Small Business
Pages: [1] 2
Expect moderate returns in 2010
Consequent to the sharp run up in markets in 2009, investors will have to be careful in picking stocks while lowering their return expectations - Investing for children is no child"s play - Sensex greets UPA with 2,111 pt rally - Sensex closes in the green for second week in a row - Japan GDP shrinks 4% in first quarter - Chandigarh region eyes 11% growth in tax collections - Citi sees India Inc slowdown in next fiscal too After the astonishing performance in 2009, which has helped Indian stock markets emerge among the best performing markets globally with year-to-date returns of almost 80 per cent, the year 2010 could prove to be a disappointment. The BSE Sensex has more than doubled since its lows of sub-8,000 levels in March 2009 is no secret. However, the Sensex now trades at 16 times its estimated 12-month forward earnings wherein most of the positives, primarily on account of improving economic fundamentals and corporate earnings, seem to be priced in. Notably, since the up move has been due to the expansion in price-earnings (PE ratio) multiples, it is the turn of corporate earnings to catch up and make a case for the valuations to sustain at higher levels. It is largely due to these reasons, experts believe that the markets will remain in a narrow range and suggest that the Sensex may provide returns of about 10-15 per cent by the end of December 2010. Most brokerages have set a 12-month target of 19,000-21,000 for the Sensex. Their modest expectations are also due to some concerns that will have to be overcome, which in a way indicates that investors need to be cautious as the risk-reward ratio is not as favourable as it was in 2009. Cautious mood... The tightening of liquidity and hike in interest rate, which is pretty much on the cards, could dampen sentiments of the markets, believe experts. The other concern pertains to the strength of global economic recovery besides, a roadmap regarding withdrawal of stimulus packages (by different countries) and its likely impact. Thirdly, although global liquidity is high, with many Indian companies lining up to raise funds, it will test the ability of the markets to absorb the increase in supply of paper. Since global markets have seen the dollar weaken, leading to demand for real assets like commodities, any sharp rebound in the dollar against major currencies could reverse some of the dollar carry-trade (investors take cheap dollar loans with an aim to make better returns by investing in other asset classes) and pose additional concern. Lastly, concerns pertaining to sovereign risks like the episodes of Dubai and Greece, could trigger a sell off in emerging equity markets, and impact the ongoing recovery....but, still positive The markets are positively hoping that India’s government would unleash major reforms, including implementation of Goods and Services Tax (GST) and Direct Tax Code (DTC), which will provide a stepping stone for the next leg of economic growth. Government’s fiscal prudence by speeding up the disinvestment process (selling small stakes in public sector enterprises) would also be closely watched. However, at this point in time, since the concerns are slightly more than the positives and a lot of the good news is already priced in, the return expectations from the broader market are moderate. Experts, thus, suggest that in order to get superior returns in 2010, the best investment strategy would be to adopt a bottom-up approach namely, picking individual companies, particularly in the mid cap space. The reason for being selective is primarily due to the fact that many companies are still surrounded by concerns (like excessive debt, low demand, etc) and are yet to show clear signs of a revival in their earnings. Below are ten companies, which should do well and deliver above-market returns in 2010. Most of these lead in their businesses, are well-managed and have strong entry barriers. More importantly, their future prospects look good. Although a few have high-debt on their books, they are experiencing a revival in demand for their products and services and are taking steps to de-leverage their balance-sheets. This along with relatively cheaper valuations will help them deliver better performance as well as returns. To know more on individual companies, read on. HDFC Higher liquidity and low interest rates have lowered HDFC’s cost of borrowings. This could cushion it’s margins, in spite of the company’s low home loan rate offerings starting at 8.25 per cent. The company is observing good demand in the Western and Southern regions. Although interest rates are expected to inch up in 2010, demand for home loans is likely to remain healthy on the back of an improving economy. HDFC’s overall loan book is expected to increase by 20-23 per cent in 2010-11. It’s recent acquisition of