Weight Matters

Rahul Oberoi/Money Today | Print Edition: October 2011

Did you buy shares of Titan Industries, Sun Pharmaceutical, Larsen & Toubro and Mahindra & Mahindra in August 2006? If yes, you would have made handsome gains till August 2011.

The stock price of Titan surged 425% to Rs 205, followed by Sun Pharmaceutical (171% to Rs 490), Larsen & Toubro (168% to Rs 1,609) and Mahindra & Mahindra (127% to Rs 737) during this period. The Bombay Stock Exchange (BSE) Sensex rose 43% during the period.

However, the movement of the market between August 2010 and August 2011, when the Sensex slid 7% to 16,676, would have left you scared. Especially when stocks of such big companies as BHEL, State Bank of India and DLF fell 27%, 28% and 35% to Rs 1,767, Rs 1,974 and Rs 196, respectively.

"Investing in index heavyweights at regular intervals will fetch good returns in the long run."
Vikas Jain
Senior Manager,
Motilal Oswal Securities
In a scenario as gloomy as this, market experts are recommending heavyweight stocks for the long term. Index heavyweights are stocks with high weightage in an index.

"It is good to invest in heavyweight companies for the long term as these tend to be established," says Srikant Shetty, head-equity advisory, Unicon Securities.

"Investing in index heavyweights at regular intervals will fetch good returns in the long run," says Vikas Jain, senior manager, Motilal Oswal Securities.

Between August 2006 and August 2011, which includes the global slowdown years, out of 30 Sensex companies, only two gave negative returns. Tata Motors and Hindalco Industries fell 9% to Rs 148.34 and 4% to Rs 150.35.

Index heavyweights have large market caps. These are usually considered safe for the long term because of sustained returns and high liquidity.

"Index stock requires common sense and a get-rich-slow approach. Generally, you don't have to outsmart the market, you just have to be a part of it. Other than good returns in the long run, if you invest in heavyweights, you can enjoy regular dividends," says Amit Chheda, head equity, Inventure Growth and Securities.

"While investing, you must see whether the company pays dividends. If a company has money to give to its investors, it usually means it is doing well. Companies that pay the highest dividends often see steady growth. Most index heavyweights have a record of paying handsome dividends," says Hadrien Mendonca, technical analyst, IIFL-India Private Clients.

The BSE has 13 sectoral indices - auto, Bankex, capital goods, consumer durables, FMCG, power, TECk, IT, realty, healthcare, oil & gas, PSU and metal. Here, we discuss six stocks that have the highest weights in their respective sectoral indices and have the potential of generating good returns over the next 12 months.

SUN PHARMACEUTICAL: The company completed the acquisition of Israel's Taro Pharmaceutical in 2010-11 after fighting a legal battle for three and a half years. It also launched 38 products during the year.

Performance and Valuation: In 2010-11, the company posted a net profit of Rs 1,383 crore, up 54% from Rs 898 crore in 2009-10. Between April 1, 2011, and August 30, 2011, its stock price surged 10%, or Rs 45, to Rs 490. Market experts say it has the potential to rise further. The stock beat other heavyweights in the healthcare index, Cipla and Dr Reddy's Laboratories, which fell 12.7% to Rs 280 and 7.6% to Rs 1,493, respectively, during the period.

Big and Strong: Sun Pharma and Infosys
The weights of Sun, Dr Reddy's Laboratories and Cipla in the BSE healthcare index are 17% 15% and 12%, respectively.

"The stock has been an outperformer. We expect it to continue to be so. Our one-year target is Rs 520-540," says Sailav Kaji, director, institutional equities, and chief strategist, Padmakshi Financial Services.

INFOSYS: The company has a global footprint with 65 offices and 63 development centres. It has the highest weight in BSE IT (51.95%) and BSE TECk (36.57%) indices.

Performance and Valuation: In 2010-11, Infosys' revenue rose 20% to Rs 25,385 crore as against Rs 21,140 crore in the previous financial year. Operating profit was Rs 9,561 crore, up 15% from Rs 8,279 crore a year ago.

The stock fell 27% to Rs 2,342 between April 1, 2011, and August 30, 2011. It is trading at 12-month trailing PE, or price to earning, multiple of 20. TCS, Wipro and HCL Technologies fell 11.8% to Rs 1,040, 30% to Rs 333 and 12% to Rs 411, respectively, during the period.

"An analysis of Infosys indicates it bottoms at 16x and falls to deep cycle multiples (11x-12x) only during severe global shocks. Our next target is Rs 2,800 by the end of the financial year," says Rajesh Jain, executive vice president and head, retail research, Religare Securities. In rupee terms, the company has projected 5.5-7.3% growth in earnings per share for 2011-2012.

TATA STEEL: The company has the highest weight of 19% in the BSE metal index, followed by Coal India (14%) and Jindal Steel (14%).

Tata Steel has Rs 6,200 crore cash. This is in addition to the Rs 3,880 crore raised in a follow-on public offer in January 2011, taking the total to Rs 10,100 crore. This is sufficient for its 2011-12 capital expenditure. Execution risks are few due to low costs and good progress on expanding capacity in Jamsedpur.

Performance and valuations: The stock has fallen 25% to Rs 468 between April and August this year. The BSE metal index has fallen 25% to 12,097 during this period. Other metal heavyweights such as Jindal Steel and Hindalco have fallen 25% to Rs 519 and 30% to Rs 150, respectively. However, Coal India has risen 8% to Rs 375.

