Consequent to the sharp run up in markets in 2009, investors will have to be careful in picking stocks while lowering their return expectations

After the astonishing performance in 2009, which has helped Indian stock markets emerge among the best performing markets globally with year-to-date returns of almost 80 per cent, the year 2010 could prove to be a disappointment.

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It is largely due to these reasons, experts believe that the markets will remain in a narrow range and suggest that the Sensex may provide returns of about 10-15 per cent by the end of December 2010. Most brokerages have set a 12-month target of 19,000-21,000 for the Sensex. Their modest expectations are also due to some concerns that will have to be overcome, which in a way indicates that investors need to be cautious as the risk-reward ratio is not as favourable as it was in 2009.

Cautious mood...
The tightening of liquidity and hike in interest rate, which is pretty much on the cards, could dampen sentiments of the markets, believe experts.

The other concern pertains to the strength of global economic recovery besides, a roadmap regarding withdrawal of stimulus packages (by different countries) and its likely impact. Thirdly, although global liquidity is high, with many Indian companies lining up to raise funds, it will test the ability of the markets to absorb the increase in supply of paper.

Since global markets have seen the dollar weaken, leading to demand for real assets like commodities, any sharp rebound in the dollar against major currencies could reverse some of the dollar carry-trade (investors take cheap dollar loans with an aim to make better returns by investing in other asset classes) and pose additional concern. Lastly, concerns pertaining to sovereign risks like the episodes of Dubai and Greece, could trigger a sell off in emerging equity markets, and impact the ongoing recovery....but, still positive

The markets are positively hoping that India’s government would unleash major reforms, including implementation of Goods and Services Tax (GST) and Direct Tax Code (DTC), which will provide a stepping stone for the next leg of economic growth. Government’s fiscal prudence by speeding up the disinvestment process (selling small stakes in public sector enterprises) would also be closely watched. However, at this point in time, since the concerns are slightly more than the positives and a lot of the good news is already priced in, the return expectations from the broader market are moderate. Experts, thus, suggest that in order to get superior returns in 2010, the best investment strategy would be to adopt a bottom-up approach namely, picking individual companies, particularly in the mid cap space.

The reason for being selective is primarily due to the fact that many companies are still surrounded by concerns (like excessive debt, low demand, etc) and are yet to show clear signs of a revival in their earnings.

Below are ten companies, which should do well and deliver above-market returns in 2010. Most of these lead in their businesses, are well-managed and have strong entry barriers. More importantly, their future prospects look good. Although a few have high-debt on their books, they are experiencing a revival in demand for their products and services and are taking steps to de-leverage their balance-sheets. This along with relatively cheaper valuations will help them deliver better performance as well as returns.

To know more on individual companies, read on.

HDFC
Higher liquidity and low interest rates have lowered HDFC’s cost of borrowings. This could cushion it’s margins, in spite of the company’s low home loan rate offerings starting at 8.25 per cent. The company is observing good demand in the Western and Southern regions. Although interest rates are expected to inch up in 2010, demand for home loans is likely to remain healthy on the back of an improving economy. HDFC’s overall loan book is expected to increase by 20-23 per cent in 2010-11. It’s recent acquisition of Credila Financial Services gives it an entry into the education loan segment, which is seen growing at 25-30 per cent annually. Further, value unlocking would happen if its 10-year old subsidiary, HDFC Standard Life, comes out with an IPO. HDFC is trading at 3.5 times its 2010-11 adjusted book-value and can deliver over 20 per cent returns.
 

Indian Hotels
The rise in occupancies in the second and third quarters of 2009-10 indicates a change of fortunes. Compared to 52 per cent occupancy in June 2009 quarter, the same stood at 60 per cent in September quarter. The third quarter has started well; analysts expect occupancies to average around 80 per cent in the second half of 2009-10. This is on the back of an increase in tourism and corporate travels. Apart from the domestic business, the long awaited turnaround in profitability of international properties would also boost Indian Hotels’ earnings. Room rates, too, have improved at select properties, and if the trend continues it would augur well for the company.

Jain Irrigation
Jain Irrigation, a leading company in micro irrigation systems (MIS), food processing and pipes, is a good play on agriculture growth and rising farm incomes. Its MIS division is expected to grow by 30-35 per cent over the next two years as penetration levels increase due to the efforts by various state governments. The company is exploring new markets and is further expanding its equipment range to cover crops such as cotton, groundnut, potato and vegetables.
 

Benefits will also come from the expected improvement in profitability of its overseas subsidiaries. Though its pipes and food processing (over 55 per cent of total revenue) businesses are seen growing at a relatively slower pace, they should also do well on the back of improving demand and lower input costs.

