Nine solid stocks to buy

It has been a good recovery for the stock markets so far. After the pummelling of January and February, the BSE Sensex has bounced back 16 per cent from its mid-March low of 14,677. At the current 17,000-levels, the Sensex is cruising steadily, although it’s hard to say whether the stock market will look up very soon. Its all-time high of 21,207 in January still seems like a distant peak. The list of negative headlines—slowing economy, rising inflation, reducing margins, and slackening global growth—are weighing heavily on the market.

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For now, the Indian economy is trying its best to fight off the effects of inflation. Many economists expect the Indian economy’s growth to cool off to around 8 per cent this financial year, while investment bank Morgan Stanley pegs it even lower at 7 per cent. The slower growth is due to the contraction in money supply as a result of RBI’s inflation control strategy. Already, there are signs that the grind has begun. In the last quarter of 2007-08 margins were under pressure, although corporate results were broadly in line with expectations.

The next few months are crucial, as analysts watch for a slowing investment rate, or slackening consumer demand, both of which are crucial for corporate profitability.

For now, the market is likely to move sideways, but if there’s any nasty surprise, the stock market can correct some more. But corrections, as the gurus of investing have maintained, are opportunities to buy— particularly in a growing economy like India. Even domestically, analysts feel that while it may be difficult to take a call on the market in the short to medium term, there are many opportunities available in quality companies.

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Like all corrections, the recent one has dragged down the prices of many fundamentally strong companies. Nearly 70 per cent of the BSE 500 companies have dipped more than the Sensex since the correction began on January 10. So, we took the opportunity to find companies that have seen their prices come off, yet have the ability to deliver returns over the long term. We asked top analysts for their best picks in the current market, and sifted through them to find the ones that have more compelling growth stories in these tough conditions. Read on.

Cadila healthcare

Cadila has been focussing on consolidating its presence in the Indian formulations market, but the bigger story is its initiatives in the regulated exports market (primarily Europe), which will be its key growth driver. It is targeting a slot in the top 10 global generic companies with sales in excess of $1 billion (Rs 4,000 crore at current exchange rates) by 2010. Says Hitesh Agrawal, Head of Research, Angel Broking: “New product launches in Europe and the US will drive its export growth.” Another growth driver is acquisitions in countries with low generic penetration and this will further accelerate its growth. Invest for the medium to long term.

Dr Reddy’s Laboratories

This long-time laggard seems all set to change gears. Dr Reddy’s Laboratories (DRL) is now a global pharmaceutical company with a presence in over 100 countries. Exports constitute 86 per cent of its overall sales. In the US alone, DRL has 69 ANDAs (Abbreviated New Drug Applications—applications with the US FDA for selling formulations in the US market) pending approval. The market opportunity: $57 billion (Rs 2,28,000 crore). In its pipeline are around 29 Para-IV filings (litigations challenging patents of companies, which can give the challenger exclusive rights to sell generics in the US for six months) with a market opportunity of $12 billion (Rs 48,000 crore). As a future growth strategy, the company plans to boost formulations sales in emerging markets.

GSK Consumer Healthcare

It is a clear market leader in the Rs 1,600-crore malted beverage category with a market share of 70 per cent. The company’s core brands, like Horlicks and Boost, have stood the test of time from competition like Cadbury, Heinz and Nestle owing to strong brand equity, innovative variants and a strong foothold in key markets like south India. In the last quarter, the company recorded a better-than-expected revenue growth of 26 per cent to Rs 411 crore, along with margin expansion. These were aided by robust volume growth and price hikes. Says Agrawal: “Rising input costs remain a key challenge for the company, but it is planning to offset the same through improved productivity and cost-cutting initiatives.”

India cements

It’s one of the major players in south India and a promising turnaround story. India Cements is increasing its capacity from 9 MT to 14 MT over the next two years, which will lead to strong volumes growth. Says Ashok Jainani, Head of Research, Khandwala Securities: “It has cash reserves of about Rs 600 crore, which will help it expand operations in states like Rajasthan and Himachal Pradesh.” The company is also cutting costs. It acquired two ships for importing coal and is also setting up lignite-based captive power plant, which will reduce its cost of operations and result in substantial cost saving.

Mahindra & Mahindra

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Mahindra & Mahindra (M&M) is expected to record steady growth in its core businesses over the next few years. It’s a leader in tractors with a market share of 40 per cent.

Tractor sales have increased over the past 3-4 years. In the domestic utility vehicle (UV) market, too, M&M is a leader with 30 per cent market share. Its strong product portfolio caters to different user segments, including taxis in the rural, urban and the semi-urban segments, which has enabled it to outperform its industry growth. M&M is now targeting exports aggressively in geographies like Europe, Australia and New Zealand.

Maruti Suzuki

India’s best-known car company has plenty of gas left, despite rising oil prices and interest rates. Maruti has the strongest brand image in the domestic market and will continue to be a dominant player in the passenger vehicle segment. It is wellpositioned in a competitive scenario, having successfully launched new products over the last two years. Its new capacity will provide it with a platform to expand into overseas markets and increase exports. Its timely launch of diversified fuel options like the diesel Swift and Omni is catching the attention of consumers.

Upping its ante, the company is now positioning itself in the mid-sized segment with the launch of the SX4. Says Agrawal: “In the next 2-3 years, Maruti will maintain its over 50 per cent market share.”

Orbit Corporation

Orbit Corporation is a niche real estate player focussed on redevelopment projects in Mumbai. It specialises in converting old, dilapidated buildings into premium highend apartments—a highly profitable business with very high margins. Says Ajay Parmar, Head-Research, Emkay Shares: “Orbit has emerged as a strong player in redevelopment projects in Mumbai and has bagged several projects in a short span of time.” The company is now looking to aggressively scale up operations. It is eyeing opportunities for redevelopment projects in suburban Mumbai and is also looking to develop townships in the Mumbai Metropolitan Region (MMR). A good bet over the long haul.

SAIL

It’s the largest domestic integrated steel producer and one of the biggest corporate turnaround stories in India. It produces both basic and special steels for domestic construction, engineering, power, railways, automotive and defense industries and exports.

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SAIL’s captive iron ore mines are a hedge against rising iron ore prices and result in better margins in comparison to non-integrated producers. It has lined up gigantic investment plans of Rs 53,000 crore to increase its capacity at various locations throughout the country from 14.5 MTPA to 26 MTPA by 2010. Says Jainani: “It’s a virtually debt-free company and is in a position to undertake major expansion.” Although the government is applying pressure on steel companies to reduce prices, there’s enough momentum and demand for steel products. SAIL’s stock is well-poised to do well.

Tanla Solutions

Tanla Solutions has a unique business model in the telecom solutions space. It operates in the niche businesses of aggregation, telecom products, and providing offshore support to its clients. All the three businesses have high margins, ranging from 35 per cent to 90 per cent and enable it to offer end-toend telecom solutions. The impressive margin profile is a clear reflection of the scalability and profitability of these businesses. Says Agrawal: “Its advanced solutions and its ability to leverage its offshore manpower has enabled the company to offer strong value at very low costs to its clients.” Tanla has relationships with mobile operators across the UK. The company’s fourth quarter numbers were impressive, with revenues up over 70 per cent and net profit up 47 per cent to Rs 147 crore and Rs 50 crore, respectively. And it makes a compelling long-term story.