The mood on Dalal Street has changed incredibly over the past year, from greed to denial to panic and now despair. There’s bad news all around, and the slivers of good news are being ignored. So, is this the time to throw in the towel and forget about stock market investing? Hardly. Instead, oversold markets provide a good entry point if you are convinced about the longterm potential of the Indian economy and the cream of Indian corporations.
There are stocks that appear in good shape to survive the slowdown, and be the first to emerge out of the gloom—and the best part is that they’re incredibly cheap when you consider their long-term potential. Business Today speaks to 11 of the brightest minds on Dalal Street and gets them to identify their favourite long-term value picks.
2009 may be a good time to buy fundamentally-sound stocks on the cheap; but investors have to be clear that they won’t reap the returns in 2009, or not even 2010. These stocks are only for long-term investors, with a minimum horizon of three years. Following is the list of 20 stock picks, in alphabetical order.
Focus on lifestyle segment keeps it in good health
For some time now, smart money has been moving into shares of multinational pharmaceuticals companies. After India entered the product patent regime in 2005, the fortunes of MNC pharma companies have changed for the better.
Sector/Business: MNC Pharma
It is focussing on fast-growing lifestyle segments like cardiovascular and diabetes in the domestic market. Aventis has a few strong products in this segment like Amaryl (anti-diabetes) with a 4 per cent market share and Cardace (cardiovascular segment) with a 28 per cent market share. Besides, its parent Sanofi-Aventis, France, has a huge pipeline of molecules under development in the lifestyle category.
But what has impressed analysts is the aggressive introduction of its parents’ products in the in the Indian market. Says Rajiv Thakkar, CEO, Parag Parikh Financial Advisory Services (PPFAS): “Aventis’ overseas product introductions in India will expand its domestic business over time.”
Another factor, Thakkar says, that will benefit the stock is its debt-free status and a hefty cash balance. Thakkar, however, has not put a target price on the stock and cautions that the uncertain market may play spoilsport in the short-term. But in the long term, he says, “the stock has the makings of a multi-bagger.”
Strong business model to offset succession worries
he stock market often reacts sharply to news from the banking sector. Axis Bank’s stock dipped sharply—slipping nearly 18 per cent to Rs 394.50 on January 27, 2009, down from Rs 485 on January 9, 2009. The market, already edgy over slowdown fears, was more worried over the retirement of Axis Bank’s long-time chairman P.J. Nayak, and the issue of a successor. Axis Bank’s advances continue to grow at a decent clip of over 50 per cent at a time when credit expansion has slumped.
The bank is facing a squeeze on margins as lending rates are falling while borrowing costs have yet to come down. Another hitch is possible stake sale of 21.5 per cent in Axis Bank held by administrator of the special undertaking of UTI. Says Vaibhav Agarwal, analyst, Angel Broking: “Axis Bank has been focussing on retail liabilities business before increasing its loan assets. Its fee income too is doing well.”
Armed for growth
ust when large manufacturers are curtailing their activities to save on costs, Bharat Electronics is opening a support centre at Kochi, Kerala, to serve its growing clientele. A Navratna public sector undertaking which gets 80-85 per cent of sales from the armed forces, BEL’s turnover and profit after tax have been rising consistently for four decades now. It is talking to global players like Lockheed Martin, Boeing and EADS to make the most of the government’s “offset” clause, which requires any foreign company bagging an order worth over Rs 300 crore from India’s defence sector to share 30 per cent of it with Indian firms.
It also gains from its links with the Defence Research & Development Organisation. Says V.V.R. Sastry, BEL’s Chairman & Managing Director: “We are interacting with DRDO for developing new products.” Over the last one year, the BEL scrip has slid some 59 per cent, but broking houses still bet big on it. Says Dolat Capital’s Sameer Panke: “In the last five years, while the defence budget has grown at 12 per cent, defence capital expenditure grew at 23 per cent. BEL is a big beneficiary of this increase. The company has strong cash flows and no debts at all.’’
More subscribers, more towers, and now more spectrum
Bharti Airtel typifies the success story of Indian mobile telephony. Its outstanding execution skills have made it the market leader. Over FY2006-08, Bharti cornered 26.5 per cent of the all-India incremental mobile subscriber additions. In the third quarter (fiscal 2009), it reported an increase of 41.5 per cent in gross revenues on a year-on-year basis, and 9 per cent on a sequential basis. During the same period, its mobile subscriber base grew by 55.3 per cent y-o-y and 10.5 per cent q-o-q to 85.7 million. Says Sunil Mittal, CMD, Bharti Airtel: “Bharti’s strategy of extensive roll-out ahead of competition, especially in new villages, has yielded rich dividends.”
