Following a strategy that is different from the herd could help increase returns in a market trading at premium valuations.
With broader indices trading at premium valuations, it may be an opportune time to look at sectors and stocks which are currently unpopular but hold promise. These are also called contrarian bets , which mean stocks considered risky at the moment due to unfavourable circumstances. It was the case a year earlier, when the information technology sector was shunned due to demand concerns in key markets like the US and Europe, but it bounced back handsomely, rewarding investors who had bought IT stocks then.
Money managers such as N Sethuraman, CIO, Shinsei AMC, say the contrarian style is probably valid in the current market conditions, where sectoral volatility has gone up. Giving an example, he says the metals sector was an outperformer four months earlier but are no longer popular. Ajay Argal, head, equity, offshore, Birla Sun Life AMC, says the contrarian style could be an investing strategy but for it to succeed, investors need patience and a longer-term perspective. Fund managers, however, warn that even within the underperforming sectors, investors must adopt a bottom-up approach and be selective to capture the upsides. We look at four sectors which markets have turned their backs on but could surprise on the upside in the long run.
| CONTRA PICKS | ||||
| In Rs crore | Sales | Ebidta (%) | PAT | P/E (x) |
| Orient Paper | 1,942 | 18.3 | 183 | 6.0 |
| Ultratech | 17,256 | 24.4 | 2,050 | 12.0 |
| Shree Cement | 5,534 | 37.7 | 892 | 7.2 |
| Birla Corp | 2,873 | 27.8 | 582 | 4.8 |
| Unitech | 5,280 | 41.7 | 1,429 | 15.8 |
| HDIL | 2,547 | 46.7 | 883 | 12.3 |
| Orbit Corp | 825 | 45.0 | 164 | 9.8 |
| Bajaj Hindusthan | 3,786 | 16.0 | 151 | 15.2 |
| Balrampur Chini | 2,297 | 21.5 | 257 | 8.5 |
| Shree Renuka | 5,833 | 11.2 | 404 | 11.4 |
| Bharti | 68,942 | 39.4 | 9,819 | 12.2 |
| Reliance Com | 32,277 | 35.7 | 4,696 | 7.2 |
| Idea | 16,217 | 32.3 | 1,462 | 15.8 |
| All figures are 2011-12 estimates Source: Analyst reports | ||||
Cement
Cement scrips have lost up to 28 per cent since their March-April highs due to concerns of oversupply and, consequently, lack of pricing power. Flat production numbers and sharply lower capacity utilisation in June and July (partly due to the high-base of last year and seasonal factors) has aggravated the problems. Not surprisingly, June quarter results of leading players were disappointing, due to pricing pressures, higher costs and logistics issues. However, Religare Capital Markets believes these negatives are already factored in and demand upturn led by stronger consumption from the construction segment by end-2010 will mean the downside from current levels is limited. Though Ebitda per tonne for 2010-11 is likely to bottom out at Rs 400-1,000 for cement companies due to higher freight, power and fuel costs, this is higher than the Rs 200-300 recorded during the last downtrend in 2001-02. The research firm is betting on Orient Paper (efficient play), Shree Cement (diversified operations), UltraTech (largest player) and Birla Cement (best mid-cap scrip) to deliver returns in the region of 32-40 per cent over 12-18 months.
Realty
The BSE Realty index is down nearly 30 per cent over the past year due to concerns over weak demand, excessive leverage and high prices. While the growth picture continues to be a concern, debt and inventory levels have come down to some extent for most companies. Focus on mid-income housing and higher sales volumes, year-on-year (aided by the low-base of last year), helped larger ones record an increase in revenues in the June quarter. Commercial and residential sales are looking up on demand from the IT/ITeS sector but higher prices in certain parts of the country are playing spoilsport and impacting volumes. While analysts favour Unitech, Orbit and HDIL, with return expectations ranging 25-45 per cent over the next year, the leverage levels, volume growth and cash flows need to be monitored.
Sugar
Stock prices in this sector have underperformed the Sensex by 27 per cent over the past year. The near-term outlook does not look promising, given the higher global production and normal monsoon, which has resulted in falling sugar prices. A BNP Paribas report says companies will have to depend on higher volumes and by-products of sugar processing such as power to maintain profitability. The biggest trigger for this highly regulated sector are measures such as removing the levy quota, release mechanism, stock holding restriction and freeing cane pricing. While the entire sugar pack is likely to benefit from such a move, Balrampur Chini is expected to be the biggest beneficiary.
Telecom
The sector has underperformed the Sensex by nearly 35 per cent. A price war and higher than expected 3G fees is hitting companies on profitability and balance sheet fronts. While cash flows are likely to take care of interest and expansion costs, the good news is that operating metrics seem to be improving. An Anand Rathi report says June quarter results indicate the wireless business is back on a sustainable growth path, the declining trend in revenues per minute is stabilising, and there is robust growth in minutes (volumes). If consolidation plays out, as expected in the next 18-24 months, expect competitive pressures to reduce and pricing power to return. The key downside risks are price wars in the post-paid segment with the implementation of mobile number portability and implementation of Trai recommendations on spectrum usage. If the bullish scenario prevails, expect a 30 per cent return on Bharti, Reliance Communications and Idea from these levels.
