The Hindu Business Line : Portfolio with potential

The banking sector, an under-performer in the last rally, is more than making up in the current one. The two stocks that appear attractive from a valuation standpoint are Centurion Bank of Punjab and Andhra Bank, in that order.

Centurion Bank

Market cap: Rs 4213 crore

Key player in the consolidation exercise, post Lord Krishna Bank

Scope for improving productivity at the branch level

Strong management

Strong focus on wealth management and fee-based services, ahead of even some of the leading private sector banks

Well-capitalised balance sheet with P/BV (price-to-book value) of 2.7

Andhra Bank

Market cap: Rs 4479 crore

Good asset quality, with low non-performing assets

Sustained earnings growth and good business momentum

Comfort in funding profile

Attractive P/BV of 1.4

Capital goods/construction

As infrastructure has emerged as a key investment theme in the last couple of years, not a day has passed without some action on the capital goods, construction and real estate fronts.

With the portfolio of stocks also swelling, threshing the wheat (quality stocks with good order book, sound management, execution capabilities and attractive valuations) from the chaff is quite challenging. Our picks from this sector are: Kirloskar Brothers and Greaves Cotton, from capital goods, and Valecha Engineering and Ansal Housing in construction/real estate.

Kirloskar Brothers

Market cap: Rs 4059 crore

Growing order book

Projects and engineering pumps division continues to be its fastest growing segment; buoyant government spending expected in irrigation and water schemes

Industrial division is likely to grow on account of capacity creation in sectors such as steel

Rising exports, especially to African countries

Risks from slowdown in government and development spending

Greaves Cotton

Market cap: Rs 1970 crore

Play on automotive and construction/road equipment for infrastructure sector

Likely to gain significantly from supply of engines for lower-end transport vehicles; meets 90 per cent of Piaggio's (leader in three-wheeler transport in the country) demand for engines

With the construction boom, players will have to hire or buy concrete/road equipment from Greaves.

Trading at 10 to 11 times FY07 earnings

Risks arise from the dependence on Piaggio as it accounts for 55 per cent of Greaves' engine volumes

Valecha Engineering

Market cap: Rs 145 crore

Capitalised on the strong project flow from the National Highways Authority of India

Healthy order-book of over Rs 800 crore (over five times FY06 revenues); convertible over the next two years

Established track record places it above similar sized peers

Trades at an attractive nine times FY08 earnings

Ansal Housing

Market cap: Rs 451 crore

Successful in integrated township model, with a strategy that banks on higher realisations in the later phases of the developed township

Mainly into residential projects, with 13 out of 18 projects on hand in and around the NCR (National Capital Region)

Strong land bank of 1,400 acres; Higher margins on account of land bought earlier at lower prices

Venturing now into Bangalore, Mumbai and areas adjoining NCR.

Cement

Another sector that is riding the crest of the infrastructure wave is cement.

With the ongoing consolidation in the sector and fresh capacities likely to come on stream only in FY08 (in a phased manner), firm pricing trends are expected to continue.

Our dark horse picks are Prism Cements and Birla Corp.

FMCG

Despite riding a strong consumption theme, FMCG was blowing hot and cold over the past year.

With Hindustan Lever's robust second quarter performance stoking interest once again, our sector choice is Marico.

Marico

Market cap: Rs 3012 crore

Focussed on high-margin or high-growth products, such as Parachute, Saffola and Hair and Care

Growth likely to come from new product categories such as hair creams and conditioners

Focus on acquisition-led overseas growth, which also represents a key risk

Pharmaceuticals

In the pharma space, we continue to be bullish on Glenmark Pharma, Cadila Healthcare and Ipca Labs, in that order.

Software

In software services, we remain bullish on our recommendations on 3i Infotech, Hexaware, Mastek and Zensar Technologies, in that order. However, we will recommend only a hold in stocks such as KPIT Cummins, MphasiS BFL or NIIT Technologies, considering the sharp run-up in their prices.

Steel

The ongoing consolidation among global steel majors has perked up interest in stocks in this sector. Apart from growth in product volumes, pricing is another variable that will be watched carefully. Two stocks that give us a measure of comfort are Jindal Steel and Power and Usha Martin.

Jindal Steel

Market cap: Rs 6207 crore

Improvement in steel business mix, with niche long product focus; strong volume growth expected

Commissioning of 1000 MW thermal power plant in four quarterly tranches of 250 MW beginning June 2007; power business not fully factored in valuations

Re-rating likely from the existing PEMs of eight times.

Risks stem from execution of the power project, especially given the scale and pricing pressures on steel products

Usha Martin

Market cap: Rs 753 crore

Higher contribution from value-added steel; investments in wire rope plant in the US and speciality OT wire joint venture with Austrian company

Value-added steel finishing facilities in growing markets

Iron ore integration from captive sources by FY 07

Phased expansion of steel capacities; financial closure of capex in final stages

Steady improvement in financial parameters; attractive valuations

Textiles

Though the sector appears to have faded from the investor spotlight over the past year, it still has a lot of steam left in it. Some of the undervalued stock picks are: Vardhaman Textiles (earlier Mahavir Spinning) and Gokaldas Exports.

Vardhaman

Market cap: Rs 1597 crore

Vertically integrated business, with strong growth in yarn and fabric business

Proposed integrated expansion will be commissioned in phases by March 2008.

Attractive PEM of 9 times FY 07 earnings

Risks arise from margin pressure and project execution risks

Gokaldas Exports

Market cap: Rs 1071 crore

Largest apparel exporter on an expansion drive that will kick in over a two-year time-frame

Diversifying its product portfolio and mix to limit exposure from its top clients

Safeguards imposed by the US and the EU on Chinese manufacturers have helped

PEM works out to 14 times FY 07 earnings, which is attractive relative to its textile peers

(With inputs from BL Research Bureau)

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