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Top 10 stocks you can buy now

June 21, 2006 09:03 IST

Like when Tom goes over the cliff in Tom and Jerry, it claws the air for a while and then falls with a thud. Markets behaved a bit like that this May, losing a quarter of their value in less than three weeks.

While no one Jerry has been named who pushed Tom off, the list of suspects includes sharply falling international commodity prices, a hike in derivative margins and a possible hike in the US interest rates. Of course, the real culprit has been the froth in the market that bubbled over, totally out of sync with valuations.

Says Rajeev Thakkar, director and senior vice-president, research, Parag Parikh Financial Services: "A lot of leveraged positions had built up here. Internationally too, interest rates were moving up and liquidity was drying." It was this liquidity which had driven Indian markets up.

As Abhay Aima, country head, equities and private banking, HDFC Bank, explains, "Valuations were greatly stretched. Momentum players were dominating." All these put together triggered 'Sell' calls by some foreign investors. The exit call was not just for India, but for other emerging markets as well.

The Road Ahead

Though the dust has not yet settled after the thud, it is time for long-term investors to go bottom fishing and hook up promising winners. But don't expect the market to move up sharply very soon. Concerns include rise in interest rates -- that are likely to affect corporate profitability and project costs -- and high crude prices.

Says Tridib Pathak, CIO, DBS Cholamandalam: "Tightening of liquidity on a global basis is a concern and linked to that is lowering of risk appetite." The upward bias in the US interest rates could possibly impact flow of money into emerging markets including India.

But don't let this deter you from building up your stock portfolio with systematic investing in the stocks we recommend. Says Pathak, "Nothing has happened that has put a question mark on the India story."

The gloom hovering over the stock markets has a silver lining. It is the right time to buy the choicest scrips. We select the 10 best options for you to choose from.

1. ACC

When there is a gold rush, sell shovels, says conventional wisdom. When there is a country under construction, buy cement stocks.

Estimates put the unfulfilled demand for housing at 40 million units triggering huge investments in the next few years. Cement is going to be a winner and likewise India's largest cement maker with a capacity of 19 million tons per annum (mtpa) should be a winner too.

With 13 cement plants across India, ACC is the only company with a pan-India presence, which helps it to withstand regional fluctuations in prices and alter distribution strategy to meet market needs. ACC is also a dominant player in ready-mix concrete business.

Cement prices have been strong and will remain so. With annual demand growing at 7-8 per cent, other plants at near full capacity and no significant capacity likely to go on stream in the near future, ACC is well placed to take advantage. It has increased capacity by 0.5 mtpa, while another expansion of 1 mtpa should go on stream in the next three months. This increase in volumes, firm cement prices and potential gains on account of better cost management will ensure steady growth in sales and profits for ACC.

2. Bharat Bijlee

A relatively small company with a market capitalisation of just Rs 520 crore (Rs 5.20 billion), Bharat Bijlee has a six-decade long history. It manufactures a wide range of motors and power & distribution transformers. After almost six years of range-bound sales (Rs 140-166 crore -- Rs 1.4-1.66 billion, during 1996-97 and 2001-02) and meagre losses in almost all of these years, the company's performance has improved remarkably since 2002-03, thanks to the pick up in economy and the power sector.

Sales have increased from Rs 163.7 crore (Rs 1.637 billion) in 2002-03 to Rs 300.8 crore (Rs 3.008 billion) in 2005-06, while net profit has grown from Rs 1.8 crore (Rs 18 million) to Rs 33.7 crore (Rs 337 million) -- including extraordinary income of Rs 3.5 crore (Rs 35 million).

Anticipating demand growth, Bharat Bijlee had undertaken an expansion programme resulting in its new transformer facility at Thane (Mumbai) that commenced operations in March 2006 resulting in more than doubling of capacity to 8,000 MVA per annum.

Some good investments in stocks whose combined value is Rs 125 crore (Rs 1.25 billion) are the cherry on the cake. Adjusting for these investments (Rs 220 per share of the company) and taking into account Bharat Bijlee's future growth prospects, the stock is quoting at just 10 times 2006-07 earnings. Although the floating stock is low, this company can deliver good returns.

