What's a good buy and what's a goodbye... - Views on News from Equitymaster

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What's a good buy and what's a goodbye...

Dec 31, 2007

As we bid adieu to 2007, we look back and evaluate which sectors bore fruits for investors in 2007 and those that failed to generate wealth. While a single calendar year is too short a duration to make judgment about a sector's potential, and certainly not a rational benchmark for future performances, the same can only give a perspective on the upsides here from. Looking back at 2007

While the capital goods and banking stocks brought smiles to many faces, pharma, FMCG and auto stocks barely managed to conserve the wealth, while the software stocks actually destroyed some of it this year. The returns were, however, not commensurate with the growth potential and valuations in all cases, but was partial to certain sectors in terms of factoring in long-term opportunities. Sectors like capital goods raked in the benefit of overflowing order books thanks to a capex boom, while banks were buoyed by the retail as well as corporate demand for loans. Nonetheless, there were other sectors whose fundamentals despite remaining intact failed to garner investor interest due to certain short-term concerns. We would like to remind investors that there are a couple of sectors with equally sound long term potential that they may be blissfully ignoring in the meanwhile.

Are you missing out on these?

Medicines for chronic diseases and life saving drugs will continue to remain a necessity for generations to come irrespective of geographic diversity. What will make the difference will be the pharma companies' ability to make them more accessible and affordable. India's per capita health expenditure at US$ 20 is very low as compared to China (US$ 33), Brazil (US$ 309) and Malaysia (US$ 81) (Source: World Bank). However, with growing health awareness coupled with the growth of the health insurance schemes, the per capita health expenditure is bound to rise. As per IMS, the India pharma market is expected to grow at a CAGR of 9.5% for the period 2004-2009 driven by chronic (cardiovascular, diabetes etc.) and niche specialty (oncology etc.) segments. Further, the product patent regime is expected to result in the introduction of patented drugs into the country and possibly, higher growth rates for the MNC pharma companies in the long term.

Clothes are no more limited to being a 'necessary commodity' but are lifestyle indicators thanks to the advent of branded garments and increased affordability of the same. India's textile industry has been on a growth trajectory since the quotas were phased out. With policy initiatives in place, capacity expansions and India's rising market share, there are rapid export growth opportunities in the sector. Changing lifestyles and accelerating preferences of the urban population for branded apparels are also some of the growth drivers. Identification of the textile sector as a priority one for 'job creation' by the government certainly augurs well for the long-term. This is particularly a positive for players in the garmenting side, the same being very labour intensive. Similarly, the subsidisation of debt cost by way of TUF (technology upgradation fund) has given impetus to the capex plans of these companies. Given the latent opportunities present in the global scenario, these measures are likely to help textile companies become more competent and attract sizeable orders from the US and European markets. More importantly, it would enable textile companies to increase capacities and gain scale, which is a critical element while bidding for global orders.

Global technology spending seems to be on an up-trend, with the offshore component seeing impressive traction, driven by increasing acceptance of the 'global delivery model'. As such, Indian IT companies that provide a broad range of services and have proven capabilities in executing large and complex projects are likely to emerge winners over the long term. Notwithstanding the fact that the rupee's appreciation against the dollar at an accelerated pace over the past 12 months, has been a bone of content for the sector, the speed of acceleration and the business models of the software companies might not just remain the same forever. Even if an investor does not wish to take a call on the rupee dollar rate, the fact that the IT companies are slowly adapting themselves to the changed industry dynamics and currency scenario must not be ignored.

Lower age of first time car users, shorter replacement cycles or above all, lower car penetration will continue to grow the automobile industry at a robust rate in the long term. Rising income levels, introduction of new models and easy availability of finance have acted as the major catalysts in driving the recent growth in the domestic passenger car industry. As per SIAM (Society of Indian Automobile Manufacturers) estimates, the Indian auto industry has the potential to grow its turnover at an impressive CAGR of 16% between 2006 and 2016 and reach US$ 145 bn from the current US$ 34 bn levels.

While it is imperative that valuations do not take a back seat while you take your pick from these sectors, identifying the latent opportunity in these sectors - that the crowd is shying away from - will only relieve you of the herd mentality. We leave you with these thoughts to introspect and evaluate your portfolio so as make it a more balanced one. We hope that a well-researched and long term investing discipline in 2008 brings more cheers to you. Happy investing!

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