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We
must be crazy, an apt adjective to describe anyone who proffers
advice on what stocks to pick when the market is on a high and
due for an imminent correction. Consider this: on March 8, 2005,
the bellwether BSE Sensex closed at 6,915.09 points, the highest
closing value in its 25-year history. The next day, March 9, it
touched a high of 6,954.86 in intra-day trading, an agonising
nudge away from the magical 7,000-mark. And as this article is
being written, it is in the 6,700-6,800 range, with most experts
positing that this is the begining of a correction that has been
imminent for some time. This magazine still stands by its position
that the Sensex will touch 7,500 by the end of the year, but that
doesn't make the task of picking 10 stocks at this point in time
very much easier.
We are aware that the fact we have just revealed
about the Sensex implies spectacular returns for investors. We
are also aware that it presents a classic dilemma. What kind of
stocks should you invest in? Should you invest in growth stocks,
such as an Infosys, which is a. quoting at a high Rs 2,227.4 (as
on March 14, 2005) b. clearly the market leader in its domain,
and c. still outpacing rivals with growth rates higher than most?
Or should you invest in value stocks, whose intrinsic strengths
have still not been recognised by the market, leaving a lot of
value still to be unlocked, like, say, a Bata?
Growth Vs. Value
It's a debate that's as old as stock markets
themselves, and is something no two analysts with their heads
in the right place can ever agree on. Rohit Sarin, Partner, Client
Associates, reckons that the best bet for any investor is to have
an appropriate mix of growth and value stocks, because of the
inverse relationship between the two (up to a point, and more
on this later). His reference is to the fact that growth stocks
do best in bull markets and get hammered in bear markets, and
the reverse is true for value stocks. "A good mix would be
a good hedge," says Sarin.
However, identifying value stocks in a bull
market can be tough. If the bull-run is as sustained as the one
we are witnessing (corrections and all, and this is the up-to-a-point
of the inverse relationship we referred to), most value stocks
can be expected to be converted into growth stocks because of
the overall momentum of growth. Says Sandip Sabharwal, Fund Manager
at SBI Mutual Fund: "Attractive value stocks are already
becoming difficult to find today, and the distinction between
value and growth stocks is increasingly getting blurred."
Amitabh Chakraborty, Vice President and Head of Research (Private
Client Group), Kotak Securities, actually believes that value
investing in India is not possible to a large extent because the
takeover code does not favour hostile bids, which unlock value.
"India is a growth story and the market assigns higher valuation
to companies reporting superior growth as compared to the peer
group," he says.
Of course, it would be naïve to assume
that there are absolutely no value stocks available. Gul Tekchandani,
CIO, Sun F&C, maintains that even in a bull market there will
always be a number of value stocks, but the catch lies in identifying
them. For Tekchandani, Budget 2005 was about "infrastructure,
infrastructure and infrastructure", and so it's no surprise
that the man picks infrastructure companies, including those in
the business of steel and power as growth stories for the future.
Sabharwal is bullish on the sector too, but has a few more on
his radar. "The stocks of companies in textiles, construction,
auto ancillary and power equipment are undervalued even in these
bullish times," he says. By his logic, companies such as
Arvind Mills, Raymond, BHEL and L&T are obvious choices that
are likely to improve their valuations over the next couple of
years.
As for growth stocks, Aditya Palwankar, Fund
Manager, JM Financial Mutual Fund, advises that investors ought
to distinguish between cyclical growth stocks (such as those of
companies in sectors like metals and other commodities that have
an upturn for two to three years followed by a downturn for another
three), and non-cyclical ones that are on a seemingly perennial
ascendant, courtesy structural changes in the economy. The last
would include companies in sectors such as information technology,
pharma, automobile and auto ancillary industries, where the better
business models are built around exports and the consequent avoidance
of business cycles. "It is these non-cyclical stocks that
are more important from a long-term perspective," says Palwankar.
If all this verbal sparring has confused
you, don't lose heart. There's one thing that analysts of all
hues agree on, and that is that stocks across sectors are likely
to do well in the next year, be they of large, mid-cap or low-cap
companies. As such, the safest strategy in today's market would
be to pick potential winners across sectors, regardless of the
growth/value angle. Here's our selection of 10 for the long-term.
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| Riding the alternative boom: Pune-based
Thermax is likely to gain from the move towards alternative
fuels |
The Happening 10
Arvind Mills: The denim cycle and a
sudden drop in demand for the product sent the company's fortunes,
and its stock price, into a tizzy in the second half of the 1990s.
Now, post a succesful restructuring, the company is back in business
and analysts predict a 20 per cent appreciation in its stock price
over the next two to three years. The expiry of the quota system
on January 1, 2005, bodes well for this company.
