The top picks for 2008

The year 2007 was a heady one for the Indian stock markets as the Sensex raced from 12,500 to 20,000 levels. The march of the market was fuelled by a booming economy that grew over 9 per cent and strong corporate earnings growth driven by rising domestic consumption. With the India growth story still on track, 2008 may be another good year for the domestic markets. Says Hitesh Agrawal, Head (Research), Angel Broking: “We believe that long-term money will keep flowing into the country as fund managers across the globe look for relatively safer options to park their funds.”

For investors, the rules of the game remain the same: back companies with sound fundamentals and quality managements. We have shortlisted 10 undervalued but quality stocks that have the potential to outperform the markets this year.

Reliance Communications

In just five years since the countrywide launch of its CDMA services in 2002, the Anil Ambani-controlled Reliance Communications has become a leading player in the Indian telecom industry, the fastest growing in the world. Thanks to attractive tariffs and offerings across the telecom value chain, besides valueadded products and services and brand-building initiatives, it has transformed the competitive dynamics of the sector. Says Agrawal: “The mobile subscriber base in the country is likely to continue to grow at a robust pace. There is enough room for growth for all players, and since RCL is the second-largest player in the market, we expect the company to be a major beneficiary of this growth.”

Vesuvius India

As a major manufacturer of and trader in refractories, the company appears poised to capitalise on the Indian steel industry’s plans to almost double its production capacity to 80 million tonnes by 2015. Vesuvius also caters to the ferrous and non-ferrous foundries and glass industries. “This increase in steel manufacturing capacity presents a huge opportunity for refractories in India,” says Agrawal.

Vesuvius is ramping up its production capacity to meet the anticipated demand. In the last eight years, the company has made four acquisitions to supplement capacity. More importantly, it is backed by a strong parent, the Cookson Group, which has a presence in over 30 countries.

Nestle India

A 61.9 per cent subsidiary of global food and beverage (F&B) giant Nestle SA, Nestle India is one of the largest and most diversified F&B company in India. It boasts of some of the most established brands, including Maggi, Nescafe, Lactogen, Kit Kat, Milkmaid, etc.

The company operates in four key segments—milk products and infant nutrition; prepared dishes and cooking aids; beverages and chocolate and confectionery. It is a leader in categories like baby foods, instant noodles and instant coffee.

Says Agrawal: “Nestle has a distinct advantage over its competitors in the F&B space on account of its strong focus on developing products around the nutrition, health and wellness platform and a culture of innovation in its offerings.” Moreover, the company is backed by a strong parent, which is the largest food company in the world.

Aban Offshore

It is India’s largest offshore drilling contractor in the private sector, offering drilling and oilfield services for offshore exploration and production of hydrocarbons to domestic as well as overseas oil industry. The company provides oilfield operators with equipment like rigs or floating production units (FPUs) for the exploration and production of oil from marginal oilfields. All its rigs are deployed on a charterhire basis with reputed oil exploration operators like Oil & Natural Gas Corporation (ONGC) for the entire year.

Thanks to government policies, oil E&P activities in the country have increased considerably leading to a growing and sustained demand for rigs and, as a result, better day rates and long-term income sustainability for drilling companies like Aban. Says Sandeep Nanda, Head (Research), Sharekhan: “Aban’s business model provides opportunities for high earnings growth, which we believe is sustainable.”

HDFC

The company that began its journey in 1977 with the social objective of promoting home ownership by providing long-term finance to households for their housing needs, has today become one of the most sought-after financial conglomerates in India with interests in banking, asset management and insurance through its key subsidiaries.

HDFC has gained significant market share over the past couple of quarters. Also, continuous CRR hikes by RBI have benefitted HDFC the most, as the company doesn’t need to maintain CRR.

Hence, its lending rates have remained stable. Says Nanda: “Its core mortgage business is expected to grow at 25-30 per cent over the next couple of years.”

The company has also created significant value in its subsidiaries like HDFC Bank, HDFC Life Insurance and HDFC Mutual Fund.

