Track portfolio for better returns

The domestic investors are increasingly realising that it takes a combination of timing, patience and probably little bit of luck to make money from the stock markets.

Those who missed the opportunity of booking profits during the earlier boom run are regretting, and even those who made an entry less than a year ago are not a happy lot. That is sure to make many wonder what it takes to be an investor in the stock markets. Check out if you have these traits.

Risk appetite

Equity sure lets you earn more money but not all your investments can turn into a goldmine. This is particularly true when you bet on stocks. As a result, an equity investor needs to have the ability to take risks which could be in the form of negative returns.

While the prospects of loss of capital are much lower when the investment horizon is long, there are chances that some stocks may not recover even in the long term due to a change in their business prospects. In such cases, 'stop loss' becomes a strategy and investors may be forced to settle for loss of capital.

As a result, equity is definitely not an option for those who can't see negativity in their portfolio.


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Time to monitor

If you are one of those jetsetting professionals with little time on your hands for managing money, equity investing is not the option for you. The stock markets are all about volatility and hence need careful analysis and monitoring.

When you take the direct stock route, investment decisions need to be reviewed regularly. Gone are the days when you could invest in a stock and relax. Today, even market leaders are faced with the challenge of business cycles and hence, investors have to keep a tab on macro and micro factors.

For those who don't have the energy and time for regular monitoring, mutual funds may be a better option as the money you invest is managed by professional managers. Since mutual funds also take care of the diversification aspect because of their larger portfolios , the investor gets the benefit of better returns.

Though in the short term, direct equity investing may prove beneficial, history has shown that mutual funds have the ability to generate higher returns over the long term because of diversified portfolios. Also, mutual funds have the advantage of holding on to cash unlike individual investors

Stick to your conviction

It may sound contradictory but equity investors need a combination of conviction and nimble footedness to maximise gains. While the ability to book profits at regular intervals is an integral part of equity investing , an investor also needs the discipline to think longterm with his investments.

For instance, if you have chosen the equity option for building wealth over a period of 10 years, the aberrations in the short term should not be a constraint. Again, for long-term goal fulfilment, systematic investment plans (SIPs) in equity can do a better job when compared with direct stocks as stocks may not retain the same level of potential over a long term.

On the other hand, the SIP form of investing through mutual funds can be more rewarding and less cumbersome .

While these are some traits which can help investors tide over the uncertainties of equity, the basic principle of wealth creation is discipline. Irrespective of your choice of product, be focused with your goals and the means you choose.

Bartronics: Buy

Smart card business on high growth

Order pipeline strong

Government tech spells opportunity

Growth in the smart card business and the continuing strength in the data capture segment may provide scope for improving margins.

Mid- and small-cap stocks often bear the brunt of a steep market correction such as the present one. These stocks also face higher challenges in terms of making a comeback. Stocks (in this segment) with strong business prospects, sustainable growth and minimal risks of blip in earnings are the ones that would hold renewed return potential for investors.

The triple-digit growth experienced by Bartronics in revenues and profits over the last couple of years has come on the back of a rapid scale-up of operations and expanding geographic presence.

Its automatic information and data capture (AIDC) business and, more recently, its smart-card business which has seen an increasing pipeline of orders from government initiatives provide a sustainable revenue stream for the company. Importantly, many of these deals may provide scope for improving margins over the next couple of years.

In this light, investors with a one-two year perspective can buy the shares of Bartronics, considering its strong business prospects and reasonable valuations. At the current share price of Rs 157, the stock trades at about 10 times its trailing earnings and 6-7 times its likely earnings for FY 2009.

Bartronics primarily sells products and solutions for data capture in the areas of logistics and inventory management, time and attendance management and asset tracking operations. It has now broad-based its AIDC offering to services such as bar coding, biometrics, radio frequency identification and radio frequency data communications and electronic article surveillance. This has not only signalled a move up the value chain but also enabled the company to have a stronger client penetration in India, South-East Asian countries and the US. The company derives 50 per cent of its revenues from India, 30 per cent from the US and the rest from countries such as Singapore and Malaysia, providing reasonable geographic diversification.

