Stocks that won't fall in market meltdown
24 May 2010, 0218 hrs
IST,Ramkrishna Kashelkar,ET Bureau
After the skeletons popped out of the closets of the world’s largest economy in 2008, it's the time for the weak members of Europe to put their soft belly on display. The fiscal problems that surfaced in some of the Euro zone countries as much capable of disrupting the global economy as the US's financial system fiasco in 2008.
As the international economist Nouriel Roubini puts it,
first came rescue of private firms, and now comes the rescue of the rescuers - ie, the governments. Rumours abound that problems are much worse than what meets the eye.
There is no doubt that what investors have seen in the US sub-prime mortgage crisis makes them more susceptible to such rumours. And as a result the volatility continues. At a time when the markets are gloomy and the media is abuzz with talks on things like fiscal crises, double-dip recession, overheating, debt burdens et al one just can’t be overcautious.
Retail investors, in particular, are cursed to fail in such markets.
- Firstly they are always late to react - be it a rally or a fall.
- And secondly, the doubts ‘what if I sell out today and markets rebound tomorrow?’ or vice-versa never leave them at peace.
It, therefore, pays to build a portfolio that has inherent shock absorbers.
However, if you haven’t installed these shock absorbers already, it is not too late to act. But the end to the current volatility is nowhere in sight and investors can rightly be scared of making fresh investments.
Wouldn’t it, therefore, be just wonderful, if we had a handful of companies that won’t buckle, if the markets were to fall further, but will bounce back, if the stability were to return? Do such stocks exist?
Yes, they do. In fact, ET Intelligence Group has unearthed a few such investment ideas, which fit the bill - they are available at attractive valuations and hold the potential to reward investors once the market sentiment turns positive. And the list contains companies from various industries apart from just FMCG and Pharmaceuticals - the traditional friends in the times of volatility.
We have mainly five types of companies here.
- Firstly there are large brand driven FMCG businesses with large cash generating capacities.
- Then we have companies commanding almost monopolistic leadership in their respective industries.
- There are companies that have recently completed major capex and are going to reap its benefits in FY11.
- A couple of companies that have seen their business models evolve into becoming more robust also figure in the list.
- At the end, we have chosen two companies that have taken a disproportionately bigger hit in the weak market and are now available at attractive valuation compared to their peers.
Brand driven businesses
FMCG and pharma industries have always been well regarded as recession-busters. So much so that in market rallies, when these sectors start picking pace, market observers start predicting a correction. Most of these stocks are
slow gainers, but they hold the capacity to make a new all-time high in every bull-run. One main problem, however, is that owing to their market credibility and a long-history of superior performance,
they don’t come in cheap.
Despite rising food inflation pressuring the profit margins of the company,
Nestle India remains one of the priciest FMCG company on the Dalal Street with a price-to-earning (P/E) multiple of 42. Its market leadership in the niche product category of ready-to-eat food and dairy product has enabled its revenues and profits to grow at a strong pace.
Despite the stretched valuations, it remains a classic defensive stock.
The diversified nature of ITC makes its business model de-risked.
A stronger growth in its non-cigarette businesses is reducing its dependence on tobacco business for forging its future growth. Valued at little over six times its annual revenues and a (P/E) ratio of 26, the scrip appears reasonably valued with limited downside risk.
Its ability to raise dividends year-after-year adds to its attractiveness.
Similarly, Dabur India’s non-cyclical product-mix in consumer care, healthcare, food and retail with strong brand recall and international presence makes it an attractive consumer business. The company has outperformed its peers in the past several quarters justifying its premium valuations at P/E of 32.
GSK Consumer Healthcare (GSKCH) is a market leader in niche category of malt based health drinks with a portfolio of OTC drugs. Although its margins were affected by rising food prices, it has successfully kept competition at bay.
Despite trading at high valuations, this company has limited downside risk given its niche product category and non-cyclical nature of its business.
GlaxoSmithKline Pharma is the third largest player in the domestic pharma market. Its established international lineage, consistent growth, market leadership in many therapeutic areas and strong brand equity work in its favour. The company is aggressively increasing its presence in various therapeutic areas and expanding its field force. Its stock is trading at a P/E of 33.
While these are relatively high valuations, the company is a promising long-term buy - offering limited down side.
Monopolistic Business Model
The country’s largest paints company,
Asian Paints, has enjoyed almost a monopolistic leadership in the decorative paints segment. The company has greatly benefited from increasing consumer spending in the domestic market over the past few years. While the domestic market is the key driver for the company’s growth, Asian Paints has been consolidating its portfolio in the international market.
