Experts believe investors should focus on protecting capital rather than chasing returns.
The stock markets have bounced back after the mayhem early this week. Most experts are taking this with a pinch of salt, given that the uncertainties still hover and there are fair chances of the market drifting down. Hence, they say investors should look at protecting capital rather than chasing returns, till the situation gets better.
“If the market falls by 10 per cent more, we could have more opportunities. But the most important thing is to protect the capital, by looking at quality companies,” says Chetan Parikh, director, Jeetay Investments.
Since it is difficult to predict how severe or long the ongoing correction will be, experts also suggest that bottom fishing could be a dangerous strategy to adopt in the current environment.
“There is not enough clarity at this point in time, given the sheer number of global uncertainties swirling around us. It is difficult to expect a broad-based economic recovery in India and, correspondingly, it is hard to see why the Sensex might not go back to 18,000-19,000 levels in the near term,” says Saurabh Mukherjea, head, institutional equities, at Ambit Capital.
Adding, “It is better for risk-averse investors to focus on high quality, defensive stocks with good balance sheet and ability to generate free cash flows”.
Among the stocks that most experts believe will stand out in a storm are:
BHARTI AIRTEL
Some sense of predictability is returning to the telecom sector and pricing power is also improving. Bharti Airtel, given its leadership and good management, is considered relatively better positioned to gain from the opportunities in this space. It also scores well in terms of earnings, expected to grow 15 per cent in 2011-12 and over 50 per cent in 2012-13.
Operating and net margins are expected to be led by factors such as firm prices (rates), a likely increase in the share of value-added services, turnaround in the African business and economies of scale. This will also improve its cash flows significantly and return ratios—its return on equity (RoE) is seen improving from 13 per cent in 2010-11 to about 17 per cent in 2012-13.
| STRONG AND STEADY | |||||
| Company | Debt-to- equity (x) | RoE (%) | CMP (Rs) |
FY12E | |
3.6*
RoE: Return on equity; EV/Ebitda: Enterprise value/Operating profit; P/E: Price/Earnings
COAL INDIA
Coal India is less susceptible to the movement in global commodity prices, as it sells most of its production at 25-30 per cent lower than global prices. Even then, its net profit margin is over 20 per cent and return on equity is in excess of 35 per cent. Also, the demand is predictable and less volatile, given that its buyers in the power sector depend on its supplies for coal, which is scarce in India. In other words, even during uncertainties, the demand and the price outlook for its coal remain stable. This is a key reason why experts believe the company is a stable bet for any portfolio offering steady growth. On the fundamental side as well, the company is sitting on huge reserves, having a strong balance sheet with zero debt.
HDFC BANK
Considering its strong assets quality, high capital adequacy, leading position in the private banking space and predictable and steadily growing earnings, HDFC Bank is seen as a sturdy investment bet. Despite the ups and downs in economic cycles seen in the past five years, the bank has sustained RoEs of 16-17 per cent and NIMs (net interest margins) of four to five per cent. Despite concerns over rising interest rates and slowing in credit offtake, analysts expect the bank to deliver loan growth of a little over 20 per cent, a 15-20 per cent growth in net interest income and 25-30 per cent in net profits over the next two years. Notably, the stock is trading at its historical average of 3.4 times the one-year forward book value.
ITC
ITC generates about 80 per cent of its revenue from the cigarette business, which is less cyclical, with robust margins and cash flows. This has helped ITC deliver high RoEs of 25-32 per cent, increase dividends every year and, importantly, invest surplus funds into new businesses, leading to value creation for its shareholders. While valuations are not cheap at current levels, this is one stock that should hold well during any market downfall. In terms of growth visibility, too, analysts are expecting revenue growth of about 15 per cent and net profit growth of 15-18 per cent over the next two years.
POWER GRID
Power Grid, too, is offering a good risk-reward equation. At current levels, the stock is offering almost two per cent dividend yield and is trading at reasonable valuations, given its earnings growth of 23-25 per cent over the next two years. Also, despite downgrades in the power sector, analysts don’t expect PGCIL’s earnings estimate to get lowered, given its relatively less risky business model. Growth visibility is also good on the back of the ongoing capex and its future plans. In the medium term, the company’s RoE is expected to go up, consequent to completion of ongoing projects, which should possibly lead to re-rating of the stock. In the long run, it aims to invest Rs 1,20,000 crore in the 12th five-year plan (2012-2017), which should help sustain growth.
