Graham's magic multiple: Check out stocks that are worth investing for the long term:: ET

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After rallying briefly, the Indian stock market is on a downward spiral again. While this phase is likely to continue for the medium term, it offers investors a good long-term buying opportunity as the valuations have come down to the desired levels. Though the broader market is yet to reach the bear market valuations, several sectors and stocks have already hit rock bottom. It is these pockets of undervalued stocks that offer an opportunity to anyone who follows value investing.

Value investing, however, is not easy because it involves an elaborate analysis to arrive at the intrinsic values of these stocks and then picking only the ones that are quoting at significant discounts to these values. This is because value investing doesn't consider the current market price as a stock's value. More importantly, value investors insist that the difference between the calculated value and current market price (also known as margin of safety) should be substantial. "The strategy should be to buy stocks that are quoting at 50-60% discounts to their intrinsic values," says Raamdeo Agrawal, joint managing director, -Motilal Oswal Securities.

Hindustan Zinc – 2Q12 result update ::RBS

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Hindustan Zinc reported 2QFY12 EBITDA of Rs14.6bn (-8% qoq and +35% yoy), lower than our
forecast with lower volumes due to a maintenance shutdown and no concentrate sales.
Management guides for 450t of silver volumes in FY13 versus our est. of 238t. Maintain Buy.


Zinc-lead production at 200kt declines 4% qoq
􀀟 Refined zinc production was 185kt (-4% qoq and +5% yoy) down sequentially due to a
maintenance shutdown. Saleable lead production (excluding captive consumption) was 15.6kt
(+6% qoq and +8% yoy). Saleable silver production was 41.8kt (+6% qoq and +18% yoy).
Saves lead concentrate for refinery
􀀟 Refined zinc sales volume was 184kt (-4% qoq and +5% yoy). Lead sales were at 14.7kt (flat
qoq and +2% yoy) and silver volumes were at 41.4kt (flat qoq and +12% yoy). With the silver
refinery shortly to be commissioned, the company has not sold any lead and silver
concentrate during the quarter.


EBITDA of Rs14.6bn (-8% qoq and +35% yoy)
􀀟 Net revenues were Rs26.4bn (-7% qoq and +22% yoy) impacted by lower refined metal and
concentrate sales. Mining royalty was up 11% qoq despite flattish production. EBITDA was
Rs14.6bn (-8% qoq and +35% yoy) versus our estimate of Rs16.9bn. Other income was
Rs3.8bn, up 9% qoq. Adj. net profit of Rs13.6bn (-9% qoq and +44% yoy).
Move to percentage of profits dividend policy will increase yield substantially
􀀟 Management highlighted during the conference call that the company has moved to a
percentage of profits dividend policy from a progressive dividend policy. It has announced an
interim dividend of Rs1.5/share for 1HFY12. (22% of profits in 1H versus 9% in FY11). We
note that at current market prices, dividend yield for FY12 could be ~3% if dividend was
maintained at about 20%.
On track for 500 tonne silver capacity by end FY12
􀀟 Company expects to ramp-up the SK mine to 2Mtpa by end FY12. The silver refinery which is
expected to be commissioned this quarter will also ramp-up to 85-90% capacity by 4QFY12.
This will pave the way for 500 tonnes of silver capacity by the same time. Management
guided for 450 tonnes of silver production for FY13F.
Plans to start mining in Kayar mine soon
􀀟 The company plans to start mining in Kayar mine soon with groundbreaking already
complete. The mine has resources of 9Mt with average zinc grade of 10.6% and 1.7% lead
grade. It expects to produce 1Mtpa of ore from the mine.
Valuations attractive; Buy with of Rs182
􀀟 Hindustan Zinc is currently trading at 7.1x/ 6.4x FY12/13F on a PE basis and 3.6x/2.5x
FY12/13F on an EV/EBITDA basis. We have a Buy rating on Hindustan Zinc with TP of
Rs182

Tata Consultancy – Confident stance continues ::RBS

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We hosted TCS's investor meet/conference call. It remains optimistic on demand and is not
witnessing any changes in demand trends/sales cycle, though it is cautious on current macro
weakness. Lower billable days will likely to have a toll on qoq growth momentum within export
revenues in 3Q12.


