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Unveiling Value

Check out the 9 companies whose performances have revealed profound profit-generating potential

The article first appeared in the October issue of Wealth Insight magazine. It uses a certain, time-tested, theme unveiled by one of the most recognised stock market experts, to carry out a study and thereby unveil some interesting investment possibilities.

Benjamin Graham, economist and professional investor, suggested a filter to find undervalued stocks — the price-to-book (PB) value ratio. According to him, the ideal company for an investor should sell under book value.

What is the book value of a company? It is the value at which the assets are carried in the books, net of the liabilities. It is the value that the equity share holders would get if the company was to be liquidated.

It is a bargain — you get an item that is worth Rs 100 by paying less than that amount. A discount deal, isn’t it? But should the company really need to be liquidated for you to realise the margin gains?

A company might be trading below book value because of expected liabilities, assets being carried in books at wrong values, a controversy, etc. It is often argued that the markets sooner or later realise the real worth of a security and prices move closer to it. Also, several studies have shown that stocks that are priced below their book values outperform the broad market in bull rallies.

These are the companies we zeroed in on. In the current rally, starting in early March, among the top 10 performing stocks, just one had its PB ratio at more than one at that time! All the worst 10 performers had PB ratio at more than one, except one.

To ensure that such a company is in good financial health, looking at its dividend yields helps ascertain its cash flows. Also, if the company was profitable during the worst periods, investors can be more certain about its financial health. We found 9 companies that can be good picks.

Among them are Bank Of Maharashtra (BoM), Oriental Bank Of Commerce (OBC) and Syndicate Bank — all of them are nationalised and all are PSU banks. For BoM, the profits after tax (PAT) more than doubled in Q1FY10, year-on-year (Y-o-Y). It has recently raised Rs 300 crore through bonds to expand its business. The bank is looking to improve its capital adequacy ratio which was 12.05x in Q1FY10.

The OBC plans to increase its branch network by 100 to 1,500 this fiscal. Post-restructuring, of loans worth Rs 550 crore (7.7 per cent of outstanding loans), its gross non-performing assets (NPA) declined from 6 per cent in FY06 to 1.5 per cent in FY09. 
For Syndicate Bank, PAT tripled in Q1FY10, Y-o-Y. The bank has recently taken steps to capture a younger clientele. It is also looking to provide customers with instant ATM cards, net-banking and mobile-banking.

The agri-business sector threw up  two companies: Deepak Fertilisers & Petrochemicals has a presence in chemicals, specialty retailing and  agri-business. Through Ishanya, it is building up excellence in space design and envisions evolving into a one-stop shop for interior and exterior products. It has increased its sales at an annualised rate of close to 36 per cent over the past three years, and PAT at 23 per cent.

The other firm, Gujarat Narmada Valley Fertilizers, increased PAT 48 per cent Y-o-Y in Q1FY10. However, sales fell in FY08-09 by 15 per cent while profits saw a fall of 39 per cent. With demand for fertilizers  expected to rebound this fiscal, both are expected to benefit.

A totally different space is occupied by the sixth company on our list, Graphite India. It is among the top 5 graphite electrode manufacturers in the world. Its PAT in Q1FY10 was higher by 35 per cent Y-o-Y, but fell quarter-on-quarter (Q-o-Q) due to slack demand for steel. It’s core businesses provide important inputs for steel manufacturing industries and any rebound therein will improve fortunes further.

Alok Industries saw its profits fall 54 per cent in Q1FY10 Q-o-Q, but it logged an increase of 4 per cent Y-o-Y. It has a presence in apparel fabrics, home textiles and cotton yarn.  Its sales in Q1FY10 jumped 45 per cent. It recently raised Rs 450 crore to meet long-term working capital needs.

The Shipping Corporation of India saw its profits negatively impacted due to the global downturn. The Q1FY10 PAT of Rs 120 crore fell 57 per cent Y-o-Y or 40 per cent Q-o-Q.  It’s looking to diversify into ship building and port terminal management.

Tamil Nadu Newsprint & Papers, a maker of bagasse-based paper, exports a fifth of its output to some 30 nations. The second-largest writing paper maker in India, it is planning to invest Rs 370 crore on three new projects over the next three years. There is also an ongoing expenditure of Rs 1,000 crore on mill expansion. Fall in international paper prices has been a cause of concern to the company’s sales, as was seen in FY09.

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