The company is also well placed with its telecom infrastructure business, given the need for rapid network expansion by current and new operators. Bharti, with the largest tower portfolio in India through Infratel, is likely to be a key beneficiary. Then there are other reasons why the stock is a good bet. The spectrum allocation imbroglio seems to have been resolved. Says Hitesh Agrawal, Head of Research, Angel Broking: “The spectrum issue was critical for the sustained growth of the telecom sector. Now the medium-term growth requirement of Bharti has been taken care of.”
Everybody wants light in dark times—and BHEL has the spark.
Bharat heavy electricals, the largest manufacturer of power plant equipment, is one company that is unlikely to be hit by the economic gloom. It knows the government will spend freely to improve the power sector. And the government does not cancel orders. So, BHEL, which has 64 per cent of the power plant market, has been ramping up capacity.
By December 2007, it had increased capacity from 6,000 MW a year to 10,000 MW, and is now taking it to 20,000 MW by 2011-12. Says Pulkit Bakliwal, analyst at Sharekhan: “The 11th Five-Year Plan has envisaged capacity addition of 78,000 MW.
BHEL has been the major beneficiary of the spending.” Government projects account for around 85 per cent of BHEL’s order book of Rs 1,04,000 crore, giving it high revenue stability. “Even in the present scenario, orders placed by government institutions are unlikely to get cancelled,” says Bakliwal, pointing out that the cash-strapped private players may have to do so. “This gives BHEL a huge comfort level,” Bakliwal adds.
But there are bumps on the road ahead. BHEL could face project delays and a lag before new orders start coming in. The stock, at slightly above Rs 1,320, is trading at a premium. Says Bakliwal: “A strong balance sheet and huge cash pile of about Rs 8,400 crore would help BHEL sail smoothly through the challenging business environment. We recommend a buy with a price target of Rs 1,546 over the next 12 months.”
Ratings become vital during downturns
he global credit crisis has hit the capital-raising plans of Indian companies.The only window open these days is through domestic debt issues or bank borrowings.
Here’s where a debt rating from CRISIL, India’s largest rating agency, helps. Another growth avenue has been created by the Basel-II norms to rate corporate loans given by banks.
Says Jigar Valia of Parag Parikh Financial Advisory Services (PPFAS): “It’s a small component now, but it’s going to be a phenomenally fast-growing business. It’s a perpetual and stable income.” CRISIL’s work for its parent Standard & Poor’s is a cash cow.
Adds Valia: “Even in years of de-growth, this company was trading at a PE multiple of 20 times; but thanks to the financial crisis, the stock is cheap.”
No fear of input cost hikes
One of Asia’s leading design and engineering companies, Engineers India builds petroleum refineries, industrial projects, offshore structures, metallurgy and power projects. India’s substantial investments in infrastructure have given it an order book of Rs 8,000 crore, to be executed over 3-4 years. It has begun protecting its margins by signing open-book orders—input cost hikes are passed through.
Says Ajay Parmar of Emkay Global Financial Services: “The stock looks quite attractive… there are no worries about the management since the government holds a 91 per cent stake… it has zero debt and high dividend payout. It’s a very safe bet in the current market scenario.”
Sitting on a mine of wealth
he share price of Gujarat Mineral Development Corporation was one of the worst affected when Gujarat government asked state-run companies to fork out 30 per cent of their profit before tax for social work. Despite this, the stock is still seen as a good value pick—the bad news has been discounted. Profitability is expected to get a boost from the recent lignite price hike. “Full impact will be seen in the next financial year,” says Sameer Ranade, analyst at PINC Research.
The government may reverse the 30 per cent rule, since minority shareholders at some other companies have mutinied. GMDC’s moves into the power sector will add to valuation.
Seeking a global footprint
s India’s fifth-largest IT services exporter, straddling a diverse portfolio of services that ranges from R&D to enterprise, BPO and infrastructure management, HCL Technologies has a de-risked model as it is essentially in high-growth, high-end, low competition areas. It is looking at inorganic growth.
The acquisition of UK-based Axon last year is expected to help it become a major player in SAP implementation, an area from which it expects to get a quarter of its revenues, against 11 per cent now. Says Vineet Nayar, CEO, HCL Technologies, “We have successfully integrated Axon to dominate the SAP space globally.”
Anagram’s V.K. Sharma says: “We feel the worsening global macroeconomic situation and slowdown in IT spending is factored in at this price. The stock trades at almost 8 per cent dividend yield, limiting its downside from these levels.”
Pioneer grows biz in slowdown
At a time when the home loans business is in the dumps, a lower third-quarter profit at India’s largest housingfinance company did not ring any alarm bells. Housing Development Finance Corporation actually boosted net interest income by 18 per cent to Rs 785 crore but was hit by higher running expenses. Analysts did not waver from their “buy” rating.
