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What can investors do in times of war…?

BS Smart Investor Team

When there is blood on the street, it's a great time to buy, say the experts. There is evidence to suggest that equities have more often than not rewarded investors who have dared to enter or stay put when the financial markets are bleeding. And that's why it makes sense to keep a steady head and remember that, even in such tumultuous times, there are great bargains to be found.

Many blue-chip shares are going cheap. For the long-term wealth builder, the focus should be on buying stocks which hold growth potential and are available at attractive valuations. We believe that it's better to stick to the leaders in times of uncertainty because they are best-positioned to ride the storm. So we've picked five fundamentally strong, blue-chip stocks that hold plenty of promise for the future.

Cipla: Health's wealth

Known for its superior process skills and cost efficiency, Cipla is also one of most efficient managers of capital. Its return on capital employed stands at 36 per cent -- one of the highest in the Indian drugs industry.

The company's strategy of focusing on high-value exports to the US and Europe has paid off handsomely: exports now account for over 60 per cent of profit. Driven by exports, revenues jumped by 48 per cent in the last fiscal, while profits climbed 28 per cent.

Growth triggers this fiscal will include exports of omeprazole --the generic version of Astra Zeneca's blockbuster drug Prilosec -- to Andrx, which is expected to commence in the second quarter of this fiscal. Analysts estimate that this product to rake will in Rs 2.50 billion for the company this year.

Cipla hopes to receive marketing approval for its CFC-free inhalers for asthma sufferers in the European markets by this September. The company is also hoping to launch (jointly with IvaxCorp) in the next three years, six generic products in the US markets. These will include selling Zoloft and Zyprexa exclusively for six months.

Known for its astute marketing skills, the company has been able to outperform the domestic industry consistently for many years. Eight of Cipla's products rank among the top 250 selling brands in the country.

In research, the company focuses on chiral chemistry and improved chemical entities, which are not as expensive as basic research. In addition, they are also less riskier as the payback period is quicker.

The stock currently trades around Rs 1,026 discounting its estimated FY2003 earnings 20 times. Considering the company's bright growth prospects, and the fact that it has been able to deliver consistent performance over the years, investors can buy into the stock at these levels.

Grasim: Concrete future

Once a conglomerate with varied business interest, Grasim is now focusing on cement and textiles. Contributing more than 40 per cent to revenues, the cement division has been the main growth driver of late for the Rs 44 billion company.

Improved realisations and reduced energy costs pushed up revenues from this division by six per cent in fiscal 2002. Operating profit margin improved by a hefty five percentage points. The Grasim-L&T combine has a significant presence in the southern and eastern region of the country.

As far as its other businesses are concerned, viscose staple fibre contributes to another 40 per cent of revenues. It is also the largest producer of VSF in the country, boasting a 93 per cent market share. It is also one of the lowest-cost producers in the world, thanks to its backward integration.

The textiles business has undergone massive restructuring. The loss-making unit at Gwalior was sold for Rs 320 million, while the fabrics business is to be consolidated at Bhiwani. The restructuring is expected to help the business achieve a turnaround.

In fiscal 2002, sales declined by two per cent to Rs 43.87 billion. Against that, net profit declined 20 per cent to Rs 3.03 billion, primarily because of a heavy deferred tax burden.

Currently, Grasim's scrip trades at Rs 315, with a price earnings multiple of 9.5. The restructuring and its huge investment in L&T is expected to help it reap big gains in the future. The stock offers good value at current prices.

Hindustan Lever: Valuable brand

The last two years haven't been particularly good for the country's largest consumer goods company. Topline growth has moved at a snail's pace, though bottomline has witnessed growth, mainly on the back of the company's sustained efforts to cut costs and improve efficiencies. Even so, even in the past three months, the stock has underperformed the Sensex.

The faster rate of decline in HLL's stock, analysts believe, is due to the not-so- encouraging performance in the first quarter of the current year. A 30.6 per cent fall in exports coupled with an inventory correction at the dealer's end resulted in a 9.91 per cent drop in sales. All the same, HLL's earnings before exceptionals grew 11.64 per cent during the period.

Power brands -- which had grown at double the rate of overall sales growth in the quarter ending December -- have failed to deliver this time around. Analysts, however, believe that the factors responsible for the decline in topline in for the last quarter were a "one-off" event, and were unlikely to be repeated in the ensuing quarters.

In fact, revenue growth in HLL's core brands this quarter is expected to be appreciably higher than the previous quarter. Consumer offtake in April 2002 has improved and growth in sales of HLL's core brands has been 8-9 per cent.

Besides, the re-launch of some established brands such as Lux, Breeze, Lifebuoy, and Wheel has been very successful, and is expected to drive profits and revenue in ensuing quarters. At the current price of Rs 189, the stock discounts this fiscal's estimated earnings by less than 24 times. At this price, the stock makes for a great bargain for the long-term investor.

National Aluminium: Shiny future

National Aluminium Company -- India's largest aluminium exporter is one of the country's better-managed state-run companies.

After a long spell of falling prices, the metals industry , in particular aluminium and copper, seem header for sunnier times. Chinese demand, especially, is predicted to grow 10 per cent and will be a key driver. Local demand is also expected to revive with economic growth.

