STOCK DOCTOR | GS Sood
Be selective, jettison dud stocks
Be selective, jettison dud stocks
link : http://www.gfilesindia.com/title.aspx?title_id=162
THE markets have more than doubled in the past 15 months and are staying at a high whereas a majority of investors are hoping for a correction. However, as big bull Rakesh Jhunjhunwala said, the correction never happens when it is expected most or when a majority of the investors (especially retail) expect it to happen. The markets, though, have started showing signs of fatigue as evidenced by the redemption pressure in equity funds. Fearing a correction, investors in diversified equity funds redeemed close to Rs 4,000 crore in June and July. Equity mutual funds have witnessed an outflow exceeding Rs 11,000 crore over the past year. Investors’ concerns are amply documented by the recently released annual report of the RBI which states that inflation containment may have to be given precedence over other policy objectives – economic growth and financial stability – even as domestic risks to growth have receded significantly due to gradual pick-up in private consumption demand that could accelerate to make the growth process more self-sustaining. This fuels speculation that the RBI may soon raise interest rates.
The report has also hinted at a possible slowdown in future growth with data indicating that reforms have done little to raise productivity. It cautioned that better-than expected revenues from the one-off gains such as spectrum auctions are unlikely to improve the country’s fiscal situation as new avenues of expenditure have emerged. The perception about global recovery has also turned adverse which is not giving investors the comfort and confidence to buy stocks.
The purchases of existing houses in the US fell by a record 27 per cent in July to a 3.83 million annual pace which is the lowest of the decade and worse than the most pessimistic forecast of economists surveyed by Bloomberg. This, coupled with slowing export growth in Japan, added to the evidence that the global economic recovery is weakening. The persistent foreign fund inflows have already made Indian equities the most expensive amongst Asian and BRIC markets. The Sensex is trading at 18 times the expected profits for the current year. Easy money supply and very low rates of interest are mainly driving capital to the emerging markets. Given India’s potential, recovery in capital inflows has been much faster than predicted. The inflow from abroad reached a record Rs 83,420 crore in 2009, exceeding the high set two years ago. The other more traditional and crude pointer to the markets being due for a correction is the steep run-up in the prices of dud stocks and stocks of loss-making companies without any justifiable reasons.
Also, the fact that things like capital protected schemes have again come into vogue may be yet another pointer to the fact that fund managers and brokers feel that share valuations are expensive relative to their historical averages and the risk of a sharp correction is high given the uncertainty prevalent in the world markets. In such a scenario, small investors are advised to defer fresh investments in the market for the time being and use the ongoing rally to get rid of the dud and risky stocks that have run up a lot without any apparent reason. Only very selective investments in fundamentally good stocks of companies with good managements need be considered, provided their valuations justify such an action.
Sonata Software
(CMP Rs 44)
SONATA Software, headquartered in Bengaluru, is a leading IT consulting and services company. Its customers are located across the US, Europe, West Asia and the Asia-Pacific region. Its portfolio of services includes IT consulting, product engineering services, travel solutions, application development, application management, managed testing, business intelligence, infrastructure management and packaged applications. As per industry rankings released by NASSCOM for FY ’08-09, Sonata Software figured among the top 20 IT software and service exporters in India for the second consecutive year. Sonata Software has also been ranked number two globally in the 2008 Top Ten ESO: Outsourced Software Development in the Black Book of Outsourcing.
The stand-alone results of the company for Q1 is reported to be up by 15 per cent to Rs 63 crore with EBIDTA up by 12 per cent to Rs 18 crore. The net profit for the quarter increased by 11 per cent to Rs 5.65 crore though the consolidated results were not all that encouraging. The widely perceived European exposure may not be a strong negative for the stock. With an EPS of Rs 6 the CMPis discounted at a PE of just seven times. The stock also offers a good dividend yield of approximately 4 per cent.
The author has no exposure in the stock recommended in this column. gfiles does not accept responsibility for investment decisions by readers of this column. Investment-related queries may be sent to gfilesindia@gmail.com with Dr Sood’s name in the subject line.
