
2,40,000 crore will be spent on the sector during the Twelfth Five-year Plan period. It makes perfect sense for the

http://money.outlookindia.com/printarticle.aspx?267863 24-Nov-10

Nevertheless. it makes a strong case for a buy. In the following years. has not just helped reduce costs. roughly twice its fiscal year (FY10) revenue. The most critical factor for Shree Cement is its venture into the power business. 82 per cent is from domestic companies. in the down cycle. in topline and bottomline. the industry has struggled to achieve high bottomline growth. With the growth drivers in place. and in FY10 this contributed around 14 per cent of the company’s revenues. the gestation period of capacity addition is low. which reduces freight cost. However. From the order book of Rs 4. which help it react quickly to demand surge and avoid idle capacity. the industry’s capacity utilisation went up from fiscal year 2003 (FY03) to FY08. it will be impacted less. In the market. to grow the profit. Shree Cement The problems affecting the cement industry are well- established.69 per cent. and with a strong order book.outlookindia. The company also has the advantage of proximity of its plants to the market. 21 per cent distribution. which is now the highest compared to its peers. Several factors have allowed it to do so. the fact that it sitting on an order book of over Rs 4. should give confidence to investors about its future. which now meet the entire power needs of the company. It has proved its credentials by clocking a five-year compounded annual growth rate (CAGR) of 35 and 50 per cent. the realisation for the industry declined. Outlook Money in the past has recommended two companies in power sector financing business—Power Finance Corporation and Rural Electrification Corporation. The volatile price of power and fuel. Shree Cement now sells excess power on merchant basis (market-determined price). a price- to-earnings ratio of 14 is not too much to pay for its shares. has delivered strong growth both during the upturn and the downturn of the cement cycle despite all these risks. Despite a strong correlation between demand for cement and economic growth. Also. In terms of verticals. First. An overcapacity. as Shree Cement’s market is mainly north India. FY 09 and FY10. the company rapidly ramped up its production facility to boost its topline. the realisation for the company is high compared to players in other regions. in the business related to the power transmission sector. The company works in areas of transmission lines. This suggests that even as the company can bank on construction activities in the economy. The company remains upbeat on the further flow of orders. while the net profits increased by 17. respectively. respectively. a public sector distribution company. 68 per cent would be transmission. sub-stations and setting up distribution networks. which has traditionally been a high-value market. the company’s revenues were up 16. The topline and bottomline rose annually by 27 per cent and 61 per cent. http://money. a mid-sized company. respectively.000 crore. This time we highlight Jyoti Structures. it will cushion Shree Cement’s earnings in the cement downturns. because of a utility business such as power.30 per cent.aspx?267863 24-Nov-10 . contributes about 35 per cent of the orders. is certainly the biggest problem. It is working towards commissioning more capacity. Shree Cement.com/printarticle. with the capability to execute turnkey projects in all areas of power distribution. proven track record and earning visibility. Building captive power units. On the domestic side.106 crore. Shree Cement’s growth figures were still attractive during this period. further makes it difficult to maintain margins.outlookindia. north India’s largest cement producer. In the quarter ended June 2010. but will also help it in times of downturn in the industry. Also. but also took care that the margins continue to improve. All these years. while the rest will come from sub-stations. Overall. Power Grid Corporation of India. which brings down the cement price and thus the margin. and when the power business becomes a significant part of the overall business.business.com | 5 Cool Stocks In A Hot Market Page 2 of 5 investors to be part of this huge opportunity to enhance long- term gains. Shree Cement also benefitted from it and reported around 34 per cent and 107 per cent growth in total income and profit. which are the major costs for cement companies. the stock is currently trading at 12 times earnings.

