Compelling valuations

Though it’s a no-brainer to pick stocks in the current market, it does make sense to sift the wheat from the chaff. Though there are blue-chips galore which can be picked up at attractive valuations, some of them may be a while in bouncing back esp. those in capital goods/engg sectors such as L&T, BHEL and the like. So it boils down to the time horizon you are looking at, of course if u are a long term investor, time doesn’t matter and the current time would be as good as any you will ever get. Having said that, there is also the opportunity cost that you may have to pay for buying such blue chips at current prices, since they would still be available at similar prices/valuations 3-6 months down the line but some of the others at similar valuations may not. So timeline has some significance after all.

After the market mayhem of the last few days, some of the blue chips have again come down to the December levels with compelling valuations. Some of the beaten down ones which merit attention today could be:

Shriram Transport Finance, the flagship company of Shriram Group, a prominent player in commercial vehicle financing business, has gone down with others in the current market downward spiral to levels below 500 from 800 it was at a few months back.  Also, a corporate development happening here is that it is merging/has merged an unlisted group holding company with itself. TPG holds about 49% stake in this unlisted company and to provide them an exist option, this merger is happening. Post the merger, TPG will hold 20% stake in the company STFC. Now TPG has expressed view that it is looking at a valuation of not less than 600/share for STFC. Considering that it is slightly below 500 currently, this is a huge upside as and when it happens. Even if it doesn’t happen, with an improving outlook, STFC should itself come out of this and regain earlier levels of 800 or close to them. Even then it is still 40%+ upside.

Add to that the fact that RBI has recently opened the tap on banking licenses, albeit with some conditions which may not be too difficult to comply for clean companies/corporate. STFC is a prime candidate to apply for a banking license as and when it happens. It must however be kept in mind that this being a regulatory matter, things take their own time and it may be a couple of years at least before anything meaningful happens on this front. This may in fact be a blessing in disguise since there will be enough time for the country and the economy to recover (hopefully) and things may begin to look rosy again. Any recovery before this event will anyway bring STFC to the earlier valuations with a significant upside from current levels. And fundamentally, there are no issues here.

Hero MotoCorp, the Maruti of 2-wheelers, had crashed to 1700 after Honda split but bounced back to nearly 2250 on promoters’ confidence in taking the company forward. It has now again come down to about 1850. Now that it has the freedom to export as well as tie up with any auto major for specific tech, it should prosper in the coming times. And with Hero’s rural reach, this should again go back to 2200+ levels in the coming months, once this rate cycle and inflation ebbs. It has already started to explore technology tie-ups abroad as well as chalked out serious strategy for export markets in Africa, Latam and SE Asia. Once the current gloom ends, the results should start showing in the price.

And if you still have money left after buying out the above, take a look at the fresh moves being made by BOC and Ineos ABS (India), now known as Styrolution ABS (India) towards delisting;

• BOC to get the freedom to bid for large oil & gas projects in India, especially the PSU, where they currently can’t bid on their own but the parent can since it has the relevant expertise and experience in executing such projects. A merger will allow everybody the synergies to optimize global as well as local resources.
• The German parent already holds 87% in Styrolution ABS (India).after an unsuccessful attempt last year at 607/share. It doesn’t appear to be in a mood to bring its holding to 75% by next June (2013) in line with govt. directives and hence appears to have decided on this route. It has already reached 750 currently @P/E of about 26. 

The point to note is that 2 swedish majors Alfa Laval and Atlas Copco recently delisted at a whopping PE multiple of around 35. If this is anything to go by, though not necessarily so, there may still be a lot of steam left in Styrolution.