Betting On Winners

Best picks among the 50 stocks in BSE-200 that have more than doubled since 2008.
Rahul Oberoi & Sarbajeet K Sen        Print Edition: December 2013
Top stocks in BSE-200 that have risen multifold since 2008

On 8 January 2008, the TTK Prestige stock was at Rs 202, while the Bombay Stock Exchange Sensex ended the day at 20,873. Nearly six years later, on 7 November 2013, while the Sensex was around the same levels, TTK Prestige's performance has been stellar; it has risen 15 times to Rs 3,259.

The period also saw Eicher Motors rise 897% from Rs 402 to Rs 4,012, Lupin 618% from Rs 122 to Rs 876, and Glaxo Smithkline Consumer Healthcare 569% from Rs 699 to Rs 4,677.

What is so significant about 8 January 2008? That day, the Sensex not only reached its highest level till then, but also started its relentless slide, aggravated by the global financial crisis at the end of the year, a fall that took it to 8,160 on 9 March 2009 and wiped off investor wealth in a way Indian markets had never seen before.

Since then, Indian equities have been on a rollercoaster ride. After the March 2009 low, things picked up, taking the Sensex to its then all-time closing high of 21,004.96 on 5 November 2010.

Good times did not last long, and the index slid again, touching 15,175 on 20 November 2011. And then, after a period marked by several ups and downs, it reached its highest-ever closing of 21,239 on November 3 this year.


Equities can be one of the most profitable investments provided one buys the right stocks and stays invested for a long period to ride out market ups and downs. In fact, 50 stocks in the BSE 200 index doubled between 8 January 2008 and 7 November 2013, many rising by three-four times and more, in spite of the Sensex remaining at the same level.

Compare this to other assets. A fixed deposit of Rs 200 yielding 8% per annum would have grown to Rs 317 during the period, and that too without taxation. A company deposit offering 11% a year would have taken Rs 200 to Rs 374. The only asset that matched equities is perhaps gold, which rose over 180% in these six years.

What about the future? Though it's not easy to pick sure-shot winners in stock markets, we bring to you a dozen stocks from the list of 50 which have doubled since 2008 that experts say are best-placed to give good returns over the next two to three years as well. But before we take you through these gems, let's discuss some points that you must never forget if you want to make money in equity markets.

Long Distance Run

The remarkable rise of some stocks despite the market uncertainty and volatility shows that equity investment can be highly lucrative over the long run for discerning investors.

"One should know that investments over the long term in good quality stocks will yield high returns," says Deven Choksey, managing director, KR Choksey Shares and Securities.

"Huge returns have been earned by people who have held on to such stocks. Acquisition with a short-term perspective would have given far less returns," says Dipen Shah, head, private client group research, Kotak Securities.

Rajesh Cheruvu, chief investment officer, RBS Private Banking, India, agrees. He says the massive returns given by some stocks over the past five-six years prove the long-term nature of equities. Most of these stocks had languished, unloved, for a long period before coming back in favour after 2009. Markets may test patience, but if the company has the right combination of quality business, strong balance sheet and good management, they eventually discover its worth.

He says that is why investors should be willing to ride out market cycles if they want to gain from their equity investments. "Investors need to be willing to hold stocks for the long term, that is, five-seven years or more. Then, they must focus on companies that have the strength to survive multiple market cycles on the back of competitive/technological edge, their position in a profitable niche, good management and healthy balance sheet. This combination will lead to market leadership, pricing power, superior return ratios and positive cash flow, all of which make the enterprise stable and sustainable over the long run."

Going For Quality

Experts advise investors to focus only on quality stocks backed by good earnings growth and management record.

"These top performing stocks have exhibited phenomenal growth in earnings of 20% a year for the past five years. Though there may be interim volatility due to news flow, stocks of companies which show consistent profit growth outperform the market. Over the long term, earnings growth takes precedence over valuations. Therefore, stocks that deliver consistent earnings growth will continue to attract investor interest even if they command rich valuations. It is interesting to note that the top 15 performers' earnings CAGR (compounded annual growth rate) was 37.6% while the 15 worst performing companies reported an earnings CAGR of -28% between 2007-08 and 2012-13," says Pankay Pandey, head of research, ICICI Securities.

