Mutual funds and stock valuation

Its often a good idea to see what mutual funds are buying or selling these days. This helps you predict stocks which have a higher propensity of taking the dive or perhaps, soar the skies. I used MutualFundsIndia to list the top 4 performing funds over the last 3 months .. here's their list -
1. Deutsche Alpha Equity Fund - 37.35% in last 3 months
2. Sundaram Select Mid-cap Fund - 33.10% in last 3 months
3. SBI Magnum Comma Fund - 32.90% in last 3 months
4. Franklin India Opportunity Fund - 32.10% in last 3 months

Now, I guessed that the portfolio composition of all these 4 funds would tend towards parity or perhaps, a high correlation. If not companies, atleast the sectors. Here news -
1. Deutsche Alpha - Diversified (29%); Computers (9%); Metals (8%) ... top 3 cos: Sterlite (8%); Tata Steel (8%); Tata Chemicals (7%)
2. Sundaram Midcap - Engineering goods (17%); Housing (11%); Auto & ancillaries (11%) ... top 3 cos.: Kalpataru (4%); Balrampur Chini (4%); Ansal (3%)
3. SBI Magnum - Cement (14%); Diversified (13%); Metals (12%) ... top 3 cos: Hindustan Zinc (8%); Shree Cement (7%); United Phos (5%)
4. Franklin - Entertainment (22%); Auto & ancillaries (14%); Diversified (11%) ... top 3 cos: TVS Motors (9%); Jaiprakash (7%); Calcutta Electric Supply Co. (7%)

Amazingly ...
i) The top three sectors among the four top performing funds is strewn over 8 different industries (from a max:12)
ii) The top 3 holdings of each of the 4 funds is different i.e. we have 12 different companies that form the top 3 holdings of these 4 funds.
iii) The average holding in equities from the total corpus is a healthy 94%. (so you might want to rethink your idea of staying 60% in cash and rest in equity)

Mutual funds donot think alike and have different priorities and basis of evaluating stocks. For us the advantage is in identifying changes in portfolio in mutual funds to understand what they are buying or selling, researching the same and arriving at a decision.

PS: Has anyone checked the Calcutta Electric ... ???

Nahar Industrial Enterprises Limited

Nahar Industrial Enterprises Ltd. The company results have been very impressive over the last 3 quarters -
Jun-05: Sales increased to 176 crs from 90 crs LY; profits up from 3 crs to 14 crs
Sep-05: Sales up from 82 crs to 172 crs; profits rose from 7.12 to 15.07 crs
Dec-05: Sales upto 169 crs (from 156 crs); profits up from -0.72 to 18.26 crs.

Extrapolating these numbers over the next 3 quarters puts the fwdPE of the company at a powerful 8.56. I also find that -
1. The organisation's interest cost has been decreasing over the last few quarters, which is brillant. (there is one news item however, which indicates that the company is in discussion for issue of FCCBs)
2. The NCAV of the scrip is 13.92 with a sizable investment head of 66 crs in the balance sheet (mostly owing to shares in sister concerns - NSML and NEL)
3. A visible increase in net margin from -1.5% in FY2004, 3.3% in FY2005 and 9.2% till Dec-05
4. Surprisingly, no dividend has yet been issued although the company has enough cash reserves and cash profits.
5. The 31-Mar-05 book value is a comfortable 175 rupees/share

I would love to buy this stock. The only hitch on the charting is : the scrip had just created a valley a few days back when it dipped from 170 rupees to 130 rupees. It's now back to 170 rupees. Dont risk market timing ... buy a small number of shares, buy more on declines.

Alembic Pharma

Watch out for this stock. I advice BUY on declines in the price of the stock. Reasons -
1. Alembic has come out with a good Q4 result, displaying a strong increase in PAT (from 6.36 crs to 17.10). This is in line with earnings over the last few quarters.
2. The yr has closed at an EPS of 28.36. With the CMP at 401 (29-Apr), the PE comes to 14.13.
3. Sales have risen by 20% plus on every Q-on-Q results and so have profits. A lil' extrapolation would put Alembic's next 2 Qs results at a strong footing equaling around 16 rupees in EPS. I would picture Alembic at a fwdPE of 12.9 which is one of the lowest in the Indian pharma space.
4. The heavier part of the sales growth has come from domestic sales (around 77%) however interestingly, Q4 has contributed one-third of the entire export pie. This marginally indicates a move towards ramping export operations by the company.

A 99 yr old company, stable sales and profits, growing, a relative inexpensive valuation to peers ... worth a buy.

National Organic Chemical Industries Limited

or NOCIL for short. NOCIL is a turnaround story ... refered to BIFR in Jan-2004, it came out of bankruptcy with a positive net worth on 31st March 2005. The company had a fantastic 3rd quarter with an impressive 23 crs of profits on a capital base of 160.79 crs. Over the last 9 months, the company has notched up 59.50 crs of profits and should close at around 80 crs for the yr. The fwdPE of the stock would be a comfortable 5.63 - an alice in wonderland situation !!!

And although the company doesn't provide for any dividend, I take comfort over the fact that NOCIL has an NCAV of 4.07 and a book value of 10.90 (as compared to a CMP of 28.25). The high court has approved of a demerger of the company in two divisions to which the shareholders will benefit as the rubber division will take advantage of an independent management.

Peers of NOCIL would be other petrochemical companies like Castrol, Manali Petro, Narama Chematur, Hind Flourocarbons, Sah Petroleum, SA Petrochem, Lanxess ABS, Chemplast Sanma, Jubilant Org, DCW, IPCL and Finolex ... (barring Sah whose profits are almost non-consequential, NOCIL and Narmada Chematur exhibit the best improvements in qtrly earnings ... Narmada Chematur has also been recommended for a buy in a previous blog).

I would place a BUY on NOCIL with a stop loss on 24 rupees.