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OVERVIEW· WHERE TO INVEST

BUS I N E S SIN D I A • January 24-February 6, 2011

But that is when it's best to invest

about gold, silver and property? Bullion prices have started going down while commodity prices are moving up. 2011 is undoubtedly going to be a challenging year f0" investors.

The global outlot, .... is uncertain too. What will happen to the Eurozone countries is a matter of concern. And whether the US economy will witness growth or not is still an open issue.

BUT PANIC SHOULD not be on the prescription. While all negative news affects sentiment, it may not impact corporate profitability. India is somewhat insulated from global events because of the strong domestic market.

Second, one has to differentiate between developments with a short-term impact and those that could struchrrally alter long-term

growth prospects. Much of what is happening now appears short-term in impact.

Finally, such periods of retreat in the markets are just the time to go hunting for bargains, particularly if the long-term prospects are good. In 2008, the ye~r following the US sub-prime crisis, there was destruction in values of all asset classes. In India, the Sensex saw a steep drop of over SO per cent after five years

of gains. From an intra-day high of 21207 in January 2008, the Sensex closed the year at 9647.

". Apr:·200"~ " ;1.2043" " . P/E":'21:4 "

Jan-Dec 2005

• WHERE TO INVEST • OVERVIEW

BUS I N E S SIN D I A • January 24-February 6, 2011

prediction we had made after the last general elections was that the markets would touch 25000 in 2011. If not by December, then certainly by March 2012. We do not see any compelling reason to change our view. The Indian growth story is well documented, as are the long-term prospects. Even a year-an-year GDP growth, ranging between 8.S and 10 per cent, could transform India into a $5 trillion economy by 2020. Temporary blips during periods of political uncertainty will not alter or dent the India growth story.

The two main pillars propelling this growth - consumption, largely domestic, and investments

The prospects at the beginning of 2009 were bleak. However, this offered one of the best periods for investors to build an equity portfolio. In our yearly assessment we had said that this can be looked on as "the best period for genuine Business India investors." We had pointed out that companies with a good dividend track record were available at ridiculously low PiES (price/earnings) in the 1-5 range. In 2009, the Sensex gave 80 per cent return; the next year it was another 12 per cent.

This year too could see a marked recovery.

And it could begin after the monsoon. Another

FII net Inflows

('{ crore)