3. BHEL

That the power sector is in the cross- hairs of the government's reform agenda is clear when one looks at the announcement of seven ultra mega projects of 4,000 megawatt (mw) capacity each. The total estimated investment for power equipment by 2012 is Rs 4 lakh crore (Rs 4 trillion).

All this is good news for Bharat Heavy Electrical Limited (BHEL), which derives over 70 per cent of its revenues from power sector and balance from industrial equipment. BHEL is augmenting its capacity from 6,000 mw to 10,000 mw by March 2007, while upgrading product technology has been an ongoing process. Recently, the company tied up for technology to manufacture high-rated 800 mw thermal sets with super critical parameters. In order to maintain its technological edge, BHEL plans to set up centres for excellence for surface engineering and for intelligent machines and robotics.

As demand continues to be robust, BHEL's order backlog has increased 17.2 per cent to Rs 37,500 crore (Rs 375 billion) during 2005-06, including export orders worth Rs 3,348 crore (Rs 33.48 billion).

Put together, BHEL is well equipped and making the right moves to grab upcoming opportunities in its business segments. Although valuations may appear rich, expect this stock to deliver annual returns of at least 15-20 per cent over the next 2-3 years.

4. HDFC

Interest rates have been rising and may spoil the retail home loan party. But don't worry about falling margins if investing in HDFC.

HDFC is a master of its craft and the last five years have seen interest rates drop by 10 percentage points and then rise again by 2-3 percentage points. HDFC has breezed through these ups and downs quite well and in the last ten years, its income and profit have grown consistently year-after-year; translating into a compounded annual growth rate of 15.8 per cent and 20.4 per cent, respectively.

Not just its core, the company has forayed into many related areas like banking, insurance and asset management quite well with excellent results. Apart from the Rs 8,000 crore (Rs 80 billion) wealth it has created through these investments, HDFC has retained a dominant position in these businesses.

Known for its ability to acquire high-quality assets (the lowest NPAs in the industry), transparency and professional management, HDFC is a great pick in this correction.

5. Infosys Technologies

No introduction needed to this one. With its 500 clients, many from the Global 1000 and Fortune 500 listings, Infosys is the second-largest IT company in India. Over the past 20 years, Infosys has built a wide basket of products and services, which helps it in presenting itself as a one-stop solutions player. While the company was amongst the first to master the offshore services model, Infosys ranks amongst the best in terms of project execution capabilities, making it a preferred vendor.

Despite rising competition, Infosys is well-entrenched in the business and has scale to its advantage; over $2 billion in revenues and 50,000 employees show its muscle. Analysts also indicate that over the next few years, offshore spending by foreign companies is set to increase further while billing rates should remain stable if not rise, which together should drive growth.

Infosys too has given a healthy guidance of 26-28 per cent profit growth for 2006-07. Beyond this too, growth rates should stay over 25 per cent at least till 2008-09. Expect this stock to provide stability and consistent growth to your portfolio.

6. IVRCL

An infrastructure construction company, IVRCL Infrastructures & Projects, has developed a niche positioning for itself in the water segment, which consists of desalination, sewage, irrigation and industrial projects. This category accounts for nearly 50 per cent of the company's revenues, with the balance coming from segments like roads, highways, power, transmission, building and infrastructure.

Revenues and profits have grown at a compounded annual growth rate of 56.4 per cent and 107 per cent, respectively, in the past three years and going forward its prospects look bright given the huge infrastructure push. IVRCL's order backlog is running strong at nearly Rs 5,000 crore (Rs 50 billion) or about three times its 2005-06 consolidated sales of Rs 1,687 crore (Rs 16.87 billion).

The company also has a portfolio of five infrastructure projects (on build-operate-transfer basis). While the future looks bright, analysts consider the low promoter stake (12.8 per cent) as a risk for investors. Barring that, the stock at Rs 187.6 is quoting at 14.2 times its 2006-07 earnings, and is capable of delivering healthy returns.

7. ITC

Not just a cigarette company, ITC also has big interests in hotels, paper and agriculture products besides small presence in apparel, gifts and ready-to-eat foods among others, making it a truly diversified company. Although the share of cigarettes in total revenues has declined from 77 per cent in 2001-02 to 64 per cent in 2005-06, it is still contributing 83.7 per cent of the profits.