Smart Cards drive growth

The smart card business, for which the company has its own manufacturing facility, holds considerable promise with opportunities in areas such as SIM cards, identity cards, credit cards and social security. Bartronics appears well-placed to capture a reasonable slice of the SIM cards market. It is also doing pilot studies in this field with a few banks and is eyeing the opportunity of the government rolling out national social security cards. With a production capacity of 80 million smart cards, the company has ramped up utilisation levels to 90 per cent from a production of 40 million cards in March 2008. Bartronics has subsidiaries in Singapore and the US to cater to the local markets in South-East Asia. The Singapore facility has already started to contribute to profits. This segment is expected to contribute to over 50 per cent of total revenues in the next couple of years.

Strong Deal Pipeline

Bartronics continues to benefit from government technology initiatives. For example, the Bhamashah Financial Empowerment Scheme of the Government of Rajasthan intends to cover about 50 lakh families through biometrically identifiable smart cards. The project, valued at about Rs 150 crores, commenced operations earlier this month. A similar project involving issuance of 39 lakh smartcards envisaged by the Bihar Government has also commenced last month. There is also a national identification card project on the anvil to be introduced across the country and Bartronics would look at tapping this opportunity.

Promise in AIDC

In AIDC, the company is well-placed to capture a significant share of manufacturing clients, both in India and abroad. The boom in organised retail in the country also offers opportunities for scaling up revenues. With strong client base in the manufacturing space — in the areas of inventory control and material tracking — this segment continues to be the main contributor to revenues (over 50 per cent) as of now.

With the Railways also looking at RFID (radio frequency identification) enablement across trains in the country and increased spends therein, Bartronics with its prominent presence in this segment appears well-qualified to capitalise on investments made by the Railways in IT enhancement.

Risks

Competition from players such as CMC in the RFID space is a risk. Direct entry by the company’s overseas principals (from which Bartronics sources some products), into the Indian market, is also a risk if there is an absence of non-compete agreements

K.Venkatasubramanian

The Businessline dt. 13 7 2008

Buy CROMPTON GREVES @ RS.240/-

The company’s focus on improving the profitability of its acquired subsidiaries is beginning to yield the desired results.

Crompton Greaves’ widening product basket and inorganic growth strategies have helped the company to transition to a complete power distribution and transmission solutions provider. With this, the company appears qualified to enjoy stock valuations commanded by the major power equipment players.

At the current market price of Rs 240 , the stock trades at about 12 times its expected consolidated earnings for FY-10, which is a good discount to peers.

Investors can consider buying the stock with a two-three year perspective. With the steep correction and continuing volatility seen in the stock market, investors can buy in small lots using declines linked to broad markets to best advantage. Crompton Greaves has on an absolute basis returned 80 per cent over the last two years on the back of aggressive inorganic growth measures.

While growth potential remains strong, investors may have to temper their return expectations. A strategy of active profit booking on reaching target returns may be a prudent measure.

Improving profitability

Crompton Greaves reported a 21 per cent growth in sales and 44 per cent growth in net profits on a consolidated basis for FY-2008. There was a slowdown in topline growth due to the company executing fewer orders albeit with higher profit margins. Further, after the acquisition of cash-strapped companies such as Pauwels and Ganz, Crompton Greaves had stated that its near term focus would be to increase the operational efficiencies and reduce costs across all its businesses, especially in its overseas acquisitions.

The results are reflected in the over-2 percentage points increase in operating profit margins to 10.9 per cent in the last financial year. Return on capital employed has also increased from 26 per cent to 32 per cent for the consolidated entity.

