BT 500: EXPERT TAKE
The Perspective Of Star Fund Managers
An expert take on the hot and happening sectors of the Indian economy, and those likely to be left out in the cold.
Infotech, communication, and entertainment stocks will continue to be the market favourites. The Compounded Annual Growth Rate of software companies will exceed 50 per cent in the next two to three years. There may be aberrations, but these will be temporary. Consider Infosys Technologies. The company has achieved a critical mass. And is looking at markets in East Asia and Europe where there is growth. Infotech will also be the key driver in moving old economy stocks up.
Infotech, when used to improve a company's processes, leads to better products and higher margins. Some companies have also come to realise the need for good corporate governance practices. Those that have, like ICICI, have been re-rated.
Biotechnology will remain a source of value in the next two years. Pharmaceutical companies that ride the biotechnology wave, like Nicholas Piramal and Dr Reddy's Laboratories will be valued more than those that do not. Companies belonging to the Fast Moving Consumer Goods sector (FMCG) will continue to remain on top of the value heap, thanks simply to our population.
Software and telecom are my favourite sectors. The unfortunate part in telecom is that there are not many companies listed. So the choice is limited. And we don't like public sector telecom stocks. In terms of earnings growth, by 2001, we will see more than 80 per cent growth in software stocks. There aren't many listed media companies around, apart from Zee. But we likeTV18 a lot.
What about the old economy stocks? These days, we do not distinguish between old and New Economy stocks; we look for growth stocks. These can grow in any environment . But if you were to differentiate between old and New Economy companies, among the latter we rate HDFC Bank and Reliance industries highly.
We have been saying this for the last two months: it is not the issue of which sector to invest in, but which stocks to invest in. For instance, we won't be investing in software stocks, because the industry will do better than, say, banking. We would prefer the best stock in each sector. So, we would rather buy Hindustan Lever than a fourth- or fifth-largest software company. FMCG and pharma stocks will give less volatile returns. But there is a market for every sector, and as a portfolio you have to invest in all kinds of stocks.
Infotech will continue to be an excellent sector, not only in terms of rate of growth, but also quality of earnings. Both very important and key factors, because one explains how fast they grow and the other explains how much they are moving up the value-chain. I am also bullish on stocks like telecom. But within telecom one has to be careful as to what you are buying. For instance, I would be more bullish on mobile telephony, but unfortunately there are not many stocks listed in this category. Even in the infotech sector, those companies that are exposed to wireless will do very well. Among infotech stocks, I see about a 60 per cent or more growth in earnings. But there will be a flight to quality and a differentiation between good quality stocks and the also-rans.
Dot.coms? Even if some dot.coms do get listed, much would depend on the business model. Some of the B2B companies will succeed, but it will take time. In the core sector, I like cement. Mostly because the demand-supply equation, which is currently in favour of supply, will change over the next one year as demand for the product grows at 8-10 per cent. Besides, with further consolidation taking place in the cement industry, five-to-six dominant players will contribute to over 60 per cent of the market. You won't find any explosive growth stories in FMCG or pharma. They will be slow and steady performers. Going ahead, rather than old and New Economy, there will emerge a distinction between performers and non-performers in every sector.
Our top three sector picks will be technology, FMCG, and cement. We are bullish on the technology sector.
In the software services sector, returns will come from the top-end of the sector. Primarily, this is because the big companies are getting bigger and the small ones may become vendors to big companies or get extinguished. We are also bullish on select FMCG companies, not necessarily the large companies, but those which are moving with a sense of strategy, and even those whose prices have fallen so much that they are available at attractive valuations. The sector is a defensive one, but with the emergence of several staple food brands in (milk and atta, for instance), it could witness top-line growth. And, it could also benefit from the expanding income levels in both rural and urban areas.
In cement, the capacity-addition has not kept pace with the demand. The demand will continue to grow. Once infrastructure projects pick up, this sector will see good times. There is also a consolidation happening in the industry. If there are a few large players, they will have better price control and better price realisation. One point I would like to highlight is that, today, stock selection, and not sector calls, holds the key to higher return.
Companies focused on software services will continue to rule the roost in the next few years. At the same time, companies in the body-shopping business won't be around in the top layer of the industry. I foresee a major shake-up in the next five years, with the top 20 of today not being in the top 20 by then. Of course, there will be many companies that will leap-frog into the top of the value-charts-those companies that can move from low-end consultancy to value-added services.
It's not just software services; more and more service companies figure at the top of the market cap listings, and that's only natural given that services make up the largest share of the GDP. That doesn't mean that the commodities and cyclicals will vanish. They will form the base of the pyramid, although the top will be dominated by the New Economy companies. Ultimately, it's going to boil down to who creates value. Companies today know that if they do not deliver, they will be punished by the markets.
To be successful in a business, global competitiveness is becoming very important. India's source of strength, in this context, is the abundant availability of knowledge workers. This has created opportunities for India in infotech services, infotech-enabled services, software products, and healthcare R&D.
With import restrictions being eased, most manufacturing-oriented businesses will be under pressure due to high capital and operating costs, coupled with global overcapacity. Companies oriented towards marketing like those operating in the FMCG, pharmaceutical, media, and retail banking and financial services sectors will, however, be successful in generating good returns for investors. Based on our top-down analysis, we are positive on infotech, FMCG, and pharmaceutical companies based on a top-down analysis. However, there are some companies in other sectors too, which we are bullish on, based on a bottom-up approach.
In the infotech sector, we are positive about the prospects of Infosys, Wipro, Satyam, Hughes, and HCL Technologies. These companies are continuously moving up the value-chain. We like the fact that their margins are still improving.
In the FMCG sector, we like Hindustan Lever Ltd (HLL), Asian Paints, and Britannia. In the pharma sector, our choices are Dr Reddy for its R&D efforts; Pfizer for its marketing thrust; and Hoechst, as its margins will improve due to a better product-mix. In banking, we believe HDFC Bank and ICICI Bank are well-positioned to exploit the growing demand for quality retail banking and financial services.