Equity investors are understandably unnerved by the sharp drops and sudden losses. But equity investors in India are in a minority, with most Indians never having ventured beyond bank fixed deposits and LIC money back policies.
The current meltdown offers investors a fantastic opportunity to buy into blue chips at throwaway prices. We never imagined that we would see such prices ever again. So, while existing investors understandably fret over their losses, a new investor should use this opportunity to enter the equity market. If you have never invested in equities before or even if you are invested less than 10-20% of your net worth, then roll up your sleeves and get ready to jump on.
Since we are riding over a rough patch, investors should buy in three lots over three months to average out in the face of high volatility. We have drawn up a list of blue chips with impeccable track records and which offer good appreciation potential over the next few years.
Buying State Bank of India equity shares >
The Indian banking sector, as a whole, is set to benefit immensely as the interest rate cycle heads lower. The domestic economy can recover over the next two quarters with adequate liquidity infusion from Reserve Bank of India (RBI). Most importantly, as alternate sources, external borrowings, capital market, private equity dry up, the Indian corporates will be forced to turn to Indian banks for funding needs. This should help shore up net interest margins at Indian banks.
WTO obligations mandate liberalization of the financial sector in 2009. With a pro reform governor at RBI, we may see some steps in this direction post elections. This can drive consolidation and M&A activity in the sector making it an attractive investment bet. The largest bank in the country is effectively a proxy for this Indian economy.
Moreover, the recent upheavals in the banking sector have sent a wave of deposits into SBI. This puts the bank in an enviable position to capitalize on any brewed growth momentum with a current capital adequacy of 13%.
SBI is available at a P/E of only 7 times at the current price of Rs 1,160. Buy with a target of Rs 2,000 over 18 to 24 months.
Buying Reliance Industries equity >
Reliance had been steady in the first leg of the fall, but has more than up during the last two month. The stock led the market down (along with ICICI bank) with a fall of 54% over two months. It is now quoting at Rs 1,020, a drop of over 70% from the peak of Rs 3,250. The Markets are nervous as petrochemicals have seen a sharp in demand and price. Reliance is likely to see continuing pressure in the petrochemicals division, but this should be more than made up by steady profits from the refining segment.
Refining GRMs remain strong at $12 for Reliance. The recent fall in rupee will negate a large part of the drop in GRMs from all time highs. The oil output from the KG Basin has already begun. The gas (which is the mainstay) will start in January 2009. We expect the gas to contribute Rs 100,000 crore to the top line and may be Rs 10,000 crore or more to profits at full output. This will effectively double Reliance’s current profit.
The consolation of its subsidiary RPL’s accounts will also give a big boost in 2010, as RPL is expected to report a net profit of around Rs 10,000 crore. The SEZ at Gurgaon and the retail venture will also yield value over a longer period.
Reliance’s market capitalization is Rs 160,000 crore with expected net profit for FY09 at Rs 16,500 crore. This is without the contribution of KG gas and RPL consolidation, the full impact of which will be felt next year. Buy with a target of Rs 2,300 over two years.
Buying Zee Entertainment equity >
Entertainment remains one of the best industries in a recession. The stranglehold of Star Plus on the Indian prime time has been broken and Zee has emerged as one of the main contenders. With a wide bouquet offering and a strong distribution reach, the Zee channels are leading in many segments of viewer ship.
With the CAS rollout and the increased penetration of satellite dishes, the channels stand to benefit immensely from better subscriber declaration. Better international viewer ship also gives Zee an edge over other Indian channels with limited international reach due to limited bouquet offerings. Zee is available at a market capitalization of Rs 5,300 crore. We believe that a discounting of 12 times is low for a company with very strong cash flows, strong brand/franchise proof characteristics and growing at 20% or more. Buy with a target of Rs 250 over two years.