Top sectors in 2010 for stock market investing

Top sectors in 2010 for stock market investing - 2009 will be remembered as a year that gave phenominal returns to stock market investors. And now coming to 2010, every stock market investor seems to highly euphoric and investing in stocks with high expectations. But its time for a sensible investor to reevaluate his expectations as the current high priced scenario can easily disappoint investors. Gone are the days of undervalued stocks. The Sensex is currently trading at a PE of 22. Sensex historically trades in a PE range of 15 to 16. So the current valuations of most major stocks are overvalued and hence a correction is due. On the other side, the growth story of India Inc seems to be encouraging, so the long term prospects are still good in may sectors.

So lets look at how different sectors might work out in 2010:

Gold: Gold should continue its growth in 2010 due to investors seeking safety in times of higher inflation and dollar loosing its value.
Automobile : Automobiles sector seems to be catching up its lost ground and the sales in the recent quarters of all major auto makers clearly demonstration a turn around in this sector. Demand for automobiles should remain encouraging in 2010 too and auto companies should maintain good growth. Auto ancillary companies will provide better opportunities. Look for stocks like amtek auto.

Banking: This is one of the sectors that is going to show continued growth on the back of growing Indian economy. Banking sector should provide the credit needed for the improving economy. We have already seen credit growth growing exceptionally in November as compared to September. Top picks in this sector are PSU banks such as SBI, Bank of Baroda and Private banks such as Axis Bank and IndusInd Bank. Long term investor should be caustious as these scripts have gone up real quick. So accumulate these in corrections.
Power : Power is a good sector for only long term investors. Only patient long term investors should invest in this sector. In short term, it will not give good returns but over long term, it will give good returns. There is a lot of capital in this sector that is in the process of building new capacity. Lot of capital has been raised recently through various IPOs such as Jindal, Adani, NHPC etc. It takes time for this capital to start producing revenue. One has to wait 3 to 4 years for good returns in this sector.

Oil & Gas: This sector seems to be encouraging in 2010. Oil and Gas prices will continue to go up in 2010 due to falling dollar price. This should work in favor of oil and gas exploration and pipe companies. Green energy stocks such as Praj, Suzlon etc should also perform good due to the increase in oil prices.

Infrastructure: Infrastructure sector start performing from second quarter of 2010 but stocks will have to be chosen carefully. Stocks with good execution capabilities of management and good cash flows will perform better. Infrastructure could underperform for short term.

Engineering & capital goods: As the economy is improving, Engineering and Capital Goods sector should perform well in 2010. There will be demand for engineering services and capital goods due to an increase in infrastructure activities.

Health care & Pharmacy: Health Care and Pharma is a defensive sector and will continue to perform good. This sector may not give phenominal results but this may not disappoint also. This sector is the best best choice for hedging your portfolio.

Cement: Cement sector is not l;ooking good for the short term due to falling cement prices but select stocks provide good opportunities to invest. Stocks related to commonwealth games area will perform better.

Telecom : Due to the fierce compitition and falling margins, the telecom sector should continue to suffer. It could give some short term upsides due to recent undervaluation but its better to stay away for medium to long term.

Mines & Minerals: Because of the increase in demand for raw materials as the economy improves, Mines and Minerals should perform well.

Agriculture: Prospects of this sector depends on monsoon next year and government focus and spending on agriculture in budget.

Information technology: IT seems to one of the sectors that might perform well in 2010. As companies around the world seems to be allocating the IT budgets that were on hold last year, order books will increase but still companies will have tough time showing good profits due to rupee appreciation. However, good midcaps might outperform large caps in 2010.

Metals: Any surge in commodity prices due to falling dollar could lead to a rally in metal stocks. Demand of metals on account of growing economy could also lead to growth

Real estate: Affordable housing sector could dominate Real Estate this year. There is already a lot of Supply, so the growth prospects in this sector seems to be low. Better to stay away from this sector in 2010.

Tourism, Hopitality and Hotels: The commonwealth games might provide a trigger for the growth in this sector. Select stocks in this sector could outperform next year due to surge in tourism and travel activities next year due to commonwealth games

Market conditions create potential sectors

This is the first month of the new financial year - 2010-11 . The markets have run up since the Union Budget announcement and going forward, the direction depends on several factors including the pace of the economic recovery in developed global markets, steps (policy actions) taken by the Reserve Bank of India (RBI) to contain the inflation rate and investor perception of its impact on growth, and Index of Industrial Production (IIP) data.

The monsoon is another important factor to watch as it has a widespread impact on the overall economy. Investors should look at balancing their portfolio with large-cap and mid-cap stocks. The large-cap stocks have a tendency to out-perform during the correction phases and mid-cap stocks have the tendency to outperform during the bull run phases. Investors should analyse the economic and business conditions, and identify favourably-placed stocks and sectors in order to get better returns.

Based on the current situation , here are some of the promising sectors, expected to perform well in the medium to long terms:

Auto

The auto sector is doing well over the last few quarters , backed by tremendous volume growth due to the rise in disposable incomes of the middle income group, and launch of new models in the market.

Analysts believe the volume growth is expected to remain strong in the coming quarters and auto stocks are expected to do well in the medium term.

Banking

The credit growth has picked up over the last few months and is expected to remain strong with improved economic conditions and pick-up in corporate demand.

The interest rates are also expected to go up in the short term which favours banks. Loans are repriced immediately. Therefore, the net interest margins (NIM) are likely to go up.

A higher NIM along with loan growth results in improved earnings in the medium to long terms.

Hotels and tourism

The travel and tourism sector in general is picking up. The thrust on domestic tourism and rise in disposable incomes of the middle income segment will result in more business for the companies operating in the hotel and tourism sector.

Information technology:

The information technology sector has the potential to do well as the global economic conditions improve. Investors should go for frontrunner companies that have well-diversified execution models, a wide base and the power to hedge against sharp currency movements.

Paper

The paper sector is expected to fare well with improved economic conditions and corporate growth. The paper prices have moved up over the last few months and the companies are expected to encash on the increased demand and pricing situation in the coming few quarters.
Investors can add some front-runner paper companies to their portfolio to increase diversity.

Tyre

The companies in the tyre sector are expected to do well from a medium term perspective, fuelled by robust demand.

The auto sector (both two-wheelers and four-wheelers ) has had major volume growth over the last few quarters due to improved economic conditions and consumer sentiments . Also, a number of new automobile companies are planning to enter the market.

There are some concerns on the rise in raw material prices (rubber) but the robust demand will help the tyre manufactures to pass on the cost to customers and hence the outlook for this sector is promising in the coming quarters.

A significant portion of the global transportation fuel market in places such as India and Europe relies on diesel and cannot benefit from cellulosic ethanol technologies . For these markets, jatropha -based biodiesel has great potential as an alternative fuel.

Ten success stories in unheard of sectors

Mick Jagger, the only surviving dinosaur from the Jurassic period, said that he became interested in cricket when he watched a young Dennis Lillee tear into bowl. Business is less a spectator sport and more a narrative. But how do you figure out who is the big story? Only a few entrepreneurs manage to make it big. Those manage to grow big create wealth for themselves, their shareholders, their employees and suppliers.

Most entrepreneurs in Forbes India’s “hidden gems” list fit the bill. They make their money in businesses as varied as coal tar pitch, cooling solutions, water desalination, building truck bodies and even water treatment. They overcome adversity. Most are unlisted companies who will go public some time. There are a few that are listed but they are still small and have growth left in their sails.

Perhaps the most critical task for us was identifying these companies. We decided to use a surrogate way. We decided to follow the moneymen. We pored over a list of 800 deals private equity companies had done over the last four years and looked for companies seeing a sharp rise in sales, profits and valuation.

