It’s a whole new year and there’s every likelihood you have already been told by brokers, media and friends of the hot stocks and other ideas to invest in.
DNA Money brings you a few picks based on market feed
MUMBAI: It’s a whole new year and there’s every likelihood you have already been told by brokers, media and friends of the hot stocks and other ideas to invest in. But, has anyone cautioned you yet against the bets you are sure to lose? DNA Money asked some of the market’s shrewdest minds about what not to invest in and why. Here are a few picks:
HPCL: Restriction to price the products in relation to high oil prices also restricts the growth in the company’s market cap. Oil bonds as compensation is a poor consolation. Though strategic sale and a constant comparison to RIL and RPL may keep the interest in the stock alive, focus on other and better sectors will be more rewarding.
Wipro: The stock can be played more in a defensive approach than a proactive strategy to make serious long-term money. While it is likely that there will be several trading opportunities in the short run, one needs to be extremely selective. Even in the best of times, with over 30% volume growth, the company’s poor pricing power is a worry. Rising salary bills and eroding dollar compound the problem further.
MindTree Consulting: Since its business model is skewed towards projects, forecasting the quarterly earnings is difficult and in the current environment, with a high probability of the rupee appreciating, the stock is likely to underperform. The company will face competition from similar sized firms while seeking to increase billing rates. It derives a significant portion of revenues by rendering development services, which are not of the annuity kind. Also, smaller size, higher client concentration and necessity to pay higher wages could create abrupt changes and volatility in growth and margins on a quarterly basis.
Bajaj Hindusthan: Constant government controls will prevent the company from charging market-related prices, even as it remains vulnerable to a decline in prices. Short-term trading opportunities may crop up frequently.
Sakthi Sugars: The company has a highly leveraged balance sheet with non-supportive cash flows and an auto components business that is yet to establish itself. The FY07 consolidated revenues fell 6% YoY to Rs 940 crore as the sugar segment revenues, which contributed 56% to the consolidated revenues, declined 24% YoY. Consolidated net earnings (adjusted) were down 98% YoY due to the sugar segment’s poor operating performance and high financial costs. To hedge its business model from the inherent cyclicality of the sugar industry, the company acquired Intermet, a European auto-component manufacturer, in May 2007 for around Rs 520 crore. Benefits of this acquisition are, however, unlikely to flow in over the medium term.
Cipla: The pharma sector is in the throes of regulatory issues and the large players are finding it tough to move to the next league globally. While the company has strong cash flows and a good cash hoard, growth is eluding it. Maturity in domestic market is also thwarting growth. Thus, operating metrics like RoCE and RoNW are expected to slide in the coming year, and this will definitely impact the stock performance this coming year.
TVS Motor: Declining price points at the lower end of the motorcycle market bode ill for the sector. With over 93% of the motorcycle industry consolidated among the top three players, there is a limit to further market share gains among them. TVS’ Q2 sales fell to Rs 820 crore from Rs 1,080 crore during the same period a year ago. Considering the dip in profits, lack of clarity on new launches and weak motorcycle demand, the stock trades at higher valuations.
Hero Honda: Rapidly changing market scenario and preferences seem to have caught this fleet-footed company on the wrong foot. Adding to the woes are the strong steps taken by Bajaj Auto to enlarge its market share. While the company is a formidable competitor and has one of the best manufacturing abilities, it will have to undertake radical measures to regain its pre-eminent position in stock and two-wheeler markets alike.
Ashok Leyland: Staid growth in its addressable markets, and an insipid product range have combined to erode the operational metrics of the company in the last few quarters. Strong competitors like Tata Motors and a rejuvenated Eicher would definitely be giving sleepless nights to the company. Even if a tie-up with an international major is forthcoming, the company has clearly stumbled in the markets and would take some time to bounce back.
Playing by the sectors
Some brokers said they would prefer to avoid sectors, rather than stocks, as valuations in some of the sectors have run ahead of the fundamentals.
The sectors to avoid are Cement, Steel and Energy. Both cement and steel industries are currently enjoying higher operating margins and with most of the planned capex coming in the next 12-15 months, we believe valuations are already factoring in the positives and are ahead of their replacement cost. Going ahead, though the power sector looks promising, we believe the current valuations have already factored in the robust growth. Of late, the sector has seen a significant run-up on the bourses on the back of news of new projects being awarded. However, the appreciation is not justified in some cases.
Some analysts are also sceptical of the pharma sector on account of its inability to pick up pace since the new drug discovery rate has declined over the years. Margin pressures are bound to increase due to competition and growing R&D expenditure. There are also pricing concerns due to large patent expirations over the next five years.
n_subramanian@dnaindia.net
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