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Saturday, May 16, 2009

Sectoral blue chip picks

PHARMACEUTICALS: Out of 12 pharmaceutical companies in my list, Dr Reddy''s Laboratories seems to be the dark horse in the pharma pack. It''s true that the company is currently going through a lean period. Its German acquisition, betapharm, is facing price cuts in its home market, which has increased Dr Reddy''s pay-back period. This has also pulled down its profitability and margins. However, in the long term, pressure on pricing is expected to ease, as the company is transferring manufacturing of key products to India. Its new initiatives in custom pharmaceutical manufacturing services and biogenerics are likely to strengthen its performance.

INFORMATION TECHNOLOGY: Infosys Technologies is my favourite pick among the 10 IT stocks in the list. The second-largest IT exporter from India is grappling with global macroeconomic challenges. However, the company is yet to report any signs of demand weakness. It has been adding new clients at higher billing rates with bigger deal sizes. Further, the US slowdown is expected to increase the outsourcing of non-discretionary projects, which will benefit Indian IT companies. Given this, Infosys appears to be a good defensive bet in times of market turmoil.

CEMENT: From the cement pack,I selected ACC and Madras Cement. Among large-cap cement makers, ACC is a strong value buy at its current market price. In the past, the company has gained from a policy of calibrated expansion and investment into cost-cutting measures such as captive power plants. Madras Cement is one of the cheapest stocks in the sector, given its size and track record. The company has a good profitability record, backed by high plant efficiency. Apart from its key markets of Tamil Nadu and Kerala, the company is now expanding aggressively in Andhra Pradesh and West Bengal. It is planning to double its capacity to 10 million tonnes by FY09.

FMCG: Despite being a commodity company, Tata Tea has grown remarkably well over the past decade. And that makes it a good FMCG bet. Its growth is further accentuated by international acquisitions, foreign joint ventures and diversification in the beverage and packaged drinking water segments. The restructuring of its tea plantation business is likely to result in increased profitability of its core business. Investors parking their funds in the company can expect a consistent appreciation of capital, as well as annual dividend income.

AUTO & AUTO ANCILLARY: Tata Motors and Sundaram Fasteners are my picks in this segment. Tata Motors''recently-launched Rs 1-lakh Nano and new variants of Sumo and Safari will support its topline growth. In the commercial vehicle segment, it is planning to launch a high-end brand called World Truck. Similarly, its Jaguar and Land Rover acquisitions, if successful, will give it a global footprint in the luxury car segment. Sundaram Fasteners is an established auto components company with customers in India and abroad. Its global presence has helped it to reduce the risk of dependence on only a few customers. It has been expanding its operations aggressively.

METALS: The metals space, especially the non-ferrous segment, is suffering from weakness in global prices. The recent fourth quarters numbers were not encouraging for many players in this segment but things seems to be changing slowly. I have picked two stocks in this space, Hindalco Industries and Sterlite Industries,which have the ability to sustain through bad patches in a commodity cycle.The acquisition of Novelis, the world leader in aluminium rolled products, has given Hindalco a global footprint. Sterlite enjoys a similar global presence.Given the strong fundamentals of these companies, this can be the right time for investors to enter these stocks with a horizon of 2-3 years.

SHIPPING:It is one of the oldest sectors in India, but only one company, Varun shipping , makes the cut. The company transports bulk cargo of LPG, crude oil and petroleum products. It is also expanding into offshore services since the pace in oil exploration activities has gained strength globally.A combination of the lowest P/E and relatively higher dividend yield of 5% makes it an attractive investment.To conclude, investors must stick to basics. As the saying goes, a judicious investor carries the weather with himself.

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