If diamonds were as plentiful as pebbles, we wouldn't stoop to pick them. True! But how does one identify the 250-carat rough cut lying anonymously among the pebbles?

Infosys Technologies was one such. Its Rs 13.1-crore IPO in February 1993 was undersubscribed. But a person who invested Rs 1,000 in Infosys stock then, was worth Rs 14.74 lakh in March 2005, provided no stocks were offloaded in between. Is there another Infosys Technologies lurking on the bourses? And is there a formula to identify these winners?

Says Nilesh Shah, President, Kotak Mutual Fund: "Companies that create globally relevant intellectual property will be the frontrunners in this race." That means it, pharma and biotech companies. A long list of the other favourites: companies dealing in mobile telephony, retailing, banking, finance and insurance, and media and entertainment.

So which one will it be? BT spoke to a cross-section of analysts and zeroed in on Bharti Tele-Ventures, Amtek Auto, Pantaloon Retail and Glenmark Pharmaceuticals. But if you want to tick "none of the above", go ahead. Who knows? You could well be sitting on the sparkler everyone else dismissed as a pebble. Hint: Check its peg (price-earnings growth); that's the P/E multiple divided by the percentage growth in y-o-y net profit. A quotient of one or thereabout means its fairly priced. If it's less than one, the share is undervalued; and a quotient greater than one indicates overpricing.

Pantaloon Retail (India)

The largest retail player in the country, its "value retailing" game plan (think Food Bazaar and Big Bazaar) is expected to drive growth. Kotak Securities projects a 50 per cent CAGR for the next three years (2006-2008). And though the "scarcity premium" that it currently commands (see Overpriced and Risky) is expected to fall in the near- to mid-term-Kotak expects the share to trade at Rs 1,250 levels in 10 months-exponential growth is expected to power its stock over the next few years. It has a peg figure of 1.07, implying it is fairly priced.

Amtek Auto

Following the acquisition of the UK-based GWK, Amtek has become a Tier 1 component supplier to global auto giants like BMW, Ford, Jaguar and Land Rover. In India, its clients include Maruti, Hyundai, Hero Honda and Bajaj Auto. Analysts expect Amtek's exports to grow at a CAGR of 62 per cent over the next three years and have set a target price of Rs 237 by February 2006. Its peg value is 0.39, giving it considerable scope for appreciation

Bharti Tele-Ventures

Bharti Tele-Ventures is the largest mobile phone company in the country. It plans to invest Rs 4,000 crore this fiscal to expand its footprint to 5,000 cities and towns, up from about 2,800 now. On the watch list of every analyst, Bharti is a favourite to emerge as the next Infosys. Target price: Rs 315 by July 2006. With a peg value of 0.22, there is significant scope for a steep upward climb.

Glenmark Pharmaceuticals

Two compounds, the anti-asthmatic GRC 3886 and the anti-diabetic GRC 8200, are what makes Glenmark Pharmaceuticals a favourite with analysts. Both these are potential global blockbusters that can bring the company huge profits. It has outsourced the former to the us-based Forest Labs for $30 million (Rs 132 crore) following its Phase 1 clearance by the US Food and Drug Administration. The second is still work in process. Analysts have set a target price of Rs 340 per share by July 2006. It has the lowest peg value (0.12) of the four stocks discussed here, which means it is tremendously undervalued.

SMARTBYTES

Will FDI in realty add to the bubble effect?

Indian realtors claim that the entry of foreign players will push real estate prices up to unsustainable levels. "A lot of money is chasing a few, clean fragments of land. This is pushing up prices," says Sanjay Chandra, Director, Unitech Ltd. And the entry of FDI in real estate will only exacerbate the situation. The rules stipulate that foreign players can develop properties which are at least 25 acres in size. Since there aren't too many such big plots in large cities, they will, perforce, be pushed to the suburbs and Tier-II cities, pushing up prices there. Anuj Puri, Managing Director, Chesterton Meghraj Property Consultants, says: "FDI will improve the quality of construction in the country." Adds Dinesh Chandiok, CEO, Ansal Properties and Infrastructure Ltd: "Increased competition will bring down prices." The debate rages on.

