Business Today

Down, but not out

Some sectors have underperformed, but are bouncing back. Where to find undervalued gems.

By Rishi Joshi        Print Edition: Sept 23, 2007

When the sensex tumbled from 15,795 on July 24, 2007, to 14,919 currently, it registered a mere 5.5 per cent drop. The effect of that fall, however, has been sharper in a few major sectors. For instance, the BSE it index is down 10 per cent in the same period, while the BSE Bankex lost 9 per cent. Others such as the auto and healthcare sectors, too, lagged the broad market Sensex this calendar year.

But while the stock markets seem to overreact, there's a re-rating of some sectors taking place on the street. Traditionally a defensive sector like FMCG, which was largely ignored in the current market boom, is showing signs of bouncing back on the back of strong domestic consumption. Not surprisingly, while the broad market corrected, the BSE FMCG Index returned a smart 4 per cent gain in the last 30 days.

Analysts contend that the market's forward valuations are not over the top, yet not cheap either. Sensex is expected to clock an EPS of about Rs 840 in 2007-08, which results in a one-year forward p-e of 17.7, down from its peak of about 18.8. This appears reasonable though uneven global fund flows could see the market remain range bound in the short-term and increase choppiness. Says Tarun Sisodia, Head (Research), Anand Rathi Securities: "The subprime market woes will peak by the end of 2007. Therefore, the next 3-4 months could witness more than abnormal levels of volatility." But the effects will wear out over the long haul. Concurs Lalit Thakkar, Director (Research), Angel Broking: "The US subprime market is worth $750 billion and the total outstanding debt in the global economy is $100 trillion. The subprime exposure works out to less than 1 per cent of the total outstanding credit. It's not significant to trouble the global economy and it won't be long before the markets get over it."

Opportunities still abound within sectors. And this correction is an opportunity to invest in fundamentally sound companies of sturdy sectors. Cautions Sandeep Nanda, Head (Research), Sharekhan: "Investors must raise the cash levels in their portfolios and improve the quality of the stocks they invest in." Back companies that are domestic consumption and investment demand-driven since then are least likely to be affected in the eventuality of a global slowdown. For instance, the FMCG, telecom and infrastructure sectors are the favoured sectors in the current choppy markets. Yet, analysts also point out that there's value to be had in sectors like it as it has growth stories which could give decent returns over the medium- to long-term.

FMCG

» Growth momentum on back of rising incomes and higher consumer spending.
» Low penetration levels in most categories.
» Greater pricing flexibility for companies in most product categories.
» Will gain from the boom in retail trade.

IT

» Growth in offshoring business expected.
» First mover advantage for Indian companies in offshoring.
» Impressive client base of IT services giants.
» Most domestic companies are clocking robust volumes growth and higher billing rates.
 

Banking

 » No significant exposure to the subprime market.
» Robust credit offtake expected on back of strong economic growth.
» Agricultural and rural financing to be key growth drivers going forward.

FMCG

It's bouncing back on rising incomes and higher consumer spending. Moreover, low penetration levels in most categories and an improved pricing flexibility are the prime growth drivers. FMCG major Hindustan Unilever (HUL), formerly known as Hindustan Lever, is expected to post steady revenue growth as core brands sell with a better pricing power. It's investing in high-class products and expanding its processed food business. Analysts contend, this will reflect in higher volumes. Organised retail, too, will help build and sustain volumes. Another long-time stalwart, Godrej Consumer Products has a strong toehold in the personal care and hair colouring segments. Its recent price hikes will improve margins. The company plans to gain market share (100 basis points every year) through launch of new products. It has a steady dividend payout record, with yields at 7 per cent.

Banking

Subprime market fears have seen banking stocks dip, but now they are attractive too. Most Indian banks don't have any significant exposure to the subprime market. Says Thakkar: "As the credit to GDP ratio is 0.5 times in India as against 1.2 times in China and 1.5 times in the US, the risk here is almost nil." And the country's second-largest bank, ICICI Bank, makes a good investment now. Its focus on urban retail and corporate banking paid off in the past, but now it plans to foray into the rural markets in a big way. A smaller PSU bank, Oriental Bank of Commerce, is efficient on operational fronts. Analysts contend its operating costs will further reduce following a thrust on fee-based income.

Information Technology

Offshoring is taking off in a big way, rupee appreciation and concerns about a us slowdown notwithstanding. The total offshore business potential stands at around $330 billion, according to a NASSCOM-McKinsey report-and just around 10 per cent of this is global offshore revenues. Indian companies, with their first-mover advantage in this space, global delivery capabilities, ever-increasing scale and impressive client base appear set to take full advantage of the opportunities. IT pioneer in India, TCS, is Asia's largest software company and has the highest number of global delivery centres. The company is making a move towards a 'full-service capability' organisation, offering the full range of services. TCS appears well-positioned to reap the benefits of the strong growth expected in the global offshoring industry. On the other side of the competitive divide, Infosys Technologies has one of the best managements-a prime reason to have the stock in your portfolio. Though the company's topline has recently been dented by a stronger rupee, it has continued to deliver strong volume growth and higher billing rates.

Telecom

India is the fastest-growing telecom market in the world and monthly mobile subscriber additions in July 2007 nearly hit the 8-million mark. Despite this, mobile teledensity still stands at a little over 17 per cent, leaving enormous scope for growth. Expansion of coverage area is undoubtedly the key priority for mobile service providers. The government has extended a strong support to the sector. Among the better placed companies that has been the market leader consistently is Bharti Airtel. Says Nanda: "Bharti is the key beneficiary of the consumption boom in the country. Execution excellence has been the reason behind this performance." It gradually outsourced its non-core activities, like hiving off its mobile tower business, which enabled Bharti to save costs and improve efficiency. A close competitor, Reliance Communications has also transformed the competitive dynamics of the sector. Through lower tariffs, attractive bundled offerings, an integrated presence across the telecom value chain, value-added products and services and brand building initiatives, the company has managed to become a leader in the Indian telecom industry. R-Comm owns the world's largest submarine fibre optic cable system, flag Telecom, connecting countries across the globe. Through this, the company has become the leader in the international long-distance (ILD) market.

Infrastructure and Construction

The infrastructure sector has been clocking impressive growth recently of 8-9 per cent. Enhanced investment allocation for infrastructure in the 11th Five Year Plan to $384 billion (Rs 15,74,400 crore), too, will ensure growth for the infrastructure companies.

Construction Industry Develo- pment Council estimates that Rs 14,500-billion worth of investments will be made in construction over 2007-12, which will throw up big opportunities for the construction companies like HCC. It already has a strong order book of Rs 7,856 crore that gives it earning visibility over the next few years.

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