| Expect moderate returns in 2010 |
| Jitendra Kumar Gupta & Sarath Chelluri / Mumbai December 28, 2009, 0:56 IST |
Consequent to the sharp run up in markets in 2009, investors will have to be careful in picking stocks while lowering their return expectations
After the astonishing performance in 2009, which has helped Indian stock markets emerge among the best performing markets globally with year-to-date returns of almost 80 per cent, the year 2010 could prove to be a disappointment.
The BSE Sensex has more than doubled since its lows of sub-8,000 levels in March 2009 is no secret. However, the Sensex now trades at 16 times its estimated 12-month forward earnings wherein most of the positives, primarily on account of improving economic fundamentals and corporate earnings, seem to be priced in. Notably, since the up move has been due to the expansion in price-earnings (PE ratio) multiples, it is the turn of corporate earnings to catch up and make a case for the valuations to sustain at higher levels.
It is largely due to these reasons, experts believe that the markets will remain in a narrow range and suggest that the Sensex may provide returns of about 10-15 per cent by the end of December 2010. Most brokerages have set a 12-month target of 19,000-21,000 for the Sensex. Their modest expectations are also due to some concerns that will have to be overcome, which in a way indicates that investors need to be cautious as the risk-reward ratio is not as favourable as it was in 2009.
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Cautious mood...
The tightening of liquidity and hike in interest rate, which is pretty much on the cards, could dampen sentiments of the markets, believe experts.
The other concern pertains to the strength of global economic recovery besides, a roadmap regarding withdrawal of stimulus packages (by different countries) and its likely impact. Thirdly, although global liquidity is high, with many Indian companies lining up to raise funds, it will test the ability of the markets to absorb the increase in supply of paper.
Since global markets have seen the dollar weaken, leading to demand for real assets like commodities, any sharp rebound in the dollar against major currencies could reverse some of the dollar carry-trade (investors take cheap dollar loans with an aim to make better returns by investing in other asset classes) and pose additional concern. Lastly, concerns pertaining to sovereign risks like the episodes of Dubai and Greece, could trigger a sell off in emerging equity markets, and impact the ongoing recovery....but, still positive
The markets are positively hoping that India’s government would unleash major reforms, including implementation of Goods and Services Tax (GST) and Direct Tax Code (DTC), which will provide a stepping stone for the next leg of economic growth. Government’s fiscal prudence by speeding up the disinvestment process (selling small stakes in public sector enterprises) would also be closely watched. However, at this point in time, since the concerns are slightly more than the positives and a lot of the good news is already priced in, the return expectations from the broader market are moderate. Experts, thus, suggest that in order to get superior returns in 2010, the best investment strategy would be to adopt a bottom-up approach namely, picking individual companies, particularly in the mid cap space.
The reason for being selective is primarily due to the fact that many companies are still surrounded by concerns (like excessive debt, low demand, etc) and are yet to show clear signs of a revival in their earnings.
Below are ten companies, which should do well and deliver above-market returns in 2010. Most of these lead in their businesses, are well-managed and have strong entry barriers. More importantly, their future prospects look good. Although a few have high-debt on their books, they are experiencing a revival in demand for their products and services and are taking steps to de-leverage their balance-sheets. This along with relatively cheaper valuations will help them deliver better performance as well as returns.
To know more on individual companies, read on.
HDFC
Higher liquidity and low interest rates have lowered HDFC’s cost of borrowings. This could cushion it’s margins, in spite of the company’s low home loan rate offerings starting at 8.25 per cent. The company is observing good demand in the Western and Southern regions. Although interest rates are expected to inch up in 2010, demand for home loans is likely to remain healthy on the back of an improving economy. HDFC’s overall loan book is expected to increase by 20-23 per cent in 2010-11. It’s recent acquisition of Credila Financial Services gives it an entry into the education loan segment, which is seen growing at 25-30 per cent annually. Further, value unlocking would happen if its 10-year old subsidiary, HDFC Standard Life, comes out with an IPO. HDFC is trading at 3.5 times its 2010-11 adjusted book-value and can deliver over 20 per cent returns.
| TOP PICKS FOR 2010 | |||||||||
| in Rs crores | Net sales | Net profit | Market Cap | PE (x) | Price (Rs) | PE (x) | |||
| Sept 09 | % chg | Sept 09 | % chg | FY10E | FY11E | ||||
| HDFC | 3,872.0 | 16.7 | 2,509.0 | 14.7 | 75,798.0 | 30.2 | 2,652.0 | 4.4 | 4.0 |
| Indian Hotels | 1,338.0 | -26.6 | 117.0 | -70.0 | 6,975.0 | 46.4 | 96.0 | 35.1 | 21.0 |
| Jain Irrigation | 2,339.0 | 20.4 | 153.0 | 13.3 | 6,267.0 | 37.5 | 830.0 | 24.4 | 16.0 |
| Larsen & Toubro | 34,313.0 | 16.6 | 2,978.0 | 26.9 | 100,977.0 | 21.5 | 1,682.0 | 24.8 | 21.0 |
| Pantaloon Retail | 6,608.0 | 20.7 | 148.0 | 11.9 | 7,654.0 | 51.7 | 371.0 | 29.7 | 21.0 |
| Reliance Infra | 9,966.0 | 28.1 | 1,221.0 | 5.7 | 24,910.0 | 20.4 | 1,100.0 | 16.1 | 16.7 |
| SBI * | 58,732.0 | 26.4 | 13,022.0 | 38.0 | 140,823.0 | 11.1 | 2,218.0 | 2.6 | 2.1 |
| Suzlon Energy * | 24,988.0 | 34.3 | -236.0 | - | 13,730.0 | - | 88.0 | 80.2 | 17.6 |
| Thermax | 2,902.0 | -10.5 | 266.0 | -3.0 | 7,075.0 | 26.1 | 94.0 | 26.7 | 20.5 |
| United Phosp. | 5,129.0 | 17.4 | 504.0 | 29.7 | |||||