ADS managed a topline growth of 26 per cent. anecdotal evidence such as freezes in hiring and salary cuts suggest so. which is 70 per cent of the revenue. respectively. it was not impacted much by pricing pressure in the downturn. Sales and markets support bundles services such as competitive pricing and catalogue analytics and data management. as the company focuses more on high- margin value added services to its customers. It hired more that year (almost 30 per cent rise in headcount) and the revenue went up by 62 per cent. its growth in rupee-terms remains attractive even after shedding few basis point growth on account of currency movement. It does indicate eClerx’s differential nature of business in a cluttered IT industry. when volume growth of the overall IT industry was low. the stock certainly looks undervalued at a price-earnings multiple of eight. Services under financial services head include back office services. Between FY07 and FY10. and enterprise consulting solutions. the company is expected to report high growth. Most of their revenues come from exports and if the rupee appreciates against any of the major currencies. finance and accounting and risk management. their revenue in rupee terms is hit hard. ADS has over two decades of experience in providing IT services to its clients across several domains and geographies. or a CAGR of 64. In the coming quarters. the company had a cash balance of Rs 180 crore.outlookindia. IT services is categorised under verticals such as infrastructure management services. process and data management services is divided into two verticals—financial services and sales and marketing support. among others.outlookindia. which improved in the past few quarters. EClerx Services One parameter that went into selecting stock recommendations for this issue was to judge a company’s performance even in bad economic conditions. such as dollar or euro. The bottomline increased at a similar pace. A higher growth in profit of 38 per cent indicate that unlike other IT companies. The company boasts of servicing 13 of the Fortune 500 companies. and that helped it in taking inorganic routes to growth.40. What has really differentiated its services from that of other KPO companies is that they support the core activities of the clients that are non-discretionary in http://money. if a company has delivered high volumes. networking and communication solutions. the management has said the order book is to the tune of Rs 565 crore. which is over two quarters of total revenue. In FY09. Company’s focus on domestic market. The services provided by ADS are similar to other IT companies. At the end of Q1FY11.and bottom-line growth in rupees. However. In Q1FY11. but it has managed to deliver superior growth rates.30 per cent and 78 per cent growth in total income and profit. In post Q1FY11 analysts’ conference call. One reason that allowed it to grow was that it took the inorganic route to growth. Though there is no industry-specific data to support this as most of the players are not listed. the total income has increased over fourfold from Rs 156 crore to Rs 697 crore. is expected to improve further. and eClerx Services—a knowledge process outsourcing (KPO) services provider—stood out on it.aspx?267863 24-Nov-10 . eClerx’s analytics. it was an interesting time for eClerx. around 70 per cent of revenue was generated domestically whereas 30 per cent came from exports to geographies such as the US and Australia. With its annualised earnings-per-share for FY 11 is estimated at Rs 28 and price of its share of Rs 224. The margin. However. And that is the case of IT services provider Allied Digital Services (ADS). But even if performance of the subsidiaries is ignored. remote management services. which was reflected in high growth figures on the consolidated income statement. Its growth is impacted by currency movements.com | 5 Cool Stocks In A Hot Market Page 3 of 5 Allied Digital Services Managing currency volatility has now become the norm for information technology (IT) companies.com/printarticle. in FY10 the company reported 32. was the major reason for it to sail safely through recession in the developed nations. The KPO industry was in the doldrums in 2009. but high volume growth has ensured attractive top .71 per cent.business.