• Eqllity

• Debt

. GAINERS· %gain

United Breweries 200

Titan Industries 153

M&M Financial Services 117

UCOBank 108

Vijaya Bank 96

Induslnd Bank 87

Cummins India B2

Cadila Healthcare 80

Allahabad Bank 79

Bank Of Baroda 75

Bajaj Auto 75

Pelronet LNfO 74

Calma Bank 69

Federal lank 69

Tata Motors 65

Ihushan Steel 63

Oriental Bank Of Commerce 62

lupin 61

Shriram Transport Finance 61

Sun Phannateutlcallnds. 61

Asian Paints 60

Plpavav Shipyard 60

Chambal Fertilisers 56

Tata Consultancy Services 55

Havells India 54

Sun tV Network 53

Hindalco Industries 53

Blocon

Castrollndia

Nestle India 49

Adani Enterprises 49

fOodreJ Consumer Products 46

53

GlaxoSmithKline Pharma 45

Dr Reddy'S laboratories 45

Andhra Bank 45

bide Industries 44

Aurobindo Pharma 44

Mahlndra &" Mahlndra 44

Essar Shipp. Ports & log. 43

Thennax 42

Indian Bank 42

Siemens 41

Bajaj Holdings & In\' 41

Dena Bank 40

Bharat Forge 39

ITC 39

HDFC Bank 3B

Ambuja Cements 38

let Airways (India) 3B

Indlabulls Flnanr.'~1 Servlc:es 38

Apollo Tyres 37

Bosth J7

Axis Bank 36

HDFC 36

Punjab National Bank 35

Bajal Flnserv 34

Syndicate Bank 34

Sinlex Industries 34

Indian Overseas Bank 32

Infosys Technologies 32

Glenmark Pharma 32

Colgat&PaTmollve (India) 32

Union Bank Of India 32

Adanl Power 31

52

Source AC.Equ;ry. 8SE 200 constituetvs. '96 cho"ge Jan. Is! 10 Dec. 31st 201 0

IGCI Bank 31

Mundra Port &" SEZ 30

Bombay Dyeing 29

1011 Bank 29

Engineers India 29

Ashok Leyland 29

Crompton Greaves 28

Dabur India 26

Piramal Healthcare 26

Voltas 26

State Bank Of India 24

IFCI 24

GAil (India) 24

ACC 23

HCL Technologies 23

Great Eastern Shipping Co. 23

Rural Electrification Corp. 22

Tata Chemicals 22

Gujarat State Petronet 22

L1C Housing FInance 22

lain Irrigation Systems 22

Areva TIiiD India 20

Wipro 20

MRF 19

Idea Cellular 19

Hlndustan Copper 19

Power Finance Corpn. 19

Opto Clrcult5(lndla) 18

Ultratech Cement 18

IDFC 18

Cairn India 18

Hlnrlustan Unllever 18

larsen & Toubro 18

Yes lank 17

Marico 17

Bank Of IndIa 17

15W Steel 16

United Spirits 16

Hero Honda Motors 16

Ranbaxy laboratories 16

Tala Global Beverages 15

Lee Entertainment 15

Ollindia 13

Kalak Mahlndra Bank 13

Hindustan Zinc 13

PTClndla 13

Indian Oil Corpn. 12

Clpla 10

Tala Steel 10

011 & Natural Gas Corp". 10

lanco Infra tech --1-0

Bhartl Alrtel 9

Central Bank Of India 9

en 8

Ispat Industries 6

Jal Corp 6

Bharat Petroleum Corpn. 4

eodrej Industries 4

ABa 3

Rellante Power 2

lindal Steel « Power 1

Oracle Fin. Services Software 1

Hindustan Petroleum Corp. 0

United Phosphorus 0

BUS I N E S SIN D I A • January 24-February 6, 2011

OVERVIEW • WHERE TO INVEST

- are also well known. On the macro front, the issues really concern the pace of global recovery, inflation and rising interest rates. But are these concerns and issues serious enough to shake the basic foundation of India's growth story? We do not think so. Anchoring infla-! tion expectations I :

is a challenging task for the government. Fuel and ' primary articles, (food items) are the two main constitu-' ents in the wholesale price index, ~ propelling inflation. In FY2008-09,; at the height of the global food crisis, simisues and concerns were voiced globally.

Lower global supplies and lower agricultural out-

put in India had seen WPI in that year rising by

8 per cent. Both primary articles and the fuel group had risen by 11.1 and 11.6 per cent respectively. Manufactured products, the largest component in the WPI index, saw a mod- IIIfl . est growth. The environment this year is r

similar. Food prices are soaring and crude ,/"~dfj~.

is hovering around $90 per barrel. O'-? /--

Taking both these factors into account, CMIE Ib-:

has forecast annual inflation in FY2010-11 at ~_-- •. - around 8.S per cent. This would be 0.5 per /a'/, cent higher than that witnessed in FY2008- 09 and the highest in the past five years. It is much higher than the RBI' s comfort level of 5-5.5 per cent and the 7.5 per cent forecast by Nomura. Others are still reworking their forecast made last year.

What investors need to consider is the

extent to which inflation can adversely impact consumption? With the sharp rise

m overall income levels, there shouldn't be any major effect. Given

- the good rains this year and a good winter crop,

agriculture should do its bit. CMIE has estimated a 5.7 per cent rise in this sector for FY201O-11. However

causing concern are the policy measures used by the government to tackle this problem. Will the

government use

.., } monetary measures "/ like hiking interest rates in a bid to curb consumption or will it recognise the structural shift in consumption levels (consumers are moving to higher protein foods due to rising

incomes) and go in for increased imports. Hike in interest rates by the RBI or even signals of a

harder rate regime could im_.pact consumption growth in - .certain industries, like auto-

-, mobiles and housing.

The hike in interest rates and fuel prices could slow down the growth in offtake of commercial vehicles. Passenger car com-

panies are treading cautious-

ly and have announced a price hike in January. The impact of this hike and the petrol price hike is yet to be seen.

WHERE TO INVEST • OVERVIEW

BUS [ N E S S [N D [ A • January 24-Febroary 6, zon

. LOSERS % decline

Bajaj Hindusthan -47 Jaiprakash Associates -28 NHPC -17 IRB.lnfrastructure -8
HOIL -46 Tata Teleservlces (Maha) -28 EIH -17 Mphasls -7
Punj Uoyd -45 Reliance Infrastructure Ltd -27 . Reliance Communications -16 National Aluminium Co. -6
Suzlon Energy -41 IVRCL Infl"astructures -27 Nagarjuna Construction -15 Mangalore Refinery -6
Indiabulls Real Estate -39 MTNL -26 NTl'C -15 Indian Hotels -6
Welspun Corp -37 Educomp Solutions -25 Torrent Power -14 Graslm Industries -6
India Infoline -37 Steel Authority Of India -24 Sterlite Industries (India) -13 CESC -5
Ahan Offshore -36 Tata Communications Ltd -24 India Cements -13 DIvI's Laboratories -4
NMDC Ltd -34 Reliance Capital -22 Neyveli Ugnite Corpn. -13 Aditya Birla Nuvo -4
Balrampur Chlnl Mills -M Rolta India -21 GVK Power & Infl"a. -13 Container Corpn. -4
Financial Tec.hnologies -34 Hindustan Oil Exploration -21 Shree Renuka Sugars -13 Pantaloon Retail -4
Mulndla -33 AmtekAuto -20 Shipping Corpn_ Of India -11 BHEL -3
Hindustan Construction Co. -33 Sesa Goa -20 Power Grid Corpn. Of India -11 Reliance Industries -3
KSK Energy Ventures -33 Unltech -20 Gularat NRE Coke -10 Jindal Saw -3
MMTC -32 Anant Raj Inds. -20 Videocon Industries -10 JSW Energy -2
CiMR Infrastructure -31 DLF -19 Bharat Electronics -9 Patnl Computers -2
Tech Mahindra -29 Century Textiles & Ind. -19 Maruti Suzuki India -9 Essar Oil -1
Jalprakash Power Ventures -28 Mdeod Russel India -17 BEML -8 Tata Power -1
Source Acefquity. BSf 200 constituents. ow, change Jon. huo Dec 31st 2010 Having witnessed a 30 per cent growth in the first nine months, a slow down in a couple of months in FY2010-11 may not really be a big cause for worry. FY2011-12 could possibly see a slower rate of growth given the high base (see section on sectoral outlook, page 20) The impact is being witnessed in the price movement of some shares. Tata Motors, which has a diversified portfolio in this sector, saw its share prices rise sharply from under UOO to n,306. It has since then started correcting and is available at n,178_ M&M and Maruti have likewise lost ground. In the case of Tata Motors, a rebound in the global economy could also spur higher sales in its overseas venture,