HDFC’s asset quality has improved further, it has valuable subsidiaries in insurance and asset management and it has been consolidating its business. HDFC’s asset quality has improved in December 2008. Says Gaurav Dua of Sharekhan: “Throughout its history, HDFC has shown a healthy growth.”
Great traction in falling market
While the current fiscal has been tough for the two-wheeler industry, Hero Honda, the largest motorcycle manufacturer in India, delivered improved growth rates and increased market share. Although its third-quarter sales fell (by 4.5 per cent), it was less impacted than rivals Bajaj Auto (-52.4 per cent) and TVS Motors (-18.5 per cent). Says Pawan Munjal, MD & CEO, Hero Honda: “Our results reflect Hero Honda’s remarkable resilience.” Says Krish Shanbhag of Antique Stock Broking: “We expect Hero Honda to stay ahead on the strength of its brand and new launches.” It is also a debtfree company with surplus cash.IDFC
Scores on good quality of assets and performance
The portfolio of Infrastructure Development Finance Company includes fullysecured loans and debentures, equity (both private and public), debt capital (where it syndicates financing and earns fees), apart from a host of other layered and mezzanine products. “The great quality of assets and the very sector it operates in makes it a good stock to have for the long term,” says Apoorva Shah of Prabhudas Lilladher. Despite the downturn, the company has managed to do well for itself in the nine months ended December 2008 logging a net profit of Rs 634 crore, up from Rs 593 crore last year’s corresponding period.
Some pressure now, but long-term story intact
nfosys Technologies HAS a knack of beating its own earnings guidance, something it may continue doing even in today’s tough business climate. The Bangalore-headquartered information technology major is fighting rivals that are undercutting its prices. But Infosys has in the past demonstrated that it may walk out on a client rather than give up on margins. In any case, it has ushered in the New Year with panache—its third quarter net profits are up 33.3 per cent year-on-year. And it is hoping to end the financial year with a revenue growth of around 30 per cent.
Chief Financial Officer (CFO) V. Balakrishnan admits that the company is passing through tough times. “The environment is challenging as customers are sitting tight on spending. But with clients interested in saving costs, offshoring could increase. The long-term growth story is still intact.”
The scrip may have fallen 48 per cent in the past 12 months, but brokers have a positive long-term view of it. Angel Broking, for instance, has Infy as its sector’s top pick and recommended “accumulate”. Angel’s Harit Shah, however, warns investors that any upside in the near term would be limited. But then he adds: “Infosys will be among the first companies globally to reap the benefits and score a premium over others once the sector recovers from its current spell of slowdown.”
Safe on three pillars—pipelines, retail & refining
Till a few months ago, anaLysts were sharply negative on IOC’s stock because of the spurt in international petroleum prices. Today, with crude having slumped to below $45 a barrel, things are different.
“On an incremental basis, IOC would be making profits on the marketing business apart from its refining business as well as profits from pipeline. Also… IOC’s profitability is protected because of its income from pipeline business and investments,” says Raamdeo Agrawal, Managing Director, Motilal Oswal Securities.
IOC, along with its subsidiaries, controls 40 per cent of India’s refining capacity, 47 per cent of retail market and 67 per cent of downstream pipeline capacity. Motilal Oswal expects the stock to reach Rs 870 over the next 36 months.
No pipe dreams here: just solid demand from an oil hungry world
hink of Maharashtra seamless as among the safest stocks for investors: steady financial performance, a strong balance sheet with no debt and a product (seamless steel pipes) that is in great demand. Says PINC Research Analyst Amol Rao: “MSL has the widest range of seamless products among Indian manufacturers.” The biggest customer is oil & gas sector, followed by engineering and automobile sectors. Seamless steel pipes fetch the firm 75 per cent of its revenues, and electric resistance welded pipes the rest.
The DP Jindal flagship will gain from implementation of the 5th and 6th rounds of the New Exploration Licensing Policy (NELP) for the oil and gas sector and the recent awards under NELP VII. Says Anil Jain, Group CFO, MSL:
“There has been a drop in demand from the private players, public sector players are still placing orders with us,” he says, noting that the decline in steel prices would give it bigger margins. “Liquidity is not going to be an issue for us because of the huge cash reserves,” says Jain.
PINC Research recommends a buy on the stock with a 12-18 month price target of Rs 320.
