AK NOMICS: Budget and the stock markets

For now, the stock is trading at a PE of less than 4 times its trailing earnings and the company is available at a market cap of less than 765 crore, writes Ashok Kumar.

Last weekend, I was a panelist at a post-Budget discussion at a Management Institute in Mumbai. My co-panelists included an economist from the Tata Group, an ex-Director of IDBI, an ex-Chairman of a bank and a prominent chartered accountant. The panelists raised some very interesting points and I recount a few of these below:

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Onto the markets. Enough has been said, written and read about the Bear Sterns’ of the world. Closer home, shareholders of Orchid Chemicals had a taste of what shareholders of Bear Sterns must have experienced, last week.

The stock went into a free fall during the week; down 44 per cent from its close of last Friday. The reason for such a sharp fall, while precipitated by the Bear Sterns crisis, can be attributed to the leverage position taken by the founder and MD of the company Kailasam Raghvendra Rao.

For now, the stock is trading at a PE of less than 4 times its trailing earnings and the company is available at a market cap of less than 765 crore, which is less than 0.70 times its market cap to sales. The stock thus seems cheap but is it really a value buy? Our research team’s opinion here is, while there could be some technical rebound at this counter, its near-term market prospects appear far too risky as it was not really the one-time sale by Bear Sterns but the company’s MD’s sale (forced or otherwise) of the stock that spooked the market.

More importantly, avoid getting distracted by looking at merely the relatively depressed price but evaluate it against companies available around the same price range with more robust business models. Chances are, you will find a better bet.

(The author heads Lotus Knowlwealth and blogs at www.theipoguru.blogspot.com)