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The Hunt
RACHNA MONGA
Investor
PHOTOGRAPHS BY UMESH GOSWAMI

for Value
Chetan Parikh
Director, Jeetay Investments

Stock market veterans say that time may be right to look for low-price-high-value stocks. Heres how to go about it.

TIME TO BUY Indias top value investors evaluate the market and investing strategy.
Chandrakant Sampat

Value can emerge only if theres capital formation across the economies
On the markets: I am staying away from this market. I have stayed away from it since 2004. I am keeping 70 per cent of my assets in cash and the balance 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.

Prices wont collapse or touch ground zero except in the unlikely situation of financial 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 isnt in isolation. Its the price you pay for the underlying fundamental value of the company.

What now?
Value can emerge if economies are able to earn more than the current cost of capital, which is not happening now. Today, we are only seeing capital being transferred from one hand to another hand.

What now?
If you dont 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?

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BUSINESS TODAY NOVEMBER 16

2008

RICKET AND THE STOCK

market are hogging the headlines these days, the former for its highs and the latter for its lows. And both hold the promise of greater exhilaration for the average Indian. So, while the Indian cricket team looks like recording its biggest ever Test series win against the Aussies, the incessantly falling stock market is creating excellent buying opportunities for investors despite the gut-wrenching uncertainty. Indeed, the carnage on Dalal Street has been unprecedented. Large-cap stocks have lost 57 per cent, mid-caps 69 per cent and small caps 73 per cent from their peak levels in January. Investors who took the plunge in the stock markets either directly or through mutual funds two years ago feel cheated

as stock values are down to their two year-lows. The wealth created over the last two years has gone up in smoke. People are running for cover and taking shelter in other asset classes such as gold and fixed deposits. Nobody knows when all this will end. But ironically, its the severity of the fall that has made stocks that much more alluring. They are nearly as cheap now as they were five years ago when markets were just entering the longest bull-run in the India stock market history. The

price to book valuethe basic valuation parameter that is obtained by dividing the book value of a company by its stock priceof the largecap stocks that make up the Sensex and the Nifty, has now fallen to its May 2003 levels. The mid-cap stocks and the Top-100 companies by market capitalisation are also trading at price to book values that are closer to their 2003 levels. Indias top value investors see enormous opportunities at present for picking stocks at a huge discount. Its the uncertainty and panic that causes good prices to emerge as investors tend to overreact to every news flow. My sense is

Bharat Shah
CEO & Managing Partner, ASK Investment Managers

Those who can see value arent participating because they cannot stomach a temporary downturn
On the markets: The current state of the markets is much like what Warren Buffett described the US stock markets as in 1974Like an oversexed guy in a harem. I can see value all around. Its bizarre to see reasonable businesses now trading at P/E multiples of merely 2-4. Also, I cant recollect the last time we saw a market-cap to GDP ratio of about 0.55 times.

NISHIKANT GAMRE

Parag Parikh
Chairman, Parag Parikh Financial Advisory Services

What now?
Prices can still go down further because of a sentimental backlash. But look at it this way. In a situation where credit and asset markets were squeezed, only the equity markets provided liquidity. There is a real value lying around and if you dont buy in these times, it means you dont want to invest.

Opportunities dont come everyday. But people are nursing their wounds
On the markets: The markets were in (such) a state of frenzy that (they) couldnt 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.

NOVEMBER 16

2008

BUSINESS TODAY

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DEEP VALUE STOCKS

Here are a few stocks that could offer value for money.
Company TV Today Network* Price (Rs)* 1-yr target Upside (%) Valuation Benchmark Current Historic Gap (%)
RAMEN SARKAR

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 Shree Cement Grasim Cairn India HDIL OBC Tata Steel
INVESTMENT RATIONALE :

482 480 1,500 183 134 168 305

738 692 2,104 260 179 220 390

53 44 40 43 34 30 28

P/E EV/te EV/E DCF DCF P/BV EV/E

13.4 32 3 NA NA 0.66 3.5

17.3 49 4 NA NA 0.94 3.9

-22 -35 -25 NA NA

THE VALUE HUNTERS GUIDE

Five reasons why you should do a value check before jumping in.