Then we did the taste test. A few discreet calls to a few private equity investors that have made some serious money told us that the companies in our list were thought of highly. We applied a third hurdle. If there were more than one private equity investor in the company then that was one more thing in the favour of the company. Having identified the gems, we got Dun & Bradstreet to verify the financial numbers that companies were disclosing to us. Only when the numbers added up did we move ahead.

The list that emerged had one very interesting common feature. Except for three companies, Acme and ACB (India) and Firepro, other seven companies are actually old businesses that been refurbished through smart business model changes and passionate entrepreneurship. Almost 90% of the businesses in India are family-owned. Once they were thought of as middling companies who would disappear once the IIT-IIM crowd took to business. That has not happened. Instead, the family-owned businesses have gone out, picked up new technology, learnt to value professionals and experimented with business models. For instance, Himadri Chemicals and Cebbco are such companies. The great thing is that the gems in our list are scattered all across the country — from Jabalpur to Thrissur.

This is why it is great to see blue-blooded Wall Street firms understand and finance some of these old businesses. Ten years ago, Goldman Sachs would have financed an IT services firm. A company like Sudhir Gensets would have been dismissed as an old entity with a commoditised business. But today, Goldman has put money in Sudhir because it knows that the company serves a real need that is unlikely to disappear in a hurry.

ACB (INDIA)

Promoted by G.C. Mrig, Capt. Rudra Sindhu and Major Satya Sindhu; Washes coal to reduce its ash content helping power plants to become more efficient and eco-friendly.
Secret Sauce Seasoned team, favourable regulation and sustained
demand for coal.
Financial Dashboard In 2006, Warburg Pincus bought a 24 percent stake for Rs. 310 crore. Aryan plans an IPO this year to raise Rs. 1,000 crore. Warburg will sell 10 percent. Aryan Coal’s valuation now stands nearly seven times its 2006 level.
What the Smart Set Saw First mover advantage.
Guiding Light To go beyond coal-washing and expand power generation capacity.

In 1998, when Mrig and his two friends founded Aryan Coal Benefications Ltd, the annual production of coal in India stood at about 250 million tonnes. Indian coal typically has high ash content that keeps combustibility low and affects the efficiency of power generation equipment. Only 5 percent of the coal production in the country was “washed” to reduce the ash content and most saw no need for this extra expense.

So it was not surprising when Mrig, who had spent 40 years in the industry including as managing director of Bharat Coking Coal Ltd., found it tough to get orders for his new company. His friends even wrote him off, saying, “Aapne toh paisa duba diya,” (you have wasted your money).

That was then. Now annual mining has increased to about 450 million tonnes. The government has made it compulsory for power stations located 1,000 kilometres or more from mines to wash the coal. Given that four out of 10 power stations in India are located in such faraway locations, the scope for the coal-washing business has expanded.

ACB has 62 million tonnes of coal-washing capacity, nearly half of the 130 million tonnes capacity in the whole of the country.

Private equity watchers now think that Aryan might do for Warburg Pincus this year what Bharti did for it nine years ago. And both investments were made by Pulak Prasad, who has since started his own hedge fund Nalanda Capital. Just the way Prasad spotted Sunil Mittal’s execution he was able to see Mrig’s understanding of this industry and execution skills.

Most of ACB’s washeries are located very close to the coal fields and the transportation costs are low. The company has massive operating profit margins of 44 percent that the company makes. Crisil expects ACB to benefit from the increase in demand for washed coal and stringent prequalification requirements that restrict new players. So, its market share is not under threat in the foreseeable future.

ACB doesn’t waste the coal reject that remains after the washing either. It uses the material to runs some small power plants. With 4 million tonnes of coal reject coming free every year, this has become a very profitable way for ACB to dispose the waste.

Mrig says he got the idea to recycle the waste when he saw gold miners in South Africa going after dumped mines and the Chinese extracting most out of low-quality coal.

But now it wants to enter the big league. It plans to build a 1,200 MW power plant in Madhya Pradesh and a 1,100 MW plant in Chhattisgarh.


FIREPRO SYSTEMS

Founded by N.S. Narendra; Provides fire protection and security solutions
Secret Sauce Follows the integrated approach to make sure that the customer gets all the services under one roof. Went global early and now gets 25 percent of revenues from overseas.
Financial Dashboard AIG Investments (now PineBridge Investments) invested Rs. 50 crore in 2006 for 23 percent. Recently Standard Chartered PE invested Rs. 150 crore, at four times the valuation that Pinebridge invested at.
What the Smart Set Saw A company that looked and behaved like its IT peers but was catering to a faster growing construction industry.

N.R. Narayana Murthy probably doesn’t know N.S. Narendra though both of them attended the same college — Mysore’s National Institute of Engineering — but 20 years apart. The similarities don’t end there. Like Murthy, Narendra also founded his company in a small room with a capital of a little more than R.s 10,000 back in 1993. And very much like Infosys, today Firepro is a synonym for its industry - fire protection and security solutions.

And to do that, Narendra first focussed on project delivery to differentiate Firepro from the mom-and-pop companies that had come to dominate the market. So when Intel was developing a 500,000 square feet property in Bangalore and had a specific deadline to finish it, it chose Firepro. “This is important because about 35 percent of the business comes from repeat customers,” says Narendra.

But when the competition from multinational like Honeywell and Siemens increased, Narendra did what nobody else had done before. “We followed an integrated model from 2000. While others would specialise in security and automation or fire suppression system, we brought every service under one roof as technology was evolving. We even now work with IT companies like Cisco to provide network solutions like developing city surveillance system for Bangalore.”

And to make sure that he always had the edge, Narendra invested in people. Of the 1,500 employees, 80 percent are technically qualified. He even managed to lure people employed with international fire protection companies and information technology firms to work for him. And Narendra has been willing to pay for talent with salary packages for senior positions increasing five-fold within two years.

Firepro’s revenue have jumped from Rs. 20 crore in 2002 to Rs. 500 crore last year. A fourth of this revenue comes from international operations – another differentiator for Firepro. Next on his agenda — one on which Narendra has made “a certain amount of investment” (as he puts it) — is providing premium home automation solutions for high-end customers.

The initiative has also seen the company trying to transform itself from a business-to-business company to a business-to-consumer company. It has opened an outlet in Bangalore with plans for more in other cities.

The big question, of course, is whether the Indian market has evolved enough to demand expensive home-security solutions that involve using the remote control or a handset from anywhere in the world to monitor what is going on at one’s home? Narendra is willing to take the bet and so are his two investors – AIG and Standard Chartered PE.

by Prince Mathews Thomas


HIMADRI CHEMICAL

India’s largest maker of coal tar pitch, used in making aluminium and graphite. Founded by Kolkata-based Choudhary family. The second generation, led by Anurag Choudhary, has taken charge.
Secret Sauce Has the technology to convert even low quality tar into high quality coal tar pitch; has the scope to expand portfolio to 22 products from seven.
Financial Dashboard In 2008-09, revenue was $78 million, core profit margin was 38 percent.
What the Smart Set Saw “A quality product that is backed by robust customer service and technology expertise ,” says Vivek Chhachhi of CVCI, who says it was Himadri’s customers who helped spot and later recommended the company to the private equity major.
Guiding Light To become India’s largest ‘carbon corporation’.

It is easy to miss Himadri Chemicals’ plant in Singur, near Kolkata; being a lesser-known neighbour to the unfinished unit of Tata Motors’ Nano project. And even the few who did notice it, might not have guessed that what runs through a refinery-kind of network of pipes and storage tanks is coal tar.
Coal tar? Himadri Chemicals’ CEO Anurag Choudhary is used to the casual reaction from people. “Most think it is the tar used to make roads,” he says. But for Choudhary, coal tar is a multi-billion dollar opportunity that was first spotted by his father and three uncles back in 1987.

The main product made out of coal tar is coal tar pitch (CTP) that is used in making aluminium and graphite. “It was totally dominated by the plants of Steel Authority of India. But there was a 500 percent difference in the raw material price and selling price of CTP. We spotted the opportunity,” says Shyam Choudhary, Anurag’s father.

