Most of the heavyweights of India Inc have announced their 2QFY07 results and if there were any doubts over the continuation of the growth story, the companies have performed well enough to dispel those notions. Quite fittingly then, the benchmark indices have surged ahead on the back of strong capital inflow by investors and have continued to attain new landmarks. It would be pertinent to add that in the month of October, BSE Sensex, the Indian benchmark for the first time in history breached the 13k barrier. While it closed the month a tad below 13k, point-to-point gains for the entire month for the Sensex as well as its peer, the S&P CNX Nifty, stood at 5%. Against this backdrop, let us have a look at the top five gainers for the month on the S&P CNX Nifty, which in our view is a more correct barometer of the Indian stock market.
ABB: Despite its lofty valuations, ABB, one of India's largest engineering companies continues to remain in investors' good books as is clear from the 22% gains that the company has enjoyed over the past one month. ABB is believed to be the foremost beneficiary of the gargantuan investments that the power sector is expected to undertake in order to improve its T&D infrastructure. Combine this with the company's age-old presence in India and a solid technological support from its parent and we have a winner on our hands. Little wonder that despite the 'Infosysque' valuations accorded to the company, flocking to the stock continues unabated. However, the key word here is 'long-term'.
HPCL: While ABB, the top ranked company is currently undergoing what we call momentum investing, HPCL, the second highest gainer for the month, can surely be classified as a turnaround story albeit with a lot of caveats. There are very few sectors on the face of this planet where both on the raw material sourcing front as well as product front, rationality time and again loses out to political histrionics and when this happens, tossing a coin becomes easier than predicting the prospects of a company from that sector. The Indian oil refining and marketing sector surely falls into this category and thus while HPCL has found a mention in the list of gainers for the month of October, given the uncertainty associated with the sector, we are not sure how long it is going to stay there. Although investing in the sector is not a strict no-no for us, we would definitely require a huge margin of safety.
Infosys: Occupying third place on the list with an impressive gain of 15% is Infosys, one of India's biggest success stories in recent times. Outguessing or outsmarting the street has now become a habit for the company and 2QFY07 was no different. Just as we start thinking that with increased size comes less growth, the company in its trademark style defies it and sets the bar higher for the rest of the year. Most analysts then start crunching their numbers again and the increased projections then lead to a concomitant increase in market cap. While growth may not be a problem for the company, finding enough people to man them could consume a lot of man-hours of the top management. However, until they raise some alarm, let us bask in the success of the company and intensify our search of finding the next Infosys. The task though, is as difficult as predicting the next quarter EPS of the company.
Siemens: Not making ABB feel lonely is Siemens, the 55% Indian subsidiary of the German engineering giant that gained over 14% during the month of October. And just like ABB, Siemens has been a big beneficiary of the upturn in the capex cycle in the country and increased investments in the power sector. The company is also increasingly playing an important role as an outsourcing arm of its German parent. Also in terms of valuations, as in the case of ABB, the time horizon in mind has to be really long-term, as the current price seems to be factoring the growth prospects of the company in the medium term.
M&M: Completing the list is M&M, India's largest UV and farm equipment manufacturing company. The company has added a sizeable 14% to its market cap in the last month. The optimism towards the company has seemingly stemmed from the fact that it announced among the best 2QFY07 numbers in the auto sector. But it is now not the only one driving its growth, as its investments in growth sectors like real estate and software have also started yielding rich dividends. While the divestment of some of its stake in Mahindra Gesco and M&M Financial Services earlier helped it unlock significant value, the IPO listing of Tech Mahindra, its tech subsidiary, has also given a further fillip to its fortunes. Going forward, while inherent cyclicality might subdue the performance of its automotive division, the immense potential of its subsidiaries could well ensure that M&M's growth engine keeps on chugging.
Conclusion
Having had a look at the top five stocks in the past month, we continue to find current valuation levels as slightly disturbing. While we have full faith in the long-term India story, selecting a fundamentally strong value stock based on a 2 to 3 year horizon is getting increasingly difficult. It will be as crucial at this juncture to identify the potential downside, as it will be to analyse future growth prospects, which is what we have always maintained. Happy investing!