Demand for housing is unlikely to show any decline, except in some metros, Jke Mumbai and Delhi, where prices are clearly becoming unafford-

RBI

Nov 2010

8.5

i:IfB1[q~ff~~t~Iit~f~~1~r ,~,'"?~:~H;';':.il~·:

CMIE Feb 2010 7.1 9_2

~i:~~ri~~j£14~Iij~:.9:·;;FF.12ft"\8,$i:~:,

able for the masses. However, housing prices elsewhere have shown a sharp correction. And this could actually spur more investments in this sector. Instead of going in for property developers' shares it may be worth going in for shares, like HDFC, which has one of the lowest NPA levels in the NBFC sector. Property companies that are largely focussed on urban areas are currently ruling below their historic levels (see page 64). The BSE Realty index is currently hovering around 2525 levels compared to 12727 levels in 2007_ Investors could use this period of sharp correction to accumulate shares in this sector.

The rising price of crude and higher interest rates could have an impact on corporate profitability to the extent that they are unable to pass on the higher costs to customers. Petroleum

'" ': 'I'. I -;' ~

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.50 • •

BUS I N E S SIN D I A • January 24-February 6,2011

OVERVIEW· WHERE TO INVEST.

--

companies' profitability could be impacted inasmuch as they will not be able to pass on the entire price increase in crude to customers and the government may no~ be able to reimburse the entire short- I

falL \ ~

Natural rubber prices which are "-

ruling high as also contraction in overall demand could impact tyre companies' profitability. Apollo Tyres has corrected from ~80 to ~SS; MRF has shed 20 per cent since October. . Again, this could provide oppor- ~' tunities for long-term investors.

Rising steel prices could likewise

see steel rolling mills' profit :"~ing impacted in the short run. Integrated

steel companies like Tata Steel and SAIL

will do better. Floods in Australia could

see spikes in the price of coal and impact the cement sector's profitability. These are, however, temporary issues; cement companies are going ahead with their expansion plans. In December itself projects worth {lO,OOO crore have been announced. Interest rates are unlikely to have any adverse impact on project investments.

to accelerate. Other

sectors on the up-

lSwing are services, T- rres, metals, ement and hositality. Large caps d mid-caps will

continue to better

small caps. Banks and finance com-

fianies may not perform well this year, but if one believes in the India growth story

this will be the time to accumulate these stocks. Selective

corresponding nine months in 2009. The fact is that the corporate sector is optimistic about future

investment in FMeG and pharma is advocated.

Could liquidity be a dampener? It depends on by what percentage the RBI raises rates. Higher rates may see more reliance on foreign capital as companies seek both equity and debt overseas.

Besides equities it may be worth locking in part of the funds in good debt instruments or even fixed deposits in banks,

which provide near double-digit , interest rates,

Property as an asset class may not be a good bet, though second homes outside the main metros could be worth taking a chance on. Surrogate investments through property stocks could be a good bet once

their prices start stabilising at lower levels.

OVERALL, PROJECTS WORTH B.6 lakh crore are likely to be commis-

sioned in FYl1. It is estimated that projects under implementation during April-December 2010 witnessed investments of nZ.2 lakh crore or

roughly one-third

more than the investments committed in the

growth and is building new capacities in manufactur-

ing. The bulk of the projects are coming in the power and infrastructure sectors, which

augurs well for the future. It is also

worth noting that FY2011·12 is the last

year of the 12th Five-Year Plan. And government investments in the last year generally tend

~" An increase in the price of gold to the extent seen over the past one year seems unlikely unless governments across the globe fail to anchor 'inflationary expectations and global recovery

falters. Gold could see much lower returns In the coming year.

The bottomline is that there could be a sharp swing in investor sentiment in the second half of the year. Janus may need to change his habitual abode in December-January to june-July.

• DAKSESH PAR.IKH

• WHERE TO INVEST • SECTORS

BUS I N E S SIN D I A • January 24-February_6, 2011

I nvestment opportunities

Healthy economic growth, massive fund inflows and good corporate results were key drivers that resulted in the barometer of the stock market, the BSE Sensex rising by 15 per cent in the calendar year 2010. With expectations of higher growth in GDP, enhanced investor participation and inflow of foreign capital, the stock markets are expected to perform even better in 2011. However, in the near term, higher food inflation and resultant higher interest rates, various

scams, higher oil prices and global under currents would weigh negatively on the markets. Business India spoke to a range of market participants like fund managers, investment analysts, CIOs and

portfolio managers to get their sense of direction in the year that has just begun, their gut feeling on the general trend, sectors and companies that could be outperformers. The general consensus is that they expect a 16-18 per cent growth in earnings even for target Indian companies, along with an optimistic economic growth forecast. Higher government spending, healthy capex plans, increasing disposable income thereby higher con-

sumer spending would be the key reasons for growth in certain sectors like infrastructure, capital goods, automobiles, banking et al. Here are some specific sectors and companies to keep an eye on:

- AUTOMOBILES. ON A DRIVE -

T:e Indian automobile sector has been the oast of 2010 and on an overdrive. The expectation is that the demand in the automobile sector will remain robust over FYIO- 12(expected). Strong demand from the rural and urban areas is likely to continue. Hwever, the input costs remain a concern with prices of key commodities like steel and rub-. ber fuming up in the last quarter ended December 2010, mounting pressure on margins. The

two-wheeler segment is likely to perform better with increase in disposable income and rising urbanisation in India. The growing youth population and large rural markets offer a big potential for this segment. Nonetheless, the entry of new players and capacity expansion programme will make competition stiff. The other bump for this sector could be the interest rate hikes and likely Withdrawal of stimulus.

