Consequent to the sharp run up in markets in 2009, investors will have to be
careful in picking stocks while lowering their return expectations
After the astonishing performance in 2009, which has helped Indian stock
markets emerge among the best performing markets globally with year-to-date
returns of almost 80 per cent, the year 2010 could prove to be a
disappointment.
The BSE Sensex has more than doubled since its lows of sub-8,000 levels in
March 2009 is no secret. However, the Sensex now trades at 16 times its
estimated 12-month forward earnings wherein most of the positives, primarily on
account of improving economic fundamentals and corporate earnings, seem to be
priced in. Notably, since the up move has been due to the expansion in
price-earnings (PE ratio) multiples, it is the turn of corporate earnings to
catch up and make a case for the valuations to sustain at higher levels.
It is largely due to these reasons, experts believe that the markets will
remain in a narrow range and suggest that the Sensex may provide returns of
about 10-15 per cent by the end of December 2010. Most brokerages have set a
12-month target of 19,000-21,000 for the Sensex. Their modest expectations are
also due to some concerns that will have to be overcome, which in a way
indicates that investors need to be cautious as the risk-reward ratio is not as
favourable as it was in 2009.
Cautious mood...
The tightening of liquidity and hike in
interest rate, which is pretty much on the cards, could dampen sentiments of the
markets, believe experts.
The other concern pertains to the strength of global economic recovery
besides, a roadmap regarding withdrawal of stimulus packages (by different
countries) and its likely impact. Thirdly, although global liquidity is high,
with many Indian companies lining up to raise funds, it will test the ability of
the markets to absorb the increase in supply of paper.
Since global markets have seen the dollar weaken, leading to demand for real
assets like commodities, any sharp rebound in the dollar against major
currencies could reverse some of the dollar carry-trade (investors take cheap
dollar loans with an aim to make better returns by investing in other asset
classes) and pose additional concern. Lastly, concerns pertaining to sovereign
risks like the episodes of Dubai and Greece, could trigger a sell off in
emerging equity markets, and impact the ongoing recovery....but, still
positive
The markets are positively hoping that India’s government would unleash major
reforms, including implementation of Goods and Services Tax (GST) and Direct Tax
Code (DTC), which will provide a stepping stone for the next leg of economic
growth. Government’s fiscal prudence by speeding up the disinvestment process
(selling small stakes in public sector enterprises) would also be closely
watched. However, at this point in time, since the concerns are slightly more
than the positives and a lot of the good news is already priced in, the return
expectations from the broader market are moderate. Experts, thus, suggest that
in order to get superior returns in 2010, the best investment strategy would be
to adopt a bottom-up approach namely, picking individual companies, particularly
in the mid cap space.
The reason for being selective is primarily due to the fact that many
companies are still surrounded by concerns (like excessive debt, low demand,
etc) and are yet to show clear signs of a revival in their earnings.
Below are ten companies, which should do well and deliver above-market
returns in 2010. Most of these lead in their businesses, are well-managed and
have strong entry barriers. More importantly, their future prospects look good.
Although a few have high-debt on their books, they are experiencing a revival in
demand for their products and services and are taking steps to de-leverage their
balance-sheets. This along with relatively cheaper valuations will help them
deliver better performance as well as returns.
To know more on individual companies, read on.
HDFC
Higher liquidity and low interest rates have lowered
HDFC’s cost of borrowings. This could cushion it’s margins, in spite of the
company’s low home loan rate offerings starting at 8.25 per cent. The company is
observing good demand in the Western and Southern regions. Although interest
rates are expected to inch up in 2010, demand for home loans is likely to remain
healthy on the back of an improving economy. HDFC’s overall loan book is
expected to increase by 20-23 per cent in 2010-11. It’s recent acquisition of
Credila Financial Services gives it an entry into the education loan segment,
which is seen growing at 25-30 per cent annually. Further, value unlocking would
happen if its 10-year old subsidiary, HDFC Standard Life, comes out with an IPO.
HDFC is trading at 3.5 times its 2010-11 adjusted book-value and can deliver
over 20 per cent returns.