Sonam Udasi, senior vice president and head, research, IDBI Capital Markets, says it is better to bet on companies that have built good business models. "During the last five years, stock markets have rewarded cash-rich defensive sectors and punished leveraged companies in an environment of rising interest rates and growing pressure on cash flows due to economic slowdown and global uncertainties. This proved again that companies that generate regular cash flow and have solid business models tend to manage economic shocks better and deliver steady growth. Thus, they manage to sustain valuations in good times and expand the valuation premium in tough times," says Udasi.

"Investors should focus on fundamental strengths of a company's business model and its ability to sustain growth over the long term rather than the size," says Rajesh Cheruvu of RBS Private Banking, India.

Alex Mathews, head of research, Geojit BNP Paribas Financial Services, says stocks rise because of companies' "strong brand names, diversification, good managements and strong financials, especially when financial markets are facing tight liquidity and high borrowing costs."

Choksey says it was the domestic plays with good fundamentals that emerged winners after the 2008 crisis. "Post-2008, the global economy never recovered the way it was expected to be. Stocks with domestic growth story linked to consumer spending have been the clear gainers in the last five years. Over long periods, these stocks kept performing fundamentally, which we believe led to huge returns. Business modelbased consumer spending (B2C) has shown resilience in terms of growth, profitability and return ratios compared to B2B businesses, which is reflecting in returns from stocks over the period," he says.

Buy and Hold

Since equity investing is a long-term game, investors should adopt a buyand-hold strategy while being selective in stock-picking. "Holding on to fundamentally-sound stocks for the long term definitely creates wealth for investors. However, one should be watchful and keep track of the performance and fundamentals of these stocks. As long as the fundamentals remain strong, a buy-andhold strategy will pay rich dividends," says Dipen Shah of Kotak Securities.

Pandey of ICICI Securities seconds Shah. "While churning may lead to quick gains, it is not always possible to enter and exit at opportune levels. Moreover, increased volatility makes timing the markets all the more difficult. We, therefore, advocate a buy-and-hold strategy with focus on stocks with sound fundamentals and balance sheets. However, even in a buy-and-hold strategy, it is imperative to monitor the stocks at regular intervals and exit if the company's performance is not on expected lines over a long period," says Pandey

Sonam Udasi of IDBI Capital Markets feels a buy-and-hold strategy works for investors who are wellinformed and remain up-to-date with the companies they choose to invest in. "Good cash flow generating companies with high return on equity and capital and long growth record are ideal for the buy-andhold approach," she says.

Stock Picks

ASIAN PAINTS

Asian Paints makes a wide range of decorative paints, varnishes, enamels, and black & synthetic resins. The company, through its subsidiaries, also makes specialty industrial chemicals and vinyl pyridine latex products, used to make rubber tyres.

The company reported a 37% rise in earnings for the quarter ended September 2013. Its wholly-owned subsidiary, Mauritius-based Asian Paints International, recently increased its holding in Berger International, Singapore, to 96%, via an open offer.

"A good monsoon will increase rural incomes, which may push up sales. Higher economic growth forecast indicates momentum for both top line and bottom line. We see the stock near Rs 1,300 by the end of 2016," says Alex Mathews, head of research, Geojit BNP Paribas Financial Services.

On November 14, it was trading at Rs 514.

WHY BUY
>> The company reported a 37% rise in earnings for the quarter ended September
>> A good monsoon will increase rural incomes and, thus, push up sales



INDUSIND BANK

The bank, which went through transformation after Ramesh Sobti took over as the chief executive officer in February 2008, has a number of hidden strengths, says Saikiran Pulavarthi, head of research, Espirito Santo Securities.

The bank's return on equity has risen from 7% in 2007-08 to 17% at present. It combines the strengths of a bank and a non-banking finance company to target a niche segment for its consumer finance business-small road transport operators, single truck owners and retail customers looking to buy vehicles.

"The bank's commercial vehicle, car, two- and three-wheeler, loan against property and personal loan businesses have sustainable competitive advantages and in our view are immune from any macroeconomic slowdown. We have a 'buy' rating on the stock, whose fair value is Rs 593, 33% more than the current level," says Pulavarthi.