In 2007, Himadri unsuccessfully tried to take over Rutgers Chemicals, a Germany-based industry leader in CTP. But for Anurag, the whole experience was an eye-opener.

“Rutgers, a $1 billion-company, was making 22 products out of coal tar. We were making only two. So we decided to instead invest for organic growth,” he says.

Three years later, Himadri’s portfolio has expanded from two to seven products. “Almost 75 percent of coal tar pitch we make is used by aluminium companies, who are doubling their capacities in the next two years. We are also quadrupling our capacity and setting up another unit in China, the world’s largest market and maker of aluminium,” says Anurag.

ACME TLELPOWER
Manufactures “passive” infrastructure products like enclosures, air conditioners and power management units for telecom companies. Founded by Manoj Kumar Upadhyay, 39.
Secret Sauce Materials that cool electronic equipment using very little electricity
Financial Dashboard Net sales (for the 14 months to May 2009) was Rs.2,130 crore; Net profit was Rs.505 crore; five year CAGR of 128 percent for sales and 122 percent for profit; Rs.300 crore cash flow generated from operating activities in a 14 month period; raised Rs.197 crore from DB International, Earthstone Holdings and Kotak Mahindra Capital in 2007 by selling 1.66 percent in 2007 and another Rs.400 crore from Monsoon India Inflection Fund and Jackson Heights Investments in 2008 by selling 3.35 percent. Acme’s valuation in both cases was around $3 billion. But when market conditions delayed Acme’s planned 2007 IPO, the company was forced to buy back most of the shares held by these investors.
What the Smart Set Saw A great inventor who understands energy applications inside out and has been able to build a business of Rs. 2,000 crore in just six years.

It is not often that a fast-growing company with revenues in hundreds of crores is able to expand without having to dilute the capital or borrow heavily. One could argue that when a company reaches revenues of Rs. 100 crore, its need for capital balloons and the entrepreneur must necessarily resort to external financing.

Manoj Upadhyay was able to reach Rs 1,500 crore without diluting any stake and needed to take just Rs. 100 crore as debt. Considering that his clients were huge companies like Airtel, Vodafone and such like his products must have enjoyed a huge advantage to command the premium that they did. His internal accruals were huge enough to fund the growth.

And he has done this through fulfilling a very simple need of mobile companies. He reduced costs of operating shelters that house mobile companies’ base-stations. Almost 35-40 percent of costs of running these shelters can be attributed to electricity costs in cooling electronic equipment inside a base station. Upadhyay’s company makes materials that maintain AC-like temperatures without electricity and even air conditioners without any compressors.

But with the telecom sector bleeding from falling tariffs and intense competition, Acme is trying a new tack to keep growing. It is setting up towers of its own. The maximum number of telecom towers that are economically feasible for operators is around 350,000, says Upadhyay. That number could be 450,000 if operators could get “Delhi prices in Mizoram” from their towers.

Enter “Ultra Low Cost Solution” (ULCS), Acme’s most complete and power-efficient solution for telecom sites, which it claims consumes 40 to 60 percent less energy than existing solutions. “A typical multi-site tower uses 25-30 KW of energy, we can now do it in 5 KW,” he says.

Upadhyay is now setting up his own towers using his ULCS solution, in remote and hitherto unviable locations, to offer them on a rental basis to telecom operators. The only other way his customers can buy ULCS is if they buy a ten-year service agreement from Acme.

As the telecom sector keeps attracting more and more entrants and they launch more services, expect Acme to retain its top slot. He now wants to produce over 20 products at the Hooghly unit. Enough reasons for Bain Capital to find its first investment in India in Himadri last year and for Citigroup Venture Capital International, which had fist invested in 2006, to stay put for “at least three more years.”

SUDHIR GENSETS

Makes power generators using know-how from Cummins. Promoter Sudhir Seth is transforming the business into a service-driven one.
Secret Sauce Extensive range of electricity generators powered by know-how from a three-decade-old “marriage” with Cummins, all put together at six manufacturing plants
Financial Dashboard Net sales - Rs.900 crore; Net profit margin – between 11-12 percent. Net sales CAGR over the last five years 21 percent. Goldman Sachs and GE Investments together invested Rs.300 crore in 2007 for a 10 percent stake, valuing the company at Rs.3000 crore.
What the Smart Set Saw An efficient, stable and profitable market solution to India’s perennial power woes.

More than three decades after Sudhir Seth decided to manufacture power generators to address the electricity shortfall faced by small and medium Indian businesses, the energy shortage hasn’t abated. Meanwhile, Sudhir Gensets has become a Rs.1,000 crore company with over 40,000 customers across India.

With a 60 percent share in the segments that he operates in, Sudhir is today buys giving his business a services touch. The company has now started to rent out gensets to real estate and infrastructure projects. The company expects this new revenue stream to account for 5 to 7 percent of revenue.
Sudhir’s rapid growth over the last few years was powered to a large extent by the telecom and real estate sectors, both of which were building cell sites, homes and offices at a furious pace. As growth for both sectors got broad-based towards middle India, where power was unreliable at best or absent at worst, Sudhir became the de-facto power utility.

But with telecom and real estate growth rates much slower than earlier, the company started looking for newer sources of revenue. The services business has emerged as one answer.

Till now Sudhir Gensets was only interested in making the sale, with post-sale servicing being done by local dealers. But after realising the importance of steady maintenance revenue, it has started offering its own maintenance services to customers in Punjab to begin with. Seth says the pilot has been extremely promising, even helping it grow its marketshare by 5-6 percent in the state due to a better understanding of customer needs born from frequent service interactions.

Offering turnkey project management and implementation services around power projects and electricity contracts is another area of growth. “Rather than selling our products to contractors, we become the contractors,” says Seth’s son, Rahul, who is also the company’s joint managing director. “The response has been so overwhelming that we are setting up a new manufacturing plant in Manesar to address this additional demand,” says Seth.

CEBBCO

Makes steel bodies for goods carriers. Promoted by Kailash Gupta and Ajay Gupta
Secret Sauce Technical knowledge that combines knowledge of motion technology and steel fabrication.
Financial Dashboard Jacob Ballas, which has New York Life as its anchor investor, has invested in the company at a valuation of Rs. 110 crore. Today the company is being valued in the range of Rs. 500-600 crore.
What the Smart Set Saw An entrepreneur who had built deep relationships within the heavy vehicles industry and who was nimble enough to adapt his business model in the worst of times.
Guiding Light To use knowledge and technology to be the largest player in fabrication for goods applications like trucks and railway wagons.

For Ajay Gupta, opportunity was born out of a crisis. Gupta had just invested Rs. 40 crore to automate his plant when the goods carrier market went into a cold freeze in 2008. “In adversity, you can either sit and wait for the situation to clear out or try and figure a way out. Ajay did the latter,” says Vinay Shah, CEO, Mosaic Capital, whose firm also provides corporate finance advice to Cebbco.

Forced to look for alternatives, Gupta figured that Cebbco’s fabrication strength and domain expertise could be applied to one sector that wasn’t moribund: Indian Railways. He decided to move into the territory decisively. And in a short time, he established a successful business there.

Gupta took charge at Cebbco, his father-in-law’s company, only five years ago when it was a Rs. 20-crore company making “bodies” for Tata trucks. Aided by low costs of conversion, Gupta took the business to Rs. 116 crore. The railway business is helping the fast ramping up.

There is a risk that it may get some tough competition for the wagon business. But Cebbco is going beyond just wagons and doing refurbishment for locomotives as well. His investors believe that Gupta should not take his eyes off the core business. “I think Railway business is great and it was commendable the way Ajay has gone out and got this business, but he should keep his core business extremely competitive,” says Bharat Bakshi, Jacob Ballas.

