Which stock should you buy?

Which stock should you buy?

In the equity market, stock tips are aplenty. Everyone believes themselves to be an expert just because they have a Trading and Demat account and have made some investment in the equity market! Therefore it is very important to have some basic knowledge about share market before you start investing in stocks according to share tips.

There are more than 6000 shares listed in India. But, broadly they can be categorized into four types:

 Growth stocks:  They are companies which grow faster than its industry or the market. Growth shares do not believe in paying dividends but reinvest profits for expansion and growth. They are marked by high P/E ratio and are always in demand due to potential price appreciation.

Value stocks: They are companies which have good fundamentals but are underpriced as they are temporarily out of favour. Value shares are great picks as they have a greater potential of growth. They have a low P/E ratio and low PBV ratio.

Income stocks: They are companies which regularly pay high dividends. These shares are often less volatile and may limited growth options. Profit from these stocks is in the form of regular dividends declared by the company. They are marked with higher dividend paying ratio.

Penny stocks: They are stocks with low price and low market capitalization. These shares are easy to manipulate because of low volumes. Investing in penny shares is extremely risky as these are extremely speculative in nature, illiquid and marked with volatile movements.

Share Market Update on Central Bank of India for 1QFY2012

Share Market Update on Central Bank of India for 1QFY2012 with a Neutral recommendation.

For 1QFY2012, Central Bank of India posted a 16.6% yoy decline in its net profit primarily due to higher provisions. However, results were above our estimates on lower-than-estimated operating expenses. A sharp sequential dip in NIM and high slippages despite the pending switchover to system-based NPA platform were the key highlights of the results. We maintain our Neutral view on the stock.

NIM dips on lower yield on investments; slippages remain elevated: The bank’s business momentum slowed during the usually lean quarter. Advances declined by 2.8% qoq (up 17.2% yoy) and deposits increased by 3.6% qoq (up 20.3% yoy). CASA deposits growth moderated to 14.7% yoy, resulting in a 259bp qoq decline in CASA ratio to 32.6%. Bulk deposits and CDs constituted a relatively higher ~33% of total deposits. The reduction in CASA ratio and the higher interest rate environment resulted in a sharp 72bp qoq rise in cost of deposits to 6.8%. The yield on advances went up by 77bp qoq to 11.4%. Reported NIM declined sharply by 48bp qoq to 3.0% primarily due to fall in yield on investments (fall of 73bp qoq). The sequential decline in NIM was exacerbated by the benefit of interest on income tax refund of ~`130cr in 4QFY2011. Overall asset quality of the bank deteriorated during the quarter, with annualised slippage ratio remaining elevated at 1.8% (1.1% in 1QFY2011) and net NPAs rising by 27.7% qoq. Slippages remained elevated at 1.8% as compared to 1.1% in 1QFY2011. Provision coverage ratio including technical write-offs declined to 65.2% from 67.6% in 4QFY2011. The bank is yet to switchover to the system-based NPA recognition platform, which could result in a substantial rise in slippages given the bank’s rural branches (37%) and a relatively large agri (16%) portfolio.

Outlook and valuation: At the CMP, the stock is trading at cheap valuations of 0.8x FY2013E ABV compared to its trading range of 0.5–1.5x with a median of 1.1x since listing in 2007. However, due to near-term asset-quality concerns because of system-based NPA recognition, we remain Neutral on the stock.

Share Market Update on Bhushan Steel for 1QFY2012

Share Market Update on Bhushan Steel for 1QFY2012 with a Neutral recommendation.

Strong top-line growth: During 1QFY2012, Bhushan Steel’s (BSL) net sales grew by 62.6% yoy to `2,232cr mainly on account of higher volumes of flat products. Flat products sales volumes grew by 80.2% yoy to 388,790 tonnes, while long product sales volumes grew by 7.6% yoy to 100,664 tonnes in 1QFY2012. Long product average realisation increased by 18.2% yoy to `42,915/tonne, while flat product average realisation decreased by 3.2% yoy to `49,294/tonne.

Depreciation and interest costs mute net profit growth: During 1QFY2012, EBITDA increased by 62.1% yoy to `661cr, representing EBITDA margin of 29.6%, compared to 29.7% in 1QFY2011. EBITDA/tonne increased to `13,505 (US$300) in 1QFY2012, compared to `13,186 (US$293) in 1QFY2011. Depreciation expense increased by 182.4% yoy to `151cr due to increased capacity, while interest expense increased by 173.8% yoy to `216cr because of higher debt. A sharp increase in depreciation and interest costs resulted in net profit growth of only 2.0% yoy (despite 62.1% growth in EBITDA) to `210cr.

