A clear gain of 3000 points – that’s the appreciation the Indian benchmark index has notched in 2010. The Bombay Stock Exchange Sensitive Index has galloped from 17500 points at the start of the year to 20,500 levels to mark the end of calendar year 2010.
The year 2010 has had more than its share of success and failures. Unfortunately, what emerges strikingly well is the list of laggards which have not participated in the current market rally on the back of negative sentiment prevailing in some counters; but might well have over-done in terms of subdued performance on the bourses by now.
At this juncture, it would be difficult to pin-point prominent large cap stocks for investment purpose as most of them have run-up smartly in sync with benchmark indices. However, the real value lies in mid-cap counters some of which are still reeling under pressure either due to issues such as lack of pick-up in demand for their niche products or operational issues or even hurdles of being highly leveraged financially.
Contents
Top picks from my side for the New Year 2011:
Bharti Airtel
LTP as on December 31: Rs.357/-
I am sure most of you won’t agree with my foremost pick from the telecom sector. The companies from this ailing sector have made every effort to stretch hard, from their head to toes, to squeeze-in extra bit of margin to ramp-up their performance in a bid to contend investors and fund houses.
Bharti is my top pick amongst the list of ‘value’ buys for 2011. The telecom giant has taken a clear lead in transforming itself into an emerging market multinational after buying out most of the African assets of Kuwait’s Zain Telecom for $10.7 billion. Further, the company’s non-wireless operations and overseas businesses are expected to support the profits of the company going into the future.
Bharti looks more prepared than its competitor Reliance Communications in terms of broad business diversification through its product offerings and geographical spread across 18 countries. At current value, the stock trades at a price-to-earnings ratio of 15 and trailing 12-month EPS of 22 per share, making it an attractive buy for long-term investment.
Educomp Solutions
LTP as on December 31: Rs.534/-
Education remains the most dynamic thematic investment story in India even today. Without any doubt, Educomp Solutions is a well-planned business model which provides diversified education solutions including its pioneered digital initiative transforming the way teachers teach and students learn in schools.
The company’s SmartClass segment, involved in delivering interactive and innovative multi-media content, has been growing at a brisk rate and is already contributing more than half of its revenues at healthy margins of over 54%. Even the number of schools (664 schools) where its implementation has completed has more than doubled in last one year.
The stock valuations seem attractive due to the superior growth and margin expansion that the company is likely to achieve in its key learning solutions business. Investors might do well to accumulate the stock around Rs.500-525 and more on further dips, if any.
DLF
LTP as on December 31: Rs. 293/-
DLF can be safely termed as one of the biggest laggard since 2008 market meltdown. In fact, most of the realty counters are trading at a deep discount to analyst’s estimated 12-month NAV for the companies in this sector. Moreover, the recent spate of investigation into home loan scam made matters even worse for the stock prices from this otherwise shining industry.
Just like the telecom sector, which is doing well but not reaping enough fruits for the companies involved in this highly competitive industry; even real-estate sector is shining bright but most realty firms are hit by high debt component on their balance sheets, thus putting pressure on the valuations of their stock prices on the bourses.
The valuations of the stocks from this sector are already attractive and might see some more erosion if markets go for a tailspin. But, this could well be a good time for investors to consider phased exposure to the stock around Rs. 285 zone.
Deccan Chronicle Holdings
LTP as on December 31: Rs.109/-
Deccan Chronicle Holdings Limited (DCHL) is one of the largest English language publications in the South. It also owns Asian Age and AndhraBhoomi along with its flagship brand Deccan Chronicle. Needless to say over here that the IPL team Deccan Chargers also belong to this same group.
Recently, the company had amalgamated its subsidiaries – Odyssey and Seiger Solutions – which are likely to boost its overall revenues going forward. The company has also benefited from the newsprint price crash globally. The stock price of DCHL has corrected significantly from its November highs of Rs. 150 to Rs. 108 currently. At current price, DCHL stock price is trading at a Price-to-earnings ratio of 9.92 which is at a big discount to its peer Jagaran Prakashan.
Everest Kanto Cylinder
LTP as on December 31: Rs. 95/-
The automobile industry has bounced back smartly after experiencing recession-led crunch a couple of years back. Moreover, with the fuel prices back on the upward curve, people are gradually shifting to vehicles fitted with CNG kits. Everest Kanto Cylinders (EKC), which is into manufacturing of CNG and high pressure industrial cylinders, is likely to be a beneficiary of this shift in demand pattern.
