Some Indian Shares Offer Shelter from Volatility

By Krishna Pokharel – WSJ

Looking to booming India as a haven from the world’s skittish stock markets in 2008? If so, here are three sectors — and three stocks — that analysts say are poised to outperform this year: infrastructure, consumer goods and education.

Although India’s surging economic growth is projected to slow somewhat this year as the effects of tighter monetary policy are felt, there is widespread confidence here that the expansion will continue even with a slowdown in the U.S. According to a recent report by U.K.-based accounting and consulting firm Grant Thornton International, Indian businesses are the most optimistic among the 34 economies surveyed about the prospects for increased profitability and exports and about the economic outlook in 2008.

India’s stock market, steadily on the rise since 2005, therefore still has a lot going for it, analysts say. In the first days of 2008, when the major world markets have been buffeted by fears of a recession in the U.S., the Bombay Stock Exchange’s 30-stock Sensitive Index, or Sensex, added 2.6% on top of its 47% jump last year. The index hit a new high Tuesday, closing at 20873.33, and fell yesterday 3.55 points, or 0.02%, to 20869.78 after hitting a record high of 21113.13 in intraday trading.

Among analysts, Lehman Brothers, for example, projects the Indian stock market will grow by 18% to 20% in 2008. Macquarie, too, predicts double-digit percentage gains and has a year-end target of 24000 for the Sensex.

But within the broader market, many analysts see the infrastructure and consumer-goods sectors as set to perform particularly well. Education-related companies could also emerge as hot stock picks, some analysts add.

Infrastructure is seen getting a boost from increased government spending and private investment in power generation, telecommunications, roads, ports and airports. The government late last year projected total infrastructure investment of about $500 billion over the next five years, 2.3 times the total projected to have been invested in the sector in the preceding five years.

Nipun Mehta, director and chief executive of Mumbai-based Unitis Tower Wealth Advisors, is bullish on the infrastructure sector in general and likes Punj Lloyd in particular.

Punj Lloyd is an engineering and construction outfit that builds and designs facilities such as transport systems, nuclear-power plants and pipelines. It is India’s second-largest engineering company by sales, after Larsen & Toubro, and has recently entered real-estate development and shipbuilding.

“Punj [Lloyd] has a healthy order-book position and is expected to have consistent profitability over the next few years,” Mr. Mehta says.

Mr. Mehta’s target price for Punj Lloyd stock in 2008 is 700 rupees (almost $18). Shares closed yesterday at 545.65 rupees, down 2.85 rupees.

Unitis said it doesn’t have an investment-banking relationship with Punj Lloyd, but declined to clarify its share-ownership position.

Consumer-goods companies are also expected to perform better in a stock market that may be more volatile this year. Their shares were hit in 2007 by margin squeezes as they cut the prices of their goods, but analysts say that when there are concerns over market volatility, Indian consumer-goods stocks generally give more solid returns than do manufacturing stocks.

A lagging sector last year, consumer-goods stocks have been among the top performers on the Bombay exchange in the early going this year. In 2007, with sector indexes like realty and banks surging by 73% and 60%, respectively, a key consumer-goods index rose by just 19%. This year so far, the consumer-goods sector is up 7.2%.

Tobacco and tobacco-products producer ITC, based in Kolkata, is a favorite of T.S. Harihar of Karvy Stock Broking in Hyderabad. He argues that institutional investors’ interest, and buying, will be centered on “defensives” — stocks that are more stable in periods of volatility, especially consumer goods and pharmaceuticals. This adds up to richer valuations for such companies, Mr. Harihar says.

At the same time, Mr. Harihar believes ITC’s stock could get a lift from spinning off businesses such as retail and e-marketing from its core business of cigarettes. The company hasn’t disclosed any restructuring plans, however.

“We believe that the brand equity of ITC and the hidden value in its retail and e-Choupal business [an online information and marketing portal for farmers] is yet not captured in its price,” says Mr. Harihar. His target price for ITC stock in 2008 is 350 rupees, which would represent a 54% gain from its Wednesday closing price of 227.95 rupees.

Karvy doesn’t have an investment-banking relationship with ITC or own the company’s shares.

The stock-market wild card could come from an intriguing new sector on the Indian market: education. Some analysts think it is about to take off, with the burgeoning middle class giving priority to better schooling for their children.

Gurgaon-based Educomp Solutions is one of the few listed education companies on the Bombay exchange, and a key pick for Ketan Karani at Kotak Securities in Mumbai. India’s young population and rising middle class are willing to pay more for career-enhancing education, which is expected to make the commercial education sector increasingly lucrative.

Because education-as-a-business is now emerging as a key theme in India, Educomp could continue to be a good opportunity to get in early: “It’s a niche play right now,” Mr. Karani says.

Mr. Karani notes that Educomp is the leader in the sector and was one of the top performers on the Bombay exchange in 2007, with its shares soaring more than five-fold to 4,750.45 rupees. The stock closed at 4,360 rupees yesterday.

Despite Educomp’s strong performance last year, Mr. Karani has an 11,000 price target on the company for 2008, up more than double from its current level. He sees the company’s stock rising to 20,000 rupees over the next three years.

Kotak doesn’t have an investment banking relationship with Educomp, or own its shares.

Source: WSJ

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