TCS remains optimistic on demand
􀀟 Most investors queries centered around the impact of current macro on demand. TCS is
clearly witnessing no major impact of macro economic weakness on order book, ramp ups,
sales cycle and spending pattern of clients. TCS continues to witness higher order book qoq
due to wallet share gains from vendor churn/consolidation, increasing cost optimisation from
clients driving higher outsourcing and continuing spend on some of the discretionary services.
􀀟 Secondly it continues to believe that healthy positioning of clients as well as their already
anticipated gradual recovery in global economy post last slowdown in 2008-09 is not driving
any abnormal pattern in IT spending yet.
􀀟 Even in BFSI, TCS remains optimistic on demand visibility given continuing cost optimisation
deals from clients as well as incremental spending on mobility/cloud, core banking and
risk/compliance related services.
􀀟 However TCS is cautious on current macro environment. It is closely observing/reviewing
each of its top clients positioning on regular basis to get any signals regarding budget cuts. Its
recent interactions with most of its clients do not indicate any major change in spending
pattern.
􀀟 TCS is witnessing delay in deal signing from domestic market (contributes 8-9% of revenues)
across various verticals including Government, which has lead to lower than expected growth
from India during 2Q12.
􀀟 TCS attributed the slowdown in growth rates within top-5 clients in past few quarters towards
their large base. However it remain very focussed in terms of driving absolute growth within
these clients by driving cross selling of new offerings and deeper client mining.
􀀟 With higher holidays in offshore as well as onsite location in 3Q12 as well as expected
seasonal plant shutdowns in Manufacturing and Hi-Tech verticals, TCS expects lower qoq
growth within USD International revenues (versus reported growth of 5.9% qoq growth in
2Q12). If we assume the 2Q12 end spot rates for various cross currency to continue during
3Q12, cross currency headwind could be 1-1.3% qoq for TCS. However in terms of business
momentum, TCS is not expecting any slowdown yet entering 3QFY12.
􀀟 Regarding pricing, TCS continues to expect stable pricing with small variation qoq. We
believe that versus TCS's earlier expectation of pricing improvement in 2HFY12, increased
macro headwind starting mid-2Q12 is leading to hard negotiations with clients.
Margin management to remain better
􀀟 TCS reiterated on maintaining EBIT margins at around 27% assuming INR/USD rate of Rs46.
With current spot rates higher, we expect margins to improve for TCS in coming quarters.
􀀟 Despite running tight utilisation, TCS still believes further improvement in utilisation excluding
trainees by 1-2% is possible. However with likely gross addition of 27000-28000 in 2HFY12,
utilisation including trainees may remain soft in coming quarters.

IndusInd Bank – Feeling the pinch ::RBS

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IndusInd's 2QFY12 net profit of Rs1.9bn was ahead of our and Street estimates. However, NIMs
and credit quality were under pressure in the quarter. Given our expectations of continued NIM
pressure in the current elevated interest rate scenario, we maintain Hold.


2QFY12 earnings ahead of estimates
IndusInd Bank’s 2QFY12 net profit of Rs1,931m was ahead of our estimates. NII grew 27% yoy
(7% qoq) as loans grew 29% yoy (6% qoq). NIMs at 3.35% were down 6bp both qoq and yoy,
mainly due to an increase in cost of funds. Reported cost of deposits at 8.16% in 2Q rose 45bp
qoq and 217bp yoy. Reported lending yield rose to 13.8% (up 29bp qoq) with yield in the
corporate loan book (53% of loans) at 11.78% (up 56bp qoq) and retail yields at 16.36% (up 4bp
qoq). Reported core fee income rose 13% qoq and 30% yoy. Credit costs as per the bank stood
at 13bp of loans versus 14bp in 1QFY12.
But implied cost of term deposits and borrowings up 110bp qoq
Based on our analysis, IndusInd’s cost of term deposits and borrowings increased by about
110bp qoq to 10.6% in 2QFY12 (see Table 3 on page 4). On a blended basis, the cost of interestbearing
liabilities rose 81bp qoq to 8.4% in 2QFY12. The bank disclosed that it maintained a
larger deposit and borrowing float through 2Q than the quarter-end figure to benefit from short
term arbitrage opportunities. We expect continued margin pressure if interest rates remain at the
current elevated levels.
Deterioration in credit quality
The bank’s gross NPAs rose 8% on a sequential basis (1.09% of loans) and 16% on a yoy basis
to Rs3.3bn. Delinquencies in 2Q stood at Rs1.3bn (0.56% of loans on a one-year lag and 2.2%
on an annualised basis), with delinquencies in the corporate book rising to Rs710m (0.52% of
corporate loans on a one-year lag) and Rs600m (0.61% of retail loans on a one-year lag). The
bank was confident of maintaining credit quality through the rest of the year . Recovery stood at
Rs1.1bn (46bp of loans as of September 2011).
Expensive valuations and likely margin pressure; we maintain Hold
IndusInd trades at 2.9x FY12F adjusted BV and 17.3x FY12F earnings, a 38% premium to close
peer Yes Bank (Buy, 44% potential upside) on one-year forward BV and a sizeable 60% premium
on FY12F earnings. Our EVA™-based target price of IndusInd is Rs301. We maintain Hold.

