Equity: Sparklers for your portfolio

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: One of the lessons coming out of the June 14 debacle when the market slid to 8,900 levels is that the Indian markets have developed resilience. Domestic mutual funds and institutions have the wherewithal to support the market and the FIIs can provide speed or momentum at best. In fact, from January onwards, FIIs have only invested around $5.1 billion as compared to $10 billion in 2005.

This is good news for investors.

Current reality

At the current price levels, the BSE Sensex price is roughly 22 times the earnings of its constituents. This P/E multiple is higher than that of the long-term median of 15 times earnings, suggesting that the index could be slightly overpriced and may retreat. Similarly, the price is around 4 times the book value. Most of the international markets are around 2 levels.

These valuation arguments point towards a retreat in prices. Investment experts, however, suggest that these arguments must be seen in the Indian perspective. "While the price to book value is high, one must also consider in the same light that the return on equity of the Sensex is 23.5%, which is more than most of the global indices. Therefore, Indian markets will command a higher valuation," says Rajat Rajgarhia, head - institutional research, Motilal Oswal Securities.

"Although from a longer term perspective we are in a bull market, stock markets by nature will have sharp corrections and jitters. Anybody who wants to invest in equities at this point in time or at any other point in time should have at least a two to three year time horizon. Those investors who have that type of time horizon will find reasonably good investments even at these valuations," says Nirmal Jain, CMD, India Infoline.

Keeping this in mind, investors can now look at some themes that could light up their portfolio over a longer period. These themes are based on the current assessments and prospects that stem from the India growth story. These themes are not sector-specific, but are ideas that will make the most out of the opportunities as India grows.

These themes are:

Infrastructure growth deliverers

For India, to keep growing at more than 8% every year would require tremendous investment in infrastructure. One look around tells us that India requires roads, ports, urban developments. With increased liberalisation, this opportunity will keep expanding.

In this space, power generating companies like Tata Power, Reliance Energy and NTPC will always grab attention. BHEL, the engineering and electrical giant with an order book of about 3 times of its annual turnover, is expected to keep on to its pioneering ways. Others in the construction and related engineering companies like L&T, HCC and IVRCL, will see rising opportunities. The industry is already experiencing cement shortages and cement players like ACC, GACL, Grasim and UltraTech will definitely benefit. On the oil and gas front, companies like ONGC and Reliance will be keenly watched by investors.

Economy plays

India has the second fastest growing economy in the world. Therefore, it offers a lot of investment opportunities for companies to ride on the wave of this growth.

The banking sector is a key beneficiary of this growth, backed by stabilising interest rates and consolidation being on the cards. Key players here would include HDFC, HDFC Bank, SBI and ICICI Bank. Logistics solutions are going to benefit due to higher volumes in the economy. Growing demand for value-added products and consolidation in terms of number of players is expected to pay off. Container Corporation, and GATI, among others, are expected to be the key players here.

Globalisation opportunities

Adi Godrej, chairman, Godrej Group, expects foreign outflows from India to outpace FDI in the next five years. This speaks volumes about steps Indian companies are taking to reach out to the world. Either by acquiring overseas companies, or by simply entering new territories, many Indian companies have dared to dream.

Prime among them is the Tata Group with Indian Hotels, Tata Motors, Tata Steel and Tata Tea making forays abroad in myriad ways. Pune-based Bharat Forge has ambitions to be the largest forging company in the world. Pharmaceutical companies like Dr Reddy's Labs and Ranbaxy have steadily been building their international portfolios.

Tech services

A surge in business volumes and a growing clientele has aided IT companies in posting good numbers almost every quarter. Technology companies have matured from the headhunting paradigm and now offer tremendous value to its clients. Revenue growth for these companies is sustainable and will provide investors with opportunities.

Infosys, TCS, Wipro, i-Flex, Tech Mahindra, Satyam, among others, are the bluest of blue among the tech stocks and have depicted their credentials. At the same time, there are smaller companies like Mphasis BFL, Hexaware Technologies and iGate are also graduating to the bigger league in their own way. Once invested, it would be prudent for investors to, however, keep tracking changes in business models and portfolios to understand the sustainability of revenues.

Lifestyle and consumerism statement

India happens to be home to one of the largest English-speaking middle-class population in the world, with easy adaptability to western habits, coupled with rising income levels in both urban and rural locations. This poses a great opportunity for fast-moving consumer goods companies, companies that provide entertainment software, multiplexes and also the shopping malls.

In this space, HLL looks to be the steady player in the long run, Marico Industries is getting sharp investor attention based on its ability to innovate and grow. ITC, too, happens to gain attention based on its foray into rural India and declining dependence on cigarette revenues. Retailing, growing at 30%, will also offer growth opportunities.

Lone rangers

There are themes and there are sectors. Among them are the lone rangers. These opportunities do not belong to any specific theme. These are companies that generally operate in niche markets with very strong operational focus or have professional management that gets consistent results. Players like Engineers India Limited in project management and Crisil in the credit rating space come under this category.