Money Makes Life Delightful

The current business scenario has posed challenges for both corporate as well as investors. Corporate earnings have slowed down in the last few quarters owing to various factors like slackness in demand and higher interest cost among other factors. Indian markets have trended down, in line with the global markets. Stock prices have declined significantly across the board and investor return has been muted. In the phase of falling stock prices, dividend yield strategy provides decent and assured returns.

Find below a selective list of TOP 30 companies that have a decent dividend yield history and also have not seen significant erosion in their profitability in the current challenging business environment. The dividends are paid no matter what direction the stocks move and can provide a higher yield on investment in a weak market.

CLICK HERE for Part 2 of the series…

According to money manager Ken Fisher, the stocks that got clobbered most late in a bear market are the most likely to do well in the early stages of the next bull market, reports the Forbes.

This year has gotten off to a bad start, with the Sensex down to 8000-9000 levels. This just makes me more determined in my bullishness. I like stocks for 2009 precisely because they did so badly in 2008. Did we hit absolute bottom in November? Maybe, but I can’t be sure; no one can be sure when a bear market is really over. Those who think they have some formula for precisely calling bottoms are fools. What I am pretty sure of is this: When the market rebounds, a lot of its gains will take place in a very short span (like two months or less), and people who are too cautious will miss most of these gains.

Bear markets have been typically followed by bull markets in a V-shaped pattern. The steeper and bigger the decline, the sharper and bigger the subsequent bull move. The few exceptions to this pattern in the past century have involved the emergence of completely different bad forces than the ones that created and contributed to the bear market. For example, stocks rallied 324% from July 1932 to March 1937. After a recession-induced big bear market and partial recovery over the next 21 months, stocks encountered an entirely new kind of trouble in 1939. War in Europe sent the market down even lower than the recessionary low of early 1938.

That could happen again, with the economic equivalent of an asteroid coming out of the blue. But even if such a surprise remains absent, we should get the normal V pattern. Its upward swing will swamp any late-stage bear market vicissitudes as they always do.

Following are the recommendations if you invest in the American stock exchanges…

• Cameron International,
• Royal Dutch Shell,
• Dow Chemical,
• Arcelor Mittal,
• CNH Global,
• Textron,
• Mohawk Industries,
• Daimler

Remember that the stock market is anticipatory. If you wait until the economic recovery is here, you’ll miss most of the action on the bourses! Be it in the Americas or in India…

Outrage about the $165 million in bonuses paid to executives at AIG may just be the tip of the iceberg. There are many more important concerns in the minds of public that have real ramifications for national policy and for those at the highest levels of politics and finance - reports Forbes.

U.S. taxpayers are being “forced” to accept that those people who brought AIG down should now be rewarded with (exponential) bonuses, just because only they can dis-entangle the mess they have made. If they were not given bonuses, they would join rivals of AIG, where they could use their knowledge of AIG and work against its interests, and hence those of the taxpayers (who now own 80% of the company). (In fact, New York State Attorney General Andrew Cuomo found that some people who got the bonuses have already left AIG.)

To the average person, this sounds like blackmail, or at the least an example of rewarding failure. If this is indicative of the world of high finance, then its players have a real ethical problem. Is there no sense on Wall Street of acting for the greater good?

People are very worried about the U.S. economy. This week, 45% of respondents in a CNN survey said another depression is likely. Maybe those AIG executives have the same fears and want to cash in before the crash. The Obama administration says it couldn’t force AIG to not give the bonuses, and Congress is now working on some way to retrieve the money. Outrage may feel good, but it has no value if not directed toward a solution to the bigger problem.

For now, the possibility of future government bailouts is diminished, while the probability of more regulation of banks and investment has increased. That will be part of the price Wall Street will pay for too many years of putting short-term gain ahead of long-term sustainability.

Of course, as in the markets, there are no sure things in politics. Maybe President Obama’s powers of persuasion will convince voters that more must be spent to shore up the banking system. Maybe we will get a quicker than expected recovery that stabilizes markets and shields the middle class from high levels of unemployment. Then, pressure for new regulations would ease up, and changes wouldn’t be very drastic.

