Scythed Sensex

If the 1,100 point crash on May 22, 2006, provided a great buying opportunity, current price levels must be a steal. Over 800 stocks trading on the BSE have seen a drop of over 25% since their lows on May 22nd, while nearly 1500 stocks (of the total of about 2200 traded stocks) have dropped by 15% or more. An overwhelming majority (over 90%) of the stocks traded on the BSE now trade at lower prices compared to May 22.

But considering that the selling is continuing unabatedly, few people seem to consider even the current depressed price levels as great buying opportunities. Suddenly, the markets seem to be worried about inflationary pressures, higher oil prices and increasing interest rates. Talks that the Indian markets could be in the middle of an extended bear market also seem to be keeping investors away.

It's important to note here that the Sensex has lost over 28% since its peak about 34 days ago. This, in fact, qualifies for the sharpest correction in the Sensex's history for a period of about a month. When the Harshad Mehta-led bull run went bust in early 1992, the drop in the Sensex over a similar 34-day period was lower at 26%. In 1992, the markets continued to drop for another two-and-a-half months, taking the total drop from the highs to 43%.

If that trend was to repeat, the Sensex could retreat to a level of about 7000. Given the fast pace at which the markets have fallen already, it's not reckless to say that those levels could be reached. But it needs to be noted that unlike in 1992, the bull run this time around was supported by strong earnings growth and better capital efficiency. In many industries, growth continues to be impressive, and it shouldn't be long before buyers return to the market.

In fine fettle
Opto Circuits, a medical electronics company, continued its good performance in the March quarter, with sales increasing by 23% and operating profit growing by a robust 55%. For the year as a whole, Opto's revenues jumped by 47%, while operating profit rose by 72%. Operating margins improved by an impressive 475 basis points to 32.9% over last fiscal.

The increase in profit margins is mainly due to a fall in manufacturing costs on one hand and better pricing on the other. Growth in revenues was led by the launch of about 104 additional products in the SPO2 range. Exports account for 99% of the revenues this fiscal, with as much as 47% coming from the US markets alone. The US markets accounted for 60% of revenues last year, which means that the company has been able to re-risk its revenue stream to some extent.

Going forward, the company expects revenue growth to continue at a fast pace, as it plans to enter more foreign markets. The company's recent acquisition, EuroCOR is also expected to benefit from the huge demand for stents. The company gets a valuation of 24 times trailing earnings, which seems to price in future growth opportunities.

Contributed by Mobis Philipose & Pallavi Pengonda.