Hot Stocks

Over the last couple of years, the concept of an opportunities fund has caught the fancy of many fund houses. Till 2003, there was just one such fund - DSPML Opportunities Fund. Since then, the brigade of opportunities funds has grown rapidly. In 2003, three such funds were launched, followed by four each during 2004 and 2005.

At present, 12 fund houses have an opportunities fund in their product portfolio. Together, these funds currently manage over Rs 5,000 crore worth of assets.

Broadly speaking, these funds scout for 'opportunities' of various kinds. It could be a turnaround story, a deep value stock, or maybe a stock which has been beaten down significantly due to some temporary negative news. Therefore, we thought their portfolios could be a perfect haven to search for some interesting stock ideas.

What immediately struck us is that these 12 funds lack homogeneity in their stock selection. Between themselves, they had invested in over 220 stocks as per the July-end portfolios. Of these, only 18 are owned by five or more of these funds, while the vast majority of 133 stocks are owned by just one of them. This would lend all the more credibility to our selection from their portfolios. After all, there has to be some substance in a stock which many opportunities funds own significantly, despite otherwise being quite unique with their stock selection.

To zero in on this list of elite stocks, we considered a three-dimensional criterion. The first and the most important was obviously the amount of money invested in each of the stocks. We arranged all of these stocks in the descending order of the amount invested in them by the opportunities funds as per their July 2006 portfolios.

Then we restricted our list to only those stocks present in the portfolios of at least three opportunities funds.

Our final aim was to concentrate only on those in which fund managers have invested with conviction. So we pruned the list further to include only those that enjoy an average allocation of at least 2 per cent of the assets. Our criteria led us to a list of 30 stocks, of which 14 are the constituents of the Sensex. We decided to skip them as they also happen to be the most widely held and popular stocks. In the following pages, we will give you the details of the most prominent holdings out of the remaining 16.

Before we proceed, we would like to clearly state upfront that these are not recommendations of any sort. We do not intend to imply that these are the red hot stocks which can make a millionaire out of you. Our objective is simply to identify the stocks upon which opportunities funds are betting big.

Jai Prakash Associates
Jaiprakash Industries was amalgamated with its wholly-owned subsidiary, Jaypee Cement in 2004. Subsequently, the name of Jaypee Cement was changed to Jaiprakash Associates. That led the stock to rapidly grow in popularity among the fund managers. The number of diversified equity funds invested in it has almost doubled in the last 11 months from 38 to 72 by the end of July, making it one of their hot favourites. It is also the favourite stock of opportunities funds and as many as nine of them own it.

Apart from cement, the company has interests in construction and power. Earnings have increased at a good pace over the last few years. But for the quarter ended June 2006, the company reported a 78 per cent decline in the net profits to Rs 92 crore (in comparison to the corresponding quarter in the previous year). The top-line though, grew by 9.55 per cent to Rs 895 crore.

Mahindra & Mahindra
This auto sector giant was picked in June 2001 by the then only opportunities fund in existence- DSPML Opportunities. The stock became popular among opportunities funds during 2004 end and since then has been one of the widely-held stocks. Till July, eight opportunities funds had Rs 75 crore invested in the stock. Over the last five years, M&M has appreciated at an average compounded rate of 78 per cent per annum (as on August 22, 2006). On the valuation front, with a PE of below 18, the stock is still cheaper than the Sensex as well as most of the stocks covered in this story. The company has clocked good growth rates in earnings over the last few years.

M&M commands around a 30 per cent share of the domestic tractor market and is among the world's top tractor makers. The company is eyeing Africa and Europe for expansion. M&M has plans for other product segments. It recently tied up with Renault to give a boost to the passenger cars segment.

Sterlite Industries
Sterlite Industries, part of the London-based Vedanta Resources, is leading manufacturer of copper in India. The stock started to catch the fancy of diversified equity funds during the first quarter of 2005 when about 10 funds had it in their portfolios. Since then more and more funds bought the stock.

Over the last four months there has been a sharp rise in the number of funds buying the stock. In April, 17 diversified equity funds bought it to take the total to 38. In May, nine more bought it. Among the opportunity funds as well, it has created a buzz. As many as six of the 12 such funds own the stock, up from just two in January.

In the one-year period ended April, the stock zoomed almost four-fold, thanks to a sharp rise in copper prices. But like many other metal stocks, Sterlite crashed during the recent market fall. It lost over 55 per cent between May 10 and June 14. Now the stock is on the path to recovery and has recovered about half of what it had lost.

