The year 2010 has been a really good year for the markets despite a series of scams and concern over issues relating to political and corporate governance as well as transparency in the functioning of the stock markets, which saw the year close with the markets witnessing a lot of volatility. The year 2011 is likely to be far more turbulent with mounting political uncertainty as a fallout of what happened in 2010. This is going to be reflected in the markets which are likely to witness a lot of volatility and downward pressure on valuations with rising concern over slowing down of reforms, rising fiscal deficit, food prices and interest rates.
The year 2011 may therefore not be a good one for weak-hearted investors though those smart enough to follow closely the news impacting the markets and take quick calls may end up making good money. Though the GDP estimates suggest that the economy is improving and the corporate sector too has shown improved performance as indicated by the advance tax data, experts say that companies have started facing margin pressures which could lead to deceleration in earnings growth.
The fact being that valuations can by no means be considered reasonable, investors are advised to be abundantly cautious. However, sharp corrections in individual stocks can always be used to gain exposure in them as witnessed recently in the case of a number of mid cap stocks. But be careful about the quality of management which should remain the single most important parameter for stock selection.
There are more reasons to be cautious with the FII activity slowing a bit and oil prices reaching a two-year high of around $90 per barrel. The credit deposit ratio of all scheduled commercial banks have risen to painful levels where the banks have been not only compelled to offer higher deposit
rates but have also been forced to increase lending rates to protect their margins.
Relatively high valuations and margin concerns have started impacting the asset allocation strategy of major institutional investors for the year 2011. Yet, any correction is unlikely to be deep enough to cause ripples in the investment world due to the high growth promised by the Indian economy and a reasonably good rate of growth likely to be churned out by the Indian corporate sector. There is ample money stashed on the sidelines to take advantage of any sharp correction, which may be enough to limit the downside.
The sectors that look promising in the New Year include infrastructure, mainly due to the fact that it is yet to participate in the rally and has grossly underperformed. The infrastructure-related sectors such as cement can again come into prominence. Other sectors to bet on are capital goods and IT – one due to the rising economic growth momentum, improving domestic demand prospects and growing capacity utilization since FY09, and the other due to the increased business opportunities and improved margins. Investors should pare down exposure in sectors such as auto and banking that have already run up a lot and have started looking more risky. The margins in both the sectors are under pressure and may see contraction.
DIAMOND POWER INFRASTRUCTURE LTD
(CMP Rs 197)
The company is an integrated player in the power transmission and distribution business with captive facilities to manufacture conductors, cables, transmission towers and transformers. The sector is likely to witness significant growth in the foreseeable future. The company is about to complete major capital expenditure of Rs 2.7 billion during the current financial year and is well prepared to drive growth in the medium term. The company has also strengthened its balance sheet by infusing funds worth Rs1.5 billion through QIP and warrants. The funds will enhance the working capital, enabling it to bid for a higher volume of project work.
The stock is available at attractive valuations with the current PE of less than 8 for the trailing 12 months EPS of more than 25. The annualized EPS for the current financial year is likely to be Rs 30 and for FY12 in the region of Rs 35-40. With the company very well prepared to cash in on the high growth in the power sector, investors may get decent returns by accumulating the stock at every correction in the near future.
The author is retired as Professor from the University of Delhi in 2024. He is an alumnus of IIM Indore and holds a PhD from the Delhi School of Economics. An investor activist and former member of various SEBI committees. He taught Capital Markets and Investment Banking at leading business schools of India.
