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Tuesday, February 24, 2009

Some picks which are logic driven

Legendary investor Peter Lynch believes retail investors, through their hands-on experience, can make fairly smart investment decisions — at times smarter than those made by analysts and fund managers. An oft-quoted instance is that of Mr Lynch buying a company that makes lingerie, after his wife mentioned how popular the brand was with women. Stretch that logic, and retail investors at this point may want to own the stocks of some companies that supply goods for home interiors. With a booming real estate market and rising wealth levels, the increasing popularity of home interior products (either for new homes or for renovations) is likely to continue for a long time.The boom in real estate is there for everybody to see. The obvious winners are the builders and developers. But step inside a house and view it a la´ superman with his X-ray vision and you’ll see the things which go into converting that 500 or 1,000 square feet of carpet area into a full-fledged home.To start with, there are those switches and miniature circuit boards (MCB). Copper wires run like the nerves of human systems carrying power through your homes. Remove the carpets, and there are the floor tiles.

Every 1,000 square feet carpet area of space roughly requires 1,000 tiles. The house needs a fresh coat of paint once every four years. What is a house or an office without furniture — either wood or its substitute particle board?And all the woodwork requires adhesives. Home improvement is another big segment, which involves decorative bed sets among other textile items. Lights, fans, sanitary-ware items like commodes, kitchen sinks, granite slabs are the other inputs that go into transforming that 1,000 square or more feet of space into what we call ‘home’.

I looked at a preliminary list of around 104 stocks that were in the related business of home interiors. Of the lot, Havell’s India, Finolex Cables, Orient Ceramics, Pidilite and ICI seemed reasonably priced at current market prices.

1)Havell’s India is the number one maker of MCBs; the industry is growing at the rate of 20-30% per annum. The company doubled profits in last few years and witnessed a more than 20% growth in sales and profits in the first half of FY09.The company has ventured into new products in the past three years and is present in nine verticals including switches, wires, cables, fans, compact fluorescent lamps (CFLs) and bathroom fittings. It is the second-largest player in the wires and cables business operating in the low-tension space. At a forward P/E of 6-7, it is reasonably priced.

2)Finolex Cables, which is mainly in the business of electrical cables connecting the power transformers to your homes, is another company to look at.With increasing usage of white goods, the company is also getting into manufacturing high-voltage power cables.It has also got into making switches and expects revenues of Rs 200 crore over the next two years from the segment.It has close to Rs 150 crore of capital expenditure plans, including a greenfield facility of light-duty cables in Uttaranchal.

The wall and floor tiles business is roaring. It has shown a 15-20% growth over the past 2-3 years, thanks to the boom in construction/real estate sector. All the major players, including Kajaria Ceramics, Nitco Tiles, Orient Ceramics and Murudeshwar Ceramics, have managed a high growth.However, most of the players in the floor tiles segment are facing tough competition with growing popularity of vitrified tiles, imported marbles and wooden floors. None of the tile companies inspire much confidence as long-term holdings. Nitco Tiles has tried to match up with tastes of the market so far, and it imports vitrified tiles from China.Kajaria continues to bank on its market leadership in wall tiles. Orient Ceramics is growing at a much faster pace than in the past. Apparently, the company’s products have made inroads into many hotels coming up in the National Capital Region (NCR), which is sprucing up ahead of the forthcoming Commonwealth Games 2010.

3)ICI looks like an interesting study in paints. Over the years, it has been steadily shedding businesses like chemicals, fertilisers and explosives, in line with its parent’s restructuring efforts. It has accumulated around Rs 700 crore in cash on its books.The company has not made up its mind on what to do with the cash.But the stock does give the shareholder a downside protection level.What ICI does with its cash is key. ICI’s mainstay is now the paints business, which is doing quite well, aided by its own focus on driving growth and rising demand from the automotive and housing sectors.With downside protection and a growing paints business, the scrip can give positive returns from here onwards.

Then there is Welspun which focuses on home textiles such as bed linen, bath, kitchen and furnishing material. Pidilite Industries has been growing its business and profits in the past five years. But at current valuations, its stock looks decently priced. In short, there are more than obvious winners from the realty boom. With existing housing shortages and growing income levels, these companies are expected to grow at strong rates and in line with the real estate sector. The only party-pooper that one should worry about is high interest rates,which could affect affordability and ultimately slow down real estate growth

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