Special Situations

Fidelity India runs a "Special Situations Fund". As it's fund update surmises the objectives of the fund (here), the areas identified as special situations include -

1. Turnarounds or recovery situations (underperforming companies with potential for recovery)

2. Underappreciated growth (companies whose growth characteristics have not yet been adequately recognized)

3. Asset plays (companies which sell at a significant discount to their underlying assets)

4. New product or new business streams (companies having a unique product with strong demand potential or opportunities to use existing resources for generating new business streams)

5. Corporate actions (companies which are potential candidates for mergers & acquisitions or where managements undertake significant restructuring of the business)

6. Out-of-favour stocks (unfashionable companies with improving fundamentals)

Incidentally, the Fidelity Fund celebrates it's 2nd birthday today ! Since inception, the fund that given an annualised return of 22.1% and in the last one year, performed at just 12.4%. Diversification doesnt seem to be a strength here as 6 of the top 8 holdings are in the BFSI segment currently. (here)

Siemens India ... a special situation

Siemens announced their Q2 results yesterday. The company's Q2 standalone net profit was at Rs 1.7 crore versus Rs 108.1 crore, YoY. (a drop of 99% !). Its standalone net sales were at Rs 2,142. crore versus Rs 2,129.2 crore, YoY. The reason for the drop in profits was a one-time provision for order reversals.

If the price of the stock gets beaten down on account of this one-time provision, then it might qualify for a special situation. While I am not aware of the amount of this one-time provision - given CNBC-TV18 estimates where the company was expected to post profit after tax of Rs 159.6 crore for this quarter - I shall assume the provision was a strong 157 crores.

The scrip is currently priced at Rs. 644 (April-25). The market is hinting a price drop of 40-50 rupees on account of this news. If that happens, then a perfect sound stock (assuming it is not already overpriced) would be trading 15% below it's fair price.

CNBC-TV18 further sees net sales going up at Rs 2,698 crore versus Rs 2,129 crore and OPM is likely to get improved at 8.4% from 7.6% for Q2. (the sales target was way off at Rs. 2,142 crores only; probably they maintained their previous OPM of 7.6%). In my calculations, a probable 15% drop in prices will not do the PE ratio a lot of good as it will still be over 30. However, the price drop might warrant a short-term gain.

Btw, an interesting presentation rounding Siemens' performance and businesses is available on their website (here)

April 29th : Siemens did fall by 10% and reached Rs. 580 per share. I bought the stock at Rs. 583.