These scrips won't set the stock markets on fire. They won't also make you a millionaire next week, or anytime soon. But they also won't wipe out your capital; and will probably give decent returns over the medium term. Analysts call them defensive stocks, because they protect investors during corrections and bear runs. "Only companies with good business models and scalability will escape the impending correction" says Nilesh Shah, President, Kotak Mahindra Asset Management Company. A caveat: this magazine still believes that it's best to book your profits and stay out of the market till the correction plays itself out. But for those willing to take greater risks for long-term profits, here goes:

Usha Martin

The Rs 1,500-crore Kolkata-based steel major is a favourite of analysts who believe its stock price, currently trading at about Rs 200, will touch Rs 300 by September next year. Why? Because the company's backward integration programme-it is operationalising its captive iron ore and coal mines-will result in savings of Rs 80-90 crore per year by the second quarter of 2007. That will go straight to its bottom line. Secondly, its main customers are auto ancillary units, and the boom in the auto sector will translate to more business-and a fatter bottom line-for Usha Martin.

SRF

The company is the largest manufacturer of industrial synthetics in the country, and one of the biggest players in the refrigeration gases and belting fabrics businesses. All these are likely to post solid growth. The stock, which is trading at Rs 326 now, is expected to touch Rs 500 by September next year.

Voltas

With three core businesses, engineering services, agency services and air-conditioning, Voltas is expected to post 20-25 per cent growth rates over the next few years following a pick-up in economic activity across sectors. The stock is trading at around nine times its 2004-05 earnings, a significant discount compared to the industry average of 15.6. Analysts believe that the stock is likely to touch Rs 500 in the next 12 months from Rs 457 now.

Helios & Matheson

This tier-II information technology company has one of the highest earnings growth rates in the technology sector. Moreover, its operations are considered highly scalable and analysts are confident that the company can meet the target of taking its topline to Rs 440 crore in 24 months from Rs 120 crore in 2004-05. They expect its share, currently trading at Rs 408, to touch Rs 500 in one year.

Star Paper Mills

The company has one of the highest margins-24.7 per cent, against the industry average of 14.7 per cent-in the paper sector, which is witnessing a boom in both consumption and prices. Star is hiking its capacity from 65,000 tonnes per annum to 100,000 tonnes. Given its high margins, that will make a huge difference to its bottom line. Analysts expect its share to rise from Rs 104 now to Rs 152 in 12 months.

SMARTBYTES

Should You Bet On Derivatives?

The derivatives market is a leveraged game; for example, if an investor has to buy 1,000 shares of Hero Honda at Rs 710 per share, he will have to pay Rs 7.10 lakh. But by paying only margins, he can buy many more shares in the futures and options (F&O) market. As in any stock transaction, one makes money when prices rise, but derivatives also allow one to make money when the market falls. How? By going short (selling) at the current price and covering (buying back) when the prices of the underlying securities fall to the desired level, the investor squares his account. His profit: the difference between the selling and buying prices. C.K. Narayan, Vice President, ICICI Securities, says: "One needs lots of money (since lot sizes are big and settlements are done on a daily basis) and advanced skills (since derivatives often have complex structures) to play this market." The message: stay out of derivatives; if your call goes wrong (in the above example, if the share prices rise), you could get completely wiped out.

You Can Try These Funds For Variety

The relentless rise in the bellwether BSE sensex is making some fund managers nervous. Says Nilesh Shah, CIO, Prudential ICICI: "We are hedging our bets by buying derivative instruments." His exposure to derivatives is, however, small: only 1 per cent of the total corpus. Tata Mutual Fund is more aggressive. Derivatives account for about 15 per cent of its total corpus. Ved Prakash Chaturvedi, CEO and Managing Director, Tata Mutual Fund, says: "We are aggressively using derivative instruments to make good money." The Securities and Exchange Board of India has recently ruled that funds could take 100 per cent exposure to derivatives. JM Financial, Birla SunLife Mutual Fund and Kotak Mutual Fund also make use of derivative instruments to make money (see Should You Bet On Derivatives?). It requires advanced skills and lots of money to play this market, but those aren't exactly in short supply at these fund houses.

Go For Gold

Analysts are almost unanimous: gold prices are headed north. The reasons: a weakening of the US dollar, the US' rising budget deficit and gravity-defying crude oil prices. Analysts expect the price of the yellow metal to rise from Rs 6,544 per 10 gm at present to Rs 6,740-6,900 per 10 gm within the next couple of months. Gold prices in India traditionally move in tandem with crude oil and inversely with the dollar. "Investors should derisk their portfolios by taking delivery of the gold they buy and then invest in the gold deposit schemes of banks," says U.N. Subhash, Manager, Altos Advisory Services. Banks like State Bank of India accept a minimum 200 gm of gold as deposits on which they offer 3-4 per cent interest depending on the tenure. So, if you're looking for an alternative investment option, go for gold.

-Mahesh Nayak.

CEMENT INDUSTRY
Cement Your Profits
You can lock into cement shares for handsome profits in the medium- to long-term.

The cement sector is one of the major beneficiaries of the boom in construction and infrastructure. Look around and chances are, you'll see some ongoing construction in your line of sight-be it a house, road, port or a factory. The natural corollary: cement companies are raking it in. "The outlook for the (cement) industry looks positive," says a report by India Infoline, an online stock broking and research outfit.

