Fast & Reliable Companies

Following the principles of value investing is difficult in a bull market because one can't find such stocks in a surging market. The opposite happens in a bear market, where even the high growth stocks trade at a discount. In such scenarios, it is very hard to pick stocks by sticking to the valuation rules. One never knows how long a wait it would be before a company fulfils its promises. Moreover, the company could go the other way also, ceasing to be of any value in an economic downturn.

To take care of these factors, we looked for companies which were able to increase their earnings in a fast but sustained way, but don't command a substantial premium today. Meaning, companies that trade at low price earning multiple (PE). After filtering the stocks on a set of criteria we arrived at the following companies.


Tata Steel
The funding of its Corus acquisition has considerably hurt Tata Steel's credit worthiness in the market. Furthermore, the slowdown in demand from various parts of the world would mean that the company would have to work overtime to justify its international ventures. Though, historically, the company has done better than its competitors in the sector. Tata Steel enjoys an almost 10 percentage point's difference in net profit margin with PSU major Sail.

Infosys
This is the first IT Company in our list. There is no denying that it has been a favorite of investors for many years. But it now seems to be in for its toughest test. The company has a low operational cost and the best net profit margin among all of the top three Indian IT companies.

Wipro
This former FMCG player has indeed come a long way to establish itself as a prominent player in the IT space. Even though its profits have grown in the latest quarter, the overall concerns about the future outlook of the IT industry has cast a gloom over it. Hence, Wipro is trading at a PE of just 11.49.

Jindal Steel & Power
The bleak sentiments surrounding the iron and steel industry have hurt its bottom line. However, Jindal is going into an overdrive to boost its power generation capacities. This diverse activity will help the company protect its margins from the cyclical metal business. Currently, its stock is trading at a PE of 8.45 of the FY07-08 earnings, which is slightly lower than the industry average of 8.9.

Indian Overseas Bank
This PSU bank is a very small player, but still has a highly commendable record. Though its profits are nowhere near those of SBI, it has still managed to maintain a net profit margin at par with its bigger cousin. Trading at Rs 67, discounting its book value by 32 per cent, the stock can be considered as a bargain.

Chennai Petroleum
The rising oil prices from the previous year have hit this refining company very hard. Though its business fundamentals are still in place, the fluctuating oil prices have seriously squeezed down its margins. Both its operating and net profit margins are in negative. As a result of this, its stock got severely hammered and is currently trading at a discount of almost 50 per cent to its book value.

Bharat Electronics
This company operates in a very niche segment - delivering electronic equipments to the military and other such institutions. Its major shareholder is the government, controlling around 75 per cent of its shares. Considering the heightened state of security, there is a good chance that Bharat Electronics' order book would see a healthy rise in the coming times.Currently, its stock is trading at a PE of 8.63 with a premium of 86 per cent to its book value.

Container Corporation Of India
There was a time when this Indian railway subsidiary used to enjoy monopoly in handling cargos through the railroads. Its vast network of warehouses and containers still gives it a distinct advantage over any newcomer. Though its biggest shareholder is the government; FIIs own 26 per cent of the company. This stock is currently trading at the Rs 700 level with a yield of about 1.83 per cent.

Valuable Companies

- Out of the BSE 500 listed companies, we filtered out those which have shown ROE more than 20 per cent in the consecutive five years
- To be further selective we filtered those companies whose average growth in PAT has been more than 20 per cent over the last five years
- Also, P/E should be less than 15 and the company should have managed to maintain annual profits of over Rs 500 crore


This review appeared in the February 2009 Issue of Wealth Insight.