Shiv-Vani Oil and Gas Exploration Services

With a fleet of 25 onshore drilling rigs and six seismic survey crews, Shiv-Vani has emerged as the largest onshore service provider to oil and gas exploration companies.

The addition of fresh capacities by the company is welltimed and coincides with the upcycle in the industry. The heightened exploration activity has resulted in severe shortage of resources among service providers, leading to firming up of day rates (or billing rates per km in case of seismic surveys) for various services.

In addition to the favourable business environment, the existing order backlog of Rs 2,950 crore provides a strong revenue growth possibility over the next two years.

The company also has a healthy order pipeline with planned bids worth over Rs 5,000 crore for global tenders over the next few quarters. Says Nanda: “To further consolidate its leadership position and effectively tap the huge opportunity, the company has planned an aggressive capital expenditure programme of around Rs 1,000 crore.”

Patel Engineering

It’s a specialised hydropower player that has been involved in construction of almost 25 per cent of the total installed capacity in the country. Hydropower forms nearly 50 per cent of its current order book of Rs 5,000 crore, followed by irrigation (28 per cent) and transportation and others (22 per cent). Says Ajay Parmar, Head (Research), Emkay Share and Stock Brokers: “We believe that the company will be able to grow steadily over the next four-to-five years as investments in hydropower gain further momentum, thanks to increased focus on hydropower by the government.”

Patel Engineering is one of the few companies with the technical capability to construct hydropower plants in India. Till date, the company has been involved in building 7,000 MW out of the total 32,000 MW installed capacity of hydropower. There is huge potential in the business as the government is planning to add almost 18,000 MW of hydropower capacity over the next five years.

Bank of Baroda

The bank is pursuing a strategy of aggressive credit growth along with protection of net interest margins. It is now focussing on retail lending and SME and agricultural advances to drive growth. BoB has set up loan hubs in several Tier-I cities to market its retail products. Says Parmar: “This new initiative is going to give a significant boost to its retail advances.”

The bank is also focussing on growing its fee income through copromotion of third party products. For this, it has tied up with various financial intermediaries like HDFC Standard Life Insurance, National Insurance Company, UTI Mutual Fund and India Infoline to co-promote their products.

BoB has recently seen tremendous improvement in its asset quality. With lower slippages and robust recoveries over the last five years, the bank has significantly reduced its gross and net NPAS to 3 per cent and 0.6 per cent, respectively.

Tata Steel

Established in 1907, Tata Steel is Asia’s first and India’s largest private sector steel company. It is among the lowest cost producers of steel in the world with a manufacturing network in India, South East Asia, the Pacific Rim countries, and now, the European Union. Its products are targeted at the auto sector and the construction industry. The company has recently increased capacity at its plants to ensure healthy realisations going forward. Says Parmar: “Increased supply in a strong pricing environment is likely to boost Tata Steel’s revenues.”

The acquisition of Corus last year is also expected to be beneficial for Tata Steel as it compliments the company’s product portfolio besides giving it an entry into the lucrative European steel market.

Corus’ superior product offering, impressive client list and strong brand name are likely to ensure premium pricing for its products.

Punj Lloyd

Punj Lloyd is one of the largest engineering and construction (E&C) companies in India offering integrated design, engineering, procurement, construction and project management services, mainly to the energy and infrastructure segment. The hydrocarbon sector is the thrust area for the company, which provides a whole gamut of product offerings like E&C services for onshore and offshore pipelines, gas gathering systems, oil & gas tanks and terminals and process facilities for refineries.

The company operates in numerous geographies and has strong presence in West Asia, Asia Pacific, Africa and South Asia. Overseas business contributed almost 65-70 per cent of FY 2007 consolidated revenues.

Punj Lloyd appears poised to ride on the strong growth in the hydrocarbon sector where proposed capex is pegged at Rs 2,49,800 crore over the next four years. Says Parmar: “Punj Lloyd will reap handsome gains from the opportunities in the energy and infrastructure segments by leveraging its experience and skillsets.”