In 2010-11, the company posted a net profit of Rs 6,865 crore, up 36% from Rs 5,046 crore in 2009-10.

Big and Strong: M&M, Tata Steel, Coal India and RIL
The capital structure of the company improved. The debt to equity ratio for financial year 2010-11 was 0.66(x) as against 0.71(x) in 2009-10.

A PINC Research report says the expected improvement in profitability due to lower raw material prices and start of coal mining at Riversdales Benga project, in which Tata Steel has a 35% stake and 40% offtake rights, can boost the stock.

"Tata Steel has a strong business model. Its cash flows are expected to improve. One can accumulate the stock at regular intervals with a one-year price target of Rs 691 per share," says Vikas Jain of Motilal Oswal Securities.

MAHINDRA AND MAHINDRA (M&M): M&M's prospects are looking bright as it has lined up a number of vehicle launches in 2011 and 2012. It is also likely to gain from the rise in demand for diesel vehicles as most of its models run on diesel.

The management is planning to increase focus on non-tractor agri-products such as rice-transplanters (tie-up with Mitsubishi), harvesters and rotavators (tie-up with Maschio- Gaspardo).

"Other than good returns in the long run, if you invest in heavyweights, you can enjoy regular dividends."
Amit Chheda
Head Equity, Inventure Growth and Securities
M&M is a strong rural India play and gains from rising agricultural incomes. The farm equipment sector is estimated to grow 11-13% in 2011-12 due to expectation of a better monsoon and the need for greater mechanisation due to labour shortages.

R Murali Krishnan, head'institutional broking, Karvy Stock Broking, says, "Due to construction activity in Tier-2 and Tier-3 cities, we expect an increase in non-agricultural demand for tractors. M&M is likely to benefit the most from agriculture sector growth as it has nearly 40% share of the tractor market." The closest competitor's share is 20%.

Performance and Valuations: The stock returned 31% by rising from Rs 533 on April 1, 2010, to Rs 698 on March 31, 2011. It rose 176% from Rs 197 to Rs 545 in 2009-10. In comparison, Tata Motors and Bajaj Auto rose 61% to Rs 1,247 and 46% to Rs 1,459, respectively, in 2010-11.

M&M's return on equity (percentage of net profit to equity capital) for 2010-11 was 29%, higher than Ashok Leyland's 25% and Maruti Suzuki's 17%. "Strong growth in rural incomes and new launches can boost the stock and it can touch Rs 814," says a Sharekhan report.

COAL INDIA (CIL): The world's biggest coal miner reported consolidated gross sales of Rs 50,234 crore in 2010-11. It has a weight of 4.31% in the BSE PSU index. The weight of Oil and Natural Gas Corporation is 13% while that of NTPC is 8%.

The company listed on exchanges in 2010. It collected over Rs 2,40,000 crore in its initial public offer, which was subscribed 15 times

Performance and Valuations: Since listing on the BSE on November 4, 2010, the stock has seen several ups and downs. It touched a low of Rs 291 on February 25, 2011, and a high of Rs 414 on June 1, 2011. Since listing, it has risen 9.5% to Rs 374.95 till August 30, 2011. ONGC and NTPC have fallen 23% to Rs 263 and 13% to Rs 169, respectively, between November 4, 2010, and August 30, 2011.

Between August 2006 and August 2011, out of 30 Sensex companies, only two gave negative returns.
According to a report by Aditya Birla Money, buoyed by the February 2011 price increase, higher sales from e-auctions and a rise in dispatches, the company registered consolidated net sales of Rs 14,499 crore in the quarter ended June 30, 2011, up 26.8% from Rs 11,435 crore during the corresponding period a year ago. The stock can touch Rs 398 during the next few months, the report says.

RELIANCE INDUSTRIES: The stock has the highest weightage of 10% in the Sensex and 56% in the BSE oil and gas index. Gas production from the company's most prolific KG D6 block in the Krishna-Godavari basin has been declining, impacting the stock. Also, some big investments in US shale gas assets have also not proved to be worthwhile as of now.

Performance and Valuations: Since the beginning of calendar year 2011, the stock has fallen 26%, or Rs 272. It was at Rs 781 on August 30, 2011. Other heavyweights in the BSE oil and gas index, ONGC and Gail India, have fallen 18% to Rs 263 and 20% to Rs 410, respectively, during the period.

"We don't see the stock moving beyond Rs 840 even if the Nifty rises beyond 5,200. If global financial turbulence leads to a crash in the Indian stock market and RIL falls below Rs 700, investors may buy aggressively. Till then, the stock is likely to move in the Rs 740-840 range," says VK Vijaykumar, investment strategist, Geojit BNP Paribas Financial Services. On August 30, 2011, the Nifty was at 5,001.

Annual dividend per share
According to market experts, any major positive news which can substantially influence the stock has to come from the KG D6 field. The RIL-BP joint venture, which entails an investment of $7.2 billion by BP, is capable of providing a breakthrough in arresting the fall in gas production from KG D6. But this will take time. Other developments are likely to have only a marginal impact on the share price in the medium term.

During 2010-11, the company posted an operating profit of Rs 41,178 crore, up 25% from Rs 33,041 crore in the previous financial year. The debt-equity ratio declined from 0.49x in 2009-10 to 0.46x in 2010-11.

"The Reliance Industries' stock can touch Rs 1,057 over 12 months," says Sanjay Mookim, research analyst, Credit Suisse. It is trading at a 12-month trailing PE multiple of around 18.

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