Investors in Indian stock markets have seen a lot of action in the last six months. A rally taking sensex beyond 12500 mark followed by a steep fall to sub 9000 level within a month and a range bound market in the last few weeks. All these movements have left the retail investors clueless about the market. Terrorist activities in Mumbai, rising tension in Lebanon, spurt in crude oil prices, and lack of institutional interest in the market triggered the weak sentiment in the broad market. Though the broad market sentiment is weak, the good corporate performance reiterated the fundamental growth story of India. The market reacted sharply to the good Q1FY07 performance card. According to some market experts, this is a technical pullback. But nobody challenged the fundamentals of the Indian economy. Most of the analysts advocated buying good stocks with a long term horizon. Investors accept this proposition but face the critical question of identifying those businesses that will deliver handsome returns in next 3 to 4 years. Here is an attempt to clear the grey matter.
Indian economy is the second fastest growing economy next to China. The services sector is the key driver in this growth story. Information Technology is the buzzword in the 21st century. Global spending on information technology is increasing. Tata Consultancy Services (TCS) is a company, well poised to benefit from it. TCS – a Tata group IT services and consulting company has recently consolidated its position in the market by way of mergers and acquisitions that will fill gaps in its offerings, improve margins and thereby increase earnings over a longer period. TCS aims to be one of the top 10 companies in this sector by 2010. Presence across the globe and across the business verticals will help TCS post good growth, showing a CAGR in excess of 20% over the next 3 to 4 years.
Rolta India Limited is the largest provider of interactive solutions for CAD/CAM applications and software exports and a dominant player in the niche segment of global imaging services, where it enjoys 70% of market share. The important development for the company is its JV with Stone & Webster (SAW), aimed at providing high quality engineering design services and turnkey projects in India and overseas. It is one of the cheapest stocks in the IT sector with the ability to deliver healthy business growth over the years. Any interest shown by SAW in the management control of Rolta, can act as a rerating trigger for the stock.
After Information Technology, the eyes are on BFSI sector. Housing Development Finance Corporation (HDFC) is a strong player in the financial services. On the back rising interest rates the business was not looking attractive. However, contrary to market expectations it has outperformed most of its peers in the core business of housing loans. A brand in itself, this is a business with high return on shareholders funds, low NPA, healthy capital adequacy and ability to withstand all weathers. Rise in housing activity and minimal downside makes it a good buy. Its investments in its group companies can fetch good returns over a period of time.
In the pharmaceutical sector, Cipla appears to be a better business. Low risk business model based on the partnership with frontline players across the globe and across the product offerings, strong balance sheet, consistent performance and less dependence on any one factor makes it a compelling buy.
Hospitality industry is booming on the backdrop of the growing economy. Occupancy rates are ruling high and so are the average revenues per room. Royal Orchid Hotels- a Bangalore based company is all set to ride this boom. Q1FY07 result was very encouraging and the management is upbeat about the future and provided the guidance of one new facility coming on stream each quarter for next four quarters. Company is also eyeing the high margin restaurant business. Company is expected to enjoy healthy growth due to the widening demand supply gap. The stock is attractively valued and expected to deliver well over the years.
FMCG companies delivered exceptionally well in last one year. In this space, ITC -near monopoly in cigarette business- looks good. The stock is attractively valued taking into account valuation enjoyed by its peers. Over the years, its efforts to diversify into non-tobacco businesses have started paying off. The contribution from paper, hospitality and non-tobacco FMCG businesses have started contributing to both topline and bottomline of the company. On the backdrop of Q1FY07 results the company is expected to do well as all its businesses are experiencing strong demand situation.
Outsourcing opportunities to India are not coming from IT sector only. Auto ancillary is another opportunity to grab. Bharat Forge is the biggest forging company in the world. Company has emerged as the largest exporter of auto components from India to all parts of the world. It is the ability of the company to scale up its capacity-both organically and inorganically along with cost control and innovation has made it a global player. The company is expected to do post handsome growth over the next five years.
Larsen & Toubro (L&T) is a leading company in the engineering sector. The increased spending on infrastructure and new plant capacity additions has offered growth at a high rate. An all time high order book to be executed over the next 24 to 30 months offers earnings visibility. Order book spread across the regions and across the business segments brings in desired diversification that mitigates earnings risks. Company is expected to grow at more than 20% over the next 4 years with better visibility of earnings.
Easun Reyrolle is in the high growth business of electrical components and equipments. Company has posted good results over the last two years. The capacity expansion without diluting the equity and entry into turnkey projects construction is expected to work as a growth driver. Siemens hold 20% stake in this company. Any attempt of Siemens to takeover the management control, will bring re-rating for the stock. This is one of the cheapest stocks in this segment. A word of caution, the stock is prone to risks faced by small cap counters.