SHRIRAM TRANSPORT FINANCE

Belongs to Chennai-based Shriram Group. Lends to small truck owners. Focusses on the segment not taken by banks.
Secret Sauce Built scale in a niche business by understanding the customer well.
Financial Dashboard ChrysCapital invested at Rs.35 per share in 2005; TPG Newbridge came in at Rs. 112 per share in 2006; JM Finance/Blueridge/Tiger Global paid Rs. 300 per share in 2007.
What the Smart Set Saw An ability to minimise risk in a segment considered high-risk.
Guiding Light To streamline the business by eliminating the middlemen dominating the truck resale business.

It is an unusual business model by any count. As soon as its customers become large enough, Shriram Transport Finance Company (STFC) asks them to take their business away to a bank. The company will only lend to truckers who own between one and four trucks. A bulk of the lending is for the resale of old trucks. Yet, the model, which has helped build a customer base of 1.4 million customers and an asset value of 27,000 crore for the Chennai-based company, has been hugely successful. STFC has over the past 30 years built up a rapport with the trucker fraternity which has been impossible for anyone else to replicate so far.

So how does one make money by lending to a category that was left out by traditional lenders for being high-risk? “Serving sub-prime customers was no easy task,” says R. Sridhar, managing director of STFC. “For years, STFC would get a lower credit-rating because of the customer profile, leading to more expensive funds. Finding resources from the banks and institutions for this large but credit starved segment was an ardous process.’’

Despite this handicap, the company was able to bring in institutional credit to the market that it built up simultaneously. The rates at which it lends have softened to 16-18 percent per year from above 20 percent even four years ago. Ironically, the company’s large customer base helps it spread the risk, says Sridhar.

One measure of STFC’s success is the returns that the Delhi-headquartered private equity firm ChrysCap reaped last month, when it sold off its holding at 11-12 times its investment. ChrysCap earned more than Rs 1,400 crore on the investment it made five years ago.

The focus at STFC these days is to expand the business further, by pushing out the traditional truck brokers who dominate the resale market. This is being done by organising the sales of repossessed trucks at auctions all over the country. STFC finances the purchase but without any commission, saving money for both buyer and seller. The company has begun maintaining a nationwide database of trucks, with pictures of the machine and details of its condition and age. Truckers can access these on touch screens and decide if they want to buy a vehicle.

VA TECH WABAG

Water treatment company. Bought out by Rajiv Mittal and his colleagues with private equity assistance. Took over its parent to become an India-based global player.
Secret Sauce VA Tech Wabag’s Austrian roots and local management gives it a twin advantage of global technology and economical costs.
Financial Dashboard This has been one of ICICI Ventures best investment ever. It sold a part of its stake realising an annualised return of over 240 percent over five years.
What the Smart Set Saw A competent management, a bunch of patents and a growing opportunity.

Many years ago, Rajiv Mittal was just another employee in UK-based Wabag Water Engineering, which later became VA Tech Wabag. A quirk of circumstances and the early leadership lesson saw Mittal stave off big competition from the likes of engineering giant Larsen and Toubro to buy the Indian arm of VA Tech in 2005. Another set of events finally culminated in Mittal buying out the Austrian parent in 2007, overnight making him a global player with a presence in 19 countries and a large research establishment in Vienna.

The demand for water industry is exploding. The desalination business is expected to grow at 26 percent per year. It is this opportunity Mittal is poised to tap.

Mittal and his colleagues, who had invested Rs. 10 crore for a minority stake in 2007, are worth more than Rs. 400 crore for their current 38 percent stake. Investors like Singapore Investment Board, Passport Capital and Satra have latched on to the story buying 30 percent in the last one year. ICICI Ventures, which helped Mittal in the management buyout, made its biggest ever return when it sold a part of its stake. As Mittal and ICICI Venture mull an initial issue of shares in the coming months, VA Tech may well be poised to be the next hot stock on the block.

VA Tech has a great presence in the government sector — cleaning up sewage water in cities and fixing drinking water supplies. Mumbai, which now sends its sewage into the Arabian sea, is set to put out a $1billion contract in the next couple of years to treat it and reuse the water for non-potable purposes. Mittal has been making his rounds to the city and is confident of winning a few contracts. Recently, his firm won the biggest desalination project in Chennai, with IDE as its partner.

However, the opportunity is attracting serious competition already. Having managed to set up a Indian multinational leader, VA Tech now has to defend it turf, retain its talent and keep its cost competiveness to stay remain the leader in its business. Mittal is already tied up with Chennai-based Anna University to do local research and is also setting up a local research centre to augment its existing centre in Austria. Says Mittal: “Water technology is still evolving and we have as much as an opportunity as anyone else in the business.”

MANAPPURAM FINANCE

Thrissur-based lender against gold collateral. Promoted by P.H. Nandakumar
Secret Sauce Low-cost, high-speed working capital lending against one collateral most Indians have: Old gold ornaments.
Financial Dashboard Sequioa Capital invested in 2006 at Rs. 130 a share. UK-based fund Ashmore-Alchemy invested a year later at Rs. 170 a share. Today, the share price is Rs. 677.
What the Smart Set Saw Lending to customers who aren’t necessarily poor but who would never access a bank. All lending backed by gold!

Lending against gold is an age-old business and at the face of it quite simple. After all, what does a lender do? He assess the value of jewelry and gives out a loan on a substantial portion of its value. Theoretically, then, this should be a totally commoditised business. But then, there are some like Manappuram Finance that take it a professional notch higher.

Till 2006, the business trudged along with a growth rate of around 15-20 percent per year. Then in 2006, something changed. ICICI Bank saw a potential in bankrolling entities who were reaching out to the unbanked. And Nandakumar decided to step on the gas. He borrowed to boost his lending capacity, but also raised equity to keep a leash on his own gearing. As a result, Manappuram’s network has grown from 50 branches in 2006 to almost 900 branches today.

Nandakumar likes to keep each branch very small and leanly staffed. When the business grows, he doesn’t go for a bigger office but opens a new branch. “Our aim is to give a loan in five minutes. Today. it takes about 10-15 minutes still. We want to cut that down,” says I. Unnikrishnan, president.

The gold lender’s costing is his advantage. “Assume 20 minutes for a loan. So 25 loans a day? Assume 20,000 loan size. That’s just Rs. 5 crore business. My costs are less Rs. 2 lakh per branch. It would be hard for a bank or even an NBFC to keep their costs so low,” says Unnikrishnan. So players like Fullerton, Reliance Money, Shriram Chits and even Mahindra & Mahindra Finance tried getting into the gold loan business but haven’t been able to scale up.

What’s next? “There is no reason why can’t grow to 2,000 or 3,000 branches across India. After all, gold is there in almost every Indian household.” Ask Nandakumar whether he sees any risks and pat comes the reply: “Yes if the price of gold falls to zero then we are in trouble.”

NITESH ESTATES

Bangalore-based real estate developer; promoted by Nitesh Shetty.
Secret Sauce Uses the joint venture model to build some of the best addresses in Bangalore.
Financial Dashboard Och-Ziff Capital Management Group, one of the biggest hedge funds in the world, has quadrupled its investments since 2007.
What the Smart Set Saw A young entrepreneur with verve and a differentiated, low-risk business model in a fast growing business.
Guiding Light For now, it is adrenalin. Says Nitesh Shetty, 32, “We wanted to show that young companies can fight the big boys.”

Nitesh Shetty was all of 24 when he started building some 80,000 square feet of property in the heart of Bangalore city where he grew up. Shetty, at that time, had no experience in the real estate business and his first tryst was a lost court case with a prominent city builder. Shetty had managed to convince the owner of the property to jointly develop the piece of land under his firms’ brand name. The trick worked.

