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Stocks that are Cheap for a Reason

Three stocks that are available at attractively low prices, despite having high growth in revenue and profitability

It is usual for us to sift through companies and put them to quantitative experiments, which also at times come into our radar. These companies pass through filters like high growth in revenue and profitability, high return on equity and have market capitalisation of over ₹1,000 crore. Yet, these are available at an attractively low price, which is too good to be true. Here are three stocks that fall in this category and why they are cheap.

Cairn India
PE: 4.43

Cairn India is ranked amongst the largest oil and gas exploration and production companies in India. With exploration of its new reserves, the company has grown at an exceptional pace with revenue and earnings growing at more than 80 per cent CAGR in the past 5 years.

Why is it cheap?
The major reason is the corporate governance and the parent company. The boards gave a green signal to extend a loan of $1.25 billion to the parent company Sesa Sterlite, a Vendanta group company. The loan has been extended at the rate of 300 basis points above the LIBOR which is much less than what it could have earned on a fixed deposits in India. Not to mention the amount could have been used for its own organic growth. Vedanta group is already known for these kind tactics with its subsidiaries.

Syndicate Bank
PE: 4.11

The company's earnings has grown at 18 per cent CAGR of in the last three years and has an average return on equity that is more than 18 per cent. Yet the stock has been trading at 10 to 60 per cent discount to its book value at low price to earnings.

Why is it cheap?
SK Jain, CMD of the Bank was caught taking bribe from Neeraj Singal, Vice Chairman and MD of Bhushan Steel. Singhal bribed Jain for ₹50 lakh, in order for the bank to extend a loan to his already debt heavy company, which it otherwise did not qualify for. Instead of going for capital restructuring, Singhal tried to cover the situation by taking more loans to avoid defaulting on existing loans. However, it is interesting to know that this stock was still trading at rock bottom low valuation much before things surfaced in the news.

Vardhman Textiles
PE: 4.36

Vardhman Textile's business includes yarn, fabrics, thread, acrylic fibre and alloy steel. The company has witnessed a CAGR of 60 per cent in its earnings over the last 5 years. Still the stock is trading at price to earnings of 4.55 despite the market rising to a new high.

Why is it cheap?
The company exports its products which accounted for almost 40 per cent of its total revenues in FY14. The revenues have gone up to this level from the 20 per cent that it was in FY09. This rise in its revenues was supplemented because of the depreciation in the rupee in this period. However, this growth, is not sustainable in the long run. After all, the production quantity of yarns has risen by a mere 7 per cent in the same period, which tells the real story.