Second Coming

Though the current rally in the B group shares of the BSE has been stronger than the previous bull run in the second quarter of 1997-98, it is still unlikely to sustain.

The Smart Investor looks at some stocks that can be bought in the B group

january 1, 1998: 210 scrips in the midcap segment of the NSE hit the upper end of the price band during intraday trading. In the final count, 79 scrips were frozen. The Crisil-500 index gains 8.97 points to 676.38 points and the BSE Sensex gains 36 points to close at 3694.62 points over the previous day.

 

January 2, 1998: More than 100 scrips attract the circuit filter at the higher level on the NSE and about 50 stocks close at the circuit filter level. The Crisil-Midcap index gains 5.7 points to close at 437.17.

On January 4: As many as 226 scrips hit the upper end of the circuit breaker on the NSE.

The scene on the BSE was no different.

Going by the number of scrips which continued to hit the upper limit of the circuit filter, almost everybody was heralding the return of a boom for the small and mid sized companies. Explains a Mumbai-based broker, In the past three months, bad market sentiments have seen a lot of good fundamental companies in the midcap segment touching new lows. He also adds, At current valuations, these scrips appear attractive and which in turn attracted a lot of buying interest.

But how long will the bull run in the midcap segment continue and is the rally sustainable? To check this out, The Smart Investor looks at some of the key parameters like advance-decline ratio, volumes in the midcap and the smallcap segments and what have been the trends of the bull runs in these stocks in the past two years.

When the BSE Sensex rises, it takes the largecap companies along with it. The midcap and the smallcap companies may or may not follow suit. Advance-decline ratio is one of the key indicator and is a simple signal for stock price recovery. If the ratio of advances-to-declines is higher than one then it indicates that there is an overall upward trend in the market and if the ratio is less than one it indicates a downward movement. For this purpose The Smart Investor constructed two separate indices for the advances and the declines on an equal weights basis.

The stocks selected for the two indices were taken only if they had been traded in the weeks closing January 5, 1998 and December 12, 1997 (the period in which the Sensex has risen 390 points). The equal weights are assigned to prevent the index from being skewed by a few scrips in the index. Simultaneously, the volumes in both the B and B1 group were observed. For the purpose of analysis the last three short term bull phases occurring between from January 25, 1996 till January 5, 1998 have been taken.

The Smart Investor Index (advances) rose from a low of 51.30 to 61.38 on 5/1198 and the Smart Investor Index (declines) also rose but moderately from a low of 43.49 to 44.42 . The advances-to-declines ratio has been positive in this rally beginning December 12, 1997 and ending January 5, 1998 rising to 1.91 from 0.29 in the bull period from January 1, 1996 to June 21, 1996.

We take a look at four phases of the market movements since 1996; two are bull phases and two are bear phases. The first bear phase starts on June 6, 1996 and ends on December 5, 1996. The second is the bull phase begining on December 6, 1996 and ending on August 7, 1997. The third is the bear phase begining on August 8, 1997 and ending on December 11, 1997. The last phase is the bull phase starting on December 12, 1997 and ending on January 1, 1998. The advances-to-declines ratio has been calculated over the daily data in the above mentioned phases for both the B1 and the B group which are plotted in the charts. On an average the advances-to-declines ratio has been less than one in the bear phase and has been greater than one in the bull phase.

In the first bear phase (see chart 21/6/96-5/12/96) witnessed an overall decline across various market segments. Crisil-500 dropped 259 points to close at 541.22 points. The average advances-to-declines ratio in this period was less than one.

In the first bull phase (see chart 6/12/96-7/8/97) the market witnessed an upward movement which can be seen from the Crisil-500 gaining 270 points to close at 815.24 points. The average advances-to-decline ratio in this period was greater than one indicating the general upward movement of the market.

The second bear phase (See chart 8/8/97-11/12/97), which gives the downward trend of the market. During this period the average advances-to-declines ratio was less than one.

The last bull phase of the analysis was during the period starting December 12, 1997 (see chart 12/12/97-5/1/98) the market was in an upward movement which also filtered down into the B group which can be seen from the advances-to-declines ratio chart.

One important caveat in this analysis is that the average number of stocks that were traded has decreased over the period. The reason for this decline is that in the year 1996, investors were unloading most of the illiquid and dud stocks which they had bought in the primary market boom of 1994 and currently the stocks that are currently being traded are those which attract genuine buying interests in the B group.

The volumes have also witnessed an increase during the same period. The B group volumes increased from 2.1 million shares on December 12, 1997 to 3.78 million shares on January 5, 1998. As a percentage of the total BSE volumes, the B group volumes have also increased during the same period from 6.06 per cent to 8.54 per cent.

Our analysis of the past trend indicates that the B group always trails the BSE-Sensex with a time lag of a week or two and the latest short term bull run which started on December 12, 1997 saw the Sensex moving up by nearly 390 points from 3739.62.