Today Nitesh Estates is developing over 8 million square feet of hotels, housing, commercial and retail space in the country. This includes the Rs. 700 crore Ritz Carlton project – the first one from the global chain in the country. Pitched against veterans like Delhi-based DLF and Unitech who accumulated land over decades, Shetty has made a name for itself by a joint venture model. Nitesh Estate doesn’t buy land but instead it makes the land owner a partner and gives him a portion of the total revenue from the developed property. Not only does Shetty save the capital for buying the property, but he also saves a considerable time in land acquisition.

Shetty, a national tennis player and a close friend of Mahesh Bhupati, started an advertising business borrowing Rs. 12,000 from his mother. His company, Serve and Volley, got a big break when it won the contracts for advertising in the Delhi and Calcutta Metros. Shetty wanted to do something bigger and a property in M.G Road, Bangalore’s high street bought him into the thick of the business.

In the real estate business, this far, only companies with big land banks attracted high valuations. Shetty, however, worked with an asset-light model through his joint ventures. After six years, Nitesh’s 8 million sq.ft. under development compares well with new players like India Bulls real estate and Phoenix Mills. Shetty’s projects are mostly in Bangalore but he is slowly expanding to other cities. The company is developing luxury villas in Goa and will shortly issue shares to raise capital to expand its operations. With cities like Mumbai redeveloping their old precints, Shetty is looking at a large opportunity that won’t vanish in a hurry.

Experts say mkt momentum to continue, advise sectors

Indian stock markets have completed a classic rebound. After the National Stock Exchange’s 50-share Nifty recently touched a 15-month high of about 5,150 levels, a sharp sell-off saw it retracing to about 4,550. From thereon, throughout last week and today, stocks rose rapidly and the Nifty is now perched atop the 5,000 level. Was the short-term correction that took place was a blink-and-miss? Will the momentum continue? How should you, as an investor/trader, position yourself?

“Even as many investors are saying the markets are not worth these prices,” says Sajiv Dhawan of JV Capital Services, “There is enough buying and enough appetite at lower levels and any trend follower would obviously be long at the moment.”

Dhawan says he does not see any short-term trigger for a 5–10% correction. “There is no negative news anywhere, global markets are performing well, liquidity is there, apart from interest rates, which are likely to go up probably next year.”

Valuations of Indian stocks are high, says David Pezarkar, Head - Equities, Shinsei Asset Management (I) Ltd. However, he adds that the amount of leverage seen in the market — “the sign of an impending reversal,” — is not high yet.

The rally that took place between the Parliamentary elections outcome in May and now has “sanely” chosen stocks that were good on earnings, he says. “The broader indices are up by 10–11%. But among the midcap stocks, half the stocks have fared well while the other half have not. “The stocks that have done well are the ones, which have either surprised positively in terms of earnings or the outlook has improved.”

“As long as foreign institutional investor (FII) flows continue to remain robust, there is no reason to be extremely bearish,” he adds.

Stocks/sectors that may outperform

“The sectors where valuations are stretched or those which have outperformed may be muted ahead,” Pezarkar says. “It is likely that certain sectors like maybe auto or banking will not continue to outperform. These may move in line with the markets,” he says, adding that the public sector banks looked more vulnerable due to rising interest rates, high government borrowing and risk on increasing non-performing assets. “Capital goods, which have been relative underperformers over the past six months, should see better traction going ahead.”

The outlook on the metal sector is also metal, opines K Ramchandran, CIO, Karvy Private Wealth. “Metals will take a breather sooner than later,” he says, adding, “It is a cyclical kind of business, which depends largely on the demand coming from China.”

“I do not see a breakdown in metal stock prices but definitely I think it will take a breather and the upmove going forward will be a little more measured,” he says.

What is the view on Suzlon Energy, a stock that trades on huge volumes, but has, in the past six months under-performed due to various debt concerns? “It remains a trader’s stock,” says Dhawan. “The target is maybe 5-10% higher from the current levels over the next few days but it is not a stock that I would be buying with any real conviction and even if it went to Rs 75-80, I would look to exit trading positions and from an investment perspective, probably still avoid.”

“It is definitely the one that can give you much higher levels over a period of time but I think there have been enough problems and issues on the stock over the last year, which should drive away a lot of serious investors because they have had their fingers badly burnt.”

Best sectoral performers - 18 Sep 2009

It has been a roller-coaster ride for investors right from the beginning of the year. Those who dared to bet against the crowd during the panic of March, have raked in unbelievable returns.

Real estate and metal shares witnessed the sharpest bounceback, partly because these had also been badly beaten down during the bear phase.

Other strong performers are banking and automobile shares. Investors briefly shifted to defensives like FMCG and Pharma but shunned them the moment the broad market started to look up.

Realty Sector



Metal Industries


Textiles Industries


Auto Companies


Sugar Industries

Worst performing sectors & companies - Aug'09

We bring to you the sectors and companies, which saw their performance meter dipping. To put it in few words, they were the worst performing players of India Inc. Investors better be watchful, as the chances of recovery for these sectors are slim.

Real estate:


The change in product mix from high margin luxury apartments to low mid housing segments affected sector’s performance. Though, the residential segment has seen recovery, retail and commercial segment continue to languish.

The sector has to reduce its dependence on borrowed funds. Developers have realized increasing volumes will now drive growth and profitability. Hence, they have launched the products in mid market/affordable segment and have also cut down the prices of existing projects. This might revive demand a bit, but margins will remain muted.

Hospitality:


Double whammy in terms of terror attacks and global economic downturn resulted in 15-20 % drop in occupancy.

Coming quarters would be tough for companies. Occupancy rates continue to be low and most hotels have nearly halved their room rates in a bid to boost sales. EIH, Asian Hotels, Indian Hotels performance took a hit during the quarter.

Shipping:


Shipping companies continue to grapple with sluggish global trade volumes. Moreover, spot freights have also fallen on y-o-y basis. In tanker segment, spot average freight rates declined by as much as 88% y-o-y .

Indian companies have a majority of fleet capacity in this segment. Though, the companies have long-term contacts with customers, but that could help offset the impact of weak freight rates only partially.

In short term spot freight rates are expected to remain weak. GE Shipping and Shipping Corporation of India were worst affected companies in the June’ 09 quarter.

Sectors and cos that look attractive over the long term

ET Intelligence Group wades through the gobbledygook of the latest Union Budget to bring you the sectors and scrips that look promising over the long term. These are the sectors that will be most likely benefited by the government's initiative to encourage expenditure on infrastructure and consumption in the country on a long term basis.

Agriculture:


Proposal

The recent budget provides for 13% growth in agricultural credit in FY10, an extension to the interest subvention scheme, and sizeable increase in allocations for the Accelerated Irrigation Benefit Programme. Budget allocations have also been substantially increased towards the National Rural Employment Guarantee Act and the six schemes under Bharat Nirman.

Impact

Higher liquidity in the hands of Indian farmers will benefit companies providing direct or indirect inputs to the agriculture industry such as seeds, fertiliser, agrochemicals or pumps and pipes for irrigation, warehousing infrastructure and transportation.

Top Picks
Advanta, Rallis, Tata Chemicals, Chambal Fertilisers and Jain Irrigation, Aries Agro and Sabero Organics.

FMCG:

Proposal

The government has increased its allocated expenditures on many rural deveplopment schemes leading to more money in the hands of rural consumer. Despite the central excise duty rate having increased to 8%, the government has maintained the excise duty rate on food items, items of mass consumption like pressure cookers, cheaper electric bulbs, low-priced footwear, and water filters/purifiers, CFL, etc at 4%.

Impact

The FMCG sector, which is much dependant on the consumption demand, does have a reason to smile from this budget. Increase in income means more money in the hands of the have nots. This will mean more new customers for the companies in the sector.

Top Picks:
Hindustan Unilever, ITC, Nestle, Dabur, Eveready Industries, Emami, Jyothy Laboratories, K S Oils, Relaxo Footwear and Cera Sanitary.

