Buy on declines

The latest hike in Statutory Liquidity Ratio SLR,tightening of norms for non-performing assets,and the expected hike in key policy rates...

The latest hike in Statutory Liquidity Ratio SLR,tightening of norms for non-performing assets,and the expected hike in key policy rates create fear of liquidity drying up in the market. Reduced liquidity in the system will increase the borrowing cost of consumers and of business in general. This is likely to reduce expenditure,resulting in diminishing demand for goods and services. Profitability of corporates will be impacted both by the rise in interest costs and by reduced sales.

An increase in interest rates also makes equity relatively less attractive as an asset class because the risk-free return available elsewhere increases. As interest rates go up,bank deposit rates rise and new issues of government securities are made at a higher premium rate. This means that the risk premium associated with stock markets declines. As the relative reward for investing in stocks falls,investors move money out of the stock market and put it in bank deposits and government bonds,pushing down the prices of shares.

Much of the volume in the markets these days,whether retail or institutional,is made on margin. This means that initially the investor only puts up a fraction of the funds needed to buy shares. The remaining funds are loaned by the broker on a short-term basis. An increase in interest rates increases the cost of margin trading.

All the above factors are likely to pull down the indices in the short run. For investors this will provide interesting buying opportunities. Here are a few good stock ideas for investing:

SBI

With its surplus liquidity and balance sheet size,we believe SBI will be a major beneficiary of the pickup in credit demand going forward. Its non banking subsidiaries SBI Capital Markets,SBI Mutual Fund and SBI Life Insurance will benefit from the uptick in capital markets and corporate activity. Its mammoth branch network most of it already under Core Banking Solutions,increasing contributions from fee-based activities,comfortable capitalisation,a well-diversified loan book,and high proportion of low-cost deposits are positives for the bank. At its current market price of around Rs 2,200 it trades at 2x of its FY10E adjusted book value. In the banking sector it remains our preferred pick. Buy it on any fall.

Tata Steel

Tata Steel is one of the worlds top ten steel producers with an existing annual crude steel production capacity of 30 Million Tones Per Annum MTPA. It is an integrated steel plant and is geographically diversified through investments in Corus,Millennium Steel and NatSteel Holdings,Singapore and a well-established marketing network in 50 countries. The company has impressive expansion plans that have the potential to catapult it to one of the leading players in the steel industry. Steel as a commodity is in a long-term bull market and Tata Steel is likely to be one of the major beneficiaries. The demand from domestic as well as international players is expected to increase as the global economy stabilises.

TCS

TCS is one of the worlds leading information technology companies and is well poised to take advantage of the amazing business opportunity in outsourcing that is set to emerge as the worlds leading companies reorganise themselves after the financial crisis of 2008. It has around 90 clients the world over and has been showing good performance over the years. TCS will in future also benefit from the diversity of its operations. TCS has reported better-than-expected volume and profit growth in recent quarters. We recommend that you should buy TCS as the stock trades around 19 times FY10E,which is a 15-20 per cent discount to the valuation of Infosys.

Marico

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With a strong distribution network and popular products like Parachute and Saffola,Marico has a multiple growth driver based model. It has a superior quality of revenue growth which is predominantly volume led. Domestic volume growth at 15 per cent continues unabated. All its major brands contribute to its growth. Any adverse effect of the poor monsoon on Maricos sales is likely to be minimal,as the company draws only 18 per cent of domestic sales from north India 30 per cent of this is rural,which has had the weakest rainfall,while 60 per cent of revenues come from west and south India,which have experienced very marginal rainfall deficit. Domestic FMCG sales comprise 75 per cent of Maricos overall sales. With increasing consumer disposable income this is one stock that is likely to continue performing well.

Cairn India

The company is set to emerge as one of Indias leading petroleum producers,and possibly the largest onshore producer once its oilfields in Rajasthan reach peak production by FY12. Going ahead,the profits are likely to show astonishing returns on year-on-year basis assuming that the company will be able to meet its production targets and there will not be any major negative movement in crude prices. Hence any weakness in its stock price should be used as a buying opportunity.

The author is chief executive officer of New Delhi-based Invest Shoppe India