Speculation Watchlist

This will be a quick post; while I posted about asset allocation and need to increase equity investments, I've come across these few stocks where I believe a speculative bet will help generate some decent profits, and help me satisfy the urge of "gambling".

- IL&FS Investment Managers (IIML): I just concluded this morning that IIML is not a good enough investment for long term, but it might be a reasonable speculative bet, in small amount. I'll keep adding trickles of this stock to my portfolio - I don't see it running away in a hurry, but yes, if macro-economics improve, this stock may be an out-performer.

- Wockhardt Ltd: The stock has fallen from 2000 odd levels to 1200 levels in last 2 months, and is probably over-discounting the recent news of quality concerns with their medicines. It maybe a favorable bet, let's see if risk / reward is good enough. Looking at some numbers quickly, the company has generated an average annual revenue of Rs 4600 crores in last 3 years, and the sales is growing at about 18% annually. Further, the operating profit margin is growing from 24% to 36%. Assuming that the US import restrictions impact top-line by US$ 150 million (taking margin of 50% on what management says), this translates into a hit of Rs 750 crores to annual revenues. Assuming no revenue growth and current revenue level of average(5449 for last fiscal, 4600 as average for last 3 years) = ~Rs 5000 crores, and reducing Rs 750 crores, we get a revenue of Rs 4250 crores for next financial year. At a 30% OPM, this results in Rs 1275 crores of OPM. Now, looking at current numbers, Market Cap / Operating Profit has been around 10, and at current share price of Rs 1200, we get slightly smaller ratio. So, Rs 1200 per share is a reasonable price proxy to the share price before the import restriction, and if the company is able to regain FDI compliance (as management says they'll do it in next 3 months), the stock price can rebound back towards Rs 2000.

Considering the quick analysis above, I feel that the stock can be purchased below Rs 1200 for about 25-40% gains in next 3-6 months, and downside risk is very limited. As for margin of safety, we've taken higher hit on revenues, assumed no growth and a lower OPM, and that should be good enough to justify a small purchase in the stock, of course limited to less than 2-3% of my portfolio.

I'll add more speculative bets if they come, and till I don't hit upper limit of my speculative funds.