Another important point to note is that most of the B group stocks have very low market capitalisation because of their low equity levels. This acts as a deterrent for FIIs who invest in stocks which are more liquid and the floating stock available in this market segment is not sufficient enough for FIIs to invest. Almost all the B group transactions are by individual investors and hence the liquidity for the small investors is not a problem.

The last three trading sessions have seen the market going down from its highs and market sentiment also seem to have changed with the news of Moodys planning to downgrade India. Any optimism at present for B1 and B group stocks as a whole is thus misplaced. But some stocks in the B group may still hold out promise, but their number does not justify a widespread rally in these stocks as such rallies are unlikely to sustain and should be utilised by investors to liquidate dud stocks in their portfolio.

Here are some of the stocks which The Smart Investor finds investment worthy at this point and can be looked at as they offer an upside potential.

Asian Electronics

Asian Electronics has seen a massive bear hammering and depreciated by nearly 41 per cent from a high of Rs 140.75 on July 30, 1997 to Rs 80 on December 12, 1997. But since then it has moved up to Rs 90.50.

What makes this stock still attractive is the fact that Asian Electronics has been able to perform despite a sluggish growth in the electrical equipment industry. In the first half of 1997-98, turnover increased 19.05 per cent to Rs 57.43 crore and net profit grew 37.98 per cent to Rs 7.12 crore. Significantly, its operating profit margin (OPM) improved by 1.74 percentage points to 17.39 per cent. The company's performance in the first half of 1997-98 would have been even better but for the CBDT directive on sale and leaseback by SEBs. However, this problem has been now sorted out with the SEBs.

Asian Electronics' future growth depends on how well it implements the US-based Energy Saving Company (Esco) project. This project is being funded by the International Finance Corporation, Washington and the World Bank. Recently, International Finance Corporation has invested Rs 19.8 crore by picking up 12.25 per cent of the company's equity at a premium of Rs 190 per share. It is also advancing a debt of $16 million for the Esco project.

Asian Electronics had touched a high of Rs 150, but subsequently declined and at its current price level it remains an attractive long term buy.

Merind

The share price of Merind has lost nearly 39 per cent from a high of Rs 178.50 on August 6, 1997 to a low of Rs 108 on November 24, 1997. Its present sell-off is almost ruled out and the focus of the management now appears to be on increasing its valuations to fetch a better price in the near future. The Tatas expect a price of Rs 285-300 against a valuation of Rs 160-180 done by KPMG-Peat Marwick. Considering its size and product profile, the expected price looked steep and consequently Merind lost its buyers.

Merind's main business areas are human health (largely formulations and less bulk), animal health and diagnostics. It has a limited range of products most of them being under Drug Price Control Order (DPCO). It has a virtual monopoly in vitamin B12, a vital input for vitamin-based formulations. B12 is fortunately out of DPCO and has the advantage of high entry barriers in terms of high capital cost and complex fermentation process. But the vitamin formulations market is overcrowded with many of the other vitamin bulks under DPCO thus affecting its realisations.

Merind's net profit in the first half of 1997-98 increased 43.9 per cent to Rs 38.69 crore though its turnover increased by 12.9 per cent to Rs 77.72 crore. In fact, its profit for the first half this year is at the same level as that of the last full year (Rs 38.61 crore). This is mainly on account of value addition by the company.

Vikas WSP

Vikas WSP's share price declined by a mere 18.52 per cent between August 14, 1997 and October 17, 1997, which is relatively a small fall compared to other scrips in the B group. The stock is currently trading at Rs 112, discounting its latest earnings only four times. At its current price level the stock still holds potential.

Vikas WSP enjoys a near monopoly in the production of certain agro-based speciality polymer and derivatives. A 100 per cent export unit, Vikas WSP is the major producer of agro products like guar polymer and its derivatives which find application in food processing, pharmaceuticals, oil drilling and textiles. Its products have a strong demand in the international market especially in the US, Germany, UK and Italy.

Its first half financial performance in 1997-98 surprised most analysts. Net profit grew 100 per cent to Rs 14.10 crore from Rs 7.03 crore in the corresponding period in 1996-97. Sales grew by 77.66 per cent to Rs 49.07 crore. This indicates that its expansion has paid off. The company had installed additional capacity for odourless guar polymer (4,800 tonnes) and VHV guar polymer (4,800 tonnes) in May 1996.

Vikas WSP is funding its ongoing investment programme through a mixture of debt and internal accruals. It is putting additional capacity of 18,900 tonnes of odourless guar polymer and derivative which is expected to commence production in the second half of 1997-98. This in turn should help the company post better results.

HOEC

The share price of Hindustan Oil Exploration Company (HOEC) declined from a high of Rs 63.25 on August 6, 1997 to Rs 36.25 on December 11. But since then it is trading at Rs 40.75.

HOEC's major goldmine has been its Cauvery offshore block PY-3, which is the largest block to be acquired by the company. For this block, HOEC has a production-sharing agreement for a 21 per cent share in a consortium with ONGC (40 per cent), Tata Petrodyne (21 per cent) and Hardy Oil & Gas (18 per cent).

