SIP these five stocks for the long term

They are large-caps, leaders in their business and have good brand value

Long-term investing has been a tough strategy to follow for investors since 2008. Even now, many stocks are down 70-90 per cent since their 2008 highs. Only a few have done well, due to their fundamental strengths and better growth rates.

But how to pick these? Vibhav Kapoor, group chief investment officer, IL&FS India, says: "They have to be large-caps, leaders in their business, have good brand value, so that they can pass on cost increases and have a steady track record of growing higher than median growth rates. This helps them withstand temporary downturns." For him, Larsen & Toubro, ICICI Bank, ITC and Infosys/TCS fit the bill. Rajat Rajgarhia, managing director, institutional equities, Motilal Oswal Securities, likes HDFC Bank, ACC, L&T, Tech Mahindra and ONGC. Others point to Reliance Industries and HDFC. Business Standard picks five stocks that investors can gain from by buying through a systematic investment plan (SIP) over a three to five-year period. (Click here for graphics)

ICICI Bank will be a key beneficiary from revival in economic growth and/or lower interest rates. Over the past four to five years, a focus on profitable growth and re-balancing of the portfolio in favour of the retail segment has paid good dividends. Today, retail loans account for 37 per cent, with the rest split between domestic corporate and foreign loans, most of which are secured. ICICI Bank has also improved the share of low-cost Casa (current account and savings account) deposits from 29 per cent in FY09 to 43.3 per cent currently.

Thus, net interest margins (NIMs) have expanded to about three per cent in FY13, which analysts expect to rise to 3.4 per cent in FY15. Gross non-performing assets (NPAs) have improved from 5.1 per cent to 3.2 per cent and net NPAs from 2.1 per cent to 0.8 per cent during FY10-13.

Though the weak macro-economic environment has led to some pressure on asset quality in recent quarters, a trait also true for most peers, it is manageable. From a three to four-year perspective, the bank appears attractive. A high capital adequacy ratio (17.8 per cent) and provision coverage ratio (70 per cent) provide comfort. Analysts expect its net profit to grow by 14-16 per cent in FY15 and FY16. At 1.8 times the FY15 estimated book value (standalone), valuations are inexpensive (historical average is 2.3 times).

ITC's cigarette business has been a cash cow and will remain so. Strong pricing power has helped it pass on tax/duty rises to consumers and deliver healthy profit growth. Notably, the surplus cash invested in new growth areas like fast moving consumer goods (FMCG) are showing results. The latter business, wherein ITC is among the top entities in quite a few of the segments it operates in, reported profits for the second time in its lifespan (December 2013 quarter). Growing in excess of 15 per cent, this business with annualised revenue of over Rs 7,500 crore in FY14 should report profits from FY15 onwards.

"With improving profitability in the foods segment (over 65 per cent of the FMCG business) driven by higher margins in biscuits and staples, the other FMCG segments are emerging stronger. Personal care products are also gaining good traction in key categories," noted Vanmala Nagwekar of IIFL. ITC is investing heavily in brand building and plans to enter new categories (dairy, juices), which will further drive growth. It aims to generate Rs 100,000 crore of revenue (17 per cent compounded annual growth) from its non-cigarette FMCG business by FY25-30, says Nagwekar.

Except hotels, the other businesses (paper, agricultural products) are doing well. With low capex needs and profits seen growing by at least 15 per cent annually in the coming years, investors can expect good stock returns.

Larsen & Toubro
L&T is miles ahead of most peers in engineering and construction skills, which it is also utilising to capture business in international markets. From turnkey projects, engineered systems and products, power and railway equipment, and industrial machinery, L&T's core business touches many sectors. Thus, it would be a key beneficiary of capex revival and infrastructure investments ($1 trillion over the next five years) ahead.

Notably, despite the slowdown, L&T has secured more orders and grown its business. Goldman Sachs says in a recent note, "We see L&T as a key beneficiary of capex revival. L&T has grown its order book by 13 per cent over the nine months in FY14 (to Rs 171,200 crore), compared to the rest of the sector seeing declines. Our analyst expects strong earnings growth in FY15, based on strong order book coverage (three times FY14 estimated revenues) and improved execution." In FY15 and FY16, analysts expect earnings to grow by 15-20 per cent annually. Among the few concerns is the infrastructure assets business (concession projects including road, metro, ports). This currently earns low returns and accounts for half of L&T's consolidated debt (excluding financial services). Success in monetising these assets should lower debt and provide further triggers for the stock.

Reliance Industries
The RIL stock, which delivered a compounded annual growth of 33 per cent during FY1998-2008, has fallen 23 per cent since the global crisis broke out. Pressure in global petchem & refining segments, the gas business not yielding expected results and investments in telecom and retail yet to yield returns have led to consolidated return on capital employed declining from 19.5 per cent in FY08 to 10.8 per cent in FY13. The trend, however, is likely to change. RIL is investing Rs 150,000 crore over three years across businesses. A large chunk is allocated to petrochemicals, where capacity is projected to increase 67 per cent to 25 million tonnes (some projects have already gone on stream).

Positively, the shale gas business has been yielding good results (operating earnings up 40 per cent year-on-year at $462 million in the first nine months of FY14), while retail profitability is also improving. RIL expects retail revenues to rise from Rs 10,000 crore to Rs 50,000 crore in the next few years. Oil and gas should also see gains, say analysts, led by higher gas prices from FY15 and likely new discoveries.

In sum, the low-yielding cash balance (Rs 89,000 crore), along with RIL's annual profits of Rs 20,000 crore, when invested in better-yielding core businesses should lead to higher return ratios and better valuations. After an estimated five to seven per cent earnings per share growth in FY14, analysts expect earnings to grow by 12-14 per cent in FY15 and FY16.

Tech Mahindra
From being a company focused on a single client (BT) and single vertical (telecom) in 2008, Tech Mahindra (TechM) has come a long way. It took over a much larger, albeit scam-tainted, Satyam Computers in 2009 and turned it around successfully, along with settling Satyam's legal cases. The merger made TechM a diversified information technology services company, with telecom now forming 47 per cent of revenues -- manufacturing, technology/media and entertainment, and banking and financial services are other key verticals. BT now forms only 12 per cent of revenues versus 65 per cent in 2009. Notably, despite client-specific issues at BT, TechM has grown its non-BT telecom business well.

"TechM has consistently demonstrated its ability to gain market share within its client base and improve its services portfolio through acquisitions. Despite a revenue base of $3 billion and revenue growth in the top quartile among its peers, the stock trades at 10.9 times FY16 estimated earnings," says Nitin Padmanabhan, technology analyst, Espirito Santo. Most analysts believe the stock will continue to re-rate. Expertise in the telecom vertical, a strong deal pipeline and improving cash flows provide strong growth visibility. Revenue and profit growth is pegged at 15-18 per cent in both FY15 and FY16. Acquisitions could further boost growth.

This article taken from Business Standard :