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PERSONAL FINANCE Recession Proof Stocks There may no such thing as a recession-proof stock, but there are those companies that ate better shielded during a slowdown than most others. By Brian Carvalho
Fortunately or unfortunately, there aren't any listed porno portals-or adult-entertainment sites, as they're so cutely dubbed-in this country. So if recession-proof stocks don't exist, why are we writing this story? Well, finding a company that's completely shielded from the slowdown may be difficult, but there are those that will always hurt less during troubled times. What's more, cherry-picking stocks during a slowdown makes ample sense: After all, can you think of any other time when you can get your favourite stocks at near-rock-bottom prices? Now that we're telling you that now's a good time to pick up stocks, let's also go on to say that your good old favourites might not quite work in these conditions. What's more, the traditional ''defensive'' sectors (fast-moving consumer durables, pharmaceuticals and information technology) are not as safe as they used to be. Consider the example of the FMCG sector, considered recession-proof because consumers won't stop buying soaps and toothpastes when they have less money to spend. Anagram Stockbroking's CEO Darshan Mehta points out that FMCG today is as cyclical a industry as any, as the country's agricultural production play a major role in sales growth. Sure enough, thanks largely to negative agricultural growth last year, sales growth in the FMCG sector actually declined by 13 per cent in the April-December 2000 period-and this came after a 16 per cent cumulative annual growth between 1995 and 1999.
Then, the infotech sector too has lost its element of defensiveness, thanks to the trials of the US economy. ''Fact is that this sector is highly dependent on the fortunes of the US economy,'' says Vetri Subramaniam, chief investment officer at online broking portal, sharekhan.com. The pharma sector may be the most defensive, but there's a shakeout happening, with the R&D and generic market-focused companies standing tall. The trick then is being extremely selective. How do you do that? Start with regular parameters: credibility of management, price/ earning ratios, return on capital employed etc. Then move on to what to specifically look to recession-proof your portfolio. ''To put it simply, look for those companies that continue to enjoy healthy demand either in India or in global markets or, better still, in both,'' says John Band, CEO, ask-Raymond James. You could check this out by looking at the top line of the company, and the consistency of growth there-at least 10-15 per cent growth over three-five years could help a company withstand the shocks of a slowdown. Also look at the liquidity conditions at the counter. It won't do you much good if the stock is owned by just one or two parties. A perfect example of this is Container Corp, most of which is owned by the government and Morgan Stanley. BT spoke to a cross-section of research heads, equity analysts and CEOs of broking houses to find out how best to pick up stocks in a recession-and, of course, their favourite picks. The list has some of the usual suspects. But there are some bolts from the blue: Gujarat Gas, Hero Honda, Mahindra & Mahindra, Essel Packaging. Not all of them made the BT list, as some house recommendations were greeted with incredulity by others. One warning: Don't expect fantastic returns. There's a slowdown, remember? So anything between 20 and 30 per cent over a year should do just fine. Pharma Fetishes Let's start with what is perceived to be the safest sector: pharma. Rajesh Jain, managing director of Pranav Securities, prefers Ranbaxy (Rs 544), as does Band of ASK-Raymond. Anagram's Mehta would prefer to stick with Dr Reddy's. Both are excellent long-term bets because of their R&D focus, but as Fayeza Feroz, Head of Sales at Pranav Securities, points out, it all boils down to valuations. ''Ranbaxy offers ample avenue for growth in stock price compared to Dr Reddy's because of the levels it has come down to.'' More than valuations, though, Ranbaxy appears an attractive candidate during a slowdown because its overseas sales are gathering steam, at a time when growth in the Indian market has slowed down to 7-8 per cent. It's efforts on the R&D front also can't be ignored. As for Dr Reddy's, perhaps the only dampener is that it is fairly valued at the Rs 1,600 levels, trading at 38 times its 2001 earnings. But there's ample potential in the stock, given the focus on R&D and the US generics market. The company stands to gain some $55 million in payments from Novartis Pharma (besides royalties), to which it is granting exclusive rights to develop and commercialise its insulin sensitiser. Dr Reddy's has also been able to make its bulk drug business (which contributed almost half of last year's revenues) profitable by exporting to the high-margin, high-volume US market. Then there's Cipla (Rs 1,145): A perfect slowdown-proof stock simply because it grew at 22 per cent last year, more than twice the industry growth rate. This was possible largely due to the slew of products-60 in all-launched in 2000-2001. But the biggest bang from Cipla is expected from its hotly-debated efforts in the anti-AIDS segment. What also helps Cipla is its relentless expansion overseas. Cipla's products are sold in 130 countries, exports grew by 84 per cent last year, and contributed close to a fourth of its total sales. Now let's climb onto the MNC pharma bandwagon, along with sharekhan.com's Subramaniam. He's got his reasons for having a thing for these stocks. ''Most of the MNCs don't do much of manufacturing in the country, preferring to focus mainly on branding and selling. Hence, they tend to have low capital expenditure, and low asset bases, which shields them during recessionary times,'' he points out. That's exactly why he likes Hoechst Marion Roussel, now rechristened Aventis Pharma (Rs 400). Profits were stagnant in the 1998-2000 period, which resulted in the stock crashing from Rs 1,000 levels. But now Hoechst has swept plenty of the baggage from its balance sheet: it sold its Thane plant, Rs 45 crore worth of brands, and scaled down its workforce by 450. The proceeds have been used to retire debt, and the company will soon be almost debt-free. In the meantime, it's added six high-margin, products to its portfolio, which are growing at 35 per cent and contributed 20 per cent to this year's first quarter revenues. ''It's this endeavour to become leaner and meaner that makes Hoechst a perfect stock in a slowdown,'' concludes Subramaniam. FMCG Finds If there's apprehension in the market with regard to the defensive nature of FMCG stocks, that fear goes out of the window when you mention tobacco. For, as Band puts it: ''It (the tobacco industry) is the only legal drug pusher in the world. And in most countries, tobacco companies are virtual monopolies.''