Crompton Greaves – Disappointing quarter ::RBS

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CRG's 2QFY12 consolidated PAT at Rs1.16bn (down 45% yoy) was lower than our expectation
of Rs1.42bn. Segmental analysis reveals weak growth and margins across the board. The
balance sheet too has deteriorated on macro and micro headwinds. We will review our earnings
and TP post tomorrow's investor meet.


Disappointing 2QFY12 results; margin disappoints again
Crompton’s (CRG) 2QFY12 consolidated revenue of Rs27bn (up 12.8% yoy) was higher than our
estimate of Rs25.7bn led by better-than-expected revenue at overseas subsidiaries of Rs12.5bn
(up 32% yoy). However, EBITDA margin at 8.4% (down 550bp yoy) came below our expectation
of 10%, largely led by a lower-than-expected improvement in overseas margins. Accordingly,
PAT came in at Rs1.16bn (down 45% yoy), lower than our expectation of Rs1.42bn.
Segmental analysis reveals weak growth and margins
Standalone revenue growth was flat yoy at Rs14.5bn; the power segment saw de-growth of 7%
yoy to Rs6bn, the consumer segment saw tepid growth at 3.6% yoy to Rs4.8bn (slowdown
continued from 1Q) and industrial growth slowed to 9.4% yoy to Rs3.8bn from high double-digit
growth seen in the last six quarters. Standalone EBIT margins declined across segments by 300-
600bp (see Table 2). Overseas subsidiaries’ revenue was up 32% yoy to Rs14.5bn, led by
currency gains (7.7%) and inclusion of recent acquisition (QEI and Emotron) financials in 2QFY12
numbers. The overseas power segment’s EBIT margin, at 2.3% (down 640bp yoy), disappointed
again and is a cause of concern.
Balance sheet deteriorates on macro/micro headwinds
As at 1HFY12-end, consolidated inventory days rose to 62 days of sales from 43 days as at
FY11-end and debtor days rose to 101 days of sales vs 93 days as at FY11 end. New working
capital (excluding cash) rose to 51 days of sales vs 31 days as at FY11 end. Gross debt
increased by 107% (from FY11-end) to Rs9.4bn, possibly led by funding needs for recent
overseas acquisitions and working capital requirements.
We await further clarity on the results in tomorrow’s investor meet
CRG’s investor meeting will be held tomorrow at 10:15 IST. We await further clarity on 2QFY12
results from management. We will then review our earnings and target price.

Rate-hike strategy to fight inflation may backfire: Joseph Stiglitz in ET

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.Joseph E Stiglitz , world-renowned economist and Nobel laureate, believes that India should adopt more innovative ways, such as tightening reserve requirements, to tackle inflation instead of resorting to frequent rate hikes, which can prove to be counterproductive. He also emphasises that the BRIC nations should refrain from extending support to the European Union unless adequate returns are guaranteed. Excerpts from an interview to Smriti Seth :

Your anti-austerity stand has often been criticised as being too short-sighted given the current debt situation in developed countries. What is your response to that?

The answer depends on how the money is spent. If the money is spent on education, technology and infrastructure then the nations' balance sheet looks stronger and they're able to payback what they borrow. This may not be true for Greece, but in US the interest rates are so low that it makes sense.

