There has been only one question in the minds of the investor after the sell-off witnessed in the equity market after the Budget: When to catch the falling knife? The Sensex has declined 9.32 per cent ever since its historical high of 14,652 points on February 8, 2007, and that too because of the improvement witnessed last week.
But there have been some stocks, mainly mid-caps, which have fallen in the range of 40-50 per cent. Such corrections often offer investors opportunities to buy good stocks at a cheap price thanks to 'unusual circumstances'.
Market participants are still divided if this is just a correction or the beginning of something more serious.
Says Chetan Parikh, director of Jeetay Investments, "Considering the current market scenario, it is definitely advisable for investors to be cautious while buying stocks and they may use the upside to book profits."
On the other hand, there are others who find the markets reasonable after the dip. Mihir Vora, head of fund management - equities, HSBC Asset Management, "We expect the volatility to continue for some time. However, the valuations seem to be relatively reasonable. We will buy at every dip in the market and use it as an opportunity to invest."
In the middle of uncertainty, most market experts say that the volatility will continue and advise investors against timing the market.
Peter Lynch, who is arguably the world's most famous mutual fund manager, has said, "When stocks are attractive, you buy them. Sure, they can go lower. I've bought stocks at $12 that went to $2, but then they later went to $30. You just don't know when you can find the bottom."
Ideally, investors should be invested in stocks that will hold even with adverse swings in the market, and recover fast when the sentiment improves. The idea is to invest in stocks that have lower momentum and are not cyclical in nature.
These are stocks that continue to move up, irrespective of market movements. Let us look at some of the ways to find stocks that can guard your portfolio in a down market and remain promising in terms of returns.
Earnings visibility
There could be many different factors contributing to the investment decision in particular assets.
However, the most important and basic decision to any investment is to understand that what we pay today is nothing but the present value of future cash flows from that investment. And when the current market price of an investment is less than the present value of future cash flow, it becomes an attractive buy.
Hence companies, which enjoy robust prospects underlined by strong future cash flows, which can be forecast, are the best bets. And these same companies continue to attract investors' attention even during volatile markets. They resist a fall greater than the market and rebound faster, when the markets recover.
"When the market is selling off not so much because the fundamentals of the economy have changed but because of a synchronous sell-off across the globe with money moving out of equity in general, it is very difficult to find a safe haven in the market. To that extent one must hold stocks with strong earnings visibility and be in a position to weather out the short term volatility," says Rajiv Anand, head - investments, Standard Chartered Mutual Fund.
What to look at?
But the real challenge lies in finding those sectors and stocks which have these characters. An opportunity may be driven by evolving fundamentals of the economy, external factors, demographic changes or innovation of new products.
However, it is very important to assess the size of the opportunity and how long it will last, and then, which companies are going to benefit from it.
Further, these same opportunities need to be assessed with the respect to the current market price. So, even if there is growth and sustainability attached to a business, it is very important to consider the valuations.
If growth is factored into the current market prices of the investment, the exit could take time or may result in losses. Sectors that are directly linked with the growth in the economy and show better visibility of earnings over the long-term are worth looking at, say some fund managers. Let us take a closer look.
Financial services
When an economy grows, the financial services business is among the most outstanding substitute for the growth of the economy.
Currently, India is growing at over 9 per cent per annum and even if that rate falls to 7-8 per cent in the long-run, the financial services sector can provide a very long-term sustained compounding opportunity.
The financial services sector globally is a very large business.
Says, a portfolio manager who is bullish on financial sector in India, "About 30 per cent of the total net profit of Fortune 500 companies comes from financial services businesses. In fact, almost a sixth of the total turnover of Fortune 500 companies comes from the financial services sector."
The top picks in the sector are ICICI Bank and State Bank of India.
Telecom services
Telecom is another area that fits the bill considering the current growth rate and future potential. Today, the growth equation comes from the fact that the penetration level itself is still about 15-16 per cent.
On the back of robust growth in the economy and the rising level of per capita income, telecom penetration will rise further. Mobile telephony is a huge market, growing rapidly, driven by dropping handset prices, affordable tariff and a deeper penetration in remote parts of the country.
According to industry estimates, the subscriber base is expected to touch 240 million by 2008 as compared to 170 million at the end of FY07, showing a growth of 40 per cent.
But this growth will also be accompanied by the increasing capital expenditure in the short term, thus resulting in low cash profits. It is a business of operating fixed cost, and once the business reaches a certain level of maturity, the cash flow will be robust and strong. Once the business achieves certain level scale and maturity, then the returns will be good.
Moreover, it is not easy for new players to enter. Among the listed player, Bharti Airtel has the highest market share of about 22 per cent and enjoys high revenue per subscriber of Rs 0.98 per minute. Considering its reach, better management and sound fundamentals, Bharti Airtel remains a good investment.