TOP PICKS

Tata Motors (current market price: n,197) is a good bet based on expected good growth in the commercial vehicles segment due to a thrust in infrastructure spending as well as a presence in the global markets through luxury car brand 1 aguar and Land Rover. Also, reduction of debt would help bolster the bottomline and augurs. well for the company.

M&M's (CMP: U43) acquisition of Ssanyong Motor Co (Korea), would help the company expand its product portfolio as well as increase its geographical presence. M&M's tractors

and sovs should remain a beneficiary of rural growth.

Bajaj Auto's (CMP: U,283) strong leadership position in the two and three-wheeler segment cannot be ignored. With an EBITDA margin of 20 per cent (the highest in the industry) and return of equity (ROE) of 75 per cent in FY10, it is one of the stable but growing companies to invest in.

Ashok Leyland. (CMP: 'tS8) is the second-largest manufacturer of medium/heavy-duty vehicles in India. The product of the company also ranges from 7.S tonne to 49 tonne in vehicle haulage. It also includes special

application vehicles to diese, .ngines for industrial, marine and genset applications. As industrial and agriculture sectors post robust growth and the demand for commercial vehicles (cvs) moving in tandem, the company could do well.

Escorts (CMP: U47), the third largest player in the tractor segment, is expected to gain market share as tractor sales will move northwards due to newer product launches in the popular Powertrac and Farmtrac variants. The expectation is that the growth momentum of agri-GDP led by increasing demand will inject further

.52 • •

I

WHERE TO INVEST • SECTORS

BUS I N E S SIN 0 I A • January 24-Febroary 6, 2011

steam towards farm mechanisation as labour migration towards urban areas continue.

Maruti Suzuki (CMP: n,277) could gain from the low penetration

of cars which in India is estimated at around 12 vehicles/1,OqO people, per capita near inflexion point for car demand. Besides, Suzuki's focus to make Maruti a small

car-manufacturing hub to cater to the increasing global demand for small cars, due to rising fuel prices and stricter emission standards should see the company scale new peaks.

~ AUTO ANCILLARIES. MIRRORING THE BOOM

Auto ancillaries have been the direct beneficiaries • Significant growth. Apart from this, international

of the booming domestic demand for automobiles markets are also showing encouraging signs and

in the past 12-18 months. All segments - 2-wheel- outsourcing parts from India. The surge in de-

ers, 4-wheelers, LCVs, MCVS, etc. are witnessing mand is expected to continue in the current year.

TOP PICKS

:bide (CMF: H3S) being a leader in the automobile battery segment it will gain as the buoyancy in the automoliile sector, as both in four wheelers and two wheelers continues, coupled with new products, deeper market penetration backed by extensive 'after sales service'. All this will lead to increased growth in the automotive battery business. The company plans to boost motorcycle battery capacity . 'by as much as 60 per cent, investing '!400 crore as demand for motorcycles outstrips the company's expectations. "The replacement market also provides bigger opportunity. The company has

been the key supplier for Tata Motors, and is a major supplier to Tata Nano. This inspires confidence and bodes well for volume growth.

Motherson Sumi Systems' (CMP: H74) core focus is on providing more content per car and its presence in geographies such as India and China provides the basis foi: strong conviction on its growth objectives. The fact that the company has significantly outperformed the domestic passenger car industry growth for several years in a row in its standalone operations is a testimony to the company's focus on continuously expanding its product portfolio. And

despite the acquisition of Europebased Visiocorp, the company still derives nearly 70 per cent of its revenues from outside Europe.

Goodyear: (CMF: 't246) This MNC is going to be a large beneficiary of the increase in capacity expansion by tyre industry due to shift in radial technology in India. Goodyear is a leading player in the car and tractor segment. Its competitors are planning to focus only on truck radial segment. The company has currently more than ~200 crore cash. The management tried deli sting the company at B401 share, which was unsuccessful, as investors expected a higher price.

= ALCOHOLIC BEVERAGES. IN HIGH SPIRITS ~

In terms of volumes, the Indian alcobev market las been growing at a 10-11 per cent CAGR over the past five years and the healthy growth momentum is expected to continue. Within the alcobev market, country liquor is the slowest '" -owth segment (2-3 per cent CAGR in volume), while IMFL is growing at 12-13 per cent, beer at lS per cent and wines at 30 per cent CAGR, albeit from a low base. IMFL would continue to witness. strong volume momentum driven by

consumer upgrades from country liquor and positive demographics. Both spirits and beer offer strong volume growth potential in India over the medium to long term, with beer expected to outpace the growth in spirits over the next couple of decades. Beer consumption is abysmally low in India due to taxation policies and should rise With greater acceptability of 'social drinking' and improving affordability as inC0IJJ.e levels move up.