Crompton Greaves
The list of admirers of this stock has been growing. It figured in the portfolios of seven diversified equity funds by the end of 2002. The number increased to 17 by the end of 2003 and to 49 by 2005 end . Right now, as many as 63 diversified equity funds are invested in this stock, with an average allocation of a sizeable 3.5 per cent of the portfolio. The stock is also present in the portfolio of six opportunities funds.

The popularity of the stock is not without reason. The company has posted robust growth in earnings over the last five years. And the investment has proved very rewarding as the stock has appreciated at an unbelievable average compounded annual growth rate of close to 120 per cent over the last five years. Crompton Greaves is the largest exporter of power transformers. It manufactures a wide range of products related to generation, transmission, distribution and utilisation of power. Given the potential of the power sector, the future looks promising for the company.

HCL Technologies
The number of diversified equity funds invested in the IT major has consistently remained above 20 since 2001 and currently, 39 funds have it in their portfolios. Among the opportunities funds, the stock has found favour with five of them which together have over Rs 100 crore invested in the stock.

Like most of the technology stocks, HCL Technologies took time to recover from 2000 tech debacle. It started to make a move in mid-2003 and since then, it has more than quadrupled.

This time around, it has been quick to recover from the May collapse. For the quarter ended June 2006, the company reported a 35 per cent year-on-year growth in revenues to Rs 1,254 crore. The company has been quite consistent in dividend payments and recently declared a 200 per cent dividend which was the 14th consecutive quarterly dividend. Presently, it is available at a decent dividend yield of 2.76 per cent (as on August 22, 2006).

Siemens
This is another stock that has proved to be a very rewarding investment in the last few years (average annual returns of 137 per cent over the last three years). And, if the number of funds still invested in it is anything to go by, then there is still steam left in it.

It first appeared in some of the schemes of UTI as early as 1992. At present, the stock is owned by 62 diversified equity funds, the highest number of funds ever invested in it. The opportunities funds took note of it in 2004 (when just one of them was invested in it). But now, five of them have invested an average 3 per cent of their portfolio into the stock.

The company has a significant presence in the field of electrical and electronic engineering, and caters to diverse industries spanning healthcare, energy, telecom, transportation among many others. Its products enjoy wide acceptance and the pending order book of the company was estimated to be over Rs 7,500 crore by the end of March 2006.

India Cements
This stock is catching the fancy of fund managers. The tally of diversified equity funds invested into it has trebled from nine at the end of February this year to 27 by the end of July.

The company had landed in a spot a few years back. It aggressively acquired cement plants in the late nineties by adding huge amounts of debt to its balance sheet. This pushed the company into the red. However, things have turned around in the last couple of years. The company initiated a debt restructuring plan in 2003. Along with that, positive developments in the industry such as good growth in volumes and higher cement prices have helped it get back into profits. It reported positive earnings for the last two financial years (2005 and 2006), after posting losses in the preceding three. Results for the quarter ending June 2006 have exceeded market expectations. The net profits surged 2,061 per cent to Rs 113 crore, as against Rs 5.21 crore for the corresponding quarter in 2005-06.

Television Eighteen
Television Eighteen runs five news channels - CNBC-TV18, Awaaz, CNN-IBN, IBN7 and South Asia World. While CNBC- TV18 has been a very popular business news channel for sometime, CNN-IBN is fast grabbing market share in English news.

Apart from that, it has six internet ventures, the more popular of which are moneycontrol.com and commodities control.com. The company has picked up a 50 per cent stake in the Indian arm of Jobstreet.com. The company also has a stake in travel portal yatra.com.

The stock is gaining popularity among the fund managers and is held by 19 diversified equity funds with an average allocation of over 3 per cent of their portfolios. The stock has appreciated at over 100 per cent average annual growth rate over the last two years. Though its valuations have cooled down from the pre-May levels of over 75, it is still does not look cheap at around 48 (as on August 22, 2006).

Ultratech Cement
Ultratech Cement was created after L&T demerged its cement division in 2004 and Grasim Industries acquired a majority stake in it. The company has an installed capacity of 17 million tonnes per annum. It exports over 3 million tonnes per annum, which translates into over 45 per cent of the total exports of cement from the country.

In the last two years, the stock delivered 72 per cent annual return. Moreover, it has been quick to recover from the market collapse in May this year.

The stock generated a lot of interest initially and 36 diversified equity funds had it in their portfolio by the end of July 2004. But over the next one-and-a-half year, many funds booked profits and exited the stock, bringing the tally of funds owning down to eight in February 2006. But now, the stock is again generating some interest and 15 diversified equity funds (including three opportunities funds) have an average 2.8 per cent of their assets invested in it currently.