WHY BUY

>> The bank's return on equity has been seeing a steady rise over the last few years.
>> Has a formidable sales force and more than 1,300 customer touch points.



INFOSYS

After many quarters of massive swings in earnings, Infosys is back to a return-focused investment approach. It had built up a cost base without a commensurate increase in revenue growth. Now, it is cutting excess cost and making more efforts on the sales front, which should improve growth and margins. According to experts, Chief Executive SD Shibulal recently talked about pent-up demand and improving spending in banking and financial services. This has been Infosys's most positive commentary in the last eight quarters.

"Moreover, with growth in the US improving, we expect discretionary spending to improve by the end of this year. With Infosys trying to bring back its old philosophy of predictability, the possibility of re-introduction of full-year earnings per share guidance in the near future cannot be ruled out. The stock can touch Rs 3,670," says Saikiran Pulavarthi, head of research, Espirito Santo Securities.

WHY BUY
>> Is cutting excess cost and making more efforts on the sales front
>> Revival of growth in the US will increase demand for its services



ITC

ITC is one of India's top private companies with presence in cigarettes, fast moving consumer goods, or FMCG, hotels, paperboards and specialty papers, packaging, agriculture and information technology. While it is a leader in its traditional businesses of cigarettes, hotels, paperboards, packaging and farm exports, it is rapidly gaining market share in its FMCG businesses. This growth is the fastest among consumer goods companies operating in India, says Nielsen.

According to a research report of Prabhudas Lilladher issued on November 1, ITC's revenue will grow to Rs 34,595 crore in 2013-14 and Rs 39,627 in 2014-15. In 2011-12 and 2012-13, the figures were Rs 25,174 crore and Rs 29,901 crore, respectively.

"Our three-year target for the stock is Rs 450-480 (30-32 times the expected 2015-16 earnings per share of Rs 15)," says K Sandeep Nayak, executive director and chief executive officer, Centrum Broking.

WHY BUY
>> Rapidly gaining market share in the FMCG business
>> Likely to see decent profit growth in the next few years



LIC HOUSING FINANCE

LIC Housing Finance is one of India's largest housing finance companies. It provides long-term finance to individuals for purchase, construction, repair and renovation of new and existing houses.

For the quarter ended September 2013, LIC Housing Finance registered a net profit of Rs 310.07 crore, up 27.5% from Rs 243 crore in the corresponding quarter a year ago.

Net non-performing assets, or NPAs, were 0.44% of advances as on September 2013 as against 0.28% as on September 2012.

Dipen Shah, head, private client group research, Kotak Securities, says, "We have seen LIC Housing Finance consistently maintaining its NPA below 1%. The recent non-convertible debenture issuances have come at more than 50 basis points lower than the rates touched during mid-September. The stock is trading at reasonable valuations."

WHY BUY

>> LIC Housing Finance has been consistently maintaining its NPAs below 1%.
>> Trading at reasonable valuations.



LUPIN

Lupin is reaping the fruits of geographical diversification that it has been undertaking. It has established a significant presence in the US by focusing on limited competition, niche therapies such as oral contraceptives, dermatology and ophthalmology, and acquiring small but profitable brands at the right price. Lupin is the fifth-largest generics player in the US, the world's largest market for pharmaceuticals. It has a long product pipeline in the US (183 ANDAs filed, 92 approved and 57 launches) that can take care of growth for the next four to five years.

"In the domestic formulations segment, Lupin has been increasing its presence in the lucrative area of chronic therapies. It is slowly but surely establishing itself in other geographies as well. A high growth rate of 15%-plus, debt-free balance sheet, good working capital management and management pedigree are some differentiators for the company," says Pankay Pandey, head of research, ICICI Securities.

WHY BUY
>> Has a long product pipeline in the US.
>> A high growth rate of 15%, a strong balance sheet and good working capital management are big positives.



MRF

MRF is the country's largest tyre maker with a dominant market share of 30%. It has been on the path of fast growth for a number of years, driven by the rising number of automobiles in the country.