Currently, the stock price of EKC has been adversely hit by high inventory costs and pathetic performance in their recently forayed markets of UAE and Iran. The company’s stock prices has declined 35% year to date on the back of fall in international demand for its products.
However, strong revival in demand in regions such as India and China bodes well for the company’s high-margin jumbo cylinders. Recently, the company has shifted entire activities of its Aurangabad plant to Gandhidham with a view to effectively utilize its manufacturing facilities and deliver products at lower costs.
HDIL / Indiabulls Real Estate
LTP as on December 29: Rs.187 / 125.
Mid-cap real estate companies HDIL and IBREALEST are currently trading at depressed valuations and quoting at a steep discount to their all time highs on the back of funding challenges and tapering demand scenario in the real estate sector.
While the stock price of HDIL has corrected on account of concerns over a subdued Transferable Development Rights market; the company’s progress in slum rehabilitation projects remains on path with recent decision by Mumbai High Court to reverse government’s notification to increase FSI.
Contra Pick: SKS Microfinance
LTP as on December 29: Rs.650/-
This stock from the MFI industry had listed on the bourses with quite a bit of fanfare in August 2010. However, the rally has fizzled out on the back of persistent investor concerns about the operations of microfinance institutions being constantly under the scanner following the recent Ordinance passed by the AP State Government.
Even as the analyst community keeps debating about the ethical norms and social vision being adopted by the MFIs, the stock price of the country’s only listed Microfinance Company, SKS Microfinance, has slumped from the highs of Rs.1400 to less than half at Rs.650 currently.
However, a right time to buy a stock cheap is when it is surrounded by negative news and sentiment. One needs to understand that MFI empowers small businesses and individuals situated at remotely within the country where formal banking and credit facilities are hard to reach.
The government also realizes that it can not strangulate the deep-rooted MFIs, but regulate it so that the interest that they charge is not exorbitant on the poor people. Investors can accumulate the stock and wait for the dust revolving around this lucrative sector to settle down for the time being.
What’s your say on my above Top Picks for 2011?
Disclaimer: The above content / report is only for the educational purpose of the readers. It does not qualify as any type of advice or recommendation to Buy/Sell securities. The author and the blog are not responsible for the reader’s decisions based on the above report and news within.
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I have received various private queries on real estate. Boarders will recall that I called the bottom on the sector about a month back. I shall summarise the argument for why real estate stocks are the classic contrarian play for 2011. Before I begin, patience, gentlemen, is the key. In particular, don’t bother about today’s and tomorrow’s price movement. Also don’t make the classic retail blunder of selling after making 10 or 15 % when a 100 % upside looks likely. Also please do not buy the smaller counters in the sector. Buy only the blue chips in the sector. Top picks are India Bulls Real Estate, HDIL, Orbit and Unitech. They are the ones that have the both the value argument, and the volume to attract massive FII buying, which is happening as we speak.
Donald Trump one of the world`s leading and most astute real estate developers is investing in Indian real estate for the first time. Mr. Trump will be in Mumbai to announce a new project. “I think India has amazing long-term potential. The country is going to be one of the greatest places in the world to buy real estate,” says the real estate magnate in an exclusive interview in GQ India’s forthcoming issue. PLEASE SEE ATTACHED STORY. http://www.dnaindia.com/mumbai/report_us-business-tycoon-donald-trump-to-visit-mumbai-announce-real-estate-project_1487433
The disconnect between the real estate market and the scripts is growing by the day. Real estate has more than recovered from the 2009 slump. Looking at recruitment ads, we sees that there is shortage of people from civil engineers, to karigars and bricklayers. A housing and construction boom is on. Yet the scripts are trading at 52 week lows. ( BTW, Unitech promoters have hiked their stake yesterday in their company. Insiders buying shares, and raising stakes, is one of the most bullish signs in a sector.)
The slump in real estate stocks is ironic, because real estate is the biggest beneficiary of 9 % GDP growth. It is also the biggest beneficiary of the Indian demographic story. After all, you are born, then you finish school and college, then you find a job and get married. Then what do you do ? You buy a house for your expanding family.