Metal prices have done well over the last three years. Despite some weakness in the recent past, a good growth is expected in this segment. Tata Steel (TISCO), the lowest cost manufacture of the steel in the world is expected to offer good growth in the years to come. Though the margins are expected to stabilize or rule marginally weak, the growth in volumes will act as a cushion. The renewed interest of TATA group in the business, post the Mittal-Arcelor merger backed by capex plans over the next 4 years, ensures a healthy growth.
Jhagadia Copper is the largest producer of LME Grade “A” Copper Cathodes, using secondary smelting route in India. The company is being managed by a consortium led by ICICI Bank. Recently, the commercial production started and the restructuring is about to come to an end. The current management is expected to sale this business. Over a period of next 3 years the company is expected to post good growth due to robust demand in user industries. However the stock is prone to the risks of a turnaround business.
Cement companies are one of the biggest beneficiaries of the boom in construction and infrastructure segment. Higher realizations and spurt in volumes backed by widening demand supply gap will act as growth drivers in this sector. India Cements is the largest player in the South India. The company has benefited from the restructuring and also believes in inorganic growth. Introduction of VAT in Tamilnadu will act as an immediate trigger in the short term. Shree Digvijay Cement is another opportunity in cement sector. The AV Birla group company recently completed its rights issue as per the guidelines of BIFR. The company is into restructuring phase and expected to be manufacturer of high end – high margin cement for both domestic and export markets with an expectation to offer good growth in the longer term. Business is however, exposed to the risks run by the turnaround cases.
Reliance Industries- the flagship company of Mukesh Ambani group is a near monopoly in petrochemicals sector. Its abilities in refining, E&P sector are of world standards. It is one of the cheapest bluechip stocks in the market. The strong management record and ability to super deliver vis-à-vis the investor expectations makes the success a higher probability in its new ventures in E&P, retail and SEZ businesses. RIL is being seen as a proxy play in these industries. A longer term view on this stock can bring good fortunes for the investor.
ONGC the public sector oil sector-navaratna- company is expected to do well on the back of rising demand. It will be one of the biggest beneficiaries of firm crude oil prices. ONGC is planning to add to its capacities and on the shopping spree across the globe. Despite the oil subsidy burden this is a stock worth buying with a longer term horizon. Any positive surprise on the pricing front or dilution of government stake (not possible in the short term), can act as a trigger for this stock.
To sum up, stay invested in Indian equities across the sectors, as the stock prices are the slaves of the earnings. Perception, though important, always follow the earnings, at least in the long term.
Indian economy is the second fastest growing economy next to China. The services sector is the key driver in this growth story. Information Technology is the buzzword in the 21st century. Global spending on information technology is increasing. Tata Consultancy Services (TCS) is a company, well poised to benefit from it. TCS – a Tata group IT services and consulting company has recently consolidated its position in the market by way of mergers and acquisitions that will fill gaps in its offerings, improve margins and thereby increase earnings over a longer period. TCS aims to be one of the top 10 companies in this sector by 2010. Presence across the globe and across the business verticals will help TCS post good growth, showing a CAGR in excess of 20% over the next 3 to 4 years.
Rolta India Limited is the largest provider of interactive solutions for CAD/CAM applications and software exports and a dominant player in the niche segment of global imaging services, where it enjoys 70% of market share. The important development for the company is its JV with Stone & Webster (SAW), aimed at providing high quality engineering design services and turnkey projects in India and overseas. It is one of the cheapest stocks in the IT sector with the ability to deliver healthy business growth over the years. Any interest shown by SAW in the management control of Rolta, can act as a rerating trigger for the stock.
After Information Technology, the eyes are on BFSI sector. Housing Development Finance Corporation (HDFC) is a strong player in the financial services. On the back rising interest rates the business was not looking attractive. However, contrary to market expectations it has outperformed most of its peers in the core business of housing loans. A brand in itself, this is a business with high return on shareholders funds, low NPA, healthy capital adequacy and ability to withstand all weathers. Rise in housing activity and minimal downside makes it a good buy. Its investments in its group companies can fetch good returns over a period of time.
In the pharmaceutical sector, Cipla appears to be a better business. Low risk business model based on the partnership with frontline players across the globe and across the product offerings, strong balance sheet, consistent performance and less dependence on any one factor makes it a compelling buy.