-Swati Prasad

Should you invest in a service apartment?

Assotech Cabana, a real estate company, is selling fully furnished 650 square feet service apartments for Rs 17.5 lakh. The buyer pays for it, but allows Assotech to maintain it and rent it out. So, a tenant just has to move in with his clothes. The owner gets Rs 12,000-15,000 a month as rent. That's a post-tax return of 6-8 per cent, not counting the capital appreciation.

Dinesh Chandiok, CEO, Ansal Properties and Infrastructure Ltd, feels it's a good investment option. However, not everyone is equally upbeat. Says Sanjay Chandra, Director, Unitech Ltd: "With so many stakeholders, it can become difficult to get a unanimous view on maintenance, refurbishment and upkeep." Our take: go ahead and invest, but read the fine print.

-Swati Prasad

Contrarian Play: Don't subscribe to IPOs now

Be warned: investing in IPOs (initial public offers) may not be the wisest thing to do. Why? Because the BSE Sensex, which has been flirting with the 8,000-mark for the last couple of months, is due for a correction. There hasn't been any significant profit booking since the market rose from the 6,500 level in March. Says Ashish Chugh, an analyst with Valuenotes.com: "Most investors tend to think that the price of stocks can't go below the issue price; so they apply in large quantities." Consider the case of Jet Airways. Its IPO allotment was done at Rs 1,125 in March; it is now trading at Rs 1,130, yielding practically zero gains for investors. Some recent IPOs-like Allsec Technologies, Shringar Cinema, 3I Infotech and Jaiprakash Hydro Power-listed below their offer prices. So, hold on. There's a good chance that you may be able to buy the IPO stocks you are eyeing from the secondary market. At less than their issue price.

-Sahad P.V.

RETAIL
Overpriced And Risky
Shares of retail companies are expected to fall from their current levels.

The retail sector is hot. Existing players are posting double digit topline growth, albeit from small bases, several domestic business groups are planning to enter the sector and global players are keeping more than a close watch on it. But does that justify the ridiculously high P/E multiples that are currently prevailing?

Pantaloon Retail closed 2004-05 with a total income of about Rs 1,100 crore and an annualised net profit of Rs 37 crore. Its P/E multiple is almost 100. "But more than P/E, it's peg (price earnings growth) that counts," says the company's managing director, Kishore Biyani (See The Next Infosys). The company expects to ramp up its top line to Rs 2,200 crore this fiscal, and then, to Rs 4,500 crore the next, he adds. That's an average topline growth rate of 100 per cent per annum. It also plans to increase its retail space from 2 million square feet now to 10 million square feet by 2010. On the BSE, the company's stock closed at Rs 1,558.15 on August 31, 2005.

The K. Raheja-promoted Shoppers' Stop (p/e multiple: 63.2) and Trent (p/e multiple: 51.4), which has just acquired a majority stake in bookstore chain Landmark, also look expensive. But increasing competition is likely to lead to a fall in the "scarcity premium". Says an analyst who tracks the sector: "There are only three-four listed retail stocks. This has resulted in overvaluations and makes peer group comparisons difficult." A Citigroup report draws a parallel with China and points out that retailers there have seen a fall in valuations from 30 times P/E to about 20-22 times P/E following the entry of new players. Thus, it will be reasonable to expect share prices to fall in India as well, unless companies ramp up their earnings exponentially.

Overall, the sector remains on a growth curve. It clocked a turnover of $200 billion (Rs 8,80,000 crore) in 2004, according to the Citigroup report. Organised retailers accounted for only 3 per cent of this. By 2010, these figures are likely to grow to $284 billion (Rs 12,49,600 crore), and 10 per cent, respectively. Clearly, there's huge scope for growth. Says Biyani: "Modern consumption patterns are emerging in India And organised retail will play a pivotal role in meeting this demand."

