The Hindu Business Line : When film magazines talk stocks... just stay away

Six years ago this 24-year-old man joined the Mumbai based Anagram Stockbroking as a clerk and later became a sub broker. Today, at 30, he has made a fortune in the equity market and now devotes himself full time to investing in stocks. "In the last 24 months he would have made, through my office alone, about Rs 11 to Rs 12 crores," says the firm's CEO Darshan Mehta.

Darshan Mehta

But then such spectacular success stories in the equity market do not come easily. "He is disciplined, churns his portfolio strategically, and above all, does research and due diligence right at the ground level."

Recently he picked up two stocks — Wimco and Arvind Mills — (Anagram is owned by the Arvind Group) at around Rs 7 to 8. He exited from Wimco at Rs 30; has sold about 30 per cent of his Arvind stock, and is holding the rest. "Both stocks had a dream run; he spotted both on his own analysis.

He studies very deeply, his conviction is huge, listens to all but is only guided by himself. If you say Hero Honda looks good, he'll go to a showroom, pose as a buyer of a two wheeler, ask how much do you sell, but I've heard TVS Victor is doing better... "

His former boss points out that this is exactly the kind of research one does while buying a Rs 25,000 TV set; get the literature, ask friends and check with neighbours. `Buyer Beware' should be a golden rule to follow while buying a stock. "But I'm shocked to find that people just pick up the phone and say: Mera 200 Hero Honda kharid lo. You spend Rs 60,000 on a stock and have done zero home work; in an era when the retail investor can access data on so many sites. You have to do some due diligence yourself. There is no substitute for hard work," says Mehta.

Reminds me of the confession of a puzzled Gujarati businessman after losing a fortune in the stock market. "While buying bhindis, we break them to see if they are fresh. But we buy shares worth lakhs of rupees without a second thought."

Arun Kejriwal

Arun Kejriwal, founder of Mumbai based Kris Securities, has a lot of faith in the equity story. He believes there are good opportunities in the PSU sector, and first recommended IBP when it was Rs 125 in the Diwali of 2000. When the open offer came from IOC in February 2002 at Rs 1,551 a share, "assuming an investor had bought it at Rs 125 and surrendered his shares to IOC in the open offer, and the balance (about 50 per cent) came back, at its present value of about Rs 300 a share, he would still have made a mind boggling profit of something like 14 times."

So does he know people who did that?

Hardly able to contain his smile, Kejriwal says, "Well, I am one of those." Though he wouldn't like to divulge the number of shares, he adds, "I am now known in the market as the IBP man!"

He zeroed in on IBP in 2000-end because divestment was already on the cards. "I believed this was the easiest company to divest as it did not have any refinery, was a pure marketing company, had a miniscule equity of just Rs 22 crore and it fitted in with the plan of dismanting the APM (administered price mechanism)."

Kejriwal submitted his IBP shares in the open offer, had 56% accepted and is holding on to the rest as he believes there is still steam left in IBP. "Once HPCL and BPCL get divested, the game will start all over again for IBP. At Rs 300, you are buying a pure marketing company earning Rs 100 plus a share and getting a PE (price earnings) of under three, which is attractive."

But for every such success story in the bourses, there are hundreds of stories of retail investors getting their savings wiped out. But most of them have themselves to blame because they do not follow the basic rules of investing, says Mehta, who believes that whether the Sensex is at 6000 or 3000 levels, you can find good value or get duped. "At 6000 there was value to be discovered if you looked hard enough. The Sensex reached a low of 2600 around Sep. 21, 2001, and from then to now the index has appreciated 25 per cent. Yet at that level there were five stocks of top quality that have depreciated by over 50 per cent even though the index appreciated 25 per cent. So even by buying when the index is low, if you invest in wrong stocks you can destroy value; and vice versa."

Another of his `golden rules' for retail investors is "never attempt to sell at the peak and buy at the low. Many investors have a fascination for decimal prices; when Infosys comes to Rs 3,500, I'll sell. What you don't realise is that too many people are thinking of Rs 3,500 and stocks can also meet resistance."

He gives the example of one of his very large investors... "an elderly gentleman who owns 6,000 shares of Infosys. A few months ago, when Infosys was Rs 3,890, he asked me and I gave a clear `Sell' on it saying it is a great company but over valued and he said I'll sell when it goes above Rs 4,000. It actually touched Rs 4,000 momentarily but he was not able to exit. He is still caught playing the numbers game. He again spoke to me on the eve of Infosys results and I told him to sell before the results. My next advice was to put a stop loss at Rs 3,250. Even though he had bought Infosys at very low value, that has only historical significance; to my mind he has made a loss."

