Lead Runners
The Economic Times, October 26, 2009
With the market gaining back its lost lustre, a number of stocks have hit their all-time highs. ET Intelligence Group investigates which ones in the lot still have some fire left in them

Since beginning its recovery on March 9, the benchmark Nifty index of the National Stock Exchange has almost doubled but it still has some way to go before regaining its all-time high of 6,288 on January 8, 2008. Notwithstanding this, a number of stocks have already made new all-time highs. So, are these counters over-heated? In which case, should investors sell? Or is there still room for further rise, allowing investors the chance to either hold or buy? ET Intelligence Group tries to understand by shining a light on some stocks, which have recently made all-time highs. Prominent in this list are stocks of public sector State Bank of India, Punjab National Bank, Bank of Baroda, Bank of India and Union Bank of India. This should surprise noone because the net profit of these five banks grew at an average rate of 43% year-on-year in FY 2009 and 57% in the June 2009 quarter. Coming it as it did in the backdrop of tough times, wherein the profit growth of India Inc slowed considerably, their performance was outstanding.

Moreover, top PSU banks have implemented reforms in the form of core banking solutions, rationalization of compensation structure and improvement in asset quality, among others, in the past few years. These measures have helped them bridge the gap with their private counterparts to a great extent. So, the rise in stock price was justified. But what should the investors do at current levels?

It seems that these PSU banks will continue to grow at high rates given their aggressive strategies in recent times. All the PSU Banks, which have seen new all-time highs in stock price grew their loan book at higher rates than industry in the June 2009 quarter. Moreover, despite a huge upsurge in their stock prices, their valuations still seem to be reasonable. For instance, State Bank of India is trading at 15 times its trailing twelve months earnings compared to 23 times when it made its previous all-time high in January 2008. Given the reasonable valuations and expected growth, retail investors can still buy the stocks of these five banks. In finance another stock, which has caught investor’s fancy is LIC Housing Finance. The second largest mortgage player is growing at high rates and has improved its market share. In FY 2009, its profit grew by 37%. However, the rally has taken its stock price a bit too far. At 2.7 times its book value, it is trading at highest valuations in the current decade. Investors are advised to sell the stock at current level.

The stocks of pharmaceutical companies, too, have soared in the current rally. Dr Reddy’s Labs, Cipla, Lupin and GlaxoSmithkline Pharma

– all have made a new all-time high recently. Unlike banking, where all top state-owned banks offer scope to investors to take further exposure, in the pharma space only Dr Reddy’s Labs offers some opportunity. The company has undertaken measures to increase its profitability. With recovery in the company’s US and domestic business, its prospects are looking up for now. It remains a buy at the current valuations.

 Investors should book profits on other pharma stocks, as their valuations look stretched. Glaxosmithkline Pharma is one of the costliest pharma stocks with a price to earnings (P/E) multiple of 29. The company’s growth is muted and it gives more emphasis on profits rather than growing sales. It would be advisable for the longterm investor to sell the stock and book some profit at current levels. Likewise, investors are advised to sell Cipla too as it is facing a dearth of cash flows, so much so that its balance sheet is increasingly looking like a capital-intensive company rather than a pharma company. Lupin is one of the fast-growing mid-sized pharma companies but at the current P/E of 23, the valuations look rich. Investors should wait for correction and only then buy this stock.

Apart from banks and pharma, there is no other sector, which can boast of a spate of stocks making new all-time high. Surprisingly, in the IT space, Infosys Technologies has made a new all-time high. The stock had starting falling in 2007 itself — when equities were booming — owing to the appreciation of the rupee. The stock has run up in the past few weeks and it now trades at a P/E of 21. The company has guided for a subdued performance in the second half of the fiscal. While it has reported improved decision-making cycles among its clients, a full recovery is yet to be seen. Given all this, investors can wait before they add Infosys to their portfolio. Existing shareholders are advised to hold their stakes.

Another IT stock, which has caught the frenzy of late, is Mphasis. The company is expected to get a fillip from the acquisition of AIGSS, the captive back-office arm of AIG, which has added insurance into its software development and maintenance portfolio. The acquisition is expected to double Mphasis’s revenue from the banking and financial services segment. Mphasis has also seen a gradual improvement in profit margins post the HP-EDS deal. On a standalone basis itself (without consolidating AIGSS), the stock is trading at a discount to top rung IT companies. Investors are advised to buy this stock.

Like IT threw up a few surprises, a few metal stocks reached new all-time highs. Sesa Goa’s stock has more than tripled in the past six months. This is because the company is in expansion mode and has raised capital in recent months. At current price, the stock is trading at a P/E of 17. The valuation does not seem to be too stretched considering the fact that the stock was trading at a P/E of more than 20 at the end of 2007 – when iron-ore prices were close to the current level. Investors are advised to hold the stock.

Jindal Steel’s stock price is trading at almost seven times its year-ago level. The current rise in market cap is backed by strong growth in earning, mainly from the power business. Its consolidated P/E multiple is in the range of 15-17, which is similar to its historical average level. Again, investors are advised to hold the stock.

Scorching Ahead

CLOSELYlinked to metal prices is auto industry, as metal is the primary raw material. In the same time frame, as we have seen few metal stocks making new highs, even few auto stocks have caught the fever. Maruti Suzuki and Hero Hondahave made new all time highs. Their financial results for Sept’09 quarter have justified the price appreciation, as Hero Honda and Maruti Suzuki has reported 95% and 25% profit growth respectively due to huge reduction in their raw materials. However, this is already factored their stock prices and both these stocks looks pricey by historical standards. Besides, metal prices have once again begun to inch-up and gains from low-input cost will begin to diminish from December ’09 quarter. Given this, investors are advised to book profits on these counters.

Among the oil and gas stocks, GAIL and BPCL too made their all-time highs recently. Increasing availability of domestic natural gas spurred GAIL’s stock and lower crude prices in 2009 helped BPCL’s stock price. At a P/E of 18, GAIL’s valuations appear to be stretched, particularly, when its September 2009 numbers are expected to be weak. Investors may cut down their exposure in the short term but accumulate on dips for the long term. On the other hand, BPCL is expected to report healthy profit in the September ’09 quarter, which will wipe out last year’s losses. At the same time, its Bina refinery is nearing completion and is expected to come out with an IPO towards the end of 2009. Considering all this, BPCL’s stock appears inexpensive and investors are advised to buy the stock at current levels.

In the FMCG segment, ITCmade an all-time high. Though the company reported subdued performance during the last fiscal, its performance in the second quarter of the current fiscal has been encouraging, with profit growing by 26%. The stock has potential to appreciate further as it is expected to report good numbers in the September ’09 quarter. So investors can still buy the stock. In the paints category,Asian Paintshas reached a new all-time high. At a P/E of 31, it is the most expensive paint stock in India. However, the company stands to gain the most from revival in the consumer demand. It has registered above average performance in the first two quarters of this fiscal. This is likely to continue for the rest of the fiscal and in light of this investors can hold the stock without increasing exposure.

In spite of the huge upsurge it seems many stocks, which have recently reached a new all-time highs continue to be a good bet for long-term investors. However, investors must exercise caution as the current rally seems to be more company-based than themebased, and therefore if a company fails to perform, its stock price will suffer irrespective of how attractive its sector is.