The consortium has drilled four wells in this block. Till now only one well has been found dry. However, testing of other wells has been completed and production has commenced since the end of July 1997. The field currently produces around 10,000-11,000 barrels per day. This in turn is expected to add Rs 30.05 crore to the turnover and Rs 17 crore in the current year.

HOEC is also expected to benefit from the expected revision of crude oil prices for the Asjol block, where it has a 50 per cent control in a consortium with Gujarat State Petroleum Corporation. Initially, the crude price has fixed a provisional price of Rs 3,122 per tonne is expected to be revised to above Rs 4,000 per tonne which would be applicable retrospectively from March 1995.

HOEC's total income of Rs 10.98 crore in the first half of 1997-98 included Rs 9.83 crore profit from the sale of shares of Gujarat Gas Company. Net profit was Rs 9.07 crore up from Rs 1.84 crore in the corresponding previous period.

It is expected to achieve an earnings per share of Rs 3.91 in 1997-98, which discounts its current market price about 10.43 times. This quality of earnings should improve in the future and at the current price of Rs 40, the stock is attractive.

Crisil

After Standard & Poor picked up a nine per cent stake in Crisil (Credit Rating Information Services of India), its share price has zoomed from Rs 220 in Feburary 1997 to a high of Rs 506 on October 31 1997. Since then, it has declined and is currently trading at Rs 464.75, discounting its latest earnings by 29.56 times. Even at this level, the Crisil stock holds a lot of upside potential as the debt market in India is still evolving.

Crisil is mainly in the business of credit rating, information service and advisory services. Its main income comes from credit rating. Till September 30, 1997, it had rated 2,497 number of debt instruments amounting to Rs 167,766 crore in volume terms.

In the first half of 1997-98, it had rated 288 instruments (Rs 28,047 crore in volume terms) as compared to Rs 204 instruments (Rs 13,739 crore in volume terms) in the corresponding previous period -- a 31 per cent growth in number terms and104 per cent in volume terms. Its total income grew by 36 per cent to Rs 16.85 crore and its net profit by 37 per cent to Rs 3.74 crore.

Recently, it has actively assisted the government in the disinvestment of public sector undertakings and in their valuation. Crisil's business is expected to grow even further after the recent RBI guidelines for non-banking finance companies.Investors can consider investing in Crisil for the medium term.

Orchid Chemicals

The Orchid Chemicals and Pharmaceuticals scrip declined 42.27 from a high of Rs 123 on October 30, 1997 to Rs 87.75 on January 5, 1998. It is current trading at Rs 80, discounting its latest annualised earning by mere four times. But it still holds solid upside potential as the company is expected to do better for the full year.

Orchid's performance in the first half of 1997-98 failed to maintain its previous trend. Net profit grew only 21.4 per cent to Rs 17.06 crore in the first half against a 76 per cent growth achieved in September 1996. Lower price realisations, higher interest and depreciation charges contributed to the slowdown.

Its sales grew by 35 per cent to Rs 113.94 crore against 13 per cent in the first half of 1996-97. Penicillin-G is the main raw material for Orchid's products -- cephalosporins. Penicillin-G accounts for around 40 per cent of total cost of production. Prices of Penicillin-G came down by 45 per cent in the first half of 1997-98 against the previous year.

Orchid is adding steriles capacities and is going into the forward integration of sterile cephalosporin formulations. These projects are expected to be commissioned fully by September 1998, which will eliminate dependence on the oral segment. Orchid Chemicals and Pharmaceuticals is expected to bounce back with excellent performance in the second half of 1998-99 onwards.

Vashisti Detergents

The share prices of Vashisti Detergents (VDL) dipped by 49.2 per cent from a high of Rs 62.50 on July 7, 1997 to Rs 31.75 on December 11, 1997. The stock is currently trading at Rs 41.50 and at this price it still holds goods potential.

Consequent to the amalgamation of Tomco with Hindustan Lever in December 1994, Tomco's 21.8 per cent stake in the company moved to HLL. In February 1996, HLL also acquired Maharashtra Petrochemicals Corporation's 11.1 per cent stake in the company.

Later, Hinduja Finance disinvested its five per cent stake in the company, which was part of its profit booking exercise. The formalities of taking over the company by HLL has been completed. Now, HLL is the sole promoter of VDL with a 32.9 per cent equity. And most marketmen expect VDL to merge with HLL.

VDL has a long term sourcing agreement with Hindustan Lever to ensure full volume offtake of its production. It presently manufactures various brands of toilet soaps, detergent cakes and detergent powder based on orders received from HLL. Subsequent to the debottlenecking exercise initiated as part of the revival plan, VDL's capacity has been increased from 45,000 tonnes to 80,000 tonnes. The management is now focusing on improving capacity utilisation levels at the plant.

VDL's operating and financial performance has shown an improving trend and the business and financial outlook appears positive. In the first half of 1997-98, it registered a net profit of Rs 0.25 crore against a loss of Rs 4.03 crore in the previous corresponding period and sales grew by 42.25 per cent to Rs 78.24 crore. At the current price, Vashisti Detergents is attractive for the medium term.