Credila Financial Services gives it an entry into the education loan segment, which is seen growing at 25-30 per cent annually. Further, value unlocking would happen if its 10-year old subsidiary, HDFC Standard Life, comes out with an IPO. HDFC is trading at 3.5 times its 2010-11 adjusted book-value and can deliver over 20 per cent returns. TOP PICKS FOR 2010 in Rs crores Net sales Net profit Market Cap PE (x) (Rs) PE (x) Sept 09 % chg Sept 09 % chg FY10E FY11E HDFC 3,872.0 16.7 2,509.0 14.7 75,798.0 30.2 2,652.0 4.4 4.0 Indian Hotels 1,338.0 -26.6 117.0 -70.0 6,975.0 46.4 96.0 35.1 21.0 Jain Irrigation 2,339.0 20.4 153.0 13.3 6,267.0 37.5 830.0 24.4 16.0 Larsen & Toubro 34,313.0 16.6 2,978.0 26.9 100,977.0 21.5 1,682.0 24.8 21.0 Pantaloon Retail 6,608.0 20.7 148.0 11.9 7,654.0 51.7 371.0 29.7 21.0 Reliance Infra 9,966.0 28.1 1,221.0 5.7 24,910.0 20.4 1,100.0 16.1 16.7 SBI * 58,732.0 26.4 13,022.0 38.0 140,823.0 11.1 2,218.0 2.6 2.1 Suzlon Energy * 24,988.0 34.3 -236.0 13,730.0 88.0 80.2 17.6 Thermax 2,902.0 -10.5 266.0 -3.0 7,075.0 26.1 94.0 26.7 20.5 United Phosp. 5,129.0 17.4 504.0 29.7 7,286.0 14.8 166.0 13.6 10.2 PE & Financial figures are for 12 months ended September 2009 % chg is for the corresponding trailing period, For banks: Net sales=Total income and P/E is P/Adj BV * Consolidated E: Estimates Source: CapitaLine Plus Indian Hotels The rise in occupancies in the second and third quarters of 2009-10 indicates a change of fortunes. Compared to 52 per cent occupancy in June 2009 quarter, the same stood at 60 per cent in September quarter. The third quarter has started well; analysts expect occupancies to average around 80 per cent in the second half of 2009-10. This is on the back of an increase in tourism and corporate travels. Apart from the domestic business, the long awaited turnaround in profitability of international properties would also boost Indian Hotels’ earnings. Room rates, too, have improved at select properties, and if the trend continues it would augur well for the company. Jain Irrigation Jain Irrigation, a leading company in micro irrigation systems (MIS), food processing and pipes, is a good play on agriculture growth and rising farm incomes. Its MIS division is expected to grow by 30-35 per cent over the next two years as penetration levels increase due to the efforts by various state governments. The company is exploring new markets and is further expanding its equipment range to cover crops such as cotton, groundnut, potato and vegetables. SOME MORE PICKS in Rs crores Market cap CMP (Rs) Trailing PE (x) Bartronics India 447.0 143.4 4.8 Crompton Greaves 15,432.0 421.0 23.0 IRB Infra 8,048.0 242.2 34.6 IVRCL Infra 4,789.0 358.7 21.5 K E C International 2,854.0 578.5 35.5 Lupin 13,020.0 1,465.0 22.7 M & M 29,713.0 1,061.9 21.7 Opto Circuits 4,196.0 229.4 17.7 Praj Inds. 1,902.0 103.0 15.9 Sun Pharma 32,386.0 1,563.7 22.8 Benefits will also come from the expected improvement in profitability of its overseas subsidiaries. Though its pipes and food processing (over 55 per cent of total revenue) businesses are seen growing at a relatively slower pace, they should also do well on the back of improving demand and lower input costs. Larsen & Toubro The revival in industrial capex, particularly in the power sector, along with higher spending on infrastructure mean better prospects for India’s largest engineering and construction company, L&T. Notably, the gains from its diversification into growing sectors like power equipment, shipbuilding and forging along with huge opportunities in nuclear power and defence equipment, will start paying off in the form of higher order inflows in the coming years. L&T is also foraying into the power generation segment with an aim to have 7,000 mw capacity over the next five years. Meanwhile, it’s existing order book of Rs 81,623 crore (2.3 times 2008-09 revenues), provides good visibility, and should drive revenue growth in the coming years. In terms of profits, analysts expect it to grow at about 20 per cent over the next two years. Pantaloon Retail An improving economic and employment outlook as well as encouraging demographics suggest better days ahead for the organised retail players. For Pantaloon, it expects revenue growth to average at 25 per cent over the next two years aided by its plans to nearly double its total retail space to 25 million square feet by 2013-14. Its focus on cost efficiencies should ensure that profits grow faster. The company plans to raise Rs 1,000-1,200 crore through various instruments to help fund its expansion plans and repay debt. Lastly, its move to reorganise its businesses into separate entities should help unlock value in the long run. Reliance Infrastructure Reliance Infra could be a good investment given its low valuations and growth in the construction and power businesses. The company’s EPC relatedPages: [1] 2