So we should cut back on wasteful spending like war and increase spending on investment. If we don't invest, we'll go down the Greece route where the economy grows weaker and the revenues go down and we're stuck in a downward spiral.

Do you think the Indian central bank should continue with a tight monetary policy to tackle inflation?

The major reason India is tightening is inflation, but the deeper question is whether raising interest rates is a very cost-effective way of dealing with inflation. We know the inflation-targeting framework has been totally discredited by the crisis.

So one has to be very careful about the use of inflation targeting as the basis of monetary policy. Turkey, for instance, lowered interest rates and tightened reserve requirements to curb inflation. This provided more flexibility, because if it looked like the economy was getting weaker, reserve requirement could be eased to increase lending and it worked better than controlling interest rates. India should also use reserve requirements or other instruments to tackle inflation.

India may impose curbs on imports from China to protect its current account deficit. Are protectionist policies a good idea?

This is certainly against the spirit of the WTO. China has used exchange rate policy very effectively in promoting exports whereas India hasn't been able to do that. India's central bank should consider using the exchange rate policy as a broader way of responding to the flood of imports. I think the imposition of tariffs on Chinese imports would threaten a trade war. Exchange rate policy will be better as it has same broad based effects and will help exporters as well.

What is your assessment of the Indian financial sector? You once said it's as bad as the American system. Could you elaborate?

What I meant was that India's financial sector has been asking for the same kind of deregulation as in the US and it would be a mistake to give in to that. India has fortunately had more regulation and that protected you from some of the excesses. If you went down the same deregulatory route as America you're bound to end up in a similar mess.


Do you expect yuan to emerge as the dominant currency in the near future?

I don't think the currency in which trade occurs is very important. I think its natural that the country that is becoming the largest trading country will have a lot of its trade denominated in their currency, so it's not a big deal.

As far the reserve currency aspect is considered, I think that's overall a disadvantage. When you're the reserve currency, you get people to lend to you at a very low interest rate but you end up exporting currency rather than goods. Exporting currency doesn't create jobs; therefore, I think America's job problem is related to its reserve currency status. So it's all part of the dysfunctional global international exchange rate system.

Would you encourage a group of developing nations to bail out relatively advanced countries?

Greater global stability will be in everybody's interest. The question is will this help. If the euro can't be saved then their help will be futile because it'll just extend a dysfunctional system a little longer. But if they do help, the BRIC nations also have a responsibility to their citizens to get adequate return and not get excessive risk.

It's time to invest in stocks :: Business Line

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As any news of fresh breakout of crisis in Europe or data about the economic slowdown in the US send the Indian stocks diving for cover, fears of 2003 or 2008 crisis coming back haunt the investors.

There are some reasons specific to India — the virtual policy paralysis at the Government level, permitting FDI in retail or liberalising the insurance sector further, recent decision making coal companies share 26 per cent of profit with locals — that spooked metal stocks on Friday. The high interest rates have also undermined investor confidence in stock market.

A look at the BSE Sensex, NSE Nifty, Junior Nifty would show that a good number of fundamentally strong stocks in various sectors, or even stocks outside the main indices, have shed 30-50 per cent of value in the past one year. Their PE ratios have dropped to single digits. The loss in share value appears to be disproportionate to any perceived impact a slowdown would have on the financial results of the companies over a longer period. In some cases, companies have done better so far this year than the corresponding period last year, yet their share prices have dropped.

Despite this fall in stock values, it is time to invest in equities. Here is why.

Apart from the fact that there is no investment tool better equipped than stocks to beat inflation in the long run, Indians are also riding the wave of so many favourable factors that probably not many other countries are enjoying. This offers them a cushion against any temporary setback in their stock investments. Some of the perennial investment favourites of Indians are having the best of times — real estate, gold, bank fixed deposits. And with a favourable demographic wind blowing, these investments may continue to give good returns.

But the most important difference over the two earlier crisis periods appears to be that the fears of losing jobs or suffering a cut in earnings seem to be far removed.

The Indian growth story is not restricted to select sectors such as IT or ITES but is more inclusive now with the manufacturing sector too benefiting from the outsourcing boom. The increase in land and commodity prices has created new rural millionaires and this is reflected in the consumption growth lifestyle goods are witnessing.