The organised retail sector in the country is still at a nascent stage. It has great potential, and faces equally big pitfalls. Retail investors will do well to exercise caution before rushing in. Then, that can be said of anything.

-Krishna Gopalan

The Quest For The Next Gurgaon
Any one of several contenders could emerge as India's next showpiece suburb.

Indian society seems to be steadily falling in line with yet another global trend: that of the middle and upper classes moving out of congested cities to spanking new suburbs that boast of amenities comparable with the best in the world. Gurgaon, which redefined the meaning of the word in India, was the first "happening" suburb in the country. Today, Gurgaon is more than just a satellite of Delhi. It boasts many industries (it and it-enabled services, automobile and auto-ancillaries), has the best of apartments in the NCR (National Capital Region) and also has the largest number of retail malls in the country.

Where is the next Gurgaon mushrooming? "Very soon, there will be several Gurgaons," feels Anshuman Magazine, Managing Director, CB Richard Ellis, South Asia. In the West, says Anuj Puri, Managing Director, Chesterton Meghraj Property Consultants, Pune is fast emerging as a "suburb" to Mumbai. "Pune is more cosmopolitan than Mumbai and is fast emerging as an it hub. Also, real estate is cheaper there; rents are at Rs 23-24 per square foot levels compared to Rs 35 per square foot in Gurgaon." Pune is well connected to the metros, has an airport, retail space, leisure facilities, schools and healthcare. "It is the unsung hero," says Puri. That's not surprising considering that it is actually a city and not really a suburb.

In the East, Rajarhat in Kolkata is also drawing investments in the IT and biotech sectors; and several large malls and plush residential complexes are coming up in this suburb. In Chennai, Siruseri on the Old Mahabalipuram Road is considered hot. Besides, bets are also being placed on Whitefield in Bangalore, and Kochi and Mysore emerging as the next Gurgaons.

Sanjay Chandra, Director, United Ltd, feels Greater Noida in the NCR holds the most. His logic: it has an industrial base, good infrastructure, there is a proposal to build an international airport there and it companies are flocking to it. The suburb hosts several educational institutions and dozens of high-end residential and commercial complexes. Dinesh Chandiok, CEO, Ansal Properties and Infrastructure Ltd, agrees. "Greater Noida will be better than Gurgaon. It has the best infrastructure," he says. Chandra adds that Mohali, near Chandigarh, is also a contender.

Will one of these emerge as the next Gurgaon? All of them have the potential to. So, why can't a thousand Gurgaons bloom?

-Swati Prasad

Value-picker's Corner

TORRENT POWER SURAT ELECTRICITY COMPANY; RS 422.20

Torrent Power Surat Electricity Company (TPSEC) has a low price-earnings multiple (9.3) compared to that of its peers like Reliance Energy (20) and Tata Power (15). A net profit of Rs 40 crore on a turnover of Rs 950 crore (in 2004-05) means its return on a small Rs 9-crore equity base is very high. In the first quarter of 2005-06, it clocked sales and net profit of Rs 262.35 crore and Rs 16.3 crore, respectively. TPSEC's share price has more than doubled from Rs 197 a year ago, but is still considered undervalued by analysts who reckon there's enough scope for significant appreciation in the medium to long term.

-Sahad P.V.

Trend-spotting

i-flex's Hukku: Big gains

Two high-profile deals-Citigroup's Rs 2,500-crore sale of its 41 per cent stake in i-flex Solutions to Oracle and the much smaller Rs 36-crore acquisition of a 14 per cent stake in the Hyderabad-based VisualSoft by Softbank-have set D-street abuzz. Do these mark the beginning of an extended M&A play in mid- and small-sized IT companies?

Analysts tracking the IT industry think that could well be the case. "This is where strategic investors, who might want to book profits by cashing out of existing companies, could play a role," says Karvy Broking Vice President Ambareesh Baliga. He feels Kale Consultants, which provides solutions for the airlines industry, could be ripe for the picking. But Baliga advises caution. "It is difficult for the small investor to differentiate one niche IT company from another. So it is better to avoid investing in them," he warns.

-Krishna Gopalan