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

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

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

A depressed stock price doesnt guarantee value. Price is what you pay and value is what you get A low price to earnings or price to 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

INVESTMENT RATIONALE:Trading at implied long-term crude price of $53/bl versus estimates of $75/bl

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

-30 -11

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

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, 2008 EV/E: Enterprise value to earnings P/E: Price to earnings EV/te: Enterprise value per tonne DCF: 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

that unless there is a complete breakdown of the financial system, markets will soon bottom out, says Chetan Parikh, Director of Jeetay Investments and an ardent follower of Warren Buffett and his investment principles. He believes that the prices at which stocks are available today are as good as buying a risky bond with a high but uncertain income stream. He has a word of caution, though: Price by itself has no meaning. You have to look at the underlying value in the company vis--vis its market price. Bharat Shah, CEO & Managing Partner at ASK Investment Managers and a former mutual fund manager, echoes Parikh. He says: It isnt as if the fundamentals of companies have deteriorated. But when irrationality takes over, then finding the bottom becomes mere guess

work. Its bizarre to see reasonable businesses of decent sizes, profits and reasonable track record being available at earnings multiple of two to four times, he adds. But not all value investors are gung-ho about valuations. I am staying away from this market. I

have stayed away from it since 2004. I am keeping 70 per cent of my assets in cash and the balance in stocks. There is going to be a big change of the regime. Capitalism will not be the same again. The notion of having free markets may cease to exist, says octogenarian Chandrakant Sampat, a well-known investor with a sizeable following in the investment fraternity. He believes that value can only emerge if there is capital formation across economies and they are able to earn more than the current cost of capital.

Look for True Value

Value picking doesnt mean buying stocks that have seen the steepest falls. Many stocks have suffered because foreign institutional investors, which held large stakes in them, resorted to distress selling

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GURU SPEAK
Warren Buffett
CEO, Berkshire Hathaway A sound management

Key takeaways from legendary investors.

Benjamin Graham
Buffetts late mentor and author of Security Analysis and The Intelligent Investor Focus on todays asset values and not unreliable earnings forecasts

Charlie Munger

Phil Fisher
Late author and stock investor Scuttlebutt approach: Listen to the business grapevine and get hooked into the companys ecosystem to get an idea about its strengths. Check with suppliers, end-users of the company

The incentives of the promoters Focus on earnings capability Know the businesses you are investing in

Vice Chairman, Berkshire Hathaway Keep a checklist of what you are looking for in the company for example, does it have a competitive Think like a business owner advantage, and so on and dont overpay Use mental model Special situation investing to understand is not correlated with businesses and the market the price

that has pulled down their stock prices, but that doesnt mean that their business prospects have worsened. However, many other stocks have fallen simply because they were genuinely overvalued. According to Jeetays Parikh, 350 stocks are quoting below their book values, or at a price to book value ratio of less than one. The price to book value is a key parameter for identifying a stocks 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 investment in another unlisted company 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 indication of demerger of unprofitable business units could

bring out the hidden value. ASKs Shah says he also looks at a companys corporate governance norms and the ability of its management to allocate capital efficiently. There have been instances when a companys management has displayed poor capital allocation skills. It didnt have an understanding of how to allocate across various businesses 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 companys sources of income rather than its assets, its earnings visibility, ability to sustain growth, and the size of its bottom line (it should be Rs 75 crore or above to qualify as a longterm contender in his portfolio).

Jeetays Parikh says that in a tough market such as the current one, he also checks out the actions of the promotersany 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 portfolio management firm, believes that cash-rich companies and those that are consumers of commodities will be favoured in this market. 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 recommending stocks based on their value proposition, instead of their earnings estimates as they did earlier. On October 15, ICICI Securities released 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 earnings and stock valuations and arrives at a bedrock value of top stocks under its coverage.

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BUSINESS TODAY NOVEMBER 16

2008