Robust cash flows, low leverage and good revenue visibility is the mantra of experts.
In the recent meltdown, scrips in four sectors — metals, infrastructure, realty and information technology — bore the brunt of the fall, losing 10-13 per cent over the past week, while the broader markets shed seven per cent.
As investors turn risk-averse, they are avoiding companies with a larger exposure to the crisis-hit developed markets. Fearing a repeat of the 2008 debacle, investors are dumping sectors with long gestation cycles and higher capital expenditure that has to be funded through debt. Though there are issues with each of the four sectors, the drop in prices has made select stocks attractive from the medium-term perspective, say experts. Within the picks, analysts stress that investors should focus on companies with a strong balance sheet, good track record and steady cash flows.
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REALTY
The realty sector is going through a rough patch due to higher development costs and lower demand. An unprecedented rise in interest rates, both from a developer and buyer point of view, as well as higher property prices, have led to a fall in demand. Volumes in the Mumbai market, for example, have fallen over seven months and inventories are rising. Hence, it’s not surprising that realty stocks have taken a harder knock in the market mayhem.
To fund their projects, realty players will either have to get a private equity player or drop selling prices, as they are not able to offload existing stock at the current high prices, believe analysts. A drop in prices is likely to come about during the festive season. Says Akshit Shah, research analyst, SBICAP Securities, “Given rising inventories and low volumes, a price correction in the coming months is inevitable.” While analysts are bearish on most realty stocks, they are recommending Godrej Property for its asset-light model and Oberoi Realty due to its zero debt status, strong land parcels and good cash flows. Phoenix Mills and Mahindra Lifespace are other picks.
INFRASTRUCTURE
Subdued financial performance, affected by implementation delays, high interest costs and sagging order inflows had kept stock prices of infra companies under pressure for several quarters. The current bloodbath has led to further erosion. Leading infra companies (except for capital goods and power) such as IVRCL, NCC, HCC, GMR Infrastructure, GVK Power, L&T, Punj Lloyd, Reliance Infrastructure, IRB Infra and IL&FS Transportation touched new 52-week lows on Tuesday.
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Though the valuation of nine times 2011-12 estimated earnings for the universe (excluding GMR, HCC and L&T) have reached trough levels, analysts are not in a hurry to give screaming buy calls, as the concerns have not gone away, and there are still no signs of improvement in order inflow and execution.
For now, analysts recommend staying away from most infra companies. They believe companies which are relatively better positioned in terms of competitive strengths and less leverage could be looked at from a long-term perspective.
Here, L&T stands out as a relatively stable stock, thanks to its diversified business model, scale of operations and financial strength. Among infra segments, roads seem to provide better visibility. Thus, analysts also like IL&FS Transportation and IRB. IT
IT stocks are faced with the double whammy of worsening global growth and the possibility of a weaker dollar versus the rupee. Though IT stocks will continue to be under pressure in the near term, analysts remain positive on large-cap stocks, due to attractive valuations. They believe the impact on IT companies is unlikely to be significant in terms of budget or pricing cuts, though the threat of some clients postponing or renegotiating deals cannot be wished away. A redeeming factor is that most of the deals from clients is to meet the criteria of new regulation (like Basel-2 or Basel-3 norms) or privatisation, among other reasons which will be relatively less hit by a global slowing. Second, during downturns, companies usually look at cost cutting, which drives up their offshoring demand. Among stocks, Srishti Anand of Angel Broking is bullish on Tata Consultancy Services, Infosys and HCL Tech and recommends avoiding fresh buys in Wipro. While TCS is the top pick of most analysts due to its consistent financials, Infosys is well placed to protect its margins due to multi levers like utilisations and offshore mix. HCL Tech is also expected to see sustained revenue growth. However, the Street will keep an eye on its operating margin expansion.
METALS
In the present environment, analysts like Bikash Bhalotia of PINC Research who track metal producing companies feel prices of aluminium and zinc may see some more correction. This may not prove good for non-ferrous players such as Sterlite Industries and Hindalco. Sterlite has interest in zinc, aluminium and copper and any downside in prices may not bode well. For the copper segment, though, it is the TcRc (treatment and refining costs) margins that matter more; analysts think a slide in prices would affect these, too. For Hindalco, the impact could be more profound, as it has its global subsidiary, Novelis, which has exposure to the US and European markets. On the flip side, Ravindra Deshpande of Elara Capital points out that Hindustan Zinc can be a good bet, considering that its silver production is growing.
For steel, prices are also correcting with a slowdown in demand, though some respite could come from softening of raw material (iron ore and coke) prices. Tata Steel, which has large exposure to the European market, is likely to feel the heat of these global events. JSW Steel is already reeling under problems due to Bellary mining restrictions. The prospects for SAIL have not been good, though some analysts add that looking at the correction of 24-25 per cent in the past month, most of the concerns are factored in.
With contribution from Priya Kansara Pandya, Sheetal Agarwal & Ujjval Jauhari