Larsen & Toubro
The revival in industrial capex, particularly in the power sector, along with higher spending on infrastructure mean better prospects for India’s largest engineering and construction company, L&T. Notably, the gains from its diversification into growing sectors like power equipment, shipbuilding and forging along with huge opportunities in nuclear power and defence equipment, will start paying off in the form of higher order inflows in the coming years. L&T is also foraying into the power generation segment with an aim to have 7,000 mw capacity over the next five years. Meanwhile, it’s existing order book of Rs 81,623 crore (2.3 times 2008-09 revenues), provides good visibility, and should drive revenue growth in the coming years. In terms of profits, analysts expect it to grow at about 20 per cent over the next two years.

Pantaloon Retail
An improving economic and employment outlook as well as encouraging demographics suggest better days ahead for the organised retail players. For Pantaloon, it expects revenue growth to average at 25 per cent over the next two years aided by its plans to nearly double its total retail space to 25 million square feet by 2013-14. Its focus on cost efficiencies should ensure that profits grow faster. The company plans to raise Rs 1,000-1,200 crore through various instruments to help fund its expansion plans and repay debt. Lastly, its move to reorganise its businesses into separate entities should help unlock value in the long run.

Reliance Infrastructure
Reliance Infra could be a good investment given its low valuations and growth in the construction and power businesses. The company’s EPC related order back log is robust at Rs 19,600 crore, and is expected to grow given that work for about 28,000 mw of capacity of Reliance Power is yet to be awarded. Further, its increasing focus and strong portfolio of 730 km of road projects and, scheduled completion of the Delhi and Mumbai metro projects over the next nine months, augur well. Also, increased contribution from its power business and improving margins due to lower commodity prices should result in higher profitability. Analysts value the stock at about Rs 1,350 per share based on its investment in various companies and cash in the books.

SBI
During 2008-09, SBI increased its loan book faster than its private peers. Analysts expect the trend to continue with an upward bias on the margins also. Nevertheless, RBI’s mandate to increase its provisioning coverage to around 70 per cent could put pressure on its profitability in the short-term. However, favourable policy initiatives like scrapping of SBI Act, consolidation of associate banks with SBI, and likely listing of its life insurance subsidiary could act as future triggers. Although the bank may have to raise funds in 12-18 months, the same would provide fuel for funding future growth in its businesses. Major concerns over restructured assets impacting financials would taper off, slowly but surely, as the economic growth momentum picks up further, leading to better stock valuation.

Suzlon Energy
Suzlon could be a good play given the increasing focus on renewable energy globally. Demand for wind power equipment has been lower in the recent past, but should improve in two of Suzlon’s largest markets (US and Europe) helped by customers getting easier access to funds. Suzlon is also taking steps to bring down its leverage. Recently, Suzlon’s promoters invested money in the company, while the company raised funds by selling its stake in its Netherland-based subsidiary, Hansen, which was used to pay some of its debt. Meanwhile, Suzlon is in the process of restructuring its remaining debt, which lower the pressure on its cash flow and earnings. Suzlon’s stock is currently trading at cheaper valuations as compared to its peers due to concerns over debt and lower demand. But, as things improve, expect it to get rerated, which indicates potential for strong upside.

Thermax
Thermax, a leading player in the environment and energy equipment business, could benefit from the growing environment concerns globally and an expected revival in India’s industrial capex. The company is already making efforts to gain orders for its waste treatment business for domestic municipal corporations. In power, while Thermax is leader in small and medium sized industrial boilers, it is now eyeing large-size projects on the back of an increase in its boiler manufacturing capacity which now stands at about 1500-2000 mw. The company also forayed into sub-critical power equipment segment through a technical tie-up, which should boost growth rates going ahead. Meanwhile, its strong order book of Rs 5,056 crore provides good visibility, which along with the benefits of lower commodity prices will mean higher profit margins.

United Phosphorus
United Phosphorus (UPL), which operates in two main segments (crop protection and seeds), is another stock to play on the agriculture growth story. It generates about 80 per cent of its revenues from international markets. As UPL integrates its several overseas subsidiaries and increases focus on the US and European markets for the generics opportunity in crop protection products, expect growth rates to perk up. Additionally, improved outlook for the domestic agriculture market should benefit Advanta India, a listed subsidiary of UPL which has a strong position in the domestic seeds market. Overall, its robust portfolio, strong distribution network and established presence in growing markets should help sustain healthy growth. The company’s net profits are expected to grow at about 25 per cent annually over the next two years.

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