outlookindia. Plastics consumption was up 16 per cent in India in FY10. or in the short term. The company also has a strong track record of paying dividends. These factors add an element of stability and predictability to its revenue. and with total installed capacity around 1. in the last five years. at an annualised EPS of around Rs 40 and price of Rs 597. However. That. in the short term. construction to consumer durables. and it got listed on the exchange as recently as 2007. Also. So. as we did not want to end up with small names. established in 1942. eClerx didn’t lose its business. too small to trade and track.8 crore to Rs 246. during the financial crisis of FY09 and FY10. Therefore.2 million tonnes. It has shown a phenomenal growth in the past few years. has registered revenue and net profit growth of 12 and 35 per cent CAGR. Plastic is one such example. PVC consumption was 1. coupled with the fact that they are still available at reasonable valuations means that their prices may not appreciate substantially tomorrow. The profitability ratio. the company is investing in capacity creation and intends to move up the value chain. All of which makes it an ideal buying option for the medium and long terms. while the net profits registered a jump of 103 per cent. The company. the company plans to introduce budget-level plumbing solutions which are fit for single storied building. demand clearly outpaced supply. consumer products. To the capture the opportunity. is probably more difficult today than ever. derives revenue mainly from four verticals—plastic piping systems. with rising economic activity. to grab the rural market. The reason probably is that their growth is derived. were desperately restructuring. as in the past five years. respectively. such as return on equity. or were acquired by stronger ones. Further. Our search began with first putting a lower limit of `500 crore market cap for the companies we looked at. a PE level of 15 is still attractive enough for you to buy the stock. The Way To Go Our research indicates that these five companies are inherently strong. eClerx undertakes projects that are 2 -3 years long. the company plans to invest Rs 180 crore for this. Supreme Industries. sales were up 37 per cent. Supreme Industries With rising activity in the economy. How We Did It Finding undervalued stocks. and are on an annuity basis. this stock is still available at about 12 times earnings.5 crore in FY10. especially when too much money is chasing too few stocks. From industrial production. eClerx just has a decade’s experience.8 million tonnes. To grow the invested capital. investors should enter these companies with an investment horizon of at least three years. the investor will have to take a long-term view on these companies. One concern while investing on this counter could be the sharp runup in stock prices. In the quarter ended September 2010. the gap could widen. an indication of a stable financial position. with a proven track record. Another factor that differentiates the company is the nature of contracts it undertakes. The company also used the opportunity during the downturn to attract the best talents in the industry. industrial products and packaging products—with piping contributing the highest at 43 per cent. During this period the profit grew at 32 per cent. too. There is also the possibility that these stocks. it is focusing on its pan-Indian retail network. the well-established brand in plastics. Supreme. with 19 production sites. is also high at 40 per cent. which has more than doubled over the last one year. You can rest assured that the company’s stock has gained attention from investors. there are a few industries that do not attract sufficient investor attention. Going forward. It expects the replacement market to gain prominence in the coming years as more and more buildings go for renovation. the revenue rose at a CAGR of 51 per cent from Rs 47. there is no saying what will happen. For.com/printarticle. In fact. if we ignore the charts. The balance sheet is liquid with no debt and high amount of cash. Barring that worry. even as many of eClerx’s clients in the banking industry went under.outlookindia. companies have been subject to all the conditions of a business http://money. most of them are repeat projects from the existing clients.com | 5 Cool Stocks In A Hot Market Page 4 of 5 nature.aspx?267863 24-Nov-10 . and has moved up 63 per cent in the past 12 months. However. Most of the companies in the KPO industry get revenue from projects that are short-term in nature and comes at inconsistent intervals. would correct in the event of a wider market fall. is well poised to reap the benefits. We than looked at five-year financial performances for consistency. In the current fiscal. It also avoids “request for proposal” route to win projects. plastics play a vital role. From 2006 onwards.business.

aspx?267863 24-Nov-10 .com/article. we are still excluding some names from this list as they have recently been figured as our picks of the fortnight.com/printarticle. However. Simultaneously.outlookindia.business.outlookindia.com.outlookindia.com http://money. rajeshkumar AT outlookindia.com | 5 Cool Stocks In A Hot Market Page 5 of 5 cycle. After a looking at softer issues like management. to avoid even good companies at bad prices.aspx?267863 ABOUT US | CONTACT US | SUBSCRIBE | ADVERTISING RATES | COPYRIGHT & DISCLAIMER http://money. we also kept an eye on the valuation of the stock and compared it to the company’s performance. kumargautam AT outlookindia. a final list was arrived at.