If it was inflation that was the bugbear of the Indians for close to two years, leading to continuous rise in interest rates, with the falling commodity prices, particularly crude, there are signs that inflation may moderate in coming months leading to softening of interest rates. This will reflect not only on the bottom-line of the companies but also on the disposable income of investors.

While it could be risky to apply the overall auto numbers for September to other industries for drawing conclusions about Q2 performance, the robust performance of carmakers show that they have reasons to celebrate. The numbers would have a cascading impact on other industries that cater to the sector. When the interest rates begin to decline, the going would only get better for the auto pack, lifting the fortunes of dependent sectors as well.

Buy KEC International; Target :Rs 76 ::ICICI Securities,

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F o r e x   l o s s   s p o  i  l s   t h e   s h o w  …
KEC International (KEC) reported revenue growth of 26% YoY at | 1263
crore, which was above our expectations. The negative surprise came in
from the MTM loss of forex exposure on raw materials and translation
losses to the tune of | 13 crore and | 4 crore, respectively. This coupled
with slower execution in the Middle East led to lower EBITDA margins of
7.2% (decline of 290 bps YoY).  Consequently, PAT at | 22 crore
disappointed as we had built in PAT of | 44 crore. Even though the
management expects to restore margins back to 9% for FY12, the
H1FY12 performance will lead to earnings revision for FY12 and FY13.
ƒ Order backlog growth solid to support revenue visibility
KEC witnessed order backlog growth of 20% YoY to | 8450 crore with
order inflows to the tune of | 1200 crore during Q2FY12. This, we believe,
provides reasonable revenue visibility (book to bill ratio of 1.7x based on
TTM  revenues).  We  estimate  revenue  CAGR  of  16%  CAGR  over  FY11-
FY13E. KEC  is  facing delays  in  its Middle East order book  to  the  tune of  |
400 crore. Overall, 58% of the overall backlog is from international
markets whereas, in terms of business segment. The transmission and
power system business comprises 69% and 23% share in the overall
backlog, respectively, as of Q2FY12.
ƒ Revising down earnings for FY12 and FY13
Given the macro backdrop, particularly for the power sector, and rising
borrowing costs, we are revising down our estimates for FY12 and FY13.
Our revision mainly comes in at the EBITDA level as we have pruned our
margins by 140 bps and 80 bps for FY12 and FY13 to 9% and 9.5%,
respectively. Hence, we have lowered our PAT estimates by 29% and
26% for FY12 and FY13, respectively.
V a l u a t i o n
Though we have revised our PAT estimates sharply for KEC, the
valuations have priced in most of the negatives. Hence, valuations at 8.4x
and 6.7x are attractive. We maintain our BUY rating with a lower target
price of | 76 (9x FY13E EPS)

Forex Corner: Greek drama scripts forex movements :: Business Line

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It was a roller coaster ride in the currency markets over the past fortnight. An unexpected plan by the Greeks early this week for referendum on their bailout package, and the subsequent u-turn (after tough talk by the French and the Germans) found reverberations on movements in global currencies. The Indian rupee swayed along.

RUPEE FIGHTBACK

After touching a 30-month low of 50.17 against the US dollar on October 21, the rupee scrambled back above the psychologically crucial level of 50 early in the following week and has managed to stay there since. On Friday (November 4), the rupee closed at 49.11 to a US dollar, up 91 paise from a fortnight ago.

Much of these gains were registered in the Diwali week in late October, when the rupee taking support from an upbeat domestic equity market, put up a strong show. The 25 basis point hike in the repo rate by the RBI during the week also aided the rupee. On October 31, the rupee traded at 48.69, its 5- week high against the USD.

GRECIAN JITTERS

November though did not start well for global markets and also for the rupee. The bombshell by the Greek Prime Minister, Mr George Papandreou, seeking a referendum on the country's bailout plan threatened to throw into disarray the long-drawn efforts to solve the European debt crisis.

Consequently, the Euro which was gaining against the USD on hopes of crisis resolution was hammered down and the EUR-USD cross fell from a high of 1.419 on October 27 to a low of 1.370 on November 1. The bankruptcy of MF Global and a deceleration in Chinese manufacturing growth added to the global jitters and accelerated flight of funds to ‘dollar safety'.

