11:50 August 25, 2010
Where is the market headed in the short term?
Domestic news flow has been positive in terms of corporate results, monsoon and IIP. The rate hike of 100 bps is in the price. The 3G auctions and disinvestment exercise would help the fiscal deficit cause. Also, it does not appear as if any material negative is coming from Europe, at least in the near term. Having said that, valuations aren't cheap, but they aren't rich either. The price/earning multiple of 14 for FY12E for Nifty leaves ample room for the upside. Investors can invest in quality stocks. Even if there is a correction, one should buy-on dips. Technical analysis and F&O data suggest that Nifty will range between 5350 and 5450 during this expiry.
And the long term?
With per capita income crossing $1,000, favourable demographics, low debt to GDP, high savings, sub-optimal credit penetration, low export dependence and low penetration in most industries, the economy is set for long periods of high growth. Consumption has led growth for the last 12 months. Now, investment-led growth will pick up. Capacity utilisation rates have been rising in many sectors and, with comfortable debt-to-equity position of corporates, capacity addition will be planned. With the addition of new capacities and given the low base from near zero earnings growth through fiscal years 2008 to 2010, Nifty EPS can witness a CAGR of 45-55 percent between fiscal years 2010 to 2012.
Which are the sectors that investors should have on their radar?
The consumption theme should provide you the zing; and let's also take infrastructure, with $3 trillion government estimate on this front in the Five Year Plan. Also pharmaceuticals. With drugs worth $50 billion going off patent in the US every year for the next five years, the US healthcare bill and the CRAMS (contract research & manufacturing) models will take off since these multinational companies will have to move to low cost bases such as India. One should also watch the auto-ancillaries space. With the domestic auto industry going strong, India is going to be base for auto giants.
Which stocks do you recommend?
Yes Bank. With a historical growth rate of 50 per cent CAGR in loan book and asset quality, we should expect a 32 per cent CAGR in loan book over fiscal years 2010 to 2012E.
The other stock is Tulip Telecom. It is one of the leading enterprise service providers catering to the data connectivity needs of corporates. It has an 11 per cent share of the Rs7,500 crore enterprise data services market (EDM) and a dominant 30 per cent of MPLS VPN, the fastest growing segment of EDM. From a network integrator, Tulip has emerged as a one-stop-shop for the entire gamut of telecom services, a fact highlighted by more than 80 per cent share of data connectivity in revenues. With fibre /wireless last mile connectivity in place, Tulip represents a pure-play on the enterprise data market, slated to be a $3.3 billion opportunity by 2013. We project a 14 per cent CAGR earnings, coupled with stable margin over fiscal years 2010 to 2012.
Usha Martin is also well placed to reap the benefits of a massive capex undertaken over the last three years. Volumes are set to more than double over the next two years, while improvement in raw material integration would add further value. We expect the company to witness a volume growth of about 75.5 per cent year on year to 0.56 million tonnes in FY 11 and a further 30.8 per cent (y-o-y) to 0.73 million tonnes in FY 12.
With captive consumption of both metallic and raw materials like iron ore and thermal coal increasing, Usha Martin's operating margins are expected to increase by 4 per cent 23.4 per cent in FYl 1. The company's balance sheet is set to improve, following the successful qip issue in FY10 and the steady cash flows expected over the next two years. Its debt/equity ratio is expected to remain flat at 0.7:1 as the company has announced a further capex of Rs1,200 crore over the next three years. The stock trades at a multiple of 5.3 times and is a huge discount to larger players.
Source: Business India