TOP PICKS FOR 2010 |
in Rs crores |
Net sales |
Net profit |
Market
Cap |
PE
(x) |
Price
(Rs) |
PE (x) |
Sept 09 |
% chg |
Sept 09 |
% chg |
FY10E |
FY11E |
HDFC |
3,872.0 |
16.7 |
2,509.0 |
14.7 |
75,798.0 |
30.2 |
2,652.0 |
4.4 |
4.0 |
Indian
Hotels |
1,338.0 |
-26.6 |
117.0 |
-70.0 |
6,975.0 |
46.4 |
96.0 |
35.1 |
21.0 |
Jain
Irrigation |
2,339.0 |
20.4 |
153.0 |
13.3 |
6,267.0 |
37.5 |
830.0 |
24.4 |
16.0 |
Larsen &
Toubro |
34,313.0 |
16.6 |
2,978.0 |
26.9 |
100,977.0 |
21.5 |
1,682.0 |
24.8 |
21.0 |
Pantaloon
Retail |
6,608.0 |
20.7 |
148.0 |
11.9 |
7,654.0 |
51.7 |
371.0 |
29.7 |
21.0 |
Reliance
Infra |
9,966.0 |
28.1 |
1,221.0 |
5.7 |
24,910.0 |
20.4 |
1,100.0 |
16.1 |
16.7 |
SBI
* |
58,732.0 |
26.4 |
13,022.0 |
38.0 |
140,823.0 |
11.1 |
2,218.0 |
2.6 |
2.1 |
Suzlon Energy
* |
24,988.0 |
34.3 |
-236.0 |
- |
13,730.0 |
- |
88.0 |
80.2 |
17.6 |
Thermax |
2,902.0 |
-10.5 |
266.0 |
-3.0 |
7,075.0 |
26.1 |
94.0 |
26.7 |
20.5 |
United
Phosp. |
5,129.0 |
17.4 |
504.0 |
29.7 |
7,286.0 |
14.8 |
166.0 |
13.6 |
10.2 |
PE & Financial figures are for 12 months ended
September 2009
% chg is for the corresponding trailing period,
For banks: Net sales=Total income and P/E is P/Adj BV
*
Consolidated E:
Estimates
Source: CapitaLine Plus |
Indian Hotels
The rise in occupancies in the second and
third quarters of 2009-10 indicates a change of fortunes. Compared to 52 per
cent occupancy in June 2009 quarter, the same stood at 60 per cent in September
quarter. The third quarter has started well; analysts expect occupancies to
average around 80 per cent in the second half of 2009-10. This is on the back of
an increase in tourism and corporate travels. Apart from the domestic business,
the long awaited turnaround in profitability of international properties would
also boost Indian Hotels’ earnings. Room rates, too, have improved at select
properties, and if the trend continues it would augur well for the
company.
Jain Irrigation
Jain Irrigation, a leading
company in micro irrigation systems (MIS), food processing and pipes, is a good
play on agriculture growth and rising farm incomes. Its MIS division is expected
to grow by 30-35 per cent over the next two years as penetration levels increase
due to the efforts by various state governments. The company is exploring new
markets and is further expanding its equipment range to cover crops such as
cotton, groundnut, potato and vegetables.
SOME MORE
PICKS |
in Rs crores |
Market
cap |
CMP
(Rs) |
Trailing
PE (x) |
Bartronics India |
447.0 |
143.4 |
4.8 |
Crompton Greaves |
15,432.0 |
421.0 |
23.0 |
IRB Infra |
8,048.0 |
242.2 |
34.6 |
IVRCL Infra |
4,789.0 |
358.7 |
21.5 |
K E C International |
2,854.0 |
578.5 |
35.5 |
Lupin |
13,020.0 |
1,465.0 |
22.7 |
M & M |
29,713.0 |
1,061.9 |
21.7 |
Opto Circuits |
4,196.0 |
229.4 |
17.7 |
Praj Inds. |
1,902.0 |
103.0 |
15.9 |
Sun Pharma |
32,386.0 |
1,563.7 |
22.8 |
Benefits will also come from the expected improvement in profitability of its
overseas subsidiaries. Though its pipes and food processing (over 55 per cent of
total revenue) businesses are seen growing at a relatively slower pace, they
should also do well on the back of improving demand and lower input costs.
Larsen & Toubro
The revival in industrial capex,
particularly in the power sector, along with higher spending on infrastructure
mean better prospects for India’s largest engineering and construction company,
L&T. Notably, the gains from its diversification into growing sectors like
power equipment, shipbuilding and forging along with huge opportunities in
nuclear power and defence equipment, will start paying off in the form of higher
order inflows in the coming years. L&T is also foraying into the power
generation segment with an aim to have 7,000 mw capacity over the next five
years. Meanwhile, it’s existing order book of Rs 81,623 crore (2.3 times 2008-09
revenues), provides good visibility, and should drive revenue growth in the
coming years. In terms of profits, analysts expect it to grow at about 20 per
cent over the next two years.
Pantaloon Retail
An improving economic and employment
outlook as well as encouraging demographics suggest better days ahead for the
organised retail players. For Pantaloon, it expects revenue growth to average at
25 per cent over the next two years aided by its plans to nearly double its
total retail space to 25 million square feet by 2013-14. Its focus on cost
efficiencies should ensure that profits grow faster. The company plans to raise
Rs 1,000-1,200 crore through various instruments to help fund its expansion
plans and repay debt. Lastly, its move to reorganise its businesses into
separate entities should help unlock value in the long run.
