ET has a fine report on why buying stocks with well-known brands can do wonders for