Auto:

Proposal

Higher investment in rural areas and infrastructure sector will open growth avenues for the automakers. Expansion of the scope and extent of the projects under National Rural Employment Gurantee Act (NREGA), higher fertiliser subsidies and enactment of national food security bill put more money in the hands of rural households and induce investment in the farm sector. Automakers will also gain from the Budget propsal to extend tax deduction for R&D expenses.

Impact

The proposals will expand demand for LCVs, two-wheers and entry-level cars. They may also benefit heavy and medium commercial vehicles.

Top Picks
Tata Motors, Hero Honda, Maruti Suzuki and Mahindra & Mahindra.

Power and Infrastructure:

Proposal

The budget aims to raise infrastructure investment to nearly 9% of the GDP by 2014. In the current budget, the allocation for Highways was up by 23% while that for railways has nearly doubled. The allocation for rural electrification programme is up by 30% while Jawaharlal Nehru Urban Renewal Mission programme is set to double. The government is also readying the blue print for a National Gas Grid.

Impact

The companies in infrastructure construction and capital goods sector are likely to grow and bag new orders. Though there could be some realignment in the relative growth between the some segments of the sectors.

Top Picks
BHEL, L&T, Kalindee Rail Nirman, Patel Engineering, Cromption Greaves, KEC International, GAIL, BEML Ahluwalia Contracts, Subhash Projects, Pratibha Industries, Genus Power.

Healthcare:

Proposal

The government has increased allocation towards healthcare schemes like National Rural Health Mission and Rashtriya Swasthya Bima Yojana (RSBY). It has also brought down the cost of drugs, pharmaceuticals and medical equipment by keeping their excise duty at 4%. The cost of certain life-saving drugs and life saving devices has been reduced by curtailing their customs duty and exempting them from excise duty and countervailing duty.

Impact

These measures, although not providing any immediate or ostensible benefit to the sector, are going to pave way for increased expenditure towards heathcare reforms.

Top Picks
Cipla, Glaxosmithkline Pharma, Piramal Heathcare, Cadila Heathcare and Indoco Remedies, Elder Pharma, Zydus Wellness.

Education:

Proposal

The access to education is expected to increase manifold. The Budget proposes to open a central university in all the uncovered states in the country. This is on the top of the government programme to cover the entire nation with new IITs and IIMs and National Institute of Technology. Besides, the government constitutes to expand and deepen the school education through Sarva Shiksha Abhiyan.

Impact

The move will open up new growth avenues for companies providing e-learning solutions, education software and post-college or vocational training courses. More students also mean greater demand for books, stationeries and other reading materials.

Top Picks
Educomp, NIIT, Navneet Publications, BILT, West Coast Paper, Core Projects.

Metal and Cement:

Proposal

The budget proposes a big step-up in public investment in transport infrastructure, power, gas, housing and urban infrastructure. The government is also focusing on rural developments in a big-way. Budget also aims for slum-free cities in next five years.

Impact

For most infrastructure projects cement and steel are must have inputs. Infact there can't be any construction without using a minimum quantity of cement and steel. A rise in rural income will in general push-up per capita consumption of steel in India which is around one-tenth of developed countries. It's the same in case of cement and other metals. Public investment in housing will spur demand for sanitary ware, tiles and home accessories.

Top Picks
SAIL, JSW Steel, ACC, Ultratech, Shree Cement, Madras Cement, HSIL, Cera Sanitaryware, Nitco.

Telecom:
Impact

In spite of a strong growth, telecom sector in India has not penetrated much into the rural India till now. As per a TRAI (Telecom Regulatory Authority of India) report, the rural teledensity at around 10-11% is almost one-seventh of urban teledensity in India.

Currently, the urban circles are highly crowded with the presence of at least 5-6 operators in a circle and penetration level as high as 90%.

This leaves little scope for future growth in these regions. This is why most of the companies are increasing their focus on rural areas and small towns. For instance, Bharti Airtel, the largest mobile operator in the country, recently announced the formation of a seperate business unit related to rural business. Others are also expected to follow the suit. A portion of the increased per capita income of rural consumers will be diverted towards communication related activities. The cheap handsets alongwith lower tariff rates make it compelling for rural population to use more and more of mobile telephony.

Top Picks
Bharti Airtel, Reliance Communications, Idea Cellular and Nu Tek.

How the Budget could hit your stocks

The Budget is expected to contain measures to accelerate growth while being fiscally prudent.

The Union Budget 2009-10, to be presented on July 6, will be notable in more ways than one.

ith the United Progressive Alliance getting a reasonably strong mandate in the May 2009 elections and the absence of major opposition from alliance partners, the market is expecting the Budget to announce bold measures to enhance economic growth in an 'inclusive' manner as well as introduce structural reforms.

he finance minister, nonetheless, has his task cut out due to the need for accelerated growth, meeting the needs of badly-hit segments and rural India, and simultaneously, ensuring that the government's already high fiscal deficit remains under control.

Markets will also be keenly watching out for signals that indicate the government's stance on key economic policies.

Striking the right balance

In an environment of slowing growth in India and abroad, the Budget is expected to take steps to revive domestic demand with a thrust on accelerating infrastructure spending (more importantly, to clear hurdles and speed up the pace of project execution).

There is also a strong belief that export-oriented and labour intensive sectors (textiles, apparels, gems, jewellery, leather) will receive extra attention.

Says Manish Sonthalia, senior VP Research & Strategy, Motilal Oswal Securities, "The external sector is actually bleeding given the 30-35 per cent y-o-y decline, thus expect the sector to get a lot of attention."

Among relief measures expected are interest rate and tax subsidies as well as higher export incentives. Likewise, given the UPA's stated policy of achieving 'inclusive' growth, the market is expecting sops for agriculture sector and rural India.

Says Nischal Maheshwari, head of Research, Edelweiss Capital, "Apart from measures for industry, there would be announcements pertaining to social infrastructure spending (schemes like NREGA) as well as for the common man."

For the latter, an increase in tax breaks on housing loans and lower taxes could materialise, aimed at encouraging higher consumption. The moot questions that come to the mind are how the government will bridge the revenue shortfalls and whether it will increase taxes for India Inc.

Sonthalia believes that some rationalisation in duties (excise and import) could happen. Levies on inputs could also be rationalised to bring it in line with end products.

There is a possibility of some sectors seeing the excise duties getting restated to levels prior to those existing before the stimulus packages were announced.

In simpler words, no major increase in taxes is expected. The government, however, is seen augmenting resources from the auction of 3G licenses (over Rs 30,000 crore) and selective divestment in public sector undertakings. These steps would help lower the fiscal burden, and encourage low real interest rates.

Broader expectations

Among key announcements, the market is hoping for a clear roadmap towards implementing goods and services tax by March 2010, which will eliminate the multiple taxes existing currently.

Experts are hoping that the fringe benefit tax, which contributes only 2 per cent to government's revenues, will be abolished as it involves huge administrative burden.

To sum up, while there are many expectations, some of it may just find a mention in the Budget with more details being spelt out later (like de-control of retail fuel prices and divestment). What's important is that even as hopes are running high, there is a sense of pragmatism about what can be achieved.

Says Sonthalia, "The markets will like to see an environment for growth and at the same time expect that the deficit be kept under control."

A populist Budget, however, is unlikely to go well with the markets. To know more on the expectations for individual sectors and its likely impact, read on.

Auto

On the back of excise duty cuts, drop in lending rates and new vehicle launches over the last six months, the industry has seen a revival of sorts with vehicle sales experiencing double digit growth between February and April.

While auto companies want the government to continue with the 8 per cent excise duty for smaller cars, they want the benefit to be extended to larger cars and utility vehicles; current duty is about 22 per cent.

However, some believe that the government might hike duties as a few manufacturers did not pass on the benefits of the duty cuts on small cars to consumers on their best selling models.

