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Down, but not out

Few stocks have witnessed excessive selling but may still offer a possible opportunity for investors

Markets, at least in the short-term, are anything but rational. Investors, or rather speculators, go overboard on both sides that is, either sending the share prices rocketing or absolutely crashing a stock. But these anomalies tend to even out in the long-term as long as the fundamentals of a company are intact.

We have a few such instances which have witnessed excessive selling but may still offer a possible opportunity for investors to enter the stock.

Tata Coffee
The company is the largest coffee producer and exporter of India.
Current price: Rs 939
52-week high price: Rs 1,675
52-week low price: Rs 880
Discount to 5-year PE (in %): 15
Reasons for Fall
* The company faced slowdown in FY13 due to a fall in exports caused by weak global prices
* Coffee exports of the company were 4,831 tonnes in FY13 as compared to 5,735 tonnes in FY12
* India’s coffee exports fell by 4.45 per cent in the first 6 months of the current calendar year
Reasons to Buy
* Coffee prices are expected to increase in the second half of the year due to short supply. Vietnam, a major supplier of robusta coffee, is facing drought and production is projected to be low. Moreover, the Roya attack on coffee trees in the Central American region will also hamper supply
* Tata coffee exports primarily robusta green beans and instant coffee. There is an increasing demand for instant coffee, of which robusta beans are a large component

Titan Industries
Titan is India’s largest player in the organised jewellery sector and 80 per cent of its revenues are derived from this segment. It is also a leading player in the watches and eyewear segment.
Current price: Rs 212
52-week high price: Rs 313
52-week low price: Rs 200
Discount to 5-year PE (in %): 17
Reasons for Fall
* Increase in the import duty to 8 per cent
* The changes in gold importing norms dictate that all imports will have to be made on a cash margin
* No credit will be allowed for importing gold for domestic use. This would increase costs for importing for the company. The changes came due to a high demand for gold which was adversely affecting India’s current account deficit
Reasons to Buy
* Though the new regulatory measures will hamper growth slightly, bulk of the costs would eventually be passed on to the customers
* Titan has shown the ability to grow fast over the past years and the future of branded gold jewellery still seems attractive
* The gold story of India has been the same for ages and no matter what the price, gold is still perceived as a safe haven for any and all contingencies
* The company has been trying to increase the share of diamond jewellery as it has higher margins than gold and could help it sustain momentum

Apollo Tyres
With exports to over 118 countries, Apollo Tyres is one of the largest tyre manufacturer in India.
Current price: Rs 62
52-week high price: Rs 102
52-week low price: Rs 2190
Discount to 5-year PE (in %): 25
Reasons for Fall
* The company acquired US based Cooper Tyres in a $2.5 billion deal
* The large debt taken up for the deal caused the share price to crumble. Investors felt that the acquisition may not pay off as was in the case of Tata Steel, which is still struggling to cope with the mountain of debt it took to acquire Corus Group back in 2006
Reasons to Buy
* Not only the ambitious acquisition would make the combined entity the seventh-largest tyre manufacturer in the world, it would also give the company a wider range of products in the replacements market and would push its products in different geographies
* The global replacement market took a dip in 2012 but is expected to grow this year and with more strength in developing markets
* Now even though Apollo Tyres will have greater reach, there are concerns that the combined cash flow from the companies will be able to pay off the interest costs but not pay off the principal. It remains to be seen whether Apollo Tyres can cope with the new size and take advantage from the position

Infosys
The company is one of the first established and the second-largest IT company in the country. It's still below its median PE and could offer opportunities for investment.
Current price: Rs 3120
52-week high price: Rs 3,123
52-week low price: Rs 2,190
Discount to 5-year PE (in %): 10
Reasons for Fall
* Infosys has been facing margin pressures over the past few quarters
* Problems for the company started when it revamped its business model with the 3.0 strategy which meant for it to provide business transformational solutions and not just software services. This though came at the wrong time as with the financial crisis, companies were more intent on saving what they had than on further expansion
* The company was also adamant to not chase low margin contracts which at a time of weak discretionary IT spends came to hit the company hard. Its rival, TCS, though did exactly the opposite and zoomed ahead
* The final straw was drawn when it missed its 2013 revenue estimates and the share price reacted with a 21 per cent crash
Reasons to Buy
* Though the stock price recovered slightly with Narayan Murthy coming back on the board, it is still trading at a 15 per cent discount to its 5-year median PE of 20.7 as well as below the PE of its competitors such as HCL Technologies and TCS which are at 20.55 and 24.58, respectively
* Infosys has faced problems with its business model but it seems to be taking steps to get back on track. For instance, the company hiked employee salaries recently to improve morale, reduce attrition and retain the best talent
* Pricing inflexibility, which caused it to lose projects to companies such as HCL and TCS, is planned to be rectified in the future

All data as on August 28, 2013.