Valuations are astonishing. Many of these stocks are trading at 50 to 60 % discounts to their net asset values (NAV). Now the NAV calculation is simple. If I take all the land and flats under construction and sell them, then pay of all the debts on the company’s books, I get the NAV. Consequently, most company shares should sell AT OR CLOSE TO, THEIR NAVs. Instead they are trading at massive discounts. The market is behaving as though some sort of nuclear bomb has gone off on these company’s properties. ( In fact, if there was a market for corporate control in India, it makes sense acquiring these companies, breaking them up, selling their assets and paying off their debts, to realize value).
Consider the following companies stock prices and their NAVs. IB Real current price of 130 vs NAV of 280. HDIL current price of 185 vs NAV of 370. Orbit current price of 80 vs NAV of 180. To trade at their NAVs implies a 100 % upside in these stocks from here. Remember the NAV itself is subject to upside revision particularly for IB Real, HDIL and Orbit.
A panic bottom was reached in late November due to the socalled “scam”. This was nothing but a bunch of mid level managers at banks getting paid by middlemen to facilitate loans. These middlemen are called loan syndication agents (LSAs) and the industry if full of them. The mistake this time was that the LSAs bribed mid level managers to facilitate paperwork, a common Indian practice. As a result, blue chip real estate companies have lost 50 % of their value in weeks !! This is a disproportionate result. Notice also that not a single real estate company, let alone a blue chip one, has been named in the scam.
There is also short term earnings momentum due to the base effect. Many of these companies reported lousy earnings last December, so earnings growth just due to the base effect will be considerable.
Real estate companies with substantial presence around Mumbai will benefit particularly from the final clearance to the Panvel airport project, – and the transharbour link – done a few weeks back by the Environment Ministry. Land prices are already rising substantially in anticipation. The price on India Bulls Green, a 20 mln sq ft project in Panvel has doubled almost from 2200 psf to 4000 psf, a gain in potential sales of 4000 cr on a mkt cap of 5000 cr. ! Imagine India Bulls current NAV upside from current levels of Rs 280 with this project. Also imagine future upside as Panvel becomes a suburb like Santa Cruz. After all, the IB Real city project is four times the size of Nariman Point. Astonishing !! Please see the attached story from the Business Standard. http://www.business-standard.com/taketwo/news/kolkata-metros-rideneglect/418602/
The stock according to Motilal Oswal should do 16 per share earnings, leading to a multiple of 9 vs a market trading at 21 times. This is comfortable, actually dirt cheap given the upside. In India Bulls Real Estate’s case the undervaluation reaches bizaare proportions. The company has a listed power subsidiary and IB Real’s stake in the subsidiary is worth 100 per share. The current price is 135. So I get the entire real estate business with all the upside outlined earlier at 35 per share !!
Other beneficiaries are HDIL and Orbit.
The real estate sector interests me currently because it is a genuine contrarian investment. Genuine contrarian investing is tough, dangerous, and for most people, psychologically impossible. That is why it is so hugely profitable, and practiced by all the great masters of investing. It involves buying from the crowd what the crowd hates, and selling to the crowd what the crowd loves. There are two basic requirements and I shall consider them with regard to the RE industry. First, there has to be overwhelming strong consensus, either positive or negative, about a sector. With regards to real estate, there is overwhelming strong negative consensus. There is not a single brokerage or analyst who is positive about the sector, and all are heavily underweight. The entire sector has become a dog.
Second, that strong consensus has to be supported by “weak” reasons. This is an important, and profound, point that deserves detailed explanation. In contrarian investing, a weak reason is not a weak reason per se. It is a reason that so widely known, that it is already “baked into the price”. Thus in real estate, “interest rates are rising and this will affect demand for housing” . Also, the “scam may make banks more cautions about lending” to the sector. These are all valid reasons. But because the whole world and their grandmothers are talking about it, it is already in the price, which is why the price is so low. Hence in contrarian investing, this is a weak reason. A weak reason may also have no basis in current reality. One reason cited is that “these companies have very high debt levels” . This is yesterday’s story and downright wrong. I note that India Bulls Real and HDIL have debt equity ratios of less than 0.3, as compared to conservative cyclicals like TISCO or TELCO that have debt equity ratios in excess of 1.0. !!