The industry's biggest pain point, however, has been the medium and heavy commercial vehicles which saw a 33 per cent y-o-y volume drop in 2008-09. The depreciation benefit on new CVs, which was extended to September from March 2009, could be pushed to March 2010.

The sector has also been asking for concession for UVs used in rural areas, rationalisation of VAT and provisions to boost vehicle exports.

Cement

The big boost for cement companies would come in the form of increased infrastructure spending and, incentives to the housing sector and rural India. This would help improve volumes and prove to be a boon, given that large capacities are expected to go on stream (over two years) possibly leading into an over-supply situation.

The industry is also hoping that the VAT rate will be lowered in line with other sectors, while a uniform rate of excise duty should replace the current MRP-based system. While such measures would be positive for companies, analysts don't expect the duty cuts or rationalisation to happen.

In fact, analysts at Angel Broking expect the government to increase excise duty from 8 per cent to 10 per cent, as cement companies have not completely passed on the benefits of excise duty reduction announced in April 2009.

FMCG

While the FMCG sector is more likely to gain indirectly led by focus on rural India or due to measures like implementation of GST next year, any reduction in VAT rate on biscuits from 12.5 per cent currently to 4 per cent should be positive for Britannia and ITC. Likewise, reduction in central sales tax from current 2 per cent levels will also be positive for all companies.

On the flip side, some analysts expect the government to roll-back the excise duty cuts done earlier. Should that happen, companies could pass on the increased costs by hiking prices and hence, the impact may not be really negative.

Analysts believe that there is a high probability of a hike in excise duty on cigarettes. However, any major increase (over 7 per cent) could potentially impact volume growth of cigarette companies like ITC.

Banking & Financial services

There are hopes of an increase in limit for tax deduction on interest on home loans from Rs 150,000 to Rs 250,000, which could spur demand for home loans to the benefit of banks and housing finance companies.

While SBI has set the consolidation run amongst public sector banks, any initiatives in this regard should improve market sentiments towards public sector banks. There are expectations of bold steps like lowering small-saving rates, which could indirectly lead to lower cost of funds for banks.

Measures like hiking FII holding limits in PSU banks, removal of voting rights cap (10 per cent currently) for FIIs in banks and increase in FDI limit in insurance sector to 49 per cent would make it easier for financial institutions and banks to raise capital for their expansions.

On securities transaction tax, experts believe that steps to phase it out or even reduce it would help improve trading volumes, which will benefit broking firms. Any move allowing higher deduction on interest earned from lending to infrastructure projects will lower the effective tax rate for lenders.

Capital goods

The increase in infrastructure spending, emphasis on power generation capacity addition and efforts to revive the economy are positive for companies like BHEL, ABB, Crompton Greaves and L&T.

Expectations of higher spending on rural electrification and other schemes such as RGGVY, which is in line with the objective of strengthening India's transmission network, distributing power to deficit areas and to reduce T&D losses, should lead to higher opportunities for Areva T&D, ABB, Kalpatru Power, Jyoti Structures, KEC

International, Emco and ICSA. If the 30 per cent export subsidy benefit on shipbuilding activities is extended, it will be good news for ABG Shipyard, Bharati Shipyard and L&T. Any visible increase in defence spending will rub positively on BEML and BEL.

Infrastructure & Construction

Infrastructure is one sector where expectations are the highest. Companies are hoping for measures to resolve issues pertaining to delays in project execution, project funding, high interest cost and lower than planned spending on various segments.

On a macro level, higher budgetary allocation for irrigation, road, port and, rural and urban infrastructure projects could provide the desired flip to the sector.

Analysts believe there could be more action in the irrigation and road segments, which could be positive for IVRCL Infra, HCC, Nagarjuna Construction and IRB.

An increase in the viability gap funding limits is also expected and is seen as a step towards improving the fund-flow for projects.

Additionally, any measures like bringing infrastructure bonds under Section 80C and re-introduction of Section 10 (23)(G), which could allow banks to claim the interest earned on long-term lending to infrastructure projects as tax deductible, would partially ease funding worries.

Initiatives to improve the execution pace of projects (various clearances, faster land acquisitions) are also on the wish list.

There are hopes of Section 80-IA benefits being extended to main contractors (now available to developers), which will help to reduce their tax liability.

The re-introduction of Section 80M, which allows deduction of dividends received from subsidiaries for computing dividend distribution tax at the parent company's level, could be positive for companies carrying out their business through separate subsidiaries or SPVs like GMR, Jaiprakash Associates, L&T and IVRCL among others.

Metals

Increased infrastructure spending should lead to higher demand for long-steel products. Companies, which have a higher proportion of long products in total sales, such as SAIL, JSW Steel and Tata Steel could benefit. The industry is expecting import duty on steel and aluminium to be doubled to 10 per cent, which will protect domestic steel manufacturers against cheap imports from China (China gives 9 per cent rebate on export of HRC) and CIS countries.

Such a move will also help non ferrous players like Nalco, Hindalco and Sterlite Industries. Expectations of a hike in export duty on iron ore to control domestic prices and improve raw material availability for steel makers are also there.

While such a move would be negative for Sesa Goa, it would be positive for companies like JSW Steel which do not have captive iron ore mines. Any move to deregulate coal mining will not only improve coal availability, but also help companies in improving their profitability and give them comfort to enhance capacities.

Oil & Gas

Crude oil prices at $70 a barrel suggest that under-recoveries, although lower than in 2008-09 (Rs 103,000 crore), would work out to Rs 50,000 crore (Rs 500 billion). The oil marketing companies (OMC) are losing Rs 6 per litre and Rs 2 per litre on petrol and diesel, respectively. Besides OMCs, upstream companies and the government (oil-bonds) would have to chip in majorly.

A full deregulation of fuel prices looks distant; however, there are expectations that retail fuel prices (say up to crude oil price of $75) would be partially de-regulated. If this comes through, it will be positive for OMCs. The move would also help private players like Reliance Industries as it creates a level playing field.

For ONGC, deregulation would lower its subsidy outgo. ONGC could also benefit if gas prices are hiked. A tax holiday for natural gas producers from NELP blocks will be positive for companies like Reliance Industries, while inclusion of natural gas as declared goods would benefit companies like Indraprastha Gas.

Power

The power sector, which is already facing headwinds on account of project delays, is expecting measures towards improving implementation.

Allowing private sector companies into the mining space could reduce problems of fuel supplies. An increase in funding ceiling for banks could partly sort the funding issues. Besides, there are demands for exemption of import duty on power equipments for sub-1,000 mw capacity, in line with over 1,000 mw projects, which will help lower cost for such projects.

Also, there is demand for extension of Section 80-IA benefits up to 2017 (from 2010). Steps towards the implementing the Planning Commission's proposal for a national electricity fund with a corpus of Rs 150,000 crore (Rs 1,500 billion) for investment in the T&D space will provide a major boost to equipment suppliers.

Software

The slowdown in the US and Europe (account for 60 per cent of India's software exports) has put tremendous pressure on domestic IT companies, especially the smaller outfits. Extending the tax benefits for software technology parks of India beyond March 2010 should help this labour intensive sector. Abolishing the FBT would also reduce some of pressures.

Telecom

For a sector that is adding over 11 million subscribers a month, growth is a given. The issue for telecom operators, who service over 450 million subscribers currently, is profitability. Service providers want the government to rationalise multiple levies (spectrum charges, licence fee and service fee) into a unified, single levy on revenue.

Operators want the tariffs which varies between 24-32 per cent to come down to levels in other Asian economies (below 10 per cent of revenues), says the COAI.

The association wants the government to reverse the provision inserted in the Budget for 2007-08, which denied tax benefits for amalgamation or demergers taking place after March 2007.

Further, COAI has asked for the tax benefits under Section 80-IA to be extended to new entrants, in line with services which commenced prior to April 2005.