Well-crafted turnaround strategy

Crompton crafted a two-phase strategy to improve profitability and growth. After making losses in FY-2001, the company exited unrelated businesses and ramped up presence in its industrial and consumer products segment apart from the key segment — power systems. Once the internal operating and financial metrics of the company turned around, Crompton Greaves moved to the second phase.

This involved inorganic growth plans through acquisition of global cash-starved companies which have sound business expertise. While it has successfully turned around Pauwels, Ganz is expected to move out of losses by FY-2009.

As a continuation of the inorganic growth strategy Crompton Greaves, acquired Ireland-based Microsol, which is into substation automation equipment and solutions.

More recently, it acquired a French company that provides services such as maintenance and repairs for power transformers and oil treatment and retro filling. With increasing presence in the European markets, a local servicing company may be a good strategy to retain clients.

With these recent additions, Crompton Greaves appears all set to become a complete power transmission and distribution solutions provider.

Strong product profile

Crompton Greaves, along with its subsidiaries, has been adding muscle to the product profile. Locally, the company’s plant built a 765 KV/260 MVA single-phase generating transformer (the first in India) for NTPC, Sipat. For its distribution transformers, it has used Pauwels technology to develop foil wound transformers that consume less materials but with higher efficiencies. This not only suggests lowering of costs but, more importantly, effective absorption of technology and bringing about synergy.

The acquired companies too have the latest value-added products, with some of them being market leaders. Pauwels, for instance, is the leader in SLIM transformers used in wind power installations. These transformers, which link wind turbines to the grid, have become a success, especially in the European market, due to features such as lower power loss, compact size and use of recyclable materials.

Risks: While Crompton Greaves has so far been successful, especially in its inorganic growth route, challenges remain in successfully integrating all the acquisitions.

On the margin front, while the company’s efforts have paid off in terms of higher profitability, steep hike in raw materials can spoil the party. While the company is hedged in material such as copper and aluminium, steel price hikes could pose a risk.

(Businessline dt. 6.7.08)

Buy Prime Focus @ Rs.434/- dt. 6.7.08

With a strong presence in the niche area of post-production services for films, a unique cross-border business model and a good pipeline of film projects, Prime Focus is a preferred pick within the media sector. A substantial correction in recent months has the stock trading at about 15 times its likely FY ’09 consolidated earnings per share, which is reasonable given the high visibility in earnings growth. An investment can be considered in the stock with a three-year perspective.

Prime Focus has an estimated 60 per cent market share in India. With six facilities across Mumbai, Hyderabad and Chennai, its domestic business continues to grow at a fast pace, as the use of visual and special effects in Indian films is on the rise. The business is highly profitable with operating margins at 50-60 per cent, although higher employee costs have moderated margins in recent quarters. A large pipeline of 8-10 film projects in FY 09 should ensure a steady stream of revenues for the domestic operations.

Prime Focus has built an international presence with facilities spanning the UK, US and Canada. Its first acquisition in the UK (VTR) has paid off, with Prime Focus successfully turning around the company and the facility has begun to outsource work to India. As the London operation works more on advertising film projects, it has been affected by the advertising slowdown witnessed in these markets in recent times.

Prime Focus acquired Frantic Films and Post Logic Studios for $43 million in late 2007, which gave it access to facilities and talent pools in key markets of Los Angeles, New York, Vancouver and Winnipeg. The targets have combined revenue of $25 million (Rs 107 crore) and have been associated with films such as Spiderman 3, Fantastic Four and Superman Returns. These businesses are yet to be consolidated with Prime Focus and may not contribute to profits in the next one year. However, the presence of cross border facilities have helped create a unique business model, where a significantly higher amount of work can be carried out by facilities across time zones in a cost efficient manner. Prime Focus’s tie up with Warner Bros’ Motion Picture Imaging appears to be recognition of the merits of this international operation. The benefits of the strategy are likely to pay off from FY ’10. An unexpected slowdown in domestic operations is a key risk to earnings estimates. The stock’s small-cap status may call for careful timing of investments.

(Businessline dt. 6.7.08)