The company has divested its four loss making units in the South Asian region in order to mitigate the erosion of profitability in its international operations.
Unless there is a significant drop in the consumer demand, the company’s business has limited downside risk. Trading at a consolidated P/E of 27, the company offers a good defensive bet to the long-term investors.
Another company, which is assured of its revenues by nature of its
monopolistic business, is Gail - India’s
largest transporter of natural gas. In the years to come, a vast majority of gas consumers will continue to depend on Gail’s pipeline for a seamless supply of natural gas, which will be a preferred fuel for the coming generations.
Gail has long been a cash-rich company, with very low debt. It will be spending nearly Rs 50,000 crore in the next four years to lay new pipeline and expand its polymer capacity. Defying the overall weakness in the market, Gail’s shares have gained 5.6% last week despite Sensex losing over 3.2%.
Crisil enjoys a similarly dominating position in a highly-competitive industry. Its business of providing rating, research and advisory services is far more insulated than other businesses in financial services domain. Firstly, this is not a fund-based business like lending.
Since the asset base is low, return on capital employed is much higher. Secondly, even in a case of stock market downturn, the demand remains for research and advisory services making it a sustainable business model.
Crisil has always been a
zero-debt company with strong dividend paying record. Its current price-to-earning multiple (P/E) of 28 is lower compared to what it commanded in 2005, 2006 and 2007. This shows that the stock has scope to move up further from here.
Container Corporation of India (Concor) is almost an indispensable company when it comes to transporting goods across the country by rail.
Concor has always enjoyed a dominant position in the domestic container rail freight segment. The company is debt-free and cash-rich, which has enabled it to fund its expansion plans of the past few years entirely from internal accruals. A detailed write-up on page 2 gives a better perspective on the company.
The country’s largest auto component maker Bosch enjoys a similar position in its industry. Its product range is such that every vehicle on the road carry some of the Bosch component right from fuel injection systems to spark plugs to wipers to batteries. Besides, the company is also a market leader non-automotive segments such as hand tools, compact packaging equipment and automotive audio systems. Its continues to introduce latest products in the market thanks to its German parent, Robert Bosch
Its German parent, Robert Bosch is the largest auto component maker and an technology leader.
The company is debt-free and has a history of strong operating cash with ever rising dividend payments. Not surprisingly, at the height of the market meltdown in 2008, Bosch market capitalisation exceeded most of its customers except Maruti Suzuki and Hero Honda. At its current market price, the stock is trading at just 21 times its trailing 12-months earnings and is a good buy.
Completed Capex
In the second category of companies that have completed major capex plans, we have companies like Petronet LNG. Petronet doubled its LNG capacity in the second half of last year with the additional 2.5 MTPA LNG supply starting in January. Its March 2010 quarterly numbers failed to show its benefits as RIL’s cheaper gas flooded the markets.
Completion of Gail’s pipelines in the North India will allow it to increase sales volumes as more customers get connected to the gas pipeline grid. Considering the company’s secured income source by way of regassification charges and its expanded capacities, a P/E of 15 appears attractive.
The pharma major Cipla may not have done well on the bourses in the past few years, but it has been busy building up capacities. In the past three years up to FY09, the company spent nearly Rs 1,700 crore on building its fixed assets.
It is preparing to launch its robust product line in overseas markets including asthma inhalers. The company’s current valuations do not fully reflect these upsides.
JSW Energy is another such example, where the market has failed to reward capacity addition due to the weak sentiments. The company had a very impressive growth in the fourth quarter of FY10, with sales and profit going up almost three times over last year,
aided by commissioning of 600 MW of generation capacity.
The company will be nearly doubling its total generation capacity in FY11, based on the current status of its various projects, which will give a significant boost to its financials. The stock currently trades at a P/E of 22 times, which provides huge upside potential.
The buoyancy in real estate industry is set to do good for Mahindra Lifespaces, which currently has almost 8 million square feet of properties at various stages of launch or under construction. The company predominantly operates in the mid and high-end residential segment in Mumbai, Pune, Nashik, NCR, Chennai and Nagpur. It recently launched its mass housing project in Gurgaon.
It currently has two SEZ’s in Chennai and Jaipur, both of which are seeing a strong traction in the recent past. The company is debt light, which is the main differentiating factor between other players. On an annualised EPS of Rs 23.2, it is trading at a price to earnings multiple of 18, that appears reasonable considering the growth prospects.