TOP PICKS

"United Spirits (CMF: H,3S2) is a dear leader in the domestic spirits sector with 43 per cent market share,' and continues to widen its lead over its nearest competitor. Given the entry barriers raised by regulatory constraints, this competitive lead looks sustainable and will enable .the

company to capture the longer-term consumption shift from country liquor to IMFL, resulting in healthy volume growth. The key to Significant value creatiori over the longer term would be a product mix shift to premium spirits where the company has a relatively weaker portfolio and tends to face tougher competition from

foreign players selling aspirational brands. The company is looking to augment its in-house bottling capacity (62 per cent currently), to save the mark-up paid to bottlers, which will further push profitability.

Radico Khaitan (CMP: fl47) has an established presence in the regular segment with key brands such

BUS [ N E S S [N D [ A • January 24-February 6, 2011

SECTORS. WHERE TO INVEST

as 8 PM, Contessa and Old Admiral. With Magic Moments (vodka) growing well, 8 PM (whisky) seeing renewed growth and new launches in the premium whisky segment, the

topline CAGR will be around 19.6 per cent over FYIO-FY13. Prices of mol asses fell from a peak of ~500/quintal in FY10 to ~420 levels and are now hovering at ,{450. The expectation is

that the price of this key input will remain stable around current levels, which will support an expansion in EBITOA margin for the company over FY10-FY13.

- BANKING. SECULAR THEME -

Banking is a secular theme riding the' growth in the economic activity, wherein the private sector banks are poised to grow faster than the overall industry. An 8-9 per cent GOP growth will entail the banking industry to g:- ,w at 18-20 per cent, higher than the overall Sensex earnings growth. With private banks growing above that, the sector is well-poised to remain an outperformer. While near-term headwinds (high inflation

particularly with rising commodity prices and hike in interest rates) could weigh on earnings and stock performance, the sector in the long term looks good as the loan outlook remains robust and credit costs are likely to be moderate in FY12. However, concern has been raised on the spike in deposit rates but then improvement in li-

quidity due to higher government spending would be a positive trigger.

TOP PICKS

Axis Bank (CMP: n,270) is positioning itself quite well for the imminent upturn in GOP growth, in terms of large capital adequacy and substantial network expansion. With their overall better customer proposition, the bank is also set to continue gaining market share in low-cost deposits. The bank's fee income is already amongst the highest in the sector at 1. 9 per cent of average assets (almost twice the level in PSU banks). Its performance is char-

acterised by the consistent profitability growth of above 30 per cent Y-o- Y for the past 24 quarters, one of the best records industry wide.

HDFC Bank (CMP: ,{,2,lOO) is the second largest private bank and a market leader in retail banking. A high CASA ratio (51 per cent in Q2FYll) supported by the rising interest rates could offset the pressure on margin.

SBI's (CMP: '{'2,559) market share of savings deposits has expanded by a substantial 2.70 basis points to 23.2

HOUSING FINANCE SECTOR.

per cent during FY07-FYIO (one of the few PSU banks to do so), driven by relatively faster branch expansion (9.5 per cent CAGR as against 2-5 per cent for most PSU banks), leveraging its tremendous trust factor in the country. It also has a relatively strong share of fee income, owing to its strong corporate and government business relationships. During FYIO, the bank continued its dominance with fee income at 1.3 per cent of average assets (again, highest among PSU banks).

AFFORDABILITY UP -

The housing finance companies (HFCS) have outperformed the Sensex in the last one year and while valuations are no longer cheap, the belief i~~that stock performance would be supported by robust earnings growth (23 per cent CAGR over FY10-FY13E). While growth in housing demand could be subdued in FYll (in terms of residential area sold), home loan disbursals would remain strong, driven

by a higher ticket size of loans. Affordability levels of Indian households have risen compared to

FY06, supported by the strong growth in disposable incomes. In the long term, the housing finance sector will see several structural demand drivers, including a wide demandsupply gap for housing, rising urbanisation,

continued growth in disposable incomes and low mortgage penetration.

TOP PICKS

LIC Housing Finance (CMP: n54) is likely to sustain above-industry growth rates in loan book and disbursals due to higher utilisation of direct selling agents and LIC agents, aggressive rollout of branch network and competitive product offerings. Strong

loan growth and low credit costs would drive a 27.5 per cent CAGR in earnings through FY13, even as spreads come under pressure. Return on equity (ROE) is likely to remain at 24-25 per cent. Finally, the stock performance would be supported by strong business and earnings growth.

Dewan Housing Finance Corporation Ltd's (CMP: ,{,248) total disbursals and loan book is expected to grow at 35 per cent and 40 per cent CAGR respectively over FYIO-FY13, supported by robust demand in the housing sector, lower financlal penetration in semi-urban

WHERE TO INVEST. SECTORS

BUS t N E S SIN D I A • January 24-February 6, 2011

areas and the company's widening marketing network. In the last two years, DHFC has expanded its distribution network by 77 per cent to 342 points of presence and has tied up with United Bank of India

and Punjab & Sind Bank to provide home loans to their customer base. It has also entered into an agreement with Central Bank of India to leverage the latter's distribution network in central India. The com-

- HEALTHCARE & PHARMA •

pany is expected to report stronger growth in loan book and disbursals, due to the low base, an expanding distribution network and underpenetration of housing finance in semi-urban markets.