The industry also wants the PAN requirement to be abolished as it is a hurdle in marketing mobile services to low-end subscribers. A reduction in duty on handsets has also been sought as operators prepare to penetrate the rural market.

Miscellaneous

The realty sector, which has been grappling with the collapse in demand and high debt, wants a hike in tax deduction on interest payment on home loans to Rs 2,50,000 a year, exemption of rentals on commercial properties from service tax and tax breaks for affordable housing projects.

A defensive sector, the healthcare industry has been growing at lower double digits.

The sector wants weighted deduction on research to be extended beyond 2010 and extend benefits on activities such as clinical trials and bio-equivalence studies done outside the research facility, reduction in excise duties of inputs (which are at 8 per cent even as formulations attract 4 per cent), extend tax holiday for hospitals in Tier 2 and 3 cities to 10 years, extend benefits under section 10A/10B to pharmaceutical exports beyond 2010-11 and finally, increase list of life saving drugs eligible of exemption from customs duty.

The textile industry, which has been impacted due to the slowdown in the US and Europe, is expecting measures that would help it stay profitable and competitive vis-a-vis countries like China.

They are hoping for a hike in duty drawback rate, cut in duties on machinery, increase in TUF allocation and interest rate subsidies among others.

Sectors surviving the odds

A 5% appreciation in the rupee during the quarter brings further bad news for the export-oriented sector.

The petroleum companies are expected to report a y-o-y fall in sales and profits due to the economic blues. The oil marketing companies have been selling the auto fuels below cost for most part of the quarter, which would impact their profits. The refining business too is facing a pressure on margins; with the fuel consumption reducing globally while additional refining capacities commissioning operations.

In the cement sector, realisations in the June quarter are likely to be 8-9% higher on year-on-year basis for all-India players like ACC given strong demand from rural housing and government infrastructure. While ACC and Ambuja Cements are expected to post double digit growth in sales, revenue growth for Grasim is likely to be lower as the latter hived off its sponge iron business in May.

The June’ 09 quarter is likely to see a marginal improvement in the year-on-year performance of India Inc relative to the previous quarter’s performance. It needs to be seen if the ensuing budget provides it the much needed cushion for the coming quarters.

High five: Sectoral gains

On 4 May 2009, the Sensex registered its biggest single-day gain since October last year. The 6.4% (731 points) rise saw investors rushing to buy. "At these times, we know many won’t listen, but it really helps to avoid stocks with weak fundamentals," says Amar Ambani, vice-president of research, India Infoline.

Yes, the gains did fuel expectations that the economy might rebound faster than expected, but analysts like Ambani are not sure if the momentum is sustainable as the current rally is led by sectors (real estate, metals and IT) that are yet to see a significant pick-up in demand. But these analysts are not completely pessimistic. "Our recommended strategy is to be overweight in sectors focused on the domestic market," says Nischal Maheshwari, head of research, Edelweiss Capital. We take a look at five sectors that are the most preferred by analysts and the hottest stocks in each.

Automobiles

Last year was challenging for the Indian auto industry. High commodity prices in early 2008 squeezed margins, and by the end of the year, shrinking sales began to hurt. However, the industry has hit a smooth patch, with the government reducing excise duties and lowering rates on consumer loans. This has helped revive the demand for cars and twowheelers.

"We expect the passenger car industry to continue to improve due to the excise duty benefit and rural market demand, but the requirement for commercial vehicles is likely to witness pressure," says Umesh Karne, analyst, Reliance Money.

Hero Honda and Maruti Suzuki reported very good numbers in April 2009. The two-wheeler major has seen a 15.1% rise in sales volumes, while Maruti has registered a robust 29.5% growth. Maruti, in particular, is expected to benefit when the economy revives, despite the fact that the company’s fourth quarter earnings have taken a beating. "We think that the company is better placed than its peers to take advantage of any kind of revival in the passenger car industry to maintain its leadership position in the segment," states a report by the Mumbai-based brokerage firm, Sharekhan.

Capital goods

Rising commodity prices hurt the margins of capital goods and auto companies. Like the auto industry, capital goods were also hit by a decreasing order inflow due to the slowing capital expenditure. However, according to the February index of industrial production, the segment posted a robust year-on-year growth of 10.4%.

Analysts seem cautiously optimistic, though some companies are yet to see a definite revival of order inflows. Most analysts expect new orders to come from capacity additions in the power transmission and distribution sector as tendering activity for the Power Grid Corporation gathers pace. Analysts recommend that investors stick to firms with robust order inflows and a substantial order backlog. Large-cap companies such as Bhel and Larsen & Toubro are good options. In 2008-9, Bhel’s year-on-year order inflow grew by 18.7% to Rs 59,687 crore. With a total order backlog of Rs 1.17 lakh crore, the management expects the company to clock a robust revenue growth of 20-25%. "Bhel would be one of the few Indian large-cap stocks to have an earnings upgrade cycle in 2009-10, which would drive the next leg of outperformance," says Inderjeet Singh Bhatia, an analyst at Macquarie Securities.

Pharmaceuticals

Although the pharma sector has been a relative outperformer in the past one year compared to the broader market, analysts have some concerns. The last quarter saw a mixed bag of results largely due to forex losses, says Sarabjit Kour Nangra, vicepresident, research, Angel Broking. "Having said that, one could take a stock-specific approach, as the sector makes for a good defensive bet. Look at the companies in the contract research and manufacturing services space, which is likely to grow at 25-30% for the next few years," she says. Large generics players can also be considered. The swine flu pandemic could benefit companies like Cipla and Ranbaxy in the short term, as these have the technological capabilities to manufacture Tamiflu, the drug required to treat the disease.

"Cipla will benefit significantly from the sharp rupee depreciation. Its core earnings are expected to witness a 34% cumulative annual growth rate during 2008-11. The stock is a good buy considering that it is a strong player in the generics market with a foothold in developed markets," states a report by India Infoline. On the domestic front, a burgeoning middle class and changing disease profile are expected to fuel the growth of the pharmaceutical market by more than 12% a year.

Consumer goods

Popularly seen as a safe haven in times of trouble, FMCG companies continue to attract investors. The BSE FMCG index has lost only 10%, while the benchmark Sensex has lost 30% in the past one year. Historically, the sector has been resilient during economic downturns. According to research house Noble, in the previous downturn between 2001 and 2004, diversified FMCG companies such as Marico, Dabur and Godrej Consumer fared well.

Personal care companies like HUL, Colgate-Palmolive and Dabur are expected to benefit from the correction in palm oil and packaging material prices. A decline in copra prices is expected to help improve Marico’s operating margin. "We expect volume growth to remain robust and margins to expand for most FMCG companies," says Abneesh Roy, an analyst at Edelweiss Securities.

Colgate-Pamolive is the most preferred FMCG stock. "The company comes across as an allround performer with strong brands in oral care, leading distribution in the sector, shareholder-friendly dividend policy and a track record of boosting margins in times of top-line slowdown. We do not expect any weakness in revenues from a cyclical slowdown," says Jaibir Sethi, an analyst at the Noble group.

Telecom

Always a competitive industry, the telecom sector is beginning to see an intense struggle after the entry of Reliance Communications in the GSM arena. Despite competition putting pressure on margins, the industry has reported a robust growth rate in a slowing economy. According to analysts at Macquarie, GSM operators reported the highest net subscriber additions of 10.85 million in March 2009; between October 2008 and March this year, operators have seen a breathtaking increase in new customers. "The trend supports our bullish stance on wireless subscriber growth in India," says Shubham Majumder, an analyst at Macquarie.

Bharti Airtel, which has added 2.81 million subscribers in March this year, is seen as the best bet. Analysts say that the management is now focusing on revenue market share. "Superior subscriber profile, a healthy balance sheet and higher visibility of cash flows makes Bharti our top pick in the telecom sector," says Nishna Biyani, an analyst at Prabhudas Lilladher.