Delhi-based Anant Raj Industries continues to monetise assets where it is able to get lucrative prices. In December 2009 quarter, it sold its commercial property of 0.11 million sq ft at Rs 6,500 per sq ft. Net revenue booked during the quarter was Rs 6 crore from this project. The company has been increasing its rental income on a quarter-on-quarter basis, as it booked rental Rs 13.6 crore in December 2009 as against Rs 11.3 crore in the previous quarter. In another mall, the company has been continuously leasing space.
Going ahead, it will be launching two residential projects at premium locations, an IT Park, and also rentals will start coming from its malls. The stock is currently trading at 16 times its trailing 12 months earnings, leaving enough scope to gain in the coming months.
Changing business model:
A focused management can gradually change the business model of a company to bring in better efficiencies or integration that can take it to its inflexion point -a point beyond which the growth will speed up. The first departmental store retailer Shoppers Stop and textile major Alok Industries appear to have reached such inflexion points.
Shoppers Stop has evolved its business model over a period of last decade that will enable it now to
scale up faster in the coming years. It has been derisking its merchandise model with a higher share of consignment as against the bought-out share, while its cost-cutting exercise has started paying off as visible in better margins in the two quarters.
Most of its subsidiaries have already turned profitable with a turnaround in the home solutions and international airport retail venture expected in near future. Its footfalls to sales conversion ratio came down in the March 2010 quarter, but a significant increase in average transaction size and average sales price have kept the like-to-like store growth up.
Going ahead, the company has aggressive growth plans to open 8 stores in FY11, and another 10-12 stores in the next financial year. This will cumulatively add about 1 million sq ft to the existing 20.4 million sq ft of space. These factors enable the company to justify its P/E above 27 and P/BV above 4.7, which are unlikely to weaken in market turmoil.
Alok Industries has emerged as a vertically integrated textile company with five core business divisions viz. cotton spinning, polyester yarn, garments, apparel fabric and home textiles. Its subsidiary, Alok Retail operates its branded stores ‘H&A’ having 216 stores across the country. It plans to expand to 450 shops by 2011.
Over the past 4-5 years, the company has invested heavily to create large production capacities. These capacities plus its integrated business model put it in a unique position to control the raw material costs while producing high-value-added products.
T
his has enabled it to expand its operating profits at a CAGR of 38% in the past five years, against a 22% growth in the topline. Galloping interest costs has so far eroded its profits, but its plans to monetise its real estate assets in near future can address the problem squarely. Considering the huge entry, the company has erected against its integrated business model, the downside appears limited at a P/E multiple of 6x.
Changed valuations
Going out of market’s favour can bring down the valuations significantly. However, if the business model is robust, it doesn’t take long to win back the favour. Pursuing the tariff wars and stringent regulatory recommendations, the telecom industry has been facing a lot of heat and has fallen out of market’s favour.
A steeper fall compared to its peers has made the valuations of Reliance Communications highly attractive, where a further weakness appears unlikely.
RCom lost over 50% since last October as a sharp drop in telecom fares lowered its profitability. The future, however, appears bright.
The company has domestic and global assets in the form of telecom infrastructure in India and under-sea fibre optic network overseas. Its telecom towers are fast gaining tenancy from other operators, which is likely to support its revenue in future. It’s 3G licences win in 13 circles including Mumbai and Delhi gives a better balance between the initial capex fees and revenue prospects. Given its low valuations and asset base, the stock looks attractive at the current levels.
The cement industry also has been worrying over the price realisations and the dampened demand in the upcoming monsoon season could keep it unattractive for a while. However, there is no reason a company like JK Lakshmi Cement should trade at half its book value and a P/E of 3.3x. The company is focusing on northern markets where demand is strong and provides the necessary growth momentum over the medium term. Its cement capacity will grow to 5.3 million tonne from current 4.7 MT during FY11.
One of the key assumptions that have gone in preparing this list is that the current debt crisis in the Europe can be contained and tackled reasonably within the next few weeks. No stock market investments will remain safe if the crisis blows out of proportions into what we saw in 2008.
(With inputs from Amrit Mathur, Ashish Agrawal, Karan Sehgal, Kiran Somvanshi, Ranjit Shinde and Supriya Verma)
http://economictimes.indiatimes.com/articleshow/5966128.cms
