Forget about sifting through thousands of stocks in the market to select potential winners. One measure to judge whether a stock can do well is to see how many mutual funds hold them in their portfolios. The more widely-held the stock, the better its chances of doing well.
Usually, the most popular stocks with mutual funds are companies with huge market capitalisations. Liquidity makes it easier to enter or exit stocks. Besides, fund managers also want to keep a big chunk of their portfolios in stocks that closely follow their benchmark indices. Still, not all the liquid stocks make it to the 10 most popular stocks.
Fund managers usually pick these companies after looking at their future potential, their valuations and whether they can give better returns. Says Bhavesh Shah, VP (Research), Asit C Mehta Investment Interrmediates, a broking firm: “Since Indian mutual funds are doing a good job of giving decent returns, imitating their strategy could prove rewarding.” Not surprisingly, these companies are from the core growth sectors of the Indian economy. In graphics: The most popular Stocks
Reliance IndustriesIt’s not surprising that this index bellwether is the most popular stock among Indian mutual funds. Says Hitesh Agrawal, Head (Research), Angel Broking: “With nine oil and gas discoveries during the last financial year and a portfolio of exploration blocks, the company holds great promise in the exploration business.” Reliance Industries’ (RIL’s) petrochemicals business is also benefitting from strong demand and firm product prices in both the domestic and international markets, says Agrawal. Additionally, the refining business is expected to perform better on the back of higher margins and volumes growth after Reliance Petroleum’s new refinery becomes operational later this year.
This, along with growing contribution from the retail business, provides a well-diversified growth opportunity. Angel Broking maintains a buy on the stock with a target price of Rs 3,344 over the next 12 months.
Larsen & ToubroEngineering giant Larsen & Toubro (L&T) has kept itself busy building new roads, power plants and refineries. It’s Rs 50,000-crore order book, which is nearly thrice its 2007-08 revenues, spans sectors like hydrocarbons, urban infrastructure and power. Also, L&T has consistently improved its operating profit margins, even as competitors are reeling under spiralling steel prices. L&T’s entry into the highly lucrative super-critical boilers and turbines business, through a joint venture with Mitsubishi, is a smart move since BHEL is the only other major player in the field. Analysts recommend that the correction in the market should be used as an opportunity to buy the stock. Analysts at Prabhudas Lilladher maintain an outperformer rating on L&T with a price target of Rs 3,586 over the next one year.
Bharat Heavy Electricals (BHEL) is a dominant player in Indian markets with a sound track record of manufacturing power plant equipment that are suited for Indian coal, which has a low calorific value. The company plans to expand its power plant equipment manufacturing capacity to 15,000 MW by December 2009, from 10,000 MW now. Says Shah: “A strong order-book, ongoing capacity expansion and efforts to tackle competition in the super-critical segment are factors that enhance BHEL’s prospects for earnings growth over the medium term.” Analysts at Prabhudas Lilladher maintain an outperformer rating on BHEL stock with a price target of Rs 1,750 over the next one year.
ICICI BankApart from its bread-andbutter business of banking, ICICI Bank has valuable subsidiaries in broking, life insurance and general insurance businesses that it soon plans to list on the stock market. This will unlock value in the ICICI Bank stock. In its core banking business, it has added a large number of branches during the last quarter of 2007-08, taking the total number of branches to 1,308 from 755 at the end of the previous financial year. The bank has been steadily clocking a growth rate in excess of 20 per cent in its core business. Angel Broking maintains a buy on ICICI Bank with a target price of Rs 1,228 over the next one year.
Mobile telephony has brought connectivity to more than 300 million Indians, and Bharti Airtel is leading the charge. The company has arguably the widest network in the country, covering 71 per cent of population, and has over 860,000 retail outlets. It expects its population coverage to reach 80-85 per cent by March 2009. Mobile revenues constituted around 81 per cent of its total 2007-08 revenues of Rs 27,291.85 crore, and this is set to grow further. Says Shah: “Despite increasing competition and tightening regulatory policies, we believe that with strong earnings visibility and an excellent execution record, Bharti will continue to be the market leader with 25 per cent market share till the end of 2009-10. Accordingly, we continue to remain positive on the stock with a price target of Rs 1,086 over the next six months.”
State Bank of India
State-run banking behemoth State Bank of India (SBI) has begun to move ahead with plans to boost its capital base. In the fourth quarter of the last financial year, SBI reported a bottom line of Rs 1,880 crore, which far exceeded the market expectation of Rs 1,650 crore, largely on account of healthy net interest income, higher fee-income and lower baddebt provisions. During the same period, SBI registered an operating profit of Rs 4,370 crore—which was also way above the market estimates of Rs 3,930 crore—as it cut back on operating expenses. Analysts at Emkay Share and Stock Brokers maintain a buy rating with a price target of Rs 2,200 over the next one year. In graphics: The power players (These companies have sound fundamentals and growth prospects)
Two steps behind
Fund managers have shown interest in other big names, too.
Mutual funds have turned into a formidable force in the stock market over the past five years—their holdings have risen from a negligible amount to Rs 2 lakh crore in equities alone. Not surprising then, the top 20 stocks that mutual funds have invested in account for about 25 per cent of their equity corpus of Rs 48,557 crore. In terms of investment size, Reliance Industries stands tallest with mutual funds holding more than Rs 7,858 crore worth of the stock. This is nearly double that of their second-largest holding, in ICICI Bank, which accounts for about Rs 4,008 crore. This is closely followed by engineering behemoth Larsen & Toubro (Rs 3,687 crore) and banking giant State Bank of India (Rs 3,060 crore).
It’s no surprise then that all but a few of the top 20 companies that mutual funds have invested in are part of the Sensex. That’s because most of these companies have large market capitalisations, diversified investor bases and fairly liquid stocks. The two companies that are not part of the Sensex are Sterlite Industries and Jai Prakash Associates, in which domestic funds hold Rs 1,279 crore and Rs 2,387 crore worth of equity, respectively. Fund managers, too, have shown a preference for the most popular stocks. For instance, ICICI Prudential Infrastructure Fund has the highest investments (per fund) in five of the top 20 companies.
Internationally, IT services companies have been reporting better than expected earnings growth as well as outlook. Market watchers expect Infosys to raise its guidance after the first two quarters of the current financial year. Also, Infosys has been consciously focussing on reducing its dependence on plain vanilla services and has steadily diversified into higher-value solutions like consulting, package implementation, systems integration and infrastructure management. Hence, it has been able to more effectively tap into the IT budgets of its clients by offering them a wider range of services and solutions. Taking these factors into account, analysts at Prabhudas Lilladher maintain an outperformer rating on Infosys stock with a price target of Rs 2,400 over the next one year. In graphics: Other popular stocks
Tata Steel has turned out to be a winner after its acquisition of Corus. With the help of its strategically-located production facilities in Western Europe and its global sales and distribution network, Tata Steel is focussing on achieving high growth in emerging as well as developed markets. Also, international global majors such as Nissan, Volkswagen and Renault have identified Tata Steel as the local steel partner for their automobile manufacturing projects in India. Demand for steel has been rising sharply, which means lots of opportunities for Tata Steel. Analysts at Prabhudas Lilladher maintain a market performer rating on Tata Steel, with a price target of Rs 950 over the next 12 months.
Oil and Natural Gas Corp.
ONGC is investing in improving oil recovery from small and marginal fields and has also decided to revamp its infrastructure at a cost of nearly Rs 15,000 crore. Risks exist in the form of increased subsidy burden that may impact revenues and profitability. Analysts at Prabhudas Lilladher maintain a market performer rating on ONGC with a price target of Rs 1,150 over the next one year.