The next rule is; have the discipline to chuck out bad shares. "Many investors wait for the purchase price, which has only historical significance — to your auditor and your income tax man. Beyond that it is useless to say I bought it at Rs 100; currently it is Rs 60; if it comes back to Rs 100 I will sell it. If you don't like a stock and feel you've bought a wrong stock, exit and switch into something else. But if you like the stock; then pick up more if it goes down to Rs 60 and don't talk of selling at Rs 100. It's like brooding that you've missed a bus, but only if you look to your right, more buses are coming in. So don't brood over opportunities lost in the stock market because there are more opportunities around the corner."

Kejriwal finds the PSU sector one such opportunity. "The IBP divestment was an eye opener, and as a result the value of many PSUs has suddenly doubled over the last three months. Now people realise that that PSU divestment is a reality and every Government will be committed to it. It has opened the eyes of industrialists that the days when they could buy something for one fifth or one tenth of the price are over. They have to bid and pay a fair price. Also, though some of these companies had some sort of monopoly, they were able to make profits despite inefficiency, babudom and political interference. So if these three factors are removed when the management moves to private hands, you can have efficiency doubling overnight."

Giving the example of BPCL and HPCL, he says that the presence of a Shell in India is going to transform a mundane activity as filling up your car or two wheeler with petrol and a chain of retailing activity can build up from the gas station.

Besides petroleum companies, he sees great value in both PSU as well as some private banks. "Many PSU banking stocks are available at 1.5 to 2 PE multiple. Again the retail concept is picking up and different financial products are becoming available."

His favourite is Bank of India, which has moved up from Rs 9 to 30 in the last 18 months. "Even at the current price the bank has roughly Rs 15 to 17 EPS. Which means you are buying the share at 2 PE multiple. And there is a misconception among investors that all the treasury gains of the Government securities, which have come by the way of falling interest rates over the last couple of years have been fully booked. It is not so; a lot of them are still remaining and they would be booked as time passes. This is still a hidden or untapped asset available," says Kejriwal.

He first recommended the stock the day Ketan Parekh was arrested (March 2001) and the scam broke. "The stock was available at Rs 9. The liability of Ketan Parekh towards the BoI was around Rs 127 crore, which is roughly one fourth of the bank's equity at around Rs 600 crore. And Rs 7 was shaved off the stock in a span of three days. Clearly you cannot have something like five times the liability being shaved off the market cap of any company."

So he recommend the stock at Rs 9 and it went up to Rs 35 (cum dividend) in a span of 15 months. The stock was driven up by the Government reducing its equity in almost all the PSU banks between 20 to 30 per cent, pushing up the EPS as the base of the bank reduced. Also, despite banks doing well in the last few months, BoI is still available at current year's earnings of under 2 PE.

The analyst believes that there could be a short term fall to Rs 25 or Rs 26; but with the turn around in the banking industry as a whole and the fact that the peer in the private sector banking — HDFC bank — and the largest public sector bank State Bank of India, are available at roughly 5.5 to 6 PE, "something at 2 PE is fairly attractive."

Besides the PSU banks, "there are some private sector banks which are sitting ducks for take over by foreign banks. One such bank is Federal Bank, with ICICI having a large chunk, which it wants to dispose of. Whoever buys the ICICI chunk will also have to make an open offer. Even here there might be some immediate downsize in the price of the stock but once such a deal goes through, the money could double in the next six to eight months."

That brings you to the next rule of investing; the time horizon. Kejriwal feels that a minimum horizon of three to six months is needed. "And if you want big money; 50 per cent or higher, you have to factor in a 12-month horizon."

Other sectors which are looking good to him at present are auto ancillaries; tyres, batteries, and similar component manufacturers. "Whether Hyundai, Maruti or two-wheelers, overall the sector is growing. In this sector he recommends Mahindra and Mahindra and in the tyres category, Good Year and Apollo Tyres.

He is also bullish on the capital goods sector where a turnaround is being seen in many of the equipment manufacturers. "Thermax has reported profit and a good healthy bottomline after going through two bad years. The stock is available at Rs 140; it has reported a first quarter profit, which it has not done in the last five years because the first quarter is normally a very bad period for the industry, coming as it does after March and the Budget blues and with the monsoon still away. Also, The monsoon fear which was overplayed in the third week of July is easing off so people who are connected with agricultural products; PVC and pipe manufacturers, fertiliser companies and the like, will do well."

But Mehta feels that more than sectors, individual stock picks do better in India. "Very rarely you have a sectoral story in India; so beyond a point, don't get carried away by sector stories. Even in technology, I would say that in India we do not have more than six good companies. But the outperforming sector of this year will be the pharma sector." Even though expensive, he pitches for Dr. Reddy and Ranbaxy, quoting the adage, "If you throw peanuts, you'll only get monkeys".