POISED FOR GROWTH -

The Central and state governments have been increasing their health expenditure in order to achieve better health for the citizens. The budgeted health expenditure has been increased from ,{8,086 crore in FYOS to ~21,680 crore in FYlO. The combined health expenditure for all state governments was around f43,848 crore in WI0. However, despite these increase, public expenditure in the health sector has fallen short of the target of 2 per cent of the GOP as suggested in the 11 th Five Year Plan. In order to achieve this target, public expenditure on health will have to increase to around U,60,OOO crore by 2011-12 as against the budgeted amount of around f65,OOO crore in FY10. This implies that the annual expenditure in the health sector will have to increase robustly in the next two years, thereby increasing the demand for healthcare providers. Rising per capita income and the rise of a prosperous middle class is likely to lend its support to the increase in demand for this sector.

Linked to health care, the Indian pharma companies will have a secular growth in the next 10

TOP PICKS

Cadila (CMP: ~777) is amongst the top 5 pharma companies in India that has transformed itself from being a domestic player to a well-entrenched global player with presence in US, France, Japan, Brazil and 25 other countri= ,. The expectation is that the company's revenue would grow at 21 per cent CAGR during FY10-12 with ability to manufacture complex generics such as trans dermal patches and vaccines. The company's international business will be the key growth driver with a topline CAGR of 27 per cent. The company has concrete plans to reach to $3 billion in revenue by 2016. It spends nearly 7 per cent of its revenues in R&D and has six molecules in the clinical trial stage.

Aurobindo (CMP: U,293) has transformed itself from a pure, plain vanilla Active Pharmaceuticals

years. With a total size of $16 billion, the expectation is that it could grow to $50 billion by 2015.

The domestic market could reach around $30 billion by 2020. The Indian pharma companies have expanded in the local market as well as in the international market. The domestic market will continue to grow at 14 per cent CAGR for the next three years. In

the international market, Indian companies

have expanded to both the developed as well as developing countries. These companies are likely to be among the top beneficiaries of-the US generic opportunity.

Finally, the Indian pharma industry is now going through a golden period. The relative cost attractiveness of 'manufacturers is being clearly understood by large multinational pharma companies. This is leading to M&A in this sector apart from innumerable outsourcing contracts gained by the Indian pharma industry. Of COUIse, robust domestic demand and exports to international markets both developed and developing are also providing pharrna industry a major boost.

Ingredients (APIS) player to a high margin niche formulation player. This transformation is still on and that"has improved the EBITDA margin of the company. The share of formulation in top line at present is 54 per cent as against only LOvper cent in FY05 and this will rise to 63 per cent by FY12. The recent deals with MNCs have given the company a new identity. For instance, the company has a tie-up with Pfizer to supply 100 products in developed as well as emerging markets. The revenues from Pfizer and other MNCS could touch $190 million by FY12. Henceforth, the next big growth drivers will be capacity optimisation and monetisation of the huge US Abbreviated New Drug Application (ANDA) pipeline.

Torrent Pharma (CMP: f586) is a strong player in the domestic market with presence in high margin chronic

drug segment. It has six brands in the top 300 pharma brands of India and has 39 brands in leadership position in their respective segments. The domestic business enjoys 25 per cent margins and is expected to grow at a CAGR of 20 per cent. The company also has a strong .aternanonal business with presence in Latin America, Europe and Russia. Investment phase in its international business is complete.

Lupin (CMP: N70) with sustained growth for eight quarters, it has a strong foothold in developed markets through a combination of branded and generics. A foray into niche segments such as oral contraceptives in the US, good growth in domestic branded formulations and a strong balance sheet with ever reducing working capital cycle, will help the company achieve critical mass .

• 56 • •

• WHERE TO INVEST • SECTORS

BUS I N E S SIN D I A • January 24-February 6, 2011

- TEXTILE SECTOR • LOW COST ADVANTAGE -

The home textile companies have become more aggressive on the capacity expansion front as India continues to feature amongst the lowest cost producers for the US and EU markets. Retailers like Wal-Mart, ]C Penney and GAP are planning to increase their outsourcing from India; this move will give immense opportunity to the domestic apparel exporters. As per the government targets, while India's

. textile exports are poised to grow from $17.3 billion in FY10 at an average annual rate of

is to 20 per cent over the next three years, its share in apparel and garment exports are set to

double and triple respectively until FY15. Several Indian textile companies have formed alliances with their global counterparts, particularly those with strong front-end capabilities, in a bid to access global markets, tap technological know-how, design skills and branding and retailing ability. The alliances have been struck in most cases by way of JVs or stake acquisition.

TOP PICKS

Arvind Mi1Is (CMP: ~60) is uniquely positioned to benefit from this opportunity. The company made early investments in design, sales & distribution and branding, and today boasts of strong network relationships and an impressive bouquet of established brands developed over the last couple

of years. These brands, some of which have been made private labels, also give its value retail initiative, Megamart, a strong competitive advantage over other retailers in the segment.

Over the last couple of years, Arvind has made massive investments in building scale, sales and distribution, designing, brand creation,

and also in setting up its own retail network. These investments create tremendous leverage for margin improvement going ahead. This would include improvement in realisations, savings from the bulk sourcing of goods and, finally, using the same network for distribution of multiple brands.