Power and power equipment
India has been a power-deficit country with an installed capacity (including captive) of less than 150,000 MW. Per capita consumption at around 606 units is among the lowest in the world as compared to a global average of around 2600 units and China's 1100 units.
Today, when the country is aiming to maintain a GDP growth of over 8 per cent, the growth rate in power supply needed to support that growth is estimated at over 10 per cent annually. India has laid down its ambitious plan to provide electricity to all by 2012 and bridge its power deficit. The Indian power ministry has projected to add another 100,000 MW by 2012.
The growing power sector offers a plethora of opportunities for power companies. Companies like NTPC, India's largest thermal power generating company will one of the biggest beneficiary in this upturn.
NTPC accounts for almost 19-20 per cent per cent of India's total installed capacity and contributes over 27 per cent of the total power generated in the country. The company trades at a reasonable P/E multiple, has strong earnings visibility and growth plans.
The power sector opportunity does not end here as other related sectors will also benefit. According to the industry estimates for every 1 MW of generation capacity added require an additional 7 MVA of transformer capacity. With 82,000 MW of power generation capacity being added in the next five-six years, this means a huge demand for transformer capacity.
Add the replacement demand of existing transformers into the country, and this will increase further. India's current transformer capacity of 110,000 MVA, which is just about a fifth of what is required over the next few years.
There will be similar demand for transmission towers. Thus, companies like Bharat Bijlee, Emco, BHEL, KEC International and Jyoti Structures will be the key beneficiaries of this demand. Analysts say, these companies are expected to grow over 25-30 per cent in the long run.
Infrastructure and construction
Post Union Budget 2007, the prices of most construction and infrastructure companies have come down significantly.
However, analysts are of the view that at these levels, some of these stocks might be attractive. If India has to grow and sustain the current rate of growth, the country needs to keep investing more on development of roads, ports and airports.
According to estimates the current spending on infrastructure, which is about 3.5 per cent of the GDP is expected to touch about 7 per cent of GDP by 2010. Within the infrastructure sector, the diversified players as well as companies associated with the construction of roads will continue to show better result.
Investors need to look at valuations, size and quality of the order book and capital efficiency of the company. L&T is one such diversified player having presence in diverse area of infrastructure.
Other like IVRCL, Simplex Infrastructure, Gammon India and Punj Lloyd are the national players in the different segments, which will be benefited with the infrastructure boom in the country.
Shipbuilding
Although a late entrant, the Indian shipbuilding industry is gaining grounds over the dominant players like South Korea, China and Japan.
India's low labour costs, supportive government policies and increasing technical expertise have been the growth drivers for the sector. Indian shipbuilding companies' order book has gone up by nine-fold in the last four years.
Indian companies have also been able to get a foothold in building small and specialised vessels. For instance, ABG Shipyard has emerged as the world's largest yard in terms of order book for anchor handling tug supply vessel (AHTS) and offshore vessels.
The company has strong order-book position of Rs 3,500 crore (Rs 35 lion), almost 6.5 times its FY06 revenue. Though India has a minuscule market share of less than one per cent of global ship building industry, investors perceive it as an opportunity and expect the market share to grow to 5-6 per cent in the next five years.
Looking beyond
The list of the sectors and stocks does not end here. There will be more sectors and many more companies within these sectors. Investors need to understand the visibility, sustainability, size of the opportunity and individual characteristics of the businesses to take the decision.
Sectors like, steel pipes, media, liquor and information technology are as good as those mentioned above in terms of growth and visibility of the earnings. A selective assessment of individual scrips in these sectors can fetch a better result.
Besides these sectors, there are many niche players, which have excellent business models and long term prospects to support the growth. To put it in perspective, one such players is Everest Kanto, the market leader in high pressure industrial gas and CNG cylinders, which will benefit hugely from growing domestic demand.
The company has the first mover advantage and is the only listed player available in the industry. Driven by deficit production and growing domestic demand, the company is expecting a 50 per cent growth over the next two years. CNG stations in India are expected to double by 2010 from the current 350, and the industry is expected to grow at 30 per cent annually.
Strong franchise
Last but not the least, one easy way to ensure low portfolio volatility and above average returns over the long-term is to purchase shares of business having significant franchise value.
These are some of the established and large businesses run by experienced and quality management having strong brand equity, solid financials and consistent growth in revenue and earnings.
"Buy companies with strong histories of profitability and with a dominant business franchise," says Warren Buffett. These are the market leaders and known brand in their respective sectors.
"Given the market volatility we have invested a large part of our portfolio into some of the selective large-cap companies such as Reliance Industries," says Sudhir Nair, Bonanza Portfolio.
Market analysts advise investing a part of the portfolio into selective large-cap companies diversified into different sectors. Companies like ITC, Infosys, TCS, Marico, L&T and Mahindra & Mahindra also hold potential.