Cement: The sector has seen consolidation of capacities, which has given the players an added measure of pricing discretion

Tech has fallen out of investor favour, as a result of increased margin pressure and a consequent slackening of profit growth. This could hit the next quarter as well, and perhaps even the one after that. Overall, too, the Sensex is range-bound, struggling just to get within reach of the 3,000-level. Why this should be so, however, is not very clear. "Though we are at the bottom," says Motilal Oswal, Chairman and Managing Director, Motilal Oswal Securities, "there is too much pessimism around, whether it be SARS or the war. There have not been any big positive triggers for the market. But all is in favour of the markets today. The oil prices are down, interest rates are down and valuations attractive."

The explanation for the dismal Sensex performance, then, must be that the markets are reeling under the impact of the tech fall, with investors still to recover from the shock. Yet, as Oswal put it, valuations are attractive. So surely, there must be some good investment picks for those who make the effort to look.

That still leaves the question: where to invest? While the non-tech opportunities are harder to spot, that doesn't mean they do not exist.

Sector Selection

First of all, is there a sector that can take over from where tech left off? As it turns out, there is no sector that can offer growth prospects to match the tech sector's glory phase. Biotech and nanotech, for now, are barely out of incubation to start turning money-spinners anytime soon. So the search for the 'new new thing' is out.

Auto Ancillaries: If quality standards are met and costs driven down, India could become a global export base

Most other sectors are too mature for frenetic growth. But yes, there do exist some sectors that offer an attractive combination of growth and value. And some of these could well be the next market drivers. Identifying these sectors is not easy, as the usual suspects do not measure up any longer. Times have changed. The FMCG sector, for example, has suddenly trailed off. Witness how sector-leader HLL pants itself silly even for single-digit growth. Then, there's pharma, the third part of the tech-FMCG-pharma troika that bedazzled investors during the earlier bull phase. Some of MNC pharma stocks are available at attractive valuations, but be warned, are also unlikely to attract enough interest to become market drivers. The 'globalisers' amongst Indian pharma majors, again, offer reasonable valuations. But there are no visible triggers to boost them upwards. Also, these stocks require a lot of microscopic drug-by-drug analysis.

So where will the next set of market propellents come from? With the new economy in bad shape, investors are looking to the old economy. The obvious picks here would be the core sectors. "We are positive on the core sectors due to the fact that these sectors would mirror the growth in GDP," says Sashi Krishnan, CIO, Cazenove Cholamandalam Mutual Fund. But would these stocks pass the value-cum-growth bar? Well, there are two factors to be considered here. One, any aspiring market driver must have good fundamentals in place, which includes a solid foundation at the sectoral level. Two, the story as it unfolds should be gripping enough to hold investor fancy for a reasonably sustained period.

Of the many core sectors vying for investor attention, cement seems to have one of the best chances. The sector has seen consolidation of capacities, which has given the players an added measure of pricing discretion. The government's infrastructure thrust would result in voracious consumption. Housing is in good shape too, and any industrial recovery will only serve to heighten demand. Add to that the retail interest generated by attempts at branding what is essentially a commodity. Grasim, acc, Gujarat Ambuja and L&T are names known to many, though the benefits might accrue to the well-focused cement firms (acc, Gujarat Ambuja and increasingly, maybe even Grasim).

Construction could have held investor interest as a sector, had it not been for the poor representation of this industry on Indian stockmarkets (acc is among the few plays here, though L&T, as a combination of cement and construction, is worth watching).

Auto Advantage

One sector which is showing signs of revving up is the automobile sector. Production figures for 2002 are up, and the anti-pollution movement will help further. Passenger car and commercial vehicle sales have registered an upturn. "Though the replacement of old commercial vehicles will give a boost to volumes," says S. Ranganath, Auto Analyst, LKP Securities, "fleet operators are not too keen to do that. Hence, there will be some hiccups on this count, which will eventually clear out. The infrastructure projects in the offing would provide that much-needed push to the commercial vehicles segment. We are positive on Ashok Leyland and Telco." Increased industrial activity could boost freight traffic, too. On the whole, the automotive stock to watch out for is Telco, which has a leg each in both segments of trucks and cars.

Two-wheelers, however, are taking a breather after nearly three years of scorching growth. "In the two wheeler category," says Ranganath, "the motorcycles segment is growing at a healthy rate, but this will taper off due to saturation in the urban markets. The rural markets are yet attractive, but monsoon-linked, so one would have to wait and watch. In any case, a growth rate of 13-14 per cent seems sustainable."

If the automobile segment does well, can derived-demand industries be far behind?

There is already a lot of value buying in select auto ancillary stocks: mico, Ucal Fuel, Bharat Forge, Sundaram Fasteners, SKF Bearings and Gabriel, for example. The automobile recovery is one aspect, but there appears to be a bigger story brewing too with auto ancillaries getting into the export act. If quality standards are met and costs driven down, India could become a global export base. "We are upbeat on Gabriel and SKF Bearings," says Ranganath, "Both these companies are going through a financial re-engineering process to restructure the high debt and lower capacity utilisation that they have faced in the last few years."

Bank: Banking is attracting growing interest. Prices of stocks have risen, but value plays can be found even at these levels

Though retail interest is low, auto ancillaries could quickly become the sector with the sharpest investment opportunities once it hits the desired export trajectory. The funny thing, however, is that the sector does not boast of any large-cap stocks yet. While Bharat Forge is reasonably liquid, Sundaram Fasteners and Ucal Fuel are too small to attract large-scale fund interest. But these, along with SKF and Gabriel, could become portfolio must-haves. Also watch out for a small stock called cg Igarshi Motors, which is also targeting the export market aggressively.

Adding It All Up

Banking is the other sector that's attracting growing interest. The trading volumes being logged are already impressive. "The positive trigger is the retail pick-up, the Securitisation Bill will tighten the noose on the NPAs and portfolio appreciation," says Dileep Madgavkar, CIO, Prudential ICICI Mutual Fund. Agrees Oswal, "The market looks at growth, and hence, banking is a good bet. The best bets remain the PSU banks-SBI, particularly, due to its retail thrust." In general, bank stocks are fast emerging as the top holdings of many funds. Prices have risen, but value plays can be found even at these levels-so long as the real interest rates hold stable.