Maruti Suzuki India
From entry-level to global player, A Star bets big on exports
The year 2008 will go down in history as one of the worst ever for India’s automobile sector. But the situation has started improving now, and analysts believe that companies like Maruti Suzuki India would be the first beneficiaries. Says Surjit Arora of Prabhudas Lilladher: “Although the volume growth is likely to remain subdued for the next 3-4 months, it is expected to recover in 2009-10…”
Shinzo Nakanishi, MD& CEO, Maruti Suzuki India, says: “We have just started exporting our strategic model, the A-Star. In the medium term, exports will play a far more important role… Though there is a general slump in automobile demand globally, we feel products like A-Star will draw greater attention as they are fuel efficient.” Prices of raw material and fuel have eased somewhat although the gains will not show up before the next quarter as Maruti tends to buy raw materials almost six months in advance.
At the current market price of Rs 517.70, the stock looks extremely attractive. Analysts at Prabhudas Lilladher recommend buying the stock post Q3FY09 results and expect it to touch Rs 605 in the next 12-15 months.
Taking health & wellness platform to Tier II, III cities
Nestle India, A 61.9 per cent subsidiary of Nestle S.A. of Switzerland,, is India’s third-largest FMCG company after Hindustan Unilever and ITC. It has a strong brand equity that is now helping it make inroads into Tier II and III cities. Nestle’s advantages: low penetration levels for processed foods, rising income levels, urbanisation and changing lifestyle. According to Martial Rolland, CMD, Nestle India: “Our success is based on a sound business model of sustainable performance and capital efficiency that is focussed on the consumer.” Says Edelweiss Securities: “Nestle is increasingly focussing on expanding into Tier II and Tier III cities and leveraging its recent innovations positioned on health and wellness platforms to gain incremental sales.”
The company reported strong revenue growth for its third quarter (July to September). Topline improved by over 20 per cent for the 7th quarter in a row, while bottomline surged by over 40 per cent. Robust earnings growth along with high dividend yield and low gearing makes Nestle a good bet in the long run.
All the right nutrients for growth prepare ground for big leap
When Rallis India reported an 11 per cent rise in net profit and 43 per cent rise in operating profit for the quarter to December 31, it beat analysts forecasts. “It was able to improve the process for manufacturing agrochemicals and also on the sourcing of raw materials,” notes Ajay Parmar, Head of Research, Emkay Global Financial Services. Another factor is that the restructuring undertaken by the Tata Group company in 2002-03 is now showing up in its profitability. Its other attractions: the almost debt-free status (barring a small working capital loan) and its focus on the international market.
New agro-chemical products have been well accepted and its international initiative APOLLO is in the right direction. Rallis plans to achieve revenues of Rs 2,500 crore by March 2012 compared with Rs 671 crore for the year to March 31, 2008. It hopes to achieve operating profit margins of 25 per cent against the current level of 11-12 per cent.
Market cap to sales of 0.6 times compared with 1.5 times for United Phosphorus, the closest competitor, makes Rallis an attractive investment, says Parmar of Emkay.
No cash crunch, no slowdown. All eyes now on asset quality
For the country’s biggest bank, there’s a problem of plenty. A surge in fixed deposits instead of current & savings accounts (CASA) has raised State Bank of India’s capital costs. CASA deposits added up to 34 per cent in the third quarter of FY 2008-09 as compared with 40 per cent for the second quarter of FY 2008-09. But, unlike other banks, SBI still managed to increase its margins due to better yields form its advances.
The downturn in the economy is not slowing things down at SBI. This year, its growth in advances is expected to be robust, with the third quarter’s 31 per cent growth figure a positive sign. The next year the growth could taper off due to a higher base, but a lower interest rate should help the bank’s other income.
Investments in core banking technology is paying off as the company reported an increase of 34 per cent in fee-based income in the third quarter of 2008-09 over last financial year’s third quarter.
A key area will be managing its asset quality in the coming quarters due to the slowdown in the economy. But growth should also not be a concern for a couple of quarters as it leverages on its size. Says Vishal Goyal, analyst, Edelweiss Capital: “It is fairly attractive as the bank has flexibility in earnings due to bond gains. Next year, operating expenses will be lower. Asset quality may see slippages, but it won’t impact profitability.”
Union Bank Of India
High operating efficiency, good asset quality
Union Bank Of India is among the favoured stocks in the banking sector. Recently, it reported an 84 per cent increase in net profit for the 3rd quarter to Rs 671.7 crore. Edelweiss Securities revised upwards the forecast for the full year net profit by 28 per cent. “We will maintain credit offtake and advance growth of 25 per cent for 2008-09,” says M. V. Nair, CMD, Union Bank of India.
He says the good show is due to NPA recovery, and retail and small and medium enterprise lending. Other income is also growing well, giving it a cushion if credit offtake does not improve. Edelweiss says it is better placed than its peers because of its high operating efficiency, better asset quality and potential to generate average return on equity of 22 per cent in 2008-10 financial years.
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