Hospitality industry is booming on the backdrop of the growing economy. Occupancy rates are ruling high and so are the average revenues per room. Royal Orchid Hotels- a Bangalore based company is all set to ride this boom. Q1FY07 result was very encouraging and the management is upbeat about the future and provided the guidance of one new facility coming on stream each quarter for next four quarters. Company is also eyeing the high margin restaurant business. Company is expected to enjoy healthy growth due to the widening demand supply gap. The stock is attractively valued and expected to deliver well over the years.
FMCG companies delivered exceptionally well in last one year. In this space, ITC -near monopoly in cigarette business- looks good. The stock is attractively valued taking into account valuation enjoyed by its peers. Over the years, its efforts to diversify into non-tobacco businesses have started paying off. The contribution from paper, hospitality and non-tobacco FMCG businesses have started contributing to both topline and bottomline of the company. On the backdrop of Q1FY07 results the company is expected to do well as all its businesses are experiencing strong demand situation.
Outsourcing opportunities to India are not coming from IT sector only. Auto ancillary is another opportunity to grab. Bharat Forge is the biggest forging company in the world. Company has emerged as the largest exporter of auto components from India to all parts of the world. It is the ability of the company to scale up its capacity-both organically and inorganically along with cost control and innovation has made it a global player. The company is expected to do post handsome growth over the next five years.
Larsen & Toubro (L&T) is a leading company in the engineering sector. The increased spending on infrastructure and new plant capacity additions has offered growth at a high rate. An all time high order book to be executed over the next 24 to 30 months offers earnings visibility. Order book spread across the regions and across the business segments brings in desired diversification that mitigates earnings risks. Company is expected to grow at more than 20% over the next 4 years with better visibility of earnings.
Easun Reyrolle is in the high growth business of electrical components and equipments. Company has posted good results over the last two years. The capacity expansion without diluting the equity and entry into turnkey projects construction is expected to work as a growth driver. Siemens hold 20% stake in this company. Any attempt of Siemens to takeover the management control, will bring re-rating for the stock. This is one of the cheapest stocks in this segment. A word of caution, the stock is prone to risks faced by small cap counters.
Metal prices have done well over the last three years. Despite some weakness in the recent past, a good growth is expected in this segment. Tata Steel (TISCO), the lowest cost manufacture of the steel in the world is expected to offer good growth in the years to come. Though the margins are expected to stabilize or rule marginally weak, the growth in volumes will act as a cushion. The renewed interest of TATA group in the business, post the Mittal-Arcelor merger backed by capex plans over the next 4 years, ensures a healthy growth.
Jhagadia Copper is the largest producer of LME Grade “A” Copper Cathodes, using secondary smelting route in India. The company is being managed by a consortium led by ICICI Bank. Recently, the commercial production started and the restructuring is about to come to an end. The current management is expected to sale this business. Over a period of next 3 years the company is expected to post good growth due to robust demand in user industries. However the stock is prone to the risks of a turnaround business.
Cement companies are one of the biggest beneficiaries of the boom in construction and infrastructure segment. Higher realizations and spurt in volumes backed by widening demand supply gap will act as growth drivers in this sector. India Cements is the largest player in the South India. The company has benefited from the restructuring and also believes in inorganic growth. Introduction of VAT in Tamilnadu will act as an immediate trigger in the short term. Shree Digvijay Cement is another opportunity in cement sector. The AV Birla group company recently completed its rights issue as per the guidelines of BIFR. The company is into restructuring phase and expected to be manufacturer of high end – high margin cement for both domestic and export markets with an expectation to offer good growth in the longer term. Business is however, exposed to the risks run by the turnaround cases.
Reliance Industries- the flagship company of Mukesh Ambani group is a near monopoly in petrochemicals sector. Its abilities in refining, E&P sector are of world standards. It is one of the cheapest bluechip stocks in the market. The strong management record and ability to super deliver vis-à-vis the investor expectations makes the success a higher probability in its new ventures in E&P, retail and SEZ businesses. RIL is being seen as a proxy play in these industries. A longer term view on this stock can bring good fortunes for the investor.
ONGC the public sector oil sector-navaratna- company is expected to do well on the back of rising demand. It will be one of the biggest beneficiaries of firm crude oil prices. ONGC is planning to add to its capacities and on the shopping spree across the globe. Despite the oil subsidy burden this is a stock worth buying with a longer term horizon. Any positive surprise on the pricing front or dilution of government stake (not possible in the short term), can act as a trigger for this stock.
To sum up, stay invested in Indian equities across the sectors, as the stock prices are the slaves of the earnings. Perception, though important, always follow the earnings, at least in the long term.
(Disclosures: Long Position in Shree Digvijay Cement)
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