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Finally, time to get greedy

Dipen Sheth     October 15, 2008

The market’s cracking and not a minute too soon. For a few months now, we have been sitting patiently on cash in the belief that the economic facts at our disposal do not add up. The Sensex hit an intra-day low of 10,741 on 9 October, falling by an astonishing 50% from the intra-day high of 21,207 exactly nine months ago.

We’ll get greedy soon, now that others are getting fearful. This is perhaps the last fortnight when we resist the temptation to buy. This does not mean the market is going to turn up dramatically anytime soon. It’s just that we might be ‘somewhere near the bottom’.

In the previous portfolio review, I listed potential stocks to buy from sectors such as technology, capital goods, construction, metals, energy and power. That still leaves quite a few sectors that matter for any balanced portfolio. Foremost among them, and at the centre of the ongoing economic upheaval, is, you guessed it, finance.

If you have to pick a proxy among banks, SBI becomes the automatic choice. I’d disagree. It might still be the largest bank around and has an incredible reach and deposit franchise, but what part of incremental accounts and deposits do PSU banks garner? And so, where are their borrow-lend spreads headed in the long term? Once the worst of perception fears (and FII fire sales) have played out for large private banks, I’ll go back to HDFC Bank, Axis Bank and, maybe, even ICICI Bank. The hidden gems are the Federal Bank and PFC .

In keeping with its defensive nature, the consumer goods & services sector has provided solid protection in the recent meltdown. Hindustan Unilever is up about 20% since early July and has surely been the best performing large-cap stock in this period. Yes, Indian demographic dividend is finally yielding strong visibility for consumer firms. I will look out for players with strong distribution reach, category domination and a good product launch track record. The candidates: Nestle, Hindustan Unilever, Glaxo Consumer and Colgate.

Healthcare for us includes pharma companies, hospital companies as well as healthcare equipment manufacturers. Our current favourite, Opto Circuits, is languishing in single digit PEs and is worth accumulating at under one-third of its recent peaks. Among the largecap pharma stocks, Ranbaxy seems to have been excessively beaten down due to negative news flow on the regulatory front, and offers a long-term investment opportunity.

But this sector is known more for its lack of transparency and jargon than for clear chances to find great stocks. Sun Pharma, Dr. Reddy, Lupin, Glenmark , Jubilant and Divi’s are all stocks that will come up on our radar. Your guesses are as good as mine when it comes to cherry-picking from this obtuse and opaque lot. A potential longterm concept pick for readers to debate: Apollo Hospitals.

The automobiles sector will go through some more pain. It’s a little like airlines—large enough to be visible and seeming to matter, but almost never rich on franchise or pricing power to make it attractive for investors. Safety and cash considerations ride foremost here, making Maruti, Hero Honda and Exide the only sensible choices.

A recent crash in dry bulk rates, slowing trade and softening oil and commodity prices do not augur well for logistics & shipping. Port development companies may find that traffic projections (and tariffs) were too audacious. Regulatory changes in the shipping industry may keep owners of younger and diverse fleets in better shape. We’ll have to choose either Great Eastern and Shipping Corp. or Sical Logistics.

Sectors like textiles and chemicals will not figure easily in portfolios that we construct after such stressful times. Still, if you must, we’ll consider Bombay Rayon (an aggressive integrated garment exporter) from the textiles space, and Tata Chemicals (a relatively safe soda ash+fertiliser play).

Finally, among the diversified lot, I like Sintex because its management can spot high-growth businesses (structured fabrics, plastic moulding, telecom shelters, prefabs, monolithic construction), build them quickly and create sustainable competitive advantages. But will they subscribe to warrants that they issued themselves at Rs 454 when the stock is trading at Rs 225 (down over 60% from the peak)? If they do, we’ll accumulate this one.

Send in your ideas for our shopping list and we’ll put our cash reserves to good use.

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