The other businesses have seen strong growth and in future are likely to expand faster than cigarettes. Hence, expect the share of non-tobacco businesses to increase in the future as well.

ITC is beginning to be known for its e-agri initiatives and processed food. Both are likely to be major growth drivers. The company is now aiming to expand its current reach through the e-chaupal platform of 3.5 million farmers in nine states to 10 million farmers across 15 states. Paper and hotels too are areas of future expansion.

ITC has lots of money to deploy towards growing all its businesses; given its cash profit of over Rs 2,500 crore (Rs 25 billion) -- 2005-06 -- and negligible debt. Buy with a long-term perspective.

8. Larsen & Toubro

India's largest engineering and construction (E&C) company, L&T, derives over 80 per cent of its revenues by executing projects for a wide range of industries and is poised to reap the benefits of the infrastructure push. It has received new orders worth Rs 22,300 crore (Rs 223 billion) (up 49 per cent over 2004-05) during last year (as on March 2006), leading to a 39 per cent rise in its order backlog to Rs 24,700 crore (Rs 247 billion).

The company is confident of cornering a good share of this market and expects a 30 per cent growth in order inflows in 2006-07.

The big advantage for L&T is its enviable expertise in engineering, procurement and construction (simply put, it means handling projects from concept to commissioning stage), which gives it an edge in executing complex projects and hence, in earning higher margins.

While export remains a thrust area, L&T is exploring new lucrative segments like ship building, hydro power and coal gasification to propel growth rates. Adjusting for the value of its subsidiaries (about Rs 5,000 crore -- Rs 50 billion; 19 per cent of L&T's market capitalisation) and liquid investments (Rs 900 crore -- Rs 9 billion), the stock is quoting at 17 times 2006-07 earnings and, is capable of delivering healthy returns over the next two to three years.

9. Mahindra & Mahindra

A leading player in the domestic tractor (29.7 per cent market share) and utility vehicles (47.6 per cent) segments, Mahindra & Mahindra (M&M) has changed its profile over the last few years and is strengthening its presence in other auto segments as well.

For instance, in commercial vehicles and cars, M&M has tied up with ITEC, USA and Renault, France respectively. Further, sensing the opportunity in auto components globally, the company has drawn up plans to increase revenues (from components) four-fold to $1 billion by 2010. M&M has also taken the inorganic route and acquired companies overseas.

On the other hand, growth prospects in M&M's non-automotive businesses too are looking bright. These include construction (Mahindra GESCO), IT (Tech Mahindra), leisure (Mahindra Holidays) and financial services (Mahindra Financial Services) among some others.

The total value of these businesses, estimated at over Rs 3,000 crore (Rs 30 billion), should only grow in future. In fact, some unlocking of value should happen in the next 12 months as some of these unlisted companies will come out with their IPOs. Looks good.

10. YES Bank

The only green-field banking project in the private sector in the last ten years, Yes Bank has a strong professional management team at its core. Its late entry has enabled it to set up an efficient technology backbone and, hence, ability to provide high level of customer service.

On its full year of operations (2005-06), Yes Bank reported a net profit of Rs 55 crore (Rs 550 million)  -- EPS of Rs 2; its loans portfolio stood at Rs 2,407 crore (Rs 24.07 billion) and branch network at 17 as on March 2006. The bank hopes to grow its loan portfolio to Rs 6,000 crore (Rs 60 billion) and branches to 60 by the end of this year.

Along with such aggressive expansion plans, it also expects to raise fresh capital, which may result in some expansion of equity capital.

The company hopes to maintain a relatively higher share of non-interest income at a minimum of 40 per cent. Secondly, although its retail portfolio is small and will be a focus area for the bank, it will be adopting a cautious approach here and plans to target the middle and high income category.

Introducing new products and services across banking segments will be an ongoing process. While the company is very young and hence, a relatively riskier bet than its bigger peers, Yes Bank has the ingredients to grow into a large bank over the long-term.

Vishal Chhabria, Outlook Money