Outlook and valuation: At the CMP, the stock is trading at 8.1x FY2012E and 7.1x FY2013E EV/EBITDA, a significant premium over its peers. Although we expect sales volume growth of 24.8% over FY2011–15E, we believe it is too early to play the volume growth story of BSL as strong volume growth is expected only post FY2013. Further, although BSL uses a combination of BF-EAF technology to produce steel, rising prices of iron ore and coal will affect its margins. Moreover, BSL’s debt-equity ratio remains high. Further, we believe the increase in the stock price in the past three months fairly discounts the growth prospects of BSL. Hence, we maintain our Neutral view on the stock.

Share Market Update on ACC for 2QCY2011

Share Market Update on ACC for 2QCY2011 with a Neutral recommendation.

For 2QCY2011, ACC posted a 6.2% decline in its bottom line; however, it was ahead of our estimates. The bottom-line decline was despite higher realisations, as the company faced margin pressure on account of higher power and fuel costs and freight costs. During the quarter, ACC faced the full impact of the domestic coal price hike carried out by Coal India. Realisation was higher as cement prices, which touched the peak in March 2011 remained strong until May.
At current levels, we maintain our Neutral view on the stock.

OPM at 24.1%, down 527bp yoy:  ACC posted an 18.9% yoy growth in net sales to `2,403cr on account of growth in dispatches and better realisation.
The company’s dispatches for the quarter stood at 5.9mn tonnes, up 12.5% yoy, on account of higher capacity (on a yoy basis) operational at Wadi and Chanda during the quarter. However, on a sequential basis, dispatches declined by 3.7%, indicating the lukewarm demand scenario. Realisation also improved by 5.7% yoy and 4.1% qoq to `4,052/tonne.

Outlook and valuation: All-India cement dispatches, which witnessed a marginal decline in 1QFY2012, are expected to pick-up post the monsoons. Demand growth is expected to be driven by infrastructure activities with FY2012 being the last year of the Eleventh Plan. However, the ongoing SFIO investigation on cement pricing might soften the extent of price recovery. We expect ACC to register a 16.0% CAGR in its top line over CY2010–12, aided by capacity addition. However, the bottom line is expected to grow at a lower CAGR of 4.6% over the mentioned period due to higher operating costs. At current levels, the stock is trading at EV/EBITDA of 6.8x and EV/tonne of US$110, based on CY2012 estimates. We maintain our Neutral view on the stock, as we believe it is fairly priced.

Share Market Result Update on Sarda Energy and Minerals for 1QFY2012

ShareMarket Result Update on Sarda Energy and Minerals for 1QFY2012 with a Buy recommendation and a Target Price of `259 (12 months).

For 1QFY2012, Sarda Energy and Minerals (SEML) reported net sales growth of 17.2% yoy to `254cr. However, adjusted net profit declined by 48.3% yoy to `14cr due to higher costs. We maintain our Buy rating on the stock.

Ferro alloy segment drags SEML’s 1QFY2012 profitability: During 1QFY2012, SEML’s net sales grew by 17.2% yoy to `254cr due to higher realisation in the steel segment coupled with higher sales volume of billets, ingots and power. Blended steel realisation grew by 96.1% yoy to `33,036/tonne on account of improved product mix. EBITDA margin declined substantially by 857bp yoy to 14.4% mainly on account of higher raw-material costs. Thus, EBITDA declined by 26.6% yoy to `37cr. EBIT of the ferro alloys segment declined by 73.0% yoy to `7cr on account of lower realisation coupled with higher prices of key inputs. Interest costs for the quarter increased by 112.6% yoy to `6cr, owing to which adjusted net profit declined by 48.3% yoy to `14cr.

Outlook and valuation: We continue to believe that SEML is well poised to benefit from a) backward integration into coal and iron ore, b) commercial production of pellets and c) increased power and ferro alloy production. Moreover, firm sponge iron and billet prices should lead to higher capacity utilisation in FY2012 and FY2013, thereby leading to higher sales volumes. A key catalyst for the stock would be restarting of its iron ore operations at Rajnandgaon. We recommend Buy with a target price of `259, valuing the stock at 5.5x FY2013E EV/EBITDA.