Friday 31 October 2008

Index stocks hit in October mayhem offer good long-term potential

Frontline stocks that have been beaten down badly in the October mayhem may offer good long-term potential for investors willing to stick their necks out and buy them at attractive valuations, analysts and equity experts say.

Many of these stocks such as Bharti Airtel, BHEL, Hindustan Unilever, are fundamentally strong companies with sound management in fast-growing areas of the company, they add.

"We like stocks like RIL, Bharti Airtel, HDFC Bank, BHEL and GAIL. Though the downside risk is linked to the market, these companies have solid business fundamentals. They are leaders in their respective businesses and have the ability to deliver," Rajat Rajgarhia, head, institutional research, Motilal Oswal.

"All the banks in the Sensex like SBI, ICICI Bank, HDFC bank, IT stocks such as Infosys and RIL have fallen significantly and have the least downside risk," says Dipen Shah, vice president, private client group of Kotak Securities.

For example, Bharti Airtel has lost 38% in the last one year and is trading at 11 times FY10 estimated earnings. This is below its historic price to earnings multiple band of 14-24 times. But the outlook for the business is robust as the company has highest earnings visibility in the sector and there are new growth drivers such as 3G spectrum and tower business, said a recent report by Motilal Oswal.

On the other hand, BHEL is down by 55% in a year trading at 10 times FY10 estimated earnings but provides strong business visibility with order book to sales ratio of more than 3 times. It is also a leading player catering to the power and industrial machinery. Risk-reward ratio is favourable and any further corrections in the above stocks will be unwarranted, some experts add.

Though Indian equity markets have gained more than 10%, the markets may be far from bottoming out. The gains could be an aberration and markets could see some correction before stabilising. "Market gains this week was just a technical bounce back following several recent positive developments," says Mr Shah. He expects markets to correct and touch the 7,800-8,000 levels in the short term.

"There is a high probability of markets seeing further lows of 6500-7000 as US problems are still not over, Dow Jones has still not seen last of its fall and FII (foreign institutional investors) selling in global markets especially in the emerging market like ours has still not ended," adds Amar Ambani, vice-president-equities, India Infoline.

However, some feel that stocks are now almost close to the bottom. "If liquidity infusion in the global markets and also in India continues and international markets stabilise (which is likely after few more weeks), our markets could see second round of re-rating," adds Sandeep Shenoy, strategist, PINC Research.

Some of the stocks preferred by the above-mentioned experts:

** HUL: (-17% in six months) (-5% in one year). Diversified and interest rate non-sensitive businesses is the main reason for the interest in the stock.

Source: EconomicTimes

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DISCLAIMER: The author is not a registered stockbroker nor a registered advisor and does not give investment advice. His comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity, index or any other financial instrument at any time. While he believes his statements to be true, they always depend on the reliability of his own credible sources. The author recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and that you confirm the facts on your own before making important investment commitments.