StocK TalK
Remember that the financial crisis, like Swine flu, came from foreign shores. So avoid stocks with global linkages, mostly. Go for companies that feed off domestic demand.
Thus, the prospects for automobile companies may look better if they continue to get access to cheap raw material. But that may not be the case for metal and oil suppliers, who still suffer the overhang of poor prices globally. We think four themes act as superb filters to get to the cream. Within these four themes, we have picked companies that have high return on capital employed, profit and revenue growth along with a strong connection to the domestic market. This is by no means an exhaustive list. In our judgment, the companies we’ve selected exemplify the kind of plays investors will benefit from. There may well be several other stocks among the 4,000-odd listed companies that could qualify to be selected under each of these categories.
Our list is designed to offer a variety of opportunities for both the long-term value investor as well as those with a slightly higher risk appetite.
The Consumer Play
Between 2000 and 2005, nearly a third of the incremental expenditure came from the middle class. Their non-food expenditure rose 70 percent, while expenditure on education doubled. In these years, as per capita income rose 80 percent, Indians also increased their expenses by nearly the same degree. The same theme will play out in the coming years. The five broad areas to look for companies are: food, essential non-food, education, healthcare (lifestyle) and discretionary expenditure that will include consumer durables and automobiles.
Strategy: Buy it, stash it and have a good night’s sleep.
Page Industries: A small company that makes a small product with big margins: male underwear. This Rs. 200-crore company makes the Jockey brand and has a net margin of 12 percent and ROCE of 36 percent. The company has effectively positioned its brand in a largely unbranded and unorganised Rs. 900 crore innerwear market. The company is worth a little over $100 million — cheap to even buy as an ongoing business for global competitors.
Pidilite Industries: Pidilite has brands like Fevicol, M-Seal, car polish Motomax and other assorted consumer art materials and specialised home paints. The three brands are also clear market leaders in their category. The company is available at a market capitalisation of 1.6 times its sales. With a sales growth rate of more than 22 percent for the last five years, there is a lot of steam left as its brands touch fast-growing areas like education, home décor and automobiles.
Dabur: This company has focus. Five years ago, Dabur got out of the pharmaceutical business and put all its effort, like the best brand companies, behind five of its brands. Since then, its ROCE has consistently remained above 50 percent. It touched 80 percent in 2008. Dabur strategy of focussing on health foods like fruit juices sold under its Real brand is starting to pay dividends.
Procter and Gamble Hygiene: Over the last three years, the money that P&G invested did not translate into market cap gains. The worm has now turned. Its feminine hygiene line, Whisper, grew at 21 percent and is also the category leader in value terms. Its ROCE, which started dipping since 2006, has again picked up indicating that its new investments are now paying dividends. The stock is trading at its three years highs but is still priced 20 percent below its peers.
Marico: Till 2008-09 came by, the company’s sales and profits had grown for 30 consecutive quarters, indicating a stable track record. Over the last five years, the company averaged a 20 percent growth in sales and profits. It recently launched its Saffola range of food products, which is expected to give the company its next round of growth. The stock looks fully priced but its international business and Kaya Skin Clinics have started to deliver returns. Analysts expect these businesses to expand rapidly in the coming years.
Risk: People love this sector when the chips are down. But when bulls are roaming the streets, returns from this sector fall. These stocks have higher valuations than the general market, making them look expensive.
Source:
http://www.business.in.com/article/real-issue/20-stocks-you-must-own/1682/1