The effect of weakening of the Euro and strengthening of the dollar was also reflected in the rupee, which shed 57 paise against the USD on November 1 to close at 49.26.

Over the course of the week though, Greece was under heavy pressure from other Euro zone members to reverse its decision.

Threatened with being shunted out of the Euro zone and non-release of bailout funds till the plan was shelved, the Greek Prime Minister changed tack and abandoned the referendum late in the week.

This helped the Euro gain some lost ground against the USD, and as on Friday close, it yielded 1.38 dollars, still below its high of late October.

The Euro's weakness over the last fortnight has seen the INR gain against the currency which now yields Rs 67.99 per unit, as against Rs 69.05 on October 21.

It is also some relief to the global markets that the Greek Prime Minister has won a parliamentary confidence vote early Saturday, which improves the chances of the earlier debt agreement not being cast aside. However, while it seems averted for now, the debt crisis in Greece and Europe is far from resolved. In the weeks ahead, the European debt factor may continue to exert major influence on movements in global currencies including the rupee.

On the domestic front, high inflation could act as a drag on the rupee. However, exports continuing to grow faster than imports, as seen in the recently announced September numbers, could provide support to the currency.

IN THE LIMELIGHT: MF Global ::Business Line

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MF Global, a noted futures and options brokerage, filed for bankruptcy during the week as a $6.3 billion bet on Euro-bonds went awry.

The potent combination of high leverage, volatile markets and poor risk management are believed to have lead to the downfall of the brokerage firm.

KILLER LEVERAGE

MF Global's claim to fame is its role as a derivatives broker.

The company was a force to reckon with on the Chicago Mercantile Exchange (CME). Investor concerns over the broker included immense leverage. The company's net-worth was $1.23 billion whereas it held $41 billion in assets.

Proprietary trading, the practice of trading in various securities to boost their own profits, has come under immense scrutiny following the demise of Bear Stearns and Lehman Brothers during the sub-prime crisis. MF Global, while a fraction of the size of those investment banks, will be remembered as the first notable casualty in the ongoing European debt drama.

THE AWRY BET

MF Global had bet $6.3 billion on Euro-bonds. The simple version: It bought European bonds of countries such as Belgium, Ireland and so on. It then pledged these bonds to raise money. MF Global would then pocket the spread between the lower rate at which the lender loaned it money and the return it would enjoy from holding the bonds till they matured.

MISSING MONEY

If the lender gets squeamish about the institution it has lent to or the asset that has been placed as collateral, it can ask for more collateral to be posted.

That is what precipitated this crisis. With losses registered for four consecutive quarters and little money to spare, MF Global initially looked for interested buyers who could provide capital and help the firm tide over the tight situation. An interested buyer Interactive Brokers claimed that over $600 million of MF Global's client funds were missing. The buyer backed out from a deal leaving MF Global with few options but to file for bankruptcy and the protection which comes with the process. It remains unclear if the said funds are indeed missing.

AFTERMATH

While investigations are on, there are a fresh set of questions about who was to regulate MF Global.

There are as many as six agencies which are said to have oversight on MF Global's operations with the CME and SEC being among them.

MF Global has also been accused of mingling client funds with its own. Questions have been raised over MF Global's risk management, reporting policies and its chief Jon Corzine. (former Chief of Goldman Sachs).

Fidelity Tax Advantage Fund: Invest ::Business Line

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Investors looking to save on taxes by investing in ELSS schemes can consider exposure to Fidelity Tax Advantage Fund (Fidelity Tax), given its steady track record.

Over one-, three- and five-year periods, the fund has outpaced the returns of its benchmark — BSE 200.

It delivered compounded annual returns of 13 per cent over a five-year timeframe, making it one of the best in its category as well as the overall diversified fund universe.

Over this period, the fund has delivered higher returns compared with Franklin India Tax Shield and Sundaram Tax Saver.

The fund manages to contain downsides quite well vis-à-vis its benchmark, while also ensuring adequate participation during market upswings. During the market fall of 2008-09 and in the volatile environment over the past one year, Fidelity Tax has contained losses 5-8 percentage points better than the BSE 200.

In the 2009-10 rally, the fund was able to deliver a similar level of outperformance.