Around 76% of MRF's production is absorbed by the replacement market, which is largely unaffected by fluctuations in the industrial economy. In the first quarter of 2013-14, natural rubber prices fell 12.5% to Rs 168.7 per kg, a trend that's likely to expand margins.

"We expect revenue and profit growth momentum to continue due to expected demand revival in the replacement segment and softening of natural rubber prices. A 5% fall in rubber prices will improve earnings by Rs 350 per share. The stock is trading at 6.4 times 2014-2015 estimated earnings per share of Rs 2,459. Our three-year target for the stock is Rs 24,000," says K Sandeep Nayak, executive director and chief executive officer, Centrum Broking.

WHY BUY
>> Replacement market, which is not affected by changes in the industrial economy, accounts for 76% sales.
>> Fall in rubber prices likely to expand margins.



ORACLE

Oracle is a global leader in providing software to the financial services industry. Its margins are over 30%, one of the highest in the industry. The return on capital has been above 20%.

"Oracle Financial Services Software is looking attractive considering the 13-14% compounded annual growth rate expected over 2013 and 2015 and strong balance sheet that has cash of Rs 653 per share (20% of the stock's current market price)," says K Sandeep Nayak, executive director and chief executive officer, Centrum Broking.

Oracle Corp of USA has about 75% stake in the company. "The current market cap of the company is $4.5 billion. In case of a buyout, the cost of buying minority shareholding even at a 30% premium will be $1.5 billion. This is quite possible in the next few years as the parent has about $14 billion net cash. Our three-year target for Oracle Financial Services Software is Rs 4,500," says Nayak.

WHY BUY
>> Has a lot of cash; enjoys one of the highest net profit margins in the industry (over 30%)
>> Chances of the parent buying out minority shareholders



SUN PHARMACEUTICALS

Sun Pharmaceutical makes drugs in the areas of diabetes, cardiology, neurology, psychiatry and gastroenterology. In 2012-13, its income was Rs 11,239 crore. Prabhudas Lilladher expects revenues of Rs 14,312 crore and Rs 15,949 crore in 2013-14 and 2014-15, respectively.

"Many institutional investors are bullish on the company's subsidiary, Taro Pharmaceutical, and expecting that higher sales of its key cancer drug, Doxill, can support the stock," says Alex Mathews, head of research, Geojit BNP Paribas Financial Services.

On November 14, the stock was at Rs 599.65. "It can touch Rs 1,750 in the next three years," he says.

WHY BUY
>> Income likely to see a decent rise over the next two years
>> Cancer drug from Taro, Sun's subsidiary, expected to do well



TATA CONSULTANCY SERVICES

Tata Consultancy Services, or TCS, reported a 23.86% rise in net profit in the July-September quarter. Market experts say economic recovery in developed countries may help the company get more orders. The management, too, is optimistic on the demand front, backed by more clarity in decision-making by clients and timely scale-ups.

"The company has been able to mine deeper into existing accounts as well as win new large deals. Target valuations are at a premium to peers as the company has been clocking industryleading growth rates while sustaining margins for several quarters," says Dipen Shah, head, private client group research, Kotak Securities.

WHY BUY

>> The company reported a 23.86% rise in net profit in the July-September quarter. Has a lot of cash on the balance sheet.
>> Has been clocking industry-beating growth rates for several quarters.




Triggers For Exiting

But what if your investment bet is turning out to be a losing one? When should you exit a stock? Experts suggest some clear triggers.

Pankaj Pandey says investors should set definite exit points at the time of buying. "It is important that investors define an exit point at the time of buying. If the company is not delivering on expected lines, it is best to exit," he says.

K R Choksey advises segregating trading and investment portfolios. "All trading portfolio stocks should be sold as and when the events related to individual stocks are over. One should always set a stop-loss in trading stocks. As far as investment stocks are concerned, all fundamentally good stocks can be held till they reach their intrinsic value or are fairly valued," he says.

According to Dipen Shah, any change in a company's business strategy should send alarm bells. "The most important trigger is the change in fundamental positioning of the company or the management strategy. In a dynamic world, even a long-term investor should be agile, as fundamentals can deteriorate fast. Also, if the company moves away from the desired path, one should re-look at the stock and consider all available options. Such are the stocks that have eroded in value over the past few years," says Shah.

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