The slowdown-proof stocks..........

October 16, 2008
It has been a turbulent year for the Indian stock markets—the Sensex is down more than 50 per cent (on Oct. 10 ’08) from its peak of 21,206.77 on Jan. 10, ’08. Big bank failures have spooked the stock markets globally. Now a credit crunch threatens to derail the global economy and plunge it into a recession. India, though somewhat insulated, may see its growth rate taper to around 7 per cent in 2008-09.The earnings growth of many companies may suffer in the current slowdown, and their stock prices, already down, will almost certainly fall further. Hence, investors must pick investments that will be least affected by the slowdown. This is a good time to enter the market for the long term, though in the short- to mediumterm, there could be further damage. Says Apurva Shah, Head-Research, Prabhudas Lilladher: “Speculators and traders can lose their shirt in this market. The approach should be to invest in fundamentally sound companies with a two- to three-year horizon.” We spoke to a cross-section of market analysts to identify nine stocks that are relatively insulated in this age of turbulence and those that make good long-term bets. This is what they suggested.

Aban offshore :

Aban Offshore provides drilling and services for production of hydrocarbons and offshore exploration to the oil industry in India and abroad. The company has 20 offshore assets, which in-clude 15 jack-up drilling rigs and two drill ships. Says Ajay Parmar, Head, Institutional Research, Emkay Global Financial Services: “Most oil companies are deploying their huge cash reserves in exploration and drilling activities. This has led to increased demand for offshore oil drilling rigs and this should directly benefit companies like Aban.” Aban Offshore has been delivering sound earnings numbers. In the first quarter of 2008-09, its net profit increased 152 per cent while revenues were up 94 per cent. This was largely due to higher prices for four of its assets. The stock has taken a huge beating in the downturn, but it’s a cash-generating business and the expected future cash flow should provide investors enough comfort.

Axis bank :

Among private banks, Axis Bank is well placed to ride out the current financial storm. The management has already said that in spite of the unfavourable macro-environment, the bank will deliver 40 per cent-plus growth in advances this financial year. For the first quarter of 2008-09, Axis Bank delivered over 80 per cent Y-O-Y growth in net interest income and net profit, driven by strong growth in all its core earnings streams. The bank’s capital adequacy ratio is at a comfortable 13.3 per cent. Its expansion plans are on course. In the first quarter, it opened 42 branches and extension counters and 140 ATMs. Says Hitesh Agrawal, Head, Research, Angel Broking: “Axis Bank is a good bet on account of its good management, attractive CASA deposit franchise, relatively low-risk lending franchise and multiple sources of sustainable fee incomes.”
Bharti Airtel : As the Indian mobile telephony story has played out, Bharti Airtel has consolidated its position as the market leader with a 25 per cent market share. At the end of 2007-08, the company had 35 per cent more subscribers than its next best competitor, Reliance Communications. The company has also grown its other businesses of fixed line, telemedia, enterprise solutions and long distance telephony. Meanwhile, Bharti has spun off its passive telecom infrastructure assets into Bharti Infratel, which has potential for growth. Says Agrawal: “Bharti Airtel continues to impress and outperform the mobile telephone sector with its performance on the subscriber additions front.” Telecom will be one sector that will be least affected by the slowdown. This company has a strong earnings visibility over the next few years.

BHEL : This Navratna company caters to the core sector of power generation & transmission. It is scaling up operations and gearing up to meet the power generation targets of the 12th Five Year Plan. It is expanding its capacity to 15,000 MW per annum in the next two years at a total investment of Rs 3,200 crore. The company has declared robust numbers recently with revenues and profit growing by more than 30 per cent in the first quarter of 2008-09. More comforting is its huge order book position of Rs 95,000 crore. Says Parmar: “BHEL is taking steps in right direction to address supercritical orders and is increasing its pace of execution while also expanding capacities.”
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How to navigate markets nowDon’t dump stocks nowUnless you are hard-pressed for cash, this is not the time to dump stocksStagger buyingA bear market allows you sufficient time to make your equity purchases. Stagger your investments over the next few months and bring your average purchase price down if prices dip furtherStay with domestic companiesLook at companies whose domestic growth is intact. In these times of a global recession, companies dependent on global economy will find the going toughBe a contrarionBuy battered stocks. Sure, it’s difficult to do so, but some of the savviest investors have jumped in when the chips are down. Accumulating for the long term is best done now.

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GAIL India : Over the coming years, as more gas is discovered in India, it will require storage and transportation. One company well placed to tap this booming sector is GAIL India. It already has a sizeable presence in gas transportation and now has lined up a capex plan of approximately Rs 28,000 crore over five years. This will increase its transmission capacity from 150 MMSCMD to 346 MMSCMD. GAIL India has identified cities where it will extend its gas distribution business, and this will complement its existing business. Says Ashok Jainani, Head-Research, Khandwala Securities: “The unlocking of the city gas distribution and exploration business will be a major growth driver for GAIL India.” It recorded a turnover of Rs 18,008 crore in 2007-08, and is now targeting revenues of Rs 50,000 crore by 2011-12, a growth rate of 30 per cent. GAIL India is among the best defensive stocks in the market. Godrej Consumer Products Godrej Consumer is one of the fastest growing FMCG companies in India. It operates in two key business segments—soaps and personal care. It is the market leader in the hair colour and liquid detergents category and the second-biggest company in the soaps business. Its strong portfolio of brands includes Cinthol and Godrej powder hair dye. In the first quarter of 2008-09, a steep increase in the prices of palm oil subdued its profit. Analysts expect the company’s earnings to grow at a CAGR of over 20 per cent over the next two years on the back of robust revenue growth. Says Agrawal: “Raw material cost pressures are expected to be offset by price hikes, better product mix and cooling palm oil prices.”Hero HondaIt is the world’s largest two-wheeler company. Hero Honda has consistently grown at double digits and today every second motorcycle sold in the country is a Hero Honda. It has posted healthy results due to improving product mix. From being a leader in entry-level and entrypremium bikes, Hero Honda is now focussing on selling executive and premium brands like CBZ Xtreme, Hunk and Karizma. Says Parmar: “Better product mix, along with price hikes, have helped the company beat the industry downturn.”

Hindustan Unilever : This FMCG giant and leader in the home & personal care and foods & beverages segments with over 20 distinct categories is well-entrenched in its core business. Says Jainani: “HUL’s strengths are its strong brands and vast distribution network, which will keep it relatively insulated from a global economic slowdown.” In the first quarter of 2008-09, net sales surged 21 per cent while profits grew 18 per cent. Analysts expect the company to sustain the momentum riding on the back of India’s consumption story. Despite the sell-off in stocks, HUL has bucked the momentum, gaining 18 per cent over the last three months.

Reliance Communications :

Reliance Communications (RCOMM) is India’s second-largest private integrated telecom company and has established itself in key segments such as mobile and broadband. RCOMM is well-poised to further build on the Indian telecom growth story through full-fledged rollout of its GSM-based cellular services. It is also expanding its enterprise business, which is a potentially $275 billion (Rs 13. 2 lakh crore) opportunity globally. Says Agrawal: “The company continues to witness strong growth in its wireless business segment, aided by the rapid rollout of its network in the rural areas.” RCOMM is also set to unlock value through listing of its tower business when the market turns. The stock has dipped significantly in recent months, making it an attractive buy