Investors who are yet to exhaust the 80C limit for the current fiscal can park small amounts in Fidelity Tax. Avoid SIPs as every instalment would be subject to the three-year lock in. Tax exemption on equity linked schemes may not continue if the direct tax code comes into force from April 2012.

PORTFOLIO AND STRATEGY

Fidelity Tax takes significant exposure to mid-cap stocks(less than Rs 7,500 crore market capitalisation) as with many funds of this genre.

This has been to the tune of 20-25 per cent of the portfolio across market cycles. This enables the fund to benefit from broader market rallies.

The fund has 60-65 stocks in its portfolio at any point in time and refrains from taking concentrated exposure to individual stocks, thus ensuring a cushion in volatile markets. Exposure to individual stocks is restricted to less than 5 per cent of the portfolio.

The fund also moved to cash levels of 10-15 per cent during the 2008-09 market fall. In the subsequent rally, it was quickly able to deploy the cash to equity. Banks and finance have consistently been the top sector in which the fund has invested. The fund, which had capital goods and petroleum products among its top sectors earlier, has substantially trimmed exposure to these over the past couple of years.

Software, pharmaceuticals and consumer non-durables have consistently figured among the top few sectors held.

Fidelity Tax gained due to the extended rally that the stocks in these sectors witnessed from the market lows. These three sectors have by and large remained immune to the concerns on domestic slowdown and other macroeconomic worries.

Even in terms of weights assigned to each sector, barring banks, exposure is restricted to less than 10 per cent even when a sector experiences considerable momentum.

Over the last one year, the fund moved out of troubled stocks such as SKS Microfinance and Sun TV Network. Underperformers such as REC, OnMobile Global Services and Union Bank of India too have been exited.

Interestingly, stocks that have found their way into the portfolio include mid-cap names such as Persistent Systems, Idea Cellular Redington India and Century Textiles.

Buy Subros; Target : Rs 31 ::ICICI Securities,

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M u t e d   p e r f o r m a n c e ;   v a l u a t i o n s   a t t r a c t i v e . . .
Subros reported its Q2FY12 numbers that were slightly below our
estimates. The topline came in line with our expectation at | 240.5 crore
(I-direct estimate: | 242.1 crore), a dip of 13.6% YoY owing to a decline in
volumes caused by production issues  faced by its major client Maruti.
Thus volumes declined ~8% QoQ  at ~1.8 lakh units however
realisations/unit improved ~4% QoQ to | 13,360 with richer product mix
towards truck & bus segment for Tata Motors and M&M. The company
has started to reap the benefits from the strategy of higher degree of
localisation of parts like RS evaporators and heater core thus providing an
incremental ~720 bps costs saving on YoY basis at 70.4%. EBITDA
margins however declined sequentially to 8.1% (down 217 bps QoQ) as
higher personnel costs (up 138 bps QoQ) as localisation activities
increased domestically. Margins also suffered due to forex impact which
would be provided by key clients with a quarterly lag. The reported PAT
for Q2FY12 came in at | 3.2 crore (down 34.4% YoY and 60.1% QoQ).
ƒ Localisation strategy to reduce forex exposure
The completion of total localisation of components like RS evaporators
and heater core during the quarter is expected to reduce the forex
exposure. The benefit from this is expected to flow through in the coming
quarters. The personnel expenses increased on this account (up 323 bps
YoY) as localisation led to higher salary expenses.
ƒ Key patron Maruti hit by labour unrest
Subros supplies ~73% of its sales to Maruti Suzuki, 16% towards Tata
Motors with M&M contributing ~8% of sales & ~3% from others. Maruti’s
volumes for Q2FY12 were sharply down ~20% YoY as the Manesar
labour unrest led to a loss of ~29,000 units. This resulted in higher
inventory, fixed costs leading to a EBITDA margin slide of ~100 bps QoQ
V a l u a t i o n
We expect the company’s localisation practices to further moderate input
prices and comprehend the current slowdown in domestic automotive
space as a near term phenomenon. At the CMP of | 27, the stock is
trading at 4.0x FY13E EPS. We have valued the stock at 4.5x FY13 EPS of
| 6.9 to arrive at a target price of | 31 with a potential upside of 15%.We
maintain our BUY rating on the stock.

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