Bearing the economic brunt

After the initial global liquidity driven euphoria, since December last year (2012), the markets have begun their downward journey once more, as is their wont. And this time, it is not the usual suspects, the midcaps, who have borne the brunt, but some of the large caps as well. These are by no means dodgy companies with questionable promoters but global companies who are suffering the ill-effects of a sluggish economy and more so in the power sector. Considering that this gloom-and-doom scenario is not going to last forever, this also gives an opportunity to load up on such beaten down stocks. It is interesting to note that these are from the much maligned infrastructure sector which is desperately looking for some rope from the government.

Consider 2 of the most promising stocks in the infra space, both catering to the power sector – Siemens and ABB. Both have touched their 52-week lows in the last few days and there seem to be hardly any takers for them in the current environment. And they really can’t be faulted in a trader’s market that holds sway currently. Long term investing seems to be a thing of the past, and not unjustifiably either if the behavior of the markets over the last 5 years is observed. However, as Warren Buffet once famously said, “The right time to buy is when everyone is selling”. Going by that adage, the current market seems to be ripe for the picking.

The reason for ABB tanking was the underperform rating put out by BofA-ML on it. Cost over-runs due to project delays and delay in payment by clients have resulted in a fall in revenues as well as margins. At the investor conference call, management emphasized the cautious outlook for ABB's projects business, but highlighted an improved performance for the product business. ABB currently trades @570, close to its 52-wk low of 560.

Same appears to be the case with Siemens. Siemens builds trains, power plants, wind turbines, light bulbs and other items closely related to a country’s industrial fortune. The company lost its crown in July ’12 as Germany’s most valuable company to SAP, the business software maker, even though Siemens revenues were much higher. It must be remembered that Siemens did a buyback of its shares @930 about 2 years back. The price has nearly halved in the last 2 years since then, for the reasons mentioned earlier. Siemens currently trades @538, its 52-wk low.

And in the last couple of days, Welspun Corp apparently bore the brunt of margin selling when some of its pledged shares were offloaded by brokers in the market. The company's trailing 12-month (TTM) EPS was at Rs 17.81 per share (Dec, 2012) giving a P/E ratio was just 3.48 on the current price of 62. The latest book value of the company is Rs 156.33 per share. So on all parameters, it looks beaten down much more than justified.

In one of the largest private equity (PE) deals in June ’11 and its largest in India, Apollo Global Management, a global PE firm with expertise in oil & gas sector, decided to invest up to Rs 2,250 crore ($500 million) across 3 entities of the diversified Welspun Group. This was Apollo’s largest investment in India. Under the deal, Apollo paid Rs 1,305 crore to buy close to 20% in Welspun Corp, through FCCD worth Rs 788 crore and GDR worth Rs 517 crore. The promoter holding in Welspun Corp was 41.07 per cent on March 31 ‘11. After being converted within 18 months at Rs 225 a share, it would represent 13.3 per cent equity capital of Welspun Corp. And on Feb. a week back, on 19^th, as per the terms of agreement, Apollo converted is debentures in Welspun Corp @225/share against a then prevailing market price of 90, a 150% premium.

So all in all, at such beaten down prices, no better time than now or in the following period, to have some of the better names in one’s portfolio, without expecting any miraculous returns in the near term. The key trigger would be the turnaround in the economy when these stocks will rise to their true potential.