- AGRI INDUSTRY k FERTILISERS

• FERTILE GROUND

Global demand for agriculture products continues to remain strong on the back of rising demand from food, feed and fuel. Growing population, rising per capita income and increasing energy prices are key growth drivers for demand. On the. supply side, the situation is still worse with scarcity in land availability. Increasing thrust on yield is the only solution for meeting the growing demand for food grains. This is where agri-inputs like seeds, fertilisers and pesticides come into picture.

Back home, the Indian fertiliser industry is going through a major transition with administered pricing mechanism driven by subsidies gradually being replaced in a phased manner. Nutrient based subsidy schemes have . 'ready been introduced for the non-urea segment of the industry. Market expectations are that even urea pricing will

TOP PICKS

Coromandel International (CMP: ~2S3) is the largest DAP and complex fertiliser manufacturer in India with a total capacity of 3.3 million tpa and a market share of 15 per cent. Consistency in availability of raw materials remains a key risk in the fertiliser business. Coromandel has tied up with FOSKAR for phosphorous acid. Coremandel holds 14 per cent in FOSKAR

gradually be decontrolled. Apart from these structural changes, good monsoon coupled with significant emphasis provided by government on rural India and the agricultural sector have been a boon for the fertiliser industry,

The strong demand from fertilisers with no significant capacity addition in the domestic market has increased the dependence on imported fertilisers. The government has taken

steps like linking the subsidy on dia-ammonium phosphates {DAP) and complex fertiliser and additional urea production with import parity prices that has improved the profitability of companies. The introduction of nutrient based subsidy is also a step in the right direction. With reduced dependence on suo ~idies, there is a sharp fall in the working capital requirement and the interest cost of most of the companies in this sector.

which has a huge capacity of phosphoric acid. It also has presence in the non-fertiliser business which includes agrochernicals, specialty fertilisers, micro nutrients etc. and contributes approximately 10 per cent to its revenues. The non-subsidies business currently contributes 10 per cent to the topline but the share of this business can rise significantly as the business is likely to grow at a CAGR of 30-40 per cent. This

will on the back of its existing brand recognition in the fertiliser segment and the excellent marketing network, improve the margins to improve from 9.3 per cent in FYI0 to 15.3 per cent in FY12. The rise in margin is due to favourable policies introduced by the government in the fertiliser segment and also due to increased share of top line from high-margin non-subsidies business.

.5S • •

BUS I N E S S r N D I A • January 24-February 6,2011

SECTORS. WHERE TO INVEST

Rallis: (CMP: n,310) This Tata group company is the second largest domestic player in the pesticides industry in India with a strong rural marketing network. In fact, among all the listed Tata group companies, Rallis has the highest percentage of shareholding by the Tatas, The company has restructured its business five years back and due to its local as well as international business initiatives the company has seen a seachange in business profile and its profitability. The EBITDA margins improved from single digit to around 19 per cent at present. There is still a

possibility of expansion of margins to the tune of another 3 basis points. The company is in the expansion mode with commissioning of is Dahej facility by FY12. The· company also entered into seeds business with acquisition of Metahelix.

GNFC (CMP: n 11) is a key beneficiary of two recent events. One, its fertiliser business has benefited due to Introduction of nutrient based subsidy on account of its captive ammonia facility and two, its chemical business which includes caprolactum has seen a rise in prices while the key raw material prices have not improved in the

same proportion. This has expanded its EBITDA margins. The company has aggressive expansion plans in its chemical business that will improve its profitability.

Chambal Fertilizers (CMP: ~75) is a leading manufacturer of urea with 10 per cent of the total domestic urea capacity. It is the biggest beneficiary of the urea policy where the additional urea capacity will be linked to the international parity prices. Increase in urea prices, further capacity addition and expected favourable changes in the government p. 'icy will be the key triggers for the stock,

~ SOFTWARE & IT/ITES

• GLOB"AL RECOVERY -

In software, the strong volume led recovery has resulted in earning upgrades for most of the large companies and market believes the .same to continue as these companies invest in human resources to tap this growth. Any positive pricing negotiations With clients next year would render valuations moderate. As far as IT/ITeS is concerned, the shift in the role ofInformation and Technology (IT) from merely supporting business

to transforming business is driving productivity gains and helping to create new business models. With an improved scenario in world economy and rising demand for IT services the industry is expected to grow by 20-25 per cent. The IT industry with favourable business proposition, huge market potential with penetration and ability of Indian IT companies will scale it up to take opportunities.

TOP PICKS

TCS (CMP: n,197), the largest IT company both in revenue ($37 billion - FYIlE) and employees (1,74,417) terms, IS expected to report broad-based volume growth leading to US dollar revenue growth of 23 per cent CAGR in FYlO-FY12E. Further, it is expected to log an earnings growth of CAGR 17 per cent during the same period.

HCL Technologies (CMP: ~493) is a leading IT services company with revenues of n,500 crore (FYllE) and 46,540 professionals. HCL Technologies is well-positioned to participate in incremental demand with low utilisation, superior lateral gross hires coupled with operating levers, which could help sustain operating margins.

Tech Mahindra's (CMP: ~686)

dependence on British Telecom (BT) account is expected to reduce, going forward. The non-sr accounts to drive strong 12 per cent CAGR in $ revenues over FYI0-12E, even with flat revenues from BT. Then, the merger of Mahindra Satyam is expected to help diversify from telecom to other service industries such as manufacturing, media and BPS] etc.

