Heard in Asia: Shopping Mavens Can Find Bargains in Indian Shares
By ERIC BELLMAN
Staff Reporter of THE WALL STREET JOURNAL
As in any distress sale, you will find bargains in the stock market when big investors are forced to dump their inventory of shares to raise money. Dig through the huge pile of discounted Indian stocks right now and you can find some great buys.
Market scandals, liquidity-restricting rule changes and fears over troubled funds have hammered India's market, pulling down stocks by 30% in the last year. But look past the headlines about speculators and mutual funds that have to sell their stocks at any price, and you'll notice that some of the subcontinent's biggest growth companies, including Bharat Heavy Electricals, Larsen & Toubro and Bajaj Auto, are dirt-cheap.
Despite expectations that these companies' profits will rise more than 20% for the next two years, they are trading at less than 10 times estimated earnings per share. That is half the market's five-year average and 30% below where those shares usually trade. Analysts like the shares, and foreign investors have been snapping them up, but at the same time big Indian investors have been selling and keeping their prices down. Speculators dumped their stocks after a regulator crackdown, short-term traders had to sell as India ended its so-called Badla system of stock borrowing and the Unit Trust of India has been forced to sell after a run on its $2.5 billion US-64 fund.
"The sooner the market starts to look beyond the nonfundamental negatives and focuses on the kind of earnings you can get out of Indian companies, the faster the market will rise," said Ratnesh Kumar, strategist at Salomon Smith Barney India in Bombay.
India's earnings season is already starting to focus investors' attention on the country's relatively strong growth. Shares of software company Infosys Technologies and Associated Cement Cos. surged after announcing both a better-than-expected growth rate and outlook this month. Analysts expect close to 20% profit growth this year from the companies that make up the Bombay Stock Exchange Sensitive Index, or Sensex.
Once the market focuses on fundamentals rather than big investor troubles, the benchmark index will rise as much as 30%, says John Band, chief executive officer of ASK-Raymond James and Associates, a brokerage firm in Bombay.
"The whole market is being thrashed by a whole series of self-inflicted wounds," he says. "The market is probably trading 1,000 points below fair value."
Investors say the best buys are the low-tech companies that make their money in India, and are thus defended from a global economic slowdown and the slump in demand for new computers and software.
Bharat Heavy Electricals is a company that should grow quickly even as global growth slows because it helps build power networks rather than computer networks. The company, which builds the machines and the plants that make energy, has been getting an increasing number of orders as India gets serious about providing more of its one billion-person populace with power. Analysts expect its earnings per share to surge 70% this year and around 20% next year as it installs generators and turbines in new plants across India. And thanks to the different stock market scandals -- which have no effect on Bharat's earnings -- it is trading at only eight times expected earnings per share.
"The capital goods sector is a great place for value," in the Indian market, says Mr. Kumar. "Even in the current environment they have been seeing the swelling of their order books."
Scooter maker Bajaj Auto is another low-tech bargain investors used to like. It was already being pummeled by concern that more Indians were choosing motorcycles over the traditional family scooter when the market's liquidity problems slammed the stock further. Bajaj is fighting back with a new inexpensive model that sells for as little as 23,000 rupees or less than $500. The popular new models should help arrest the decline in scooter sales and boost Bajaj's profit per share more than 20% this year and next.
"It's a turnaround story and trading at a P/E of around six, well below its usual average of eight to 10," says Ashish Jagnani, research analyst at Batlivala & Karani Securities in Bombay.
Another great buy, analysts say, is cement and engineering company Larsen & Toubro. Around 10% of the company's shares are held by the troubled fund manager Unit Trust of India so they've been hurt by market jitters that India's largest fund would be dumping more shares to raise money. The stock is down 25% from its 52-week high even as cement prices and demand are rising. Growing demand from billions of government dollars slated to be spent on new highways, pipelines and ports as well as rebuilding the areas devastated by the Gujarat earthquake should lift L&T's profit around 16% this year and 35% next year. An added bonus with this stock, analysts say, is that it may decide to spin off its cement business into a separate company, which would leave shareholders with much more valuable stocks. It is trading at a P/E of 14, which is below its regular range closer to 20.
The risks in buying now? The selling pressures from troubled domestic investors may continue for another six months, and too much or too little monsoon rain could knock down domestic demand and stock prices. Still, with prices of some shares this low it may be riskier not to buy, investors say.
"This is as cheap as cheap can be," said Samir Arora, who runs India funds for Alliance Capital Management Singapore Ltd. "We are very bullish on this market."
Write to Eric Bellman at eric.bellman@awsj.com |