In India, ITC (Rs 780) occupies that hallowed position, and it is as recessionary-proof a stock as you could ever find. It has at least 15 brands at various price points, in both the filter and non-filter segments (so basically it covers all ''addicts''). What's also good news for shareholders are the government's moves to ban advertising of tobacco products. This, estimate analysts, should boost ITC's bottomline this fiscal by 20 per cent. Psst...looking for a cheap FMCG stock? How about Asian Paints (Rs 246)? At 15 times its 2000-2001 earnings, the company does appear attractive when you compare it with the MNC FMCG majors. For one, it commands a 40 per cent share of the Indian market for decorative paints. For another its four plants are located strategically to cover most Indian markets. The only drawback for this stock-indeed for the entire paints industry-is that paints are considered luxury items. Yet, it's difficult to ignore a company that boasts a 30 per cent return on capital employed, and operating margins of 16 per cent. Anyone For Infotech High-octane risk is hardly what you should be taking during a slowdown, and that's exactly what the IT sector represents today. Yet, most analysts seem to converge on one Indian mainline IT stock. It's Satyam Computer (Rs 185) we are talking about. ''The levels to which Satyam has come down-its 52-week high is Rs 680-means that your capital is fairly protected over a year,'' says Feroz. Band feels that if Satyam is able to achieve 40 per cent growth this year-as targeted-that would make it a better performer than others. Its sequential growth too is faster than Infosys', and it runs a tighter ship: for instance, as against Infosys' office space of 180 sq feet per employee, Satyam has just 100. ''You have to be cost-conscious, which Satyam is. Infosys on the other hand is an employee's paradise,'' adds Band. The Wild Cards You wouldn't expect research houses to plump for the recession-ravaged, highly-cyclical old economy stocks. But a few of them have spotted some gems here, too. Pranav Securities is highly bullish on cement, and Feroz touts Grasim (Rs 317), ACC (Rs 140), and Larsen & Toubro (Rs 220) as safe bets. Her rationale is simple: ''Over the past two years, cement stocks have never underperformed the Sensex, and there's no reason why that trend shouldn't continue.'' Sharekhan.com's Subramaniam pulls out a total outsider from his hat: Gujarat Gas (Rs 600), a British Gas company, which distributes power in Gujarat. ''No one's going to cut down on gas usage, and most pipleline businesses are virtual monopolies,'' he explains. Subramaniam also likes power (Tata Power: Rs 142) and refining (HPCL: Rs 150.40) companies, because the fixed return regime works very well for them during a slowdown. Would the two-wheeler sector excite you? It does get Anagram's Mehta going, particularly if it's Hero Honda (Rs 144). A 35 per cent volume growth in motorcycles, a stranglehold on almost 50 per cent of the mobike market and an ROCE of 60 per cent all make the stock attractive at a multiple of 8.2 on the current year's earnings. Band, however, prefers Bajaj Auto (Rs 245), ''because they're finally getting their act together'' Such differences of opinion might not make
your task of identifying safe stocks any easier, but then you don't have
to opt for such a sector. Just remember that all of us have to eat, most
of us pop some pill or the other, and some of us need that cigarette. No
recession can change that. |
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Pornography
on the net. That's the only recession-proof industry,'' is how the head of
one broking house dismisses the concept. ''Bah, there's no such thing,''
goes another. It's difficult to disagree with either. Even as Indian
industry teethers on the brink of a full-blown recession and the US
economy shows little sign of gathering steam, online fleshpots are doing
just fine, clocking growth rates of 50 per cent upwards.