Two things can then happen. Firstly, the sector becomes vulnerable to positive news surprises that will suddenly cause the price to flare up. This could be an earnings surprise. Or FDI changes in real estate/retail. Secondly, valuation considerations start to predominate when prices fall so low. Fund managers looking for alpha and seeking to deploy excess cash, realize their stupidity and start buying in. This generates momentum, and trend followers pile in, and we have a full blown rally.
Arun Shah,
Nice views and thoughts on the Realty sector. I second almost all the views expressed by you above. Its a good call and analysis from every aspect of argument.
Now coming to Stock picks, I always admired Viral for his knowledge of stock markets. I still feel Trak readers are until now not able to take advantage of Viral.
I had left the same comment in my earlier Viral articles on stocks that he should be writing more on stocks at regular intervels.
In fact with his articles trak readers should be able to maintain a healthy portfolio in diverse sectors over diverse periods (long term, medium term, short term and day trading)
However my view on stocks is little bit different.
1990s belonged to IT. Any dot com co gave ppl good returns.
2000s belonged to infrastructure capital goods.
I believe 2010s belong to commodities and in particular minerals.
As the mining of metrials has reached a saturation point, the future of minerals.
Last year Viral has written an article saying the gold mining is on decline as all known mines are exploited. Now with usage more than production, the only way for prices is up.
Earlier iron ore was abundent and we used to export iron ore to Japan, China, Korea. Now with steel mill sin india eating up half of ore, we are slowly seeing shortage of ore for exports. Soon our ore will only cater to our mills. Soon we have to import.
Same story with coal. Upto a few years earlier, our coal was sufficient to our needs. Now we are importing coal.
Same with copper, Manganese and all other metals.
Some of the other minerals we do not have in India and import entire quantities are rock phospate for fertilizer, Nickel for steel plants, Gold and diamonds for jewellary.
Till now some how we are able to import them. But china is aquiring all known minerals from around the globe. Soon there is nothing left for the rest of the world. Indians realized this very late and for the last 5 years scouting for leftovers.
I am sure soon India will be helpless except for iron ore and aluminium.
So I assume commodities specifically minerals will be the sector to look to in future. Most of them are at cheaper valuations now but soon they will give handsome benifits.
I feel people should start traking those companies which are aquiring forign mine assets like Tata steel, Reliance Power, Adani, Jindals.
Just my two paisa.
Altaf,
Nice information on commodities. We’re already seeing inflation soaring above the realms of possibilities. What amazes me is the fact that government has set targets for inflation at almost half the rate (6 to 6.5%) that is prevailing now.
We just saw signs of inflation coming down a little more than a month ago. However, food articles have played havoc on this front and the inflation is back to double digit figures. If metals also join the party, the government might come under problem for its disability to tame inflation.
Having some metal stocks in one’s portfolio is not a bad idea, after all. In fact, it could prove as a hedge during the times of high inflation-led vagaries in stock market volatility.
The reason why Banks can not adopt MFI business model :
Here we have to understand both sides – Bank and customer.
Bank operate on documents. They want to see if the guy is financially capable, if the customer can mortagage anything.
Customer can not mortagage anything. He dont have financial capability.
See? They are not talking the same language.
Banks see the safe side. Their view on future success of the customer is of no importance.
Customer has no background, but if a small financial push is given he can generate money.
Even though the local bank manager believes in the future success of the business model, his hands are tied by Bank guidelines.
MFIs on the other hand can see the future success of the venture and ready to take risk by investing. They dont have guidelines like banks.
Therefore even though Banks is a better fit (they belong to government which is working to uplift the poor) the customer is forced to go with MFI.
Just imagine a customer with a choice to go with either SBI or some MFI. I am sure he will go with SBI. Incidentally SBI has branches in every nook and corner of India. Still MFIs are thriving. Why?
Coz Banks and customers are not talking the same language.
Dev,
It was nice reading your interesting take from the other side of the story. And, that it was quite informative and logical as well.
You are right when you say that a time will come when even Banks will adopt the route followed by MFIs. In fact, if I am not wrong, some leading banks are already into Microfinance space, to start with. However, it would still take time before they actually grab any substantial market share in the microfinance business.