_. INFRASTRUCTURE. AGGRESSIVE PLANS =

The government has rolled out an aggressive investment plan of almost doubling its infrastructure spending from ~23 lakh crore in 11th Five Year Plan (2007-12) to around \46 lakh crore in the 12th Five Year Plan (2012-17). The planned investment would increase infrastructure spending as a percentage of GDP to 10 per cent through 12th Plan from 7.6 per cent in 11th Plan. Most of these investments will be undertaken by the PPP (publicprivate partnership) model providtng immense opportunity for infrastructure and engineering

companies. Basically, the country is on the verge of expanding its Capex, driven by impending bulky investment in infrastructure and industrial activity. Rapid economic growth over the past decade has strained India's infrastructure. Under-investment in a time of high economic growth provoked constraints. India is among leading global destinations for infrastructure and investment spending over the next few years.

linked to this, the capital goods industry has a revenue visibility for next five years largely

• WHERE TO INVEST • SECTORS

BUS [ N E S SIN D I A • January 24-February 6, 2011

on back of investment in power sector (Generation, Transmission & Distribution) to the tune of $300 billion and investment in core industries like steel and cement. Private sector has accounted for around 36 per cent of investments in current Five Year Plan (2007-12) and is expected to account for around 60 per cent of planned

TOP PICKS

L&T (CMF: U,681) has witnessed a strong order inflow in _ the past few years. At present, its order backlog is at a historical high. This momentum is expected to continue in the next few years as capex activity in LEd'S core end-markets returns on a strong note and as the company diversifies into power (generation equipment and nuclear energy) and defence

investments in 12th Five Year Plan. Going forward in next fiscal, top line of companies in this sector will grow by 18-20 per cent on back of improved off-take of orders from power sector and revival of capex cycle in core industries. If we look around most of the sectors like metal, heavy engineering etc could benefit.

(that are characterised by large, highvalue add orders). The management has guided for 25 per cent growth in order inflows for FY11E. Going ahead, the market expects value unlocking by divesting a stake in its core subsidiaries like LIirT Finance Holdings, L&T InfoTech etc, will lead to huge value creation for Llrt's shareholders.

GAIL (CMF: ~488) is India's flagship natural gas company, operating

in various business segments including exploration & production, LPG production, petrochemicals, transmission, distribution and marketing of natural gas. GAIL plans to double its gas transmission and petrochemicals capacity in the next few years. With the current capital expenditure plans in place, GAIL offers a lot of safety and visibility of earnings growth to investors over the next few years.

CHERRY PICKS. STOCKS TO WATCH FOR

• Hindustan Zinc (CMF: U,345) is engaged in production of zinc and lead ingots. It is the world's largest integrated player and one of the lowest cost producers of zinc and lead. It is a debt-free company having huge cash and cash equivalent of U3,OOO crore. Going forward any improvement in zinc prices will lead to margin expansion for the company.

.. Jagran Prakashan (CMP: U65) is likely to gain on the back of its leadership position in UP (the largest print market in terms of readership and print), strong position in growing regions like Bihar and [harkhand, better I ost efficiency, phased and planned expanslon into other forms of media businesses, and a wider portfolio (induding Mid-Day).

.. CRISn. (CMF: ~5,900) is the market leader with 65 per cent in corporate credit rating and 55 per cent market share in bank loan rating, which will continue to benefit from strong credit growth of 20 per cent CAGR over 2011-13 and BASEL II policy, as a large number of entities are still to be rated. Further, its recent acquisition of Pipal Research in the quarter ended December 2010 is going to boost research revenues with the seg-

ment expected to register 22 per cent CAGR in revenues over 2010-12. CRISIL is set to benefit from the estimated $800 billion spend on infrastructure from FYIO-14E ($1 trillion in the XIIth Five-Year Plan), as it will provide a huge opportunity to the company to expand its infra and risk advisory services segment.

• Blue Star (CMF: N02) is the largest central air-conditioning and commercial refrigeration company in India, present in a high value-added bus'iness, as reflected in its high return to equity (RoE) profile. The company is poised for strong growth in the years to come, based on positive business outlook acro.., all the three segments, a healthy order book and the acquisition of D.S. Gupta Construction, which will complement the company's service bouquet.

.. Balaram.pur Chini (CM!': ~77) is expected to gain from volumes. The higher availability of sugarcane would increase sugar sales volume of the company by 40 per cent in the current year. With domestic sugar prices crossing no per kg and sugarcane cost at ~22 per kg, margins for the company would improve considerably. Simultaneously, an increase in

ethanol prices to ~27 per litre would also add to margins. It is believed that the stock is trading at the lower end of the replacement cost band and looks attractively valued.

• Greenply (CMP; U85) has forayed into the lucrative, high-growth modified density fibre (MOF) particle board market, with the largest MDF plant in India, which commenced in Q4 ended December 2010. The company doubled its laminate capacity in FYlO and the new capacity is also running at full capacity resulting in strong revenue growth. It is further expanding the plywood capacity by end of this year, which would add another H5 crore to the top line in FY12.

.. TAJ GVK (CMF: n21) is a hospitality player. With delays happening on the supply side, hotel industry demand growth is expected to outpace the growth in supply over FY 2010-13. Positive signals such as improving Foreign Tourtst Arrivals (FTAs) and pick-up in business sentiment has resulted in hoteliers witnessing higher Occupancy Rates (ORs) and there are signs of further pick-up in Average Room Rates (ARRs) - all three important parameters to plac_e a bet on a hotel stock.

• LANCELOT JOSEPH

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