But besides signs of recovering demand, what is driving intense interest in the Nalco's stock is its impending divestment.

The government plans to divest 30 per cent through the domestic and American Depository Receipt route and a further 29 per cent to a strategic investor. French firm Pechiney has reportedly evinced interest in becoming be Nalco's strategic partner.

Nalco is also in the midst of a major expansion. It has expanded its alumina capacity from 1.05 million tonnes to 1.58 mn tonne. It will add 115,000 tonnes to its current primary metal capacity of 230,000 tonnes by November 2002. Its power generation unit is being enhanced from 720 MW to 960 MW by February 2004. It's accessibility to cheap and good quality bauxite along with captive power generation facility makes it one of the cheapest producers of alumina globally.

Falling import duties will also take away the edge of selling more profitably in local markets, placing exporters on the same field as aluminium makers who concentrate on local markets. All these factors have made Nalco a favourite with many analysts. One analyst estimate pegs Nalco's valuation at Rs 182 per share.

The stock is expected to be driven by its imminent divestment and the benefits of its expansion drive. At Rs 95, the stock is trading at 15 times its 2002 earnings and is a good buy for medium-term investors.

Satyam Computers: Tech's best

Satyam seems to have made all the right moves in the last one year or so. To tackle the gloomy overhang of its loss-making subsidiaries on sentiment at the counter, the management decided to place a cap on any further investments in Sify and VisionCompass.

Furthermore, as a precursor to the proposed divestment of its stake in Sify, the company acquired the software services division of Sify. As part of its consolidation process, Satyam also merged its marketing subsidiaries with itself.

But these steps resulted in an adverse impact on operating margins. On a sequential basis, operating margins declining by 270 basis points to 30.7 per cent in the last quarter of this fiscal.

However, despite all the odds, the company managed to surpass its earnings growth guidance by eight per cent, recording a profit of Rs 4.49 billion.

Net sales grew by 42 per cent to Rs 17.32 billion. Going forward, the company has given a guidance of 21-23 per cent revenue growth, while earnings are projected to grow between nine and 12 per cent in FY03.

Growth is expected to be back-loaded, with the first quarter anticipated to be flat. The company expects a sequential growth of around 7-8 per cent from the second quarter.

The ramp-up of its engagements with the large clients it acquired recently is expected to drive growth this fiscal.

Satyam has around 263 active clients, including 50 Fortune 500 customers. Apart from this, the proposed business process outsourcing venture also expected to add some fuel to growth in coming years.l

What can investors do in times of war...?

However sadistic this may sound, but it is a fact that if you had been an investor in the US markets, you could have found some stocks that could make money in times like these.

To the long list of complaints about the Indian stocks markets, there is one more factor that people seem to have ignored till date. We have no stocks that can promise growth in times of war!

In the US, there are defence equipment majors and those focused on security that provide excellent investment opportunities. Back home, one can hardly find any. But fortunately, the Indian stocks markets are not home to companies from sectors such as airlines and insurance, that are highly sensitive to such events. Then, why are Indian stock markets so paranoid?

It's not for nothing that markets react sharply to even the faintest whiff of war-like situation. Apart from the destruction to life and property, war-like situations can be devastating for most businesses. The possibilities of a loss in production and slack demand can cause a serious dent to corporate earnings and the stock markets can be unforgiving.

Given the risks of declaring a war with a country that is equally equipped militarily, not many people anticipate a war. But the uncertainty has affected sentiment badly. And when the general sentiment is bad, stocks tumble across the board.

Then, fundamentals play very little role in stemming a fall. One reason is the apparent lack of buying interest which limits any upside in stocks. Speculators who are the primary source of liquidity in the market exit the market and prefer to adopt a wait and watch attitude, says a Delhi-based broker.

In such a scenario, Indian stock investors have no choice but to stick to fundamentally strong companies that are capable of showing steady growth.

Which asset should you buy?

Without doubt, these are nerve-racking times. Although fears of an imminent war with Pakistan have eased a bit, the air of unease still hangs heavily over the financial markets. It will probably continue till some degree of stability emerges in the current volatile political situation.

Investing is never an easy task -- in turbulent times, it's an even more confusing exercise. Most investors hope to place money in avenues that not only protect their capital, but also promise to deliver handsome returns in the long run.

We considered the four most popular investment avenues of ordinary Indian investors: debt, equities, gold and real estate. We spoke to a cross-section of market experts for their take on how attractive these asset classes looked at this point in time and what investment mix could produce the best returns.

Consensus opinion, we found, was that equities offered the best returns for investors willing to sit through the gut-wrenching volatility of the short term. And if investors truly desired long-term gains, they would, perhaps, need to endure some short-term pain.

Gold: may not glitter

Gold is seen as a "safe haven" investment in times of crisis across the world. In India, the world's largest consumer market, people still continue to be lured by the lustre of gold; and while primarily bought for ornamental value, it is still the most popular form of investment for a vast majority of rural Indians.