THE markets have more than doubled in the past 15 months and are staying at a high whereas a majority of investors are hoping for a correction. However, as big bull Rakesh Jhunjhunwala said, the correction never happens when it is expected most or when a majority of the investors (especially retail) expect it to happen. The markets, though, have started showing signs of fatigue as evidenced by the redemption pressure in equity funds. Fearing a correction, investors in diversified equity funds redeemed close to Rs 4,000 crore in June and July. Equity mutual funds have witnessed an outflow exceeding Rs 11,000 crore over the past year. Investors’ concerns are amply documented by the recently released annual report of the RBI which states that inflation containment may have to be given precedence over other policy objectives – economic growth and financial stability – even as domestic risks to growth have receded significantly due to gradual pick-up in private consumption demand that could accelerate to make the growth process more self-sustaining. This fuels speculation that the RBI may soon raise interest rates.The report has also hinted at a possible slowdown in future growth with data indicating that reforms have done little to raise productivity. It cautioned that better-than expected revenues from the one-off gains such as spectrum auctions are unlikely to improve the country’s fiscal situation as new avenues of expenditure have emerged. The perception about global recovery has also turned adverse which is not giving investors the comfort and confidence to buy stocks.
The purchases of existing houses in the US fell by a record 27 per cent in July to a 3.83 million annual pace which is the lowest of the decade and worse than the most pessimistic forecast of economists surveyed by Bloomberg. This, coupled with slowing export growth in Japan, added to the evidence that the global economic recovery is weakening. The persistent foreign fund inflows have already made Indian equities the most expensive amongst Asian and BRIC markets. The Sensex is trading at 18 times the expected profits for the current year. Easy money supply and very low rates of interest are mainly driving capital to the emerging markets. Given India’s potential, recovery in capital inflows has been much faster than predicted. The inflow from abroad reached a record Rs 83,420 crore in 2009, exceeding the high set two years ago. The other more traditional and crude pointer to the markets being due for a correction is the steep run-up in the prices of dud stocks and stocks of loss-making companies without any justifiable reasons.
The other more traditional and crude pointer to the markets being due for a correction is the steep runup in the prices of stocks of loss-making companies.
Also, the fact that things like capital protected schemes have again come into vogue may be yet another pointer to the fact that fund managers and brokers feel that share valuations are expensive relative to their historical averages and the risk of a sharp correction is high given the uncertainty prevalent in the world markets. In such a scenario, small investors are advised to defer fresh investments in the market for the time being and use the ongoing rally to get rid of the dud and risky stocks that have run up a lot without any apparent reason. Only very selective investments in fundamentally good stocks of companies with good managements need be considered, provided their valuations justify such an action.
Sonata Software
(CMP Rs 44)
SONATA Software, headquartered in Bengaluru, is a leading IT consulting and services company. Its customers are located across the US, Europe, West Asia and the Asia-Pacific region. Its portfolio of services includes IT consulting, product engineering services, travel solutions, application development, application management, managed testing, business intelligence, infrastructure management and packaged applications. As per industry rankings released by NASSCOM for FY ’08-09, Sonata Software figured among the top 20 IT software and service exporters in India for the second consecutive year. Sonata Software has also been ranked number two globally in the 2008 Top Ten ESO: Outsourced Software Development in the Black Book of Outsourcing.
The stand-alone results of the company for Q1 is reported to be up by 15 per cent to Rs 63 crore with EBIDTA up by 12 per cent to Rs 18 crore. The net profit for the quarter increased by 11 per cent to Rs 5.65 crore though the consolidated results were not all that encouraging. The widely perceived European exposure may not be a strong negative for the stock. With an EPS of Rs 6 the CMPis discounted at a PE of just seven times. The stock also offers a good dividend yield of approximately 4 per cent.
The author has no exposure in the stock recommended in this column. gfiles does not accept responsibility for investment decisions by readers of this column. Investment-related queries may be sent to gfilesindia@gmail.com with Dr Sood’s name in the subject line.