Reliance Infrastructure
Reliance Infra could be a good
investment given its low valuations and growth in the construction and power
businesses. The company’s EPC related order back log is robust at Rs 19,600
crore, and is expected to grow given that work for about 28,000 mw of capacity
of Reliance Power is yet to be awarded. Further, its increasing focus and strong
portfolio of 730 km of road projects and, scheduled completion of the Delhi and
Mumbai metro projects over the next nine months, augur well. Also, increased
contribution from its power business and improving margins due to lower
commodity prices should result in higher profitability. Analysts value the stock
at about Rs 1,350 per share based on its investment in various companies and
cash in the books.
SBI
During 2008-09, SBI increased its loan book faster
than its private peers. Analysts expect the trend to continue with an upward
bias on the margins also. Nevertheless, RBI’s mandate to increase its
provisioning coverage to around 70 per cent could put pressure on its
profitability in the short-term. However, favourable policy initiatives like
scrapping of SBI Act, consolidation of associate banks with SBI, and likely
listing of its life insurance subsidiary could act as future triggers. Although
the bank may have to raise funds in 12-18 months, the same would provide fuel
for funding future growth in its businesses. Major concerns over restructured
assets impacting financials would taper off, slowly but surely, as the economic
growth momentum picks up further, leading to better stock valuation.
Suzlon Energy
Suzlon could be a good play given the
increasing focus on renewable energy globally. Demand for wind power equipment
has been lower in the recent past, but should improve in two of Suzlon’s largest
markets (US and Europe) helped by customers getting easier access to funds.
Suzlon is also taking steps to bring down its leverage. Recently, Suzlon’s
promoters invested money in the company, while the company raised funds by
selling its stake in its Netherland-based subsidiary, Hansen, which was used to
pay some of its debt. Meanwhile, Suzlon is in the process of restructuring its
remaining debt, which lower the pressure on its cash flow and earnings. Suzlon’s
stock is currently trading at cheaper valuations as compared to its peers due to
concerns over debt and lower demand. But, as things improve, expect it to get
rerated, which indicates potential for strong upside.
Thermax
Thermax, a leading player in the environment and
energy equipment business, could benefit from the growing environment concerns
globally and an expected revival in India’s industrial capex. The company is
already making efforts to gain orders for its waste treatment business for
domestic municipal corporations. In power, while Thermax is leader in small and
medium sized industrial boilers, it is now eyeing large-size projects on the
back of an increase in its boiler manufacturing capacity which now stands at
about 1500-2000 mw. The company also forayed into sub-critical power equipment
segment through a technical tie-up, which should boost growth rates going ahead.
Meanwhile, its strong order book of Rs 5,056 crore provides good visibility,
which along with the benefits of lower commodity prices will mean higher profit
margins.
United Phosphorus
United Phosphorus (UPL), which operates
in two main segments (crop protection and seeds), is another stock to play on
the agriculture growth story. It generates about 80 per cent of its revenues
from international markets. As UPL integrates its several overseas subsidiaries
and increases focus on the US and European markets for the generics opportunity
in crop protection products, expect growth rates to perk up. Additionally,
improved outlook for the domestic agriculture market should benefit Advanta
India, a listed subsidiary of UPL which has a strong position in the domestic
seeds market. Overall, its robust portfolio, strong distribution network and
established presence in growing markets should help sustain healthy growth. The
company’s net profits are expected to grow at about 25 per cent annually over
the next two years.
A
WATCH-LIST FOR 2010
Stocks of cyclical sectors such as commodities, including metals, have rebounded
sharply on the back of higher global prices. While the demand is yet to pick up
in a meaningful manner, the price rise is largely attributed to investors
seeking real assets on account of dollar’s weakness, all of which indicates that
there is little room for appreciation in 2010.
There is high certainty about interest rates moving up in 2010, which may not
sound positive for sectors like automobile and real estate. Stocks in the two
sectors have already given strong returns in 2009, and hence, are likely to
underperform in 2010.
Despite expectation of higher interest rates, the credit growth which has
slipped to about 10 per cent recently is expected to bounce back to 16-18 per
cent going ahead. This would mean good news for the banking sector. Higher
economic growth and improving industrial numbers would translate into increased
spending by consumers and industries in 2010. Thus, the capital goods or
industrial sectors should do well particularly.
Higher agri-commodity prices, rising farm incomes and focus on increasing agri
output is good news for agri-based companies, particularly sugar, given the
demand-supply mismatch. Hence, they should do well.
Selectively picking companies which felt the hardest impact on their financial
performance due to the demand slowdown and global crisis might lead to high
returns. Such companies could get re-rated as economic conditions normalise
resulting in improved earnings. Return of risk appetite will also help companies
raise funds through QIP, etc and de-leverage their balance-sheets.
Source:
http://www.business-standard.com/india/news/expect-moderate-returns-in/380865/
Read more...
The year draws to a close ending with it one of the most phenomenal stock market rallies ever seen. In March this year, the Bombay Stock Exchange's benchmark Sensex levelled out at close to 8,000 levels and today it hovers above the 17,000 mark. Market sentiment eagerly eyes the Sensex breaching its all-time high of 21,000 level going into the next year.
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