According to Ajit Motwani, an analyst at Sharekhan.com, another online stock broking and research house, the absence of any appreciable capacity expansion in the industry will result in a supply crunch and lead to a 5-7 per cent spike in cement prices over the next eight-to-12 months. Currently, the annual domestic demand for cement is 121 million tonnes (mt) against supplies of 125 mt; the country has a total installed capacity of 148 mt, but the available capacity is only 142 mt (6 mt of cement are exported). Over the next two years, the capacity will increase by only 5.2 mt (Jaiprakash Associates: 3 mt, Shree Cement: 1.2 mt and Dalmia Cement 1 mt). Given the expected 8 per cent annual rise in demand over this period, supply will just about equal demand in 2007-08, leading to a firming up of prices.

Within the industry, companies like Grasim and Gujarat Ambuja have higher operating margins per tonne of cement. But analysts expect the likes of UltraTech Cement, Birla Corp., Orient Paper (it has a cement division) and acc, which have low EBIDTA (Earnings Before Interest, Depreciation, Taxes and Amortisation, or operating profit) per tonne compared to their peers, to benefit more from rising prices. For instance, a Rs 100-per-tonne increase in cement prices will push UltraTech's EBIDTA per tonne from Rs 237 to Rs 337, an increase of 42 per cent. For Gujarat Ambuja (EBIDTA per tonne: Rs 572), however, the same Rs 100 per tonne price increase will improve earnings by only 9 per cent. From an investment perspective, all companies look good for the medium- to long-term, but chances are that share prices of firms with lower margins will appreciate faster than that of others. Happy pickings!

-Sahad P.V.

Watch Your Step
IPOs aren't always the best way of entering the market.

The two have usually, though not always, gone hand in hand. Red-hot secondary markets have often sparked off a parallel frenzy in the primary market. But this one-to-one correlation cannot always be justified. Reason: companies often price their IPOs (initial public offerings) very aggressively, leaving little scope for future appreciation. Suzlon Energy's Rs 1,495-crore issue (at the higher end of the price band), which was open from September 23-29, 2005, offered shares in the Rs 425-510 band. The near unanimous opinion of fund managers: it was overpriced.

Says Abhay Aima, Head of Equities & Private Banking, HDFC Bank: "Investing in an IPO is riskier than investing in a listed stock, because in the latter case, the management and the business model followed by the company are known." Adds Prithvi Haldea, Managing Director, Prime Database: "Pricing is a factor of perception and while it may have been aggressive in some cases, there is no evidence of manipulation as had happened during earlier bull runs." Interestingly, there are no major IPOs in the offing. Is this an indication that the bull run is petering out? Empirical evidence from previous bull runs would suggest that. Our advice to investors is: "Watch your step."

Listed below are four companies that launched high profile IPOs (not an exhaustive list) in the last six months. Let's take a look at how they fared.

HT Media (Issue size: Rs 371 crore)
This stock listed on September 1 and opened at Rs 556.8 on the NSE-much higher than its offer price of Rs 530. Today, the stock trades at about Rs 420, about 22 per cent below its offer price.

Jet Airways (Issue size: Rs 1,900 crore)
The IPO was priced at Rs 1,100 a share and listed on March 14 this year at Rs 1,304.20. It hit a high of Rs 1,339 on the first day. Since then, it's drifted down to the level of its offer price.

Sasken Technologies (Issue size: Rs 130 crore)
Its offer price was Rs 260; it listed on September 9 at Rs 464.6 before settling at Rs 400 levels. It's still trading at a premium to its offer price. But it's early days yet.

Nectar Lifescience (Issue size: Rs 93 crore)
The company floated its shares at Rs 240 each in June. Nectar opened in July at Rs 260 and today trades at about Rs 216, 10 per cent below its offer price.

-Krishna Gopalan

Value-picker's Corner

AGRO DUTCH INDUSTRIES LTD (ADIL); PRICE: RS 72.40

The Rs 144-crore Agro Dutch Industries Ltd (ADIL) is India's largest mushroom producer. It will become the world's largest mushroom producer once its Rs 100-crore programme to expand its capacity from 36,000 tonnes per annum to 50,000 TPA is completed in about 12 months. At the current market price of Rs 72.40, ADIL has a P-E multiple of 7.4. Sirshendu Basu, an analyst at ICICI Direct, expects it to post an EPS of Rs 10-12 this fiscal. This will give the stock price a boost. Another trigger: a 1:1 rights issue at Rs 25 a pop. Basu expects the share price to touch Rs 100-120 in the medium to long term.

-Sahad P.V.

Trend-spotting

The monsoons have delivered; farmers are smiling; and so is the fertiliser industry. Good monsoons typically result in higher demand for fertilisers and fatter bottom lines for companies that make this politically sensitive commodity. Which stocks should an investors look at? Says Gurunath Mudlapur, Managing Director, Atherstone Institute of Research, a research outfit: "Indo Gulf Fertilisers (P-E multiple: 16), GSFC (P-E multiple: 12.4), Coromandel Fertilisers (P-E multiple: 10.9) and Tata Chemicals (P-E multiple: 12.8) look inviting at current levels."

-Krishna Gopalan