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Analysis: 7 fallen angels of the Indian markets

Believe the market is full of opportunities as many stocks are under owned

Jitendra Kumar Gupta  |  Mumbai 

As the bulls move up, the market pundits are busy searching under valued that could give better returns and outperform. Importantly they believe the is still full of opportunities as many of the are under owned, under valued and under performing. With the same idea of identifying under valued, under owned and under performing stock in the Indian equity markets, the leading foreign brokerage BofA Merrill Lynch has prepared a list of seven such also termed as “Fallen Angels”.

"In an effort to find attractive that are ignored by the market, we have run screens to look at that are under-owned and ignored by the market and have consequently under-performed the market and are cheap relative to its historic trading history" says Jyotivardhan Jaipuria, who prepared the report at BofA Merrill Lynch.

Broader market though has moved but there are many stock which are trading at the historical low levels and in many of the case the valuations are significantly low. Among such companies it is well know that mostly the companies which are highly susceptible with the economic situation in the country have been trading lower. Majority of these companies includes the rate sensitive and the companies in capex sector. Here is brief note on seven such companies prepared by BofA Merrill Lynch.

Jaiprakash Associates (JPA)

The brokerage says that JPA’s shares have substantial upside potential (irrespective of part cement sector divestment), as the company is set to monetize resources (coal, hydro and realty) to improve profitability as it peaks capex, generates free cash flow (FCF) and reduce leverage. It also belives that that over the financial year 12-15, JPA will sweat the assets it accumulated over the past decade to demonstrate its superior profitability like RoE of 23% accounted by Karcham power project, JP Infra's EBITDA Margin at 55% and cement valued at bottom-cycle in EBITDA per tonne tonne of Rs 750 despite start-up losses.


According to the brokerage the company is regaining traction in the market as reflected in the large and transformational deal wins at highest ever in past 6 quarters along with acquisition of a strategic asset during second quarter. Besides it is believed to be correcting its response to commodetised application and expanding offerings using the acquisitions like Lodestone acquisition for improving footprint in consulting. The company is trading at 18% discount to TCS.


The brokerage foresee strong operational performance by DLF starting financial year 2013 into FY14 as the company accelerates new residential project launches across India including the much-awaited super-luxury project launch in its core market – Gurgaon (Golf Course Road) after 4 years. The analyst also said that there is an upside to its NAV estimates as assumptions of sale price of Rs 15,000 per sq ft is lower than the management’s guidance of Rs18,000-20,000 per sq ft. The stock’s performance in the medium term will depend on new launches and its ability to conclude non-core assets sales and corresponding cut in debt.

Apart from the above mentioned there are several other where the brokerage does not have a Buy rating but they fit the above criteria. Here are the remaining four where the brokerage identifies some triggers that could make these more attractive.

State Bank of India

As the economy improves there are two main triggers  for the bank that the brokerage has listed. One is improving loan to deposit ratio coupled with re-pricing of residual bulk deposits helping NIMs of the bank. Second the asset quality improvement leading to reduction in credit costs. In fact as the asset quality shows signs of improvement, one could see material down shift in credit costs and rise in profitability. However the near term headwinds will persist with volatility in slippages. However, SBI’s strong liability franchise and turnaround in asset quality may provide justification of its premium over other Government Banks. Besides, the current valuations are at a 20-25% discount to its 5 year average, which should normalize back, as worries on SBI diminish.

Reliance Industries (RIL)

In the case of RIL there are two possible triggers a better refining and petchem margins and positive news flow in E&P like significant discovery and higher than expected hike in KG D6 gas price. How refining margins (GRM) pan out is the key to the earnings outlook of RIL. RIL's financial year 2014 EPS and year-on-year growth would be significantly higher than the expected 8% if its GRM is significantly higher than $8.1/bbl assumed by the analyst.


The company could benefit if Government kick starts power capex by solving coal linkage issue and restore purchase preference. The brokerage believes that the government is able to fix coal supply problems and start linkage window. Besides, BHEL is able to successfully expand in non-power business such as transportation, T&D and defense, which could act as positive trigger for the company.

Adani Enterprises

The company could benefit if it is able to reduce power losses by either getting tariff hike on aggressively bid PPAs with Gujarat and Maharashtra government discos or secure global coal mine with delivered cost of $40 per tonne. Also if it is able to cut the group capex, especially Australia mine capex, to control leverage that could benefit the company. Besides the report also highlights that if the company is able to improve corporate governance and honor inter-group contracts that could act as positive catalyst for the company.  

First Published: Tue, December 04 2012. 19:10 IST