Make no mistake: No investor can beat the business cycle. Thousands have discovered this fact the hard way. But the smarter ones have also spotted ways to soften the blow. Non-cyclical stocks can be less esoteric and academic than you think. Investors can, if they apply their minds, identify counters that will not give them sleepless nights. They just have to make sure that the stocks they pick up don't miss out the bull run entirely, even as they cushion them from the batterings of a bear market.
Sectors whose fortunes are directly related to the performance of the broader economy — cyclical ones such as manufacturing — fall in the line of fire during an economic downturn. This limits the choice of investors to the fundamentally strong companies in the sectors, which are more or less non-cyclical in nature. The services segment in the economy, by and large, consists of such sectors that are not directly affected by a downturn. Keeping this in mind, ET Intelligence Group this week brings you a first-cut analysis on the services space in the Indian economy, along with some investment ideas. Apart from its non-cyclical nature, another strong reason to evaluate the performance of the services sector is its prominent contribution to economic activity, represented by the gross domestic product (GDP). Between Q1 '04 and Q1 '09, the share of services in the country's GDP grew to 56% from 53%, while that of agriculture fell to 18% from 21%. The share of manufacturing, however, remained stagnant at 15% during the same period. The study selected only those aspects of the services space, which tend to show lesser coupling with the broader economy. These include healthcare, information technology (IT), telecom, logistics and recreation. Other sectors, including travel and tourism, retail, banking and financial services were not included due to their direct relationship with the changes in economic parameters. Further, the financial performance of this set of companies was compared with companies in the manufacturing sector. Here again, oil and gas was excluded on the ground that it is a tightly regulated sector. The analysis reveals that the services sector has registered a stronger growth in sales and profit in each of the past four years until FY08 vis-à-vis the manufacturing sector (see table). While sales growth in manufacturing remained lower than 30% in each of the years during the said period, services almost always exceeded this mark. Further, even though sales growth in services tapered over time — 29% in FY08 compared with 79% in FY05 —it remained above the 18% recorded by manufacturing. A similar trend prevails in the case of net profit for both the sectors. Another case in point is that higher growth in services has come on the back of higher profitability. This is in line with the common assumption that a component of services in a business offers greater profitability. During each of the past four years, the services sector has delivered better margins at operating and net levels. While the services sector has outclassed manufacturing on various financial parameters, it lags behind the latter in terms of return on capital employed (RoCE). Manufacturing companies have delivered better RoCEs during the said period. A point to note is that in the case of services, RoCE has gradually increased over a period of time. During FY08, it was 22.7%, compared to 23.3% for manufacturing. Given its stronger performance and noncyclical nature, investors can park their funds in select companies in this space (services) during an economic slowdown. ETIG has provided stock ideas on various service sector companies from time to time. It now presents a list of the best picks in this space along with the investment rationale. The Chosen Ones In logistics, the stocks of Container Corporation of India (Concor)and Gateway Distriparkslook promising. Concor is in the business of containerised movement of goods on rail. The stock trades at a priceto-earnings (P/E) multiple of 15.1 on a trailing 12-month (TTM) basis. It has historically traded at a P/E of less than 20. The company does not have any competitor in the strict sense. Concor appears to be trading at reasonable valuations, since the average P/E of stocks in the ET Logistics index is 18. The stock looks attractive at current levels, considering the growth potential in its domestic business, entry into cold chain logistics and reasonable valuations. Gateway Distriparks trades at a TTM P/E of 13.4. This is lower than the average P/E of companies comprising the ET Logistics Index. As of now, only the container freight station (CFS) segment of the company is making profit as the remaining two businesses including cold chain logistics and container rail segments are yet to turn profitable. The stock looks attractive, given the future business potential of these segments. The IT sector is battling with external economic pressures, including currency volatility and turmoil in the global credit business. So, investors can consider companies that provide niche solutions and have sizeable presence in the domestic market. One such company is Rolta India. The Rs 2,000-crore geo-spatial solutions provider is trading at a P/E of 20.4. It is the single biggest provider in its area of operations and has a significant presence in government and private sector projects. The company (through its international tie-us) is likely to benefit from the nuclear deal. In the IT services space, Infosys Technologiesand Tata Consultancy Services (TCS)look better placed to face macro-economic challenges. Both the companies are keen on inorganic growth to expand their service offerings. In the healthcare space, Fortis Healthcare has shown a turnaround. With the company's hospital network reaching a critical mass, its financials may improve in the coming quarters. (For a detailed analysis, refer to Fortis' stock idea on page 2) . The telecom space is another service sector, which continues to see buoyancy in subscriber addition despite slowing economic growth. Here, Bharti Airtel, Idea Cellular and Tulip Telecom are our top picks. Despite fierce competition, Bharti Airtel continues to hold the biggest market share in mobile telephony. The company has seen higher momentum in its net monthly subscriber additions. The company has chalked out plans to enter the direct to home (DTH) and internet protocol television (IPTV) services space. Idea Cellular looks promising, given its recent acquisition of Spice Communications for Rs 2,720 crore. We expect the company's operations to turn around in the next 2-3 quarters. This can improve Idea's future performance. Tulip Telecom provides solutions in the space of corporate data connectivity and network integration. The company has seen phenomenal growth in the past three years. It has undertaken capital expenditure (capex) to strengthen its presence in the virtual private network (VPN) space. Further, it has added two more services in its deliverables, including managed services and value-added services. These developments are expected to keep Tulip's growth momentum intact. There will be other such counters. You can spot them if the stock-picker in you plays a different role. Remember, it's not a bull market; it's life below 14K. Follow the news flow and policy drift, which can impact counters. There will be spin-offs. The only difference now is that identifying such stocks will require a little more hard work. (Inputs by Joseph Pereira, Karan Sehgal and Kiran Kabtta) var RN = new String (Math.random()); var RNS = RN.substring (2,11); b2 = ' '; if (doweshowbellyad==1) bellyad.innerHTML = b2; http://economictimes.indiatimes.com/articleshow/3483645.cms Experience is the teacher of all things. - Julius Caesar -- Posted By Ronald Chisley to Investor Forums at 9/15/2008 07:53:00 AM --~--~---------~--~----~------------~-------~--~----~ Get latest market updates & search internet right from your browser-download our toolbar here- http://investorline.ourtoolbar.com/ Visit our site at – http://investorline.co.in/ Newsroom: http://newsroom.investorline.co.in/ Learning Center- http://learning.investorline.co.in/ Mutual funds - http://mutualfunds.investorline.co.in/ Life Insurance - http://insurance.investorline.co.in/ Investor Journal - http://research.investorline.co.in/ Newscatcher- http://catcher.investorline.co.in/ Interested in Financial Planning-Let us Contact you- http://spreadsheets.google.com/viewform?key=pb_z4f1_zGMg4iBBFT3-SWQ&email=true If you like the site then promote it here- https://www.freetellafriend.com/tell/?url=http://investorline.co.in/blogs/news Create your own free blog on- http://investorline.co.in/blogger Visit this group at http://groups.google.com/group/india-investor -~----------~----~----~----~------~----~------~--~---