But that is all just speculation, and that is what got us into the mess we are in now…

Recommendation: Hold On

Current price: Rs 100 (at the time of publshing this tip)

Target price: Rs 150

Key points:

• HCL Technologies has announced that it has signed an information technology outsourcing engagement worth over US$350 million with Reader’s Digest Association spread over seven years. This deal is a part of US$1 billion worth of deals the company had won in Q3FY2009. Though HCL Technologies won record deals of US$1 billion in Q3FY2009, it is likely to incur an upfront transaction cost of US$25 million for clients.
• Further, the rupee has depreciated significantly, close to 5.2%, in the last one month and is expected to remain weak in coming days. The depreciation in the rupee is likely to again expand its unrecognised forex losses. In Q3FY2009, its unrecognised forex losses expanded to US$207 million from US$156 million due to the depreciation in the rupee.
• At the current market price, the stock is trading at 5.5x FY2009 earnings estimate and 5.8x FY2010 earnings estimate. Historically, HCL Tech has traded on an average of 20-25% discount to Infosys.
• I remain positive about HCL Technologies and hence would recommend a strong Buy call with a price target of Rs 150 over next 8-9 months.

Recommendation: Buy

Current price: Rs 35 (at the time of publishing this tip)

Target price: Rs 85

Key points:

• A significant slowdown in business and leisure travel has led the occupancies of the hotel industry to fall from 75% to 58% yoy and the average room rate declined by 17% yoy in January 2009. Foreign tourist arrival has also weakened after 9/11 terror attacks on Mumbai. However, the rate of decline has eased in February 2009 (a month-on-month increase as compared to January 2009).
• Hotel chains, airlines and travel agents along with the department of tourism of India have initiated a joint promotional campaign — Visit India 2009 — to encourage tourism in India. The campaign entails offering enticing schemes to prospective customers during the period April-December 2009. Though such initiatives are welcome, the coming lean season is expected to remain tough due to a higher base effect and continued bleak macro environment.
• As for the hotel industry, the occupancies and room rate of Indian Hotels Company will also remain under pressure in Q4FY2009 and FY2010, however the addition of new room inventory should help drive growth in FY2010. While the business faces several challenges in the medium term, the current valuations of 7.2x and 5.8x consolidated EPS for FY2009E and FY2010E are at historic low levels and provides a good entry point for long-term investment in the stock.
• I remain bullish about this stock and hence would recommend a Buy call with price target of Rs 85 over next 8-9 months.

Recommendation: Buy

Current price: Rs 55 (at the time of publishing this tip)

Target price: Rs 75

Key points:

• While the prices of sunflower, corn and rice bran oils have declined in the past few months, the hardening of the price of its key raw materials - copra and safflower oil - most important factors for Marico. These two commodities showed a significant decline in February 2009. Prices of copra, the key raw material for Parachute, have declined by 4.9% month on month (down 12.4% compared with the average prices in July 2008) whereas the price of kardi oil has fallen by 16.3%.
• Volumes of Saffola have also suffered in Q3FY2009 and grew by just 3% yoy. However, the Marico management indicates that the volume growth has recovered slightly to mid single digits in Q4FY2009 till date. The softening of the kardi oil prices is likely to provide an opportunity for the company to take correction in the price of Saffola to lower the premium over the other edible oils which it targets to bring down to 30%. Overall, competitive pricing of Saffola will help Marico get its volume growth back on track.
• Marico is trading at almost 82% premium to the Sensex and the valuation which is broadly in line with its historical peak valuations as can be seen from the above chart.
• I am bullish on Marico and recommend a Buy call with a target price of Rs 75 over next 8-9 months.

Recommendation: Buy

Current price: Rs 1,200 (at the time of publishing this tip)

Price target: Rs 1,375

Key points:

• The macro business environment has worsened further since the last commentary by Infosys Technologies’ management. In the recent interaction, the management has indicated higher than expected pricing pressure, project cancellations and considerable decline in the IT budgets of its clients.
• The worsening situation has been further aggravated by the BFSI clients, with large global players like the Bank of America, Citibank, AIG and the RBS looking for further bailout packages. In addition, the possible nationalisation of banks and the anti-outsourcing rhetoric getting shriller put a question mark on the volume growth in the next fiscal.
• On the positive side, the continued depreciation in the rupee has emerged as a significant tail wind for tech companies including Infosys. The rupee has depreciated by around 6.5% in the past one month alone and is likely to remain weak. Infosys, with a relatively lower hedging exposure and marked to market hedging policy, is likely to be among the key beneficiaries of the rupee depreciation.
• The impact on Infosys’ revenue growth of depreciating rupee (as compared to dollar) would be limited to a decline of just 0.3%, as the gain of 9.7% resulting from the change in the exchange rate assumption to Rs51/USD for FY2010 would largely mitigate the loss of 4.7% and 5.3% arising from cross currency head winds and lower pricing/volume assumption (a 5% decline in pricing and a flattish growth in volume) respectively. Even on the earning level, the impact would be limited to 0.4% only.
• I’m quite hopeful that Infosys is relatively better equipped to sail through the tough environment on account of its relatively premium pricing, operating leverage and better management quality.
• I maintain strong Buy recommendation with a target price of Rs1,375 over next 8-9 months.