Bharat Forge: With manufacturing facilities
in India and Germany, Bharat Forge is the largest forging company
in Asia and the second largest in the world. It is also the largest
exporter of auto components out of India. Exports accounted for
39 per cent of its revenues in 2003-04. The company also manufactures
products used in the oil and gas sector (in drilling, if you must
know, and this sector is booming). The acquisition of Germany's
Carl Dan Peddinghaus has helped the company break into an exclusive
group of component makers supplying to Europe's top automakers.
Kotak Securities' Chakraborty is understandably bullish: "Every
new corporate action of Bharat Forge will attract a new PE re-rating."
Thermax: First, the numbers. Analsyts
predict that the stock of the Pune-based Thermax Industries will
appreciate by nearly 25 per cent to Rs 738 over the next two years.
That isn't surprising: Thermax is one of the few companies in
the world offering integrated solutions in heating, cooling, power,
water and waste management; it also manufactures boilers that
can handle 80 different type of fuel feedstock. Given the increased
usage of alternative fuels, the company stands to gain.
SRF Limited: This is a diversified
company into businesses such as nylon tyre cord, refrigerant gas,
belting fabric, polyester film and speciality chemicals. The last
(speciality chemicals is a happening business) and the first (it
is the seventh largest maker of tyre cord in the world) are the
reasons it finds itself in this listing. In less than a year,
reckon analysts, the stock will reach the Rs 120 level.
Lumax Industries: A market leader
in automotive lighting solutions, Lumax Industries' growth story
has coincided with the steady growth in the automobile industry,
which isn't likely to go away anytime soon. The company, which
has a technical-cum-financial collaboration with Japan's Stanley
Electric, has a strong presence in the original equipment market
with customers such as Maruti Udyog, Tata Motors, Hero Honda and
Mahindra & Mahindra.
Elecon Engineering: A mid-sized engineering
firm, Elecon Engineering makes elevators, conveyors, gears and
material handling plants used in various sectors, including steel,
fertiliser, power and cement. With several contracts in its bag,
and increased demand from state electricity boards and power companies,
it looks a safe bet for the near future. And with the government
opening up the infrastructure sector to private investment and
foreign direct investment, things can only get better for Elecon.
Alok Industries: This is another major
player in the Indian textile sector that many analysts consider
a sure winner. An integrated player with substantial weaving and
processing capacities, Alok Industries' increased focus on the
household linen market and the expansion of its weaving and texturising
capacities are likely to have a favourable impact on its earnings.
The company also has a good international presence and supplies
apparel to leading retailers such as Target, Bed and Bath Linen,
and Wal-Mart. In the domestic market, it supplies fabric to Zodiac
clothing. With a 72.2 per cent growth in its net profit for the
quarter ended December 31, 2004, the good times have just begun
for this company.
Infosys Technologies: Over the last
five years, Infosys' revenues have grown at an average annual
rate of 54.44 per cent, well in excess of the software industry's
26 per cent. Any other reasons for picking Infosys? Three, actually.
One, with outsourcing continuing to be a major trend in the developed
world, the company obviously stands to gain. Two, analysts believe
that as consolidation becomes an important feature of this industry,
Infosys, one of the three largest Indian firms operating in this
space, is likely to benefit. And three, the company has effectively
no debt and hence can easily tap the debt markets should it need
any further financing (it also has some Rs 2,590 crore in cash
and cash equivalents in its books).
Crompton Greaves: Crompton Greaves
is a household name because of popular products like fans, light
bulbs and tube lights, but the company is also engaged in designing,
manufacturing and marketing high-technology electrical products
and services related to power generation and transmission. What
has made analysts bullish on Crompton Greaves is its recent acquisition
of the transformer businesses of the Pauwels Group of Belgium
for Rs 180 crore. This has given it substantial presence in the
markets of Belgium, Ireland, Canada, the us and Indonesia.
Shree Cement: If anyone has Budget
2005 to thank for a brighter tomorrow, it's Shree Cement. One
of the most efficient producers of cement along with Gujarat Ambuja
and Madras Cement, Shree Cement will greatly benefit from the
removal of 10 per cent customs duty on coal, as it is dependent
on imported coal for all its power needs. Then, its enhanced focus
on the retail segment and rising share of its value-added cement
variants appear to hold a lot of potential for appreciation. Moreover,
its proximity to key markets in the North, especially Delhi, will
only mean that its market share is likely to grow.
Of course, you need not restrict yourself
to these 10. There will be other companies that will do well,
and some of the names we've mentioned may not do as well as expected.
Investing in equity is, after all, not a zero-risk game. But if
you spread your portfolio across sectors, and wisely, there's
no reason why you cannot grow with the companies you invest in,
and yes, be a part of the great Indian growth story.
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