5th Jan 2011
Here are some stocks that combine high growth potential, healthy profit margins and low price-to-earnings multiples. These stocks are a good bet for investment in 2011
The investment environment is uncertain because of various scams coming to light in Indian politics and banking industry. So under these circumstances which companies should an investor choose?
A sensible investor has to be obsessed with buying cheap and compare individual P/E ratios with industry averages before taking a decision to buy. At the sight of any more danger or earnings disappointment, the market will flee to safety, abandoning highly priced midcaps and ‘multi-bagger’ stocks. This is not the time for adventure.
Indian companies will have to contend with high interest rates in 2011. This means any company exposed to high debt or planning to borrow more will be penalised. Also, firms depending on borrowing-led consumption, like home builders and car makers, will hurt. Companies with strong cash flows will benefit.
There are several companies that smartly invested in capacity expansion when cost of funds were low and are ready to start production from the new capacity just as demand picks up. These firms will be able to benefit from the economic growth without having to incur a heavy cost.
Our recommendations comprise a set of 10 companies that will not only thrive in a high interest rate regime, but also find themselves the beneficiary of the strongest growth impulses in the economy. These are the themes that will drive the economy forward despite the turbulence in macro indicators.
Theme: Agricultural Growth
Stock: Coromandel International
At a growth rate of 4-5 percent, agriculture is expected to play a crucial role in GDP growth in the coming year. Indian farmers have begun to invest handsomely in improving yields and Coromandel has positioned itself as a complete farm inputs company. While the company has a strong franchise in fertilizers, it is the new businesses such as speciality nutrients that will be the key growth driver. This new revenue stream now accounts for 10 percent of sales, but is seeing a 40 percent annual growth rate. The profit margins are about three times that of the fertilizer business at 10-12 percent.
Theme: Freedom from Interest Rate Impact
Stock: Bajaj Auto
Unlike cars which are mostly bought through loans, three out of four two-wheelers are bought with own cash. Bajaj Auto would thus be able to bypass the interest rate impact as it seeks growth. After the exit of Honda from Hero Honda, the spotlight is on the second largest two-wheeler maker in the country. Investors who are bearish on Hero Honda could shift to Bajaj for the two-wheeler play. Under managing director Rajiv Bajaj, the company is focussing on a stronger product line and growth opportunity in emerging markets.
Theme: Control of Raw Material Costs
Stock: Tata Steel
Neither JSW nor Steel Authority of India has the kind of raw material arrangements that Tata Steel enjoys. The company is 100 percent self-reliant and will not be affected by price increases in iron ore or coking coal. At the same time, it will fully benefit from increase in steel prices. This will lead to improved profitability. It is also the cheapest steel stock among its peers.
Theme: Demand for Industrial Consumables
Stock: Savita Oil Technologies
The company supplies industrial lubricants, waxes and other industrial consumables. It has been showing a scorching growth in net profit for some time now. With a good promoter, sound business model and a great dividend record, it is poised to benefit from industrial growth in the coming year. It is also attractively priced.
Theme: Rural Growth
Stock: Mahindra & Mahindra Financial Services
The company has a strong presence in rural markets and derives about 90 percent of its revenues from there. Its business model reflects the company’s nuanced understanding of the rural segment. As the demand for tractors grows, the company will be a direct beneficiary.
Theme: Domestic Pharma Play
Stock: Torrent Pharma
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