Top Pick from PSU Lot

Sensex & Nifty made high of 21108 & 6338 respectively on November 5, 2010 (Same is 52 Week High). This week i.e. on 14^th January, 2011 sensex closed at 18860 and Nifty closed at 5654 i.e. correction of 10.5% from recent high.

I have always maintained and will always maintain that correction is the time to enter the market. Just find the right stock. There is not any specified range for correction. It may be 10% or may be 50%. Only criteria which I see to decide whether this is correction or not is that our economy is growing despite all odds i.e. gift of scam from government, global crisis, manmade calamities and natural calamities.

Mr. Rakesh Jhunjunwala said that good stocks will always have expensive valuation. Correction is the only time when these good stocks will be available at cheap or reasonable valuation. Just you need to find out good stocks.

Recently there were lots of controversies regarding scams from Telecom Ministry (2G), Agriculture Ministry (Food price rise) and Sports Ministry (CWG & IPL). Just being POSITIVE, I wanted to take an advantage of correction in PSU Stocks. Because I believe, fundamentally, these stocks would have been downgraded by investors considerably considering uncertainty on promoters credibility i.e. Government of India.

I do not know definition of defensive stocks but for me following are defensive stocks.

Top 5 picks from PSU pack for very good capital appreciation in medium to long run.

Sr	Stock	Sector	CMP 13/1/11	52 Week High	Correction (%)	Performance
1	NHPC	Power Generation	27	36	25.00	Under perform
2	SCI	Shipping	121	202	40.10	*Under perform
3	Power Grid	Power Transmission	97	121	19.83	* Follows Index
4	Coal India	Coal	310	356	12.92	Follows Index
5	IOC	Refinery	360	556	35.25	Under perform

* Performance remarks considers dilution in equity while 52 Week high price has not been adjusted.

Differential Voting Right

Differential Voting Right (DVR) is not a new concept but only 3 companies have issued these types of securities. It simply means holder of DVR surrenders their right to vote. (Very few retail investors make their vote count). All other right for DVR holder remains same and in some case it is being compensated by entitling them for 0.5% more dividend in comparison with ordinary equity share.

Benefits of DVR

1.    Investor gets almost double dividend yield in comparison to ordinary equity share as the price is ruling at 40% discount and entitlement for additional 0.5% (Tata Motor) in comparison with ordinary equity share.

Particular	CMP	DVR CMP	Discount(%)	Divi.(Rs/share)	Ordinary Share Divi. Yield(%)	DVR Divi. Yield(%)
Tata Motor	1182	730	38.24	15	1.27	2.05
Gujarat NRE Coke	68	39	42.65	1	1.47	2.56
Pantaloon Retail	365	303	16.99	0.8	0.22	0.26

2.    Promoters can raise fund without diluting their stake which reduces takeover chance.

I believe

Fundamentally this difference (i.e. 38% to 42% discount to CMP) should reduce to ideally 5% to10% in years to come resulting in risk free outperformance. Mature market can make this thing happen and in long term market is always mature.

Here we take example of Tata Motor. Tata motor DVR were issued through right issue at discount of 10% @ Rs. 305 while ordinary equity shares were offered @ Rs. 340. Comparing the trading pattern of both DVR and Ordinary Equity Share shows amazing price movement. It is evident from following table that how over a period of time DVR Price moved to significant discount from huge premium.

Tata Motor	Ordinary	DVR	Premium (-)(%)
Date	Price	Price2	Discount(+)(%)
5-Nov-08	182.2	238.1	-30.68
12-Nov-08	150.45	278.4	-85.04
4-Dec-08	150.95	148	1.95
6-Jan-09	186.45	133.85	28.21
6-Feb-10	680.2	383.85	43.57

Imagine the situation on 5^th November, 2008 where Investor who subscribed DVR and sold their investment at Rs. 238 and bought ordinary equity share at Rs. 182. Today on 7^th January, 2011 DVR is trading at Rs. 730 giving 307% appreciation while Ordinary equity share is trading at Rs. 1182/- giving 650% appreciation. This kind of opportunity, if grabbed, results into risk free outperformance like anything.

Note: - In NSE, on 5thNov. Only 360 shares were sold for delivery i.e. 5% of total traded quantity……..so how many would have grabbed that opportunity.

Conclusion:-

Those who are long term investor and in search of risk free outperformance can start accumulating Tata Motor DVR and Gujarat NRE Coke DVR at this level. It is also possible that discount may widen in days to come. That is why I said start accumulating. Same is not applicable in case of Pantaloon Retail as discount is not that much wide.

Want to read more. Follow this CA Club India.

Keep tracking your investment. Opportunity can come anytime.

My Experience

Nobody has ever been 100% right in stock market. Experience is the key for right decision making. I entered capital market way back in September 2003 and have seen one of best Bull Run and at the same time one of the worst fall. I observed one similarity in both cases. There were many stocks whose valuation reached to crazy level whether it is upside or downside.  Sometime I made money. Sometime I lose money. But that experience has given one beautiful gift i.e. how to learn from own mistakes.

Learning is never ending process……. And I would like to continue it for lifelong.  At the same time for the sake of satisfaction and growth, I would like to capitalize on my experience.  Blog is the best medium without any investment to capitalize. 

On this, would like to share some of the conclusions made during this period. 

1.       Market does not like uncertainty. Nobody knows when market will react to that uncertainty. But one has to be cautious when there is uncertainty.

2.       Politics has direct relation with market. Have close watch over that.

3.       In short to medium term market may show irrational moves, upside or downside. Long term approach can multiply your money. I interpret long term as at least 3 years.

4.       Lots of opportunities will come in market. Quick decision should not result into long term investment.

5.       Do your homework or have price target for your investment. One has to book profit at some point of time.

6.       Averaging is not the right game to play unless it is being investment strategy.

7.       Timing the market is next to impossible. But entry near bottom and exit near top is always possible.

8.       Equity is not the only area for investment. 

9.       I do not support trading unless and until you have lots of surplus money and in addition to that regular source of income.

10.   Future, Options and commodities are very risky but at the same time understanding of that in depth may give you extraordinary return also.

HAPPY INVESTING