Another point being even if banks achieve maximum financial inclusion in remote rural areas, the small scale at which MFIs operate could be difficult to replicate for the banking fraternity.
Take, for example, MFIs are more than willing to lend as low as Rs.1000/- to small businesses and individuals. I wonder whether these figures go even below the 3-figure mark.
On the other hand, the formal banking and credit sources would find it hard to offer loans at such small scale; not to mention the cumbersome paper work and other norms that need to be followed by them.
However, in this case, a model that banks need to follow is routing their business transactions through closely-associated Business Correspondents such as retired rural teachers, postman, and other approved agents.
I doubt about the SKS pick.
First of all the management is the main problem. If you cant trust the management, will you be comfortable in owning a piece of the company? I doubt it.
Secondly, you are right in saying that “The government also realizes that it can not strangulate the deep-rooted MFIs, but regulate it so that the interest that they charge is not exorbitant on the poor people.” But I feel that though there are entry barriers to the sector, still large cap banks have the potential to erode the market share of MFIs. As far as the risks involved are concerned, these large cap banks might spin off something like SBIExpress or something to hold the MFI-type portfolios. Though you may come up with a view that, banks cant go deep into rural areas. On that I would like to mention that banks have started using technology to get deeper into rural India. And instead of lending to MFIs, there may be a time when banks (which are trying to become too-big-to-fail these days) might be interested in going all the way. And as soon as the regulations are in place to cap the interest rates charged by MFIs, I am sure large cap banks will jump into the sector with all their ‘might’.
P.S.-SKS is what DLF became of real estate sector ;). Too much money chasing the only available ‘promising’ option.
Educomp looks good and is my personal favorite It didn’t perform that well in 2010. It has also taken a great marketing initiative to boost up sales!
Btw Viral this list is awesome!
Chirag,
You’re right… the stock price has been a sort of under-performer over the last many months. In fact, Educomp made a high of Rs.1000 post 2008-crash. However, it could not sustain there for long and has almost halved from those dizzy levels.
Hopefully, the stock gets re-rated a bit before the Union Budget 2011. Glad to know that you liked the list.
Good list except SKS micro-finance, will have to wait for 3-5 years to see the substantial returns in this sector.
Nikhil,
SKS is a good pick for the price point it is right now. It is an undervalued stock. The only risk is that if some skeletons come out of the closet regarding the management spat that happened few months back…
Otherwise it is a strong stock in my opinion..
Given are very good.Would like to add Infosys also .
stock tips India,
Agreed, Infosys can always be included in any best of the best stock pick lists.
But, as I mentioned at the start of the above post, it would be difficult for me to include any prominent large-cap stocks (except Bharti Airtel & DLF), as their valuations have run-up smartly in sync with benchmark indices.
its great list no second doubts. Would like add 2 more stocks.
ONmobile
HCL Technologies
Rohit,
You really think onmobile is a good bet. I lost a lot of money on it was holding it for over 6 months…and the only way it went was down..finally loosened my position in it in September..
Arun,
I agree with Rohit’s pick on OnMobile. With the telecom industry being choked by the low-cost tariffs, it is but obvious that the network operators would increasingly look towards offering the premium value-added services to its subscribers in a bid to improve the margins going forward.
Also, agreed that you might have lost some money on this counter; but that does not mean that past performance is testimoney for the future performance as well.
In this fast-paced era, a failure is never a permanant failure.
Arun / Viral,
Only reason I picked ‘Onmobile’ is that its very undervalued stock at this moment. Though it might not be able to touch 500+ soon, but if you pick it now and keep target of 400 by year end, it becomes good stock.
I have also picked it up during 500+ and have been averaging it since then.
Onmobile is on wrong side only because telecom stocks didn’t do well. But Onmobile is not telco, it should be treated as lifeline for telco once 3G comes in.
Thanks for the explanation and Viral, I must say this is an excellent list…. Though, based on your knowledge and expertise, can you make a similar list which essentially gives out ideal mix of stock in one’s portfolio depending on his risk appetite.
Meaning…if one if a low risk investor…what are the stocks he should have and probably his ratio in equity and debt…Yes, there are many posts like this out there…but it would be nice to get it from you.
Many trak.in readers are not really very knowledgeable in stock market, but want to be part of it.. and this post could be kind of ready recknor…