Time for contrarian bets

This sector has witnessed consolidation in recent months with the intensification of competitive forces. Several stocks belonging to this sector have experienced a sharp fall within a short span of time. We believe that although the margins of major players will be affected severely,the outlook is not as bad as some participants think it is. Plenty of volume growth will unfold over the next few years. Moreover,after some consolidation pricing power will come back to players once this period of consolidation gets over and the industry matures. Most of the bad news is already factored in. In fact,positive surprises are likely to appear over a period of time. We recommend long-term aggressive investors to buy Bharti Airtel,Idea and GTL Infra in the telecom space.

Oil & Gas

Oil and gas is the other sector that has been underperforming for quite some time. Here too the fundamentals are not bad as most of the large players have been consolidating their position in the industry. Moreover,oil and gas are extremely critical commodities that have no competition from any alternative natural resource. As the global economic recovery gathers momentum,the demand for fuels oil and gas is likely to skyrocket. Global refining margins,which have plummeted,will start looking up again. Further,the various oil and gas discoveries made by Indian companies will result in upward revision of their valuations. Reliance Industries,Cairn India and Gail appear to be good,long-term contrarian picks.

Capital goods

Currently many stocks are available at attractive valuations in the capital goods sector,where sentiment has still not improved. These include players in the power transformers and consumer durables segment. One can expect improvement in these segments in future as demand is picking up and order intake is likely to improve. Improvement in the capital goods segment within the IIP (index of industrial production) also suggests a recovery and positive sentiments for the sector. Stocks like Larsen & Toubro,Emco Transformers,EKC,Videocon Industries and Indo Tech Transformers have not yet entirely participated in the rally and may be considered.

Textile sector

In sync with the economic revival,Indias textile sector,including exports,has shown improved performance during the April-November period of the current fiscal. The textiles ministry has fixed a growth target of 12 per cent to reach a market size of USD 115 billion in the next five years and a global trade share of 7 per cent.

Many export as well as domestic-oriented units of textile companies are doing well. Further,many companies in the sector have used the slowdown to expand their manufacturing capacities. Textile companies,being export-oriented,enjoy many tax and other fiscal sops. Apart from this,many textile players have huge land banks and non-operational production units that are of significant value. Due to the global slowdown and poor sentiments,many well-managed companies have become very attractively valued: today their market capitalisation is less than even the value of their land. Many integrated textile companies which possess competitive strength,high-quality products and operational efficiencies are quoting at very attractive prices just because of poor sentiments towards the entire sector.

We believe the current market scenario seems to be right for such companies. The present government is very keen to revive this industry as it is labour-intensive and helps fulfil the governments promise of generating useful employment opportunity for every able citizen. Hence,you can expect fiscal sops to this industry to continue and get further enhanced in the forthcoming budget. We recommend buying stocks like Vardhman Textiles,Alok Industries,S Kumars Nationwide,Page Industries,Welspun India,Bombay Dyeing and BRFL.

Preferred stocks

Besides the above-mentioned sectors,there are plenty of stocks that have so far underperformed the markets and present decent upside from their current levels. These stocks belong to industries that vary from logistics to pharma.

Gati

Gati is one of Indias largest express and supply-chain companies. It has wholly-owned subsidiaries in Mauritius,Hong Kong and Singapore. Over the years,it has successfully built up a strong distribution network and has been a leader in providing India-centric distribution solutions. As industrial activity improves,we believe that the logistics sector will also witness a recovery. Gati is rightly positioned to capitalise on the growth opportunity in future. We recommend buying this stock at its current levels.

PTC

PTC India is the countrys largest power trading company promoted by PSU majors NHPC,NTPC,Power Grid and Power Finance Corporation. The constant shortage of power prompts many merchant power and captive capacities to be commissioned. This is likely to increase trading volumes and creates immense scope for companies involved in power trading. Since PTC is present across the entire energy value chain,it is likely to enjoy high overall margins,which otherwise tend to be thin in power trading. The commissioning of new power projects,increased focus on the more-rewarding LTT segment,and the value unlocking potential by listing its subsidiary,PTC India Financial Services,all augur well for this company.

Glenmark Pharma

The company has been hit by several negative developments in the last one year: failure of key products in international markets,uncertainty over out-licensing income,and concerns over its ability to meet guidance. Despite all these,we believe it has a great business model and has the advantage of presence in niche markets. We expect its core generic and branded formulation businesses to improve going forward. Further,its R&D assets can provide huge upside to the stock.

The author is chief executive officer,Invest Shoppe India