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Stock Analysis, IPO, Mutual Funds, Bonds & More

These 5 stocks are at their 10-year lows. Should you invest in them?

Among stocks that are close to 10-year lows, these five are expected to give good upside potential as per consensus analysts' estimates.

, ET Bureau|
Updated: Oct 07, 2019, 09.59 AM IST
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Before rushing to buy, investors should find out why the stocks are quoting at low prices.
There is extreme volatility in the stock market at present. Some stocks are trading at all-time highs and others at decade lows. Economic logic suggests a product is an attractive buy if it is available at a discount. There are a number of stocks going dirt cheap right now. For example, Yes Bank is quoting at Rs 32, compared to its all-time high of Rs 404 around a year back. If you widen your search to include mid- and small-cap counters, you will find a large number of stocks going for 90% less than their peak prices. Should you buy stocks quoting at significant discounts to all-time highs? Experts advise caution. You could well be trying to catch a falling knife.

Several companies have lost value due to valid reasons. Investors should find out why they are quoting at low prices. Stocks usually crash for three reasons—general economic weakness, sectoral or segmental weakness and company-specific issues. Had it been general economic weakness, the crash would have been across the board and not restricted to a few segments.

Once we went through the list of companies quoting close to 10-year lows, we could spot sectoral and segmental pockets. For instance, a large number of these stocks are public sector enterprises (PSEs). Slow growth due to continued government interference is one problem faced by this segment. These counters are also getting battered because of piecemeal divestment by the government using CPSE ETFs. Now that the government has started talking strategic sales, will the sentiments change? Experts are not sure. “Since privatising a PSE is a political hot potato, we prefer to wait for concrete action, especially on the mode, style and conditions of divestment,” says Deepak Jasani, Head of Retail Research, HDFC Securities.

Even if the government shows will, six months of this financial year are already gone and therefore, a small time period is going to be the next issue. “Strategic divestments may not happen in the next six months. The government may once again use the CPSE route,” says Suhas Harinarayanan, Head of Research, JM Financial. However, PSEs always offer trading opportunities, especially when valuations are cheap. “PSEs become trading opportunities when valuations are at a 40% discount to the historical matrix and when the price is close to book value,” says Harinarayanan.

Several stocks from specific sectors are also available at low prices. Should one approach these sectoral packs? Experts say there is no need to avoid these stocks. Even if an industry is going through a bad patch, there is little chance of it closing down. “Some banks can fail, but the banking industry will come out of the current troubles,” explains Arun Gopalan, Senior VP (Investment Advisory), Systematix Shares & Stocks. Adds Jasani, “Consider investing only when sectoral problems are transitory and towards the fag end of the bearish sectoral cycle.”

Investors need to be careful with company-specific issues. It makes sense to avoid companies with governance issues. Similarly, it is better to stick with large caps while following this strategy. “The chance of value traps is more among mid and small-caps, so investors need to be extra careful,” says Gopalan. We searched large-cap stocks that are part of BSE 200. We shortlisted stocks that are close to 10-year lows. We restricted ourselves to stocks that are expected to give good upside potential as per consensus analyst estimates. Given below is the list of stocks that investors can consider now.

1. Bharat Heavy Electricals
Bharat Heavy Electricals (BHEL) is a classic case of value destruction. Rs 100 invested in 2009 has become Rs 15 now! You would have got Rs 224 if you had invested the same money in the Sensex. Power sector woes hit the company hard. The power sector index fell 40% over the past 10 years. Due to a slowdown in new power generation projects, the order inflow for BHEL is also waning. However, the power surplus situation is transitory and will turn deficit once the current transmission problems are sorted out in 2-3 years. Being a leading capital goods player catering to the power sector, this eventual upturn in the power capex cycle will be a positive for BHEL. Despite short-term worries, experts are also bullish on its throwaway valuations. “BHEL’s net cash position of Rs 5,500 crore as of March 2019 and receivable book of Rs 38,000 crore provide valuation support given that its total market capitalisation is less than 0.5 times its receivables,” says a Emkay report.

2. Glenmark
Glenmark’s US business is still facing challenges and therefore, there is little expectation of revenue growth from there in 2019-20. However, Glenmark continues to report strong growth in the domestic market and is one the fastest-growing among large peers. Glenmark’s plan to unlock value by listing its subsidiary and also to reduce debt by divesting non core assets will be positives in the long term. “The de-merger may lead to an improvement in profitability for the ex-novel business and a healthier balance sheet. The recent share price fall reflects impatience on the part of Glenmark’s investors with respect to management’s delivery vs promises.” says Deepak Jasani, Head of Retail Research, HDFC Securities.

Oil and Natural Gas Corporation (ONGC), with its PSE tag and continued share supply through CPSEs, like other upstream oil companies runs the risk of the government asking it to bear the subsidy burden in future if oil prices rise to much higher levels. This risk had become more real in the recent past because of the flare-up in crude oil prices, triggered by the drone attack on Aramco refinery in Saudi Arabia. However, global crude prices have started easing because the Aramco refinery restarted operations without much delay and this price fall should reduce the subsidy sharing fears. Lack of volume growth (no new big oil fields are getting operational) is another factor pulling these counters down. However, experts feel that the current low valuations capture all these negatives. “Though the government ownership means that it may not always operate in favour of minority interests, considering its good dividend yield and other low valuation multiples, ONGC may seem attractive to value investors,” says Jasani of HDFC Securities.

NMDC has been on the receiving end ever since Karnataka decided to withdraw its letter of lease renewal for the Donimalai mining block. However, investors can have a sigh of relief now because the government of India has amended the Mineral Rules 2015 and this makes sure the state government renews the mining lease of a government company. In addition to the resumption of production from Donimalai mine (EPS may go up by around 15% because of this resumption), this amendment also removes the ambiguity about other lease renewals that are coming up. “The NMDC stock has underperformed global iron ore players by 34% over the past 12 months, mainly due to uncertainty on Donimalai and its consequential impact on other mines coming up for renewal. This new development removes headwinds to stock performance,” says a recent Edelweiss report.

5. Tata Power
Despite being the strongest power generation player from the private sector, Tata Power lost 52% of its value over the past 10 years, compared to a loss of 40% by the power index. This under performance is because of problems specific to its Mundra project. Though tariff revision talks are on with five state governments and some positive outcome is expected, it will be time consuming. There is resolution in sight in Gujarat and Punjab and positive action is expected from Maharashtra and Haryana after the Assembly polls. The management is also trying to address the concern of high debt—around Rs 49,000 crore—through divestment of non-core assets and improving collections from discoms. The positive trigger will come in the form of revival in domestic power sector, expected in the next 2-3 years. Since its valuation has come back to reasonable levels, it provides a good investment opportunity. “Tata Power is now trading close to 10–years’ average EV/EBITDA band and is nearing the floor price,” says a recent Edelweiss report.

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