Amid the uncertainty gripping the local and global financial markets, Indian gold prices soared to touch a six year-high of Rs 6,170 per 10-tola bar last Wednesday, riding on the back of leap in global prices. India, which accounts for 20 per cent of the world gold demand, imported 53 per cent lower than last yearin the first quarter of this year.

Demand for the precious metal fell by 40 per cent during the same period because of high prices and opening stocks. Global gold prices, which ended the week at a three-year high of $320 a troy ounce, were driven by a weak US dollar, fresh worries about attacks on the US, tension along the Indo-Pak border and continued violence in the Middle East.

But with the marriage season drawing to a close in India (gold demand hits a peak during wedding seasons), industry watchers anticipate demand for the precious metal to recede in coming months.

Going by the cardinal rule of investment, "buy low and sell high", investment in gold at this point of time doesn't look very attractive. With demand slated to come down, prices are expected to decline from current levels, it doesn't make too much economic sense to snap up gold right now.

Property: prices likely to dip further

Buying a house is a cherished dream for many Indian families. Nothing offers them more security than owning a home.

But for people who are looking at real estate as an investment option, the only argument in favour can be the tax breaks that come with taking a housing loan. The real estate market has been trapped in the doldrums for the past few years.

From the dizzy heights touched in 1995, prices have been sliding down. The bright spot came in 2000, when fuelled by the IT and stock market boom, prices started to look up again. But the rise proved fleeting, when the IT bubble burst; since then, prices have languished once again.

But despite the fall in prices, real estate analysts caution against investing in the property market right now. According to Tariq Vaidya, head - advisory services, KnightFrank India, prices could fall anywhere between 7-10 per cent in the next year. "Supply still outweighs demand in this sector, and hence, prices are unlikely to pick up this year as well, " he says.

Debt: the glory days are over-- for now

Long gone are the days when debt markets used to produce super-normal returns. Back then, a series of rate cuts had fuelled a scorching rally in the bond markets. Prices zoomed, and yields fell to all-time lows. Debt mutual funds outperformed their equity peers by rewarding investors with returns of over 25 per cent.

But fund Managers reiterate that this year, with interest rates staying range-bound, the markets will be more volatile, throwing up many opportunities for day traders.

Indeed, the yield on the 10-year benchmark government paper last week climbed to 8.20 per cent s before falling back to 7.78 percent, as fears of war receded on Friday.

Says Sandesh Kirkire, fund manager, Kotak Mahindra Mutual Fund: "The yields are likely to remain between 7.25- 8.00 per cent. But even a 50 basis points fall in yields over a period of three months can translate to 2.5 per cent capital appreciation. On an annualised basis, this could translate into a 10 per cent gain, in addition to the interest income".

Though flushed with ample liquidity, a war-like situation can bring a squeeze on money supply.Industry watchers say debt funds are likely to give returns between eight and nine per cent this year and these are likely come more from trading gains and the spreads between gilts and corporate bonds.

Equities: looking very attractive

Many market experts are convinced that the equity markets are a very attractive option for investors right now.

Shuddering on war fears, the benchmark Sensex fell in eight straight trading sessions, eroding over Rs 300 billion in market capitalisation.

It was only in the last trading session that the markets found themselves heaving a sigh relief, as signs emerged that a war may no be imminent. On Friday, the Sensex gained 4.55 percent to close the week at 3,255.62 points.

However, with caution still hanging over the market, this is probably one of the best times to venture into the market.

Says Nilesh Shah, chief investment officer at Templeton Mutual Fund: " The world has been witness to many wars till date and the equities markets have bounced back. Take the case of the US markets after World War I or II. Or the Indian markets after the Kargil episode. So, equities will continue to deliver over a period of time".

However, a word of advice: with the markets still gripped by uncertainty, investing with a short-term perspective is not a good idea.

Experts have three points of advice for equity investors: don't invest with borrowed money; don't invest with a short term perspective; and invest only in stocks with compelling valuations and have visibility in earnings. "It is more of an investors market than a trader's market right now," says Maulik G Sharedalal, partner at Kaji and Maulik Securities.

As far as what sectors to invest are concerned, the choice of analysts and fund managers range from pharmaceuticals, banking and IT-enabled services to automobiles and financial services.

They are not exactly passionate about manufacturing sector and cyclical stocks right now, given that both are economy plays and there's really no telling how long it will be before the economy is back on the fast track to growth.

Some experts say that rather than choosing sectors, investors should hunt for stocks of fundamentally sound companies that are going at the right price. Says Ramdeo Aggarwal, managing director, Motilal Oswal Securities: "The key to successful equity investing is buying the stock at the right price. You can't time your entry into a stock to perfection and buy at the absolute bottom. What you can do is buy into stocks at reasonable prices and depressed conditions often throw up such buying opportunities".

Finally, panic-stricken investors also tend to rush out of the market in rocky times.

Not a very good idea.Historic evidence shows that by holding on to cash, investors can avoid short term losses, but generally miss out when the markets rebound since timing the market to perfection is almost impossible. So it's best to stay put with your investments and play the wait and watch game, say experts. But don't ask them what they are doing!

With inputs from Kripa Mahlingam

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