When asked for specific picks, he recommends in the PSU basket "efficiently performing companies like an HPCL, BPCL, Nalco, or ONGC; these are inherently profit <147,1,0>making companies. But if you buy a loss making company like Rashtriya Chemical and Fertilsers, just waiting for the PSU divestment trigger, it may not happen and may test your patience!"

Other shares at the lower end of the spectrum "I like are BOI, Ipca Laboratiory, West Coast Papers and Arvind Mills. At a higher level, I would buy Ranbaxy, Dr. Reddy's Laboratories, Hero Honda (sub Rs 300) and HDFC bank at Rs 200."

But the important thing to remember is that "every investor has his unique RQ (risk quotient). It is unique and just like a person's IQ. You have to find it and stick to it. There is no point in asking me what are you buying. It is like going to a barber and asking for Aamir Khan's hairstyle, which might not suit you."

But whatever your RQ, steer clear of companies whose business you don't understand, he warns. Of the 1000 plus fairly liquid companies available in India, it would be easy to find 15 companies whose business you can understand. "If you don't understand what Rolta does, there is no compulsion to invest. There might be an opportunity there but if you don't understand its business stay away. On the other hand, if you are an IT professional and understand what Rolta does, fantastic; go ahead and invest!"

Robust and transparent management, honesty, effective corporate governance, dynamism and innovation are other qualities to look out for, adds Mehta. And once you've found these companies, look at the valuations. "A good house at Rs. 3000 a sq. ft it makes sense but not at Rs. 4200 a sq. ft. Infosys and HLL are great companies with excellent managements. But they are expensive. The last people to get into a stock are the retail investors, and they often end up suckers. So always look out for 52- week highs and lows, and then zero in on the three week high and low, to know what kind of run up the stock has already had. If a stock was Rs. 40 three weeks back and has gone up to Rs. 110 and is quoted as a very hot tip, please understand that you are being made a sucker and would be providing an exit to a whole lot of people who bought it at lower levels and have pumped up that stock."

In case you are wondering why IT stocks have not been mentioned Kejriwal says that this would depend on how deep is the present crisis of confidence in accounting norms in the US. With the deadline of Aug. 14, when all American companies will have to come clean with disclosures, being just a few weeks away, "why jump the gun? August 14 will be a red letter day and the market can turn in either direction".

Agreeing with him on technology is Porinju Veliyath, Portfolio Manager of Geojit Securities. "There is lack of clarity and even in the bigger and better companies the managements are reluctant to talk about the next quarter."

He feels that the present bear market reflects the crisis of confidence; beginning with the world markets and ending with the monsoon blues at home. "This is a good opportunity to buy, but investors should not jump in. Buy slowly, and look at old economy stocks in sectors like steel, cement and speciality chemicals. Look at companies that make daily consumption products, sell in the Indian market but are also internationally competitive. They have better safety levels."

He agrees with Mehta on the need to be company specific. "I would pick companies with very low PEs, like Kesoram Industries. Priced around Rs. 30, it is making profit and gave a dividend of Rs. 2 this year. In steel, other than Tisco and SAIL, we have companies with poor quality of management. But as a compromise we have to buy some stocks from the Jindal group though the management quality is poor. The fortune of companies in their fold is changing and I would bet on Jindal Iron; after two years of loss they have made profit this quarter. Then there is Unichem Labs, which is doing well and available at a low PE."

As far as returns from the equity market are concerned Kejriwal feels that when debt/fixed instruments are giving under 8% returns, in equity one can definitely do better. An average investor with a time horizon of eight to 12 months should be able to get a 15 to 20 per cent annualised income from equity. "A little savvy investor who is able to do some home work, could target between 20 to 30 per cent returns, and somebody who is clearly market savvy and is able to read between the lines, can target between 30 to 45 per cent."

That is indeed a lot of money, which won't come in if you are not diligent, patient and hard working, and you buy your stocks with less care than you would your vegetables at the local mandi. Buy with a target price in mind and when that is achieved, control your greed, and exit. "But the problem is that investor are able to pick a stock and even reach the expected price too. But then they wait for it to appreciate further and watch their profit vanishing when the market falls."

So how do you decide when to buy?

Mehta has the last word here. "When cinema or women's weeklies start talking about the stock market, that is the time to exit and put your money into tax relief bonds. The time to actually buy or go gung ho is when stock market becomes a bad word. You meet a friend, start talking of the share market and he says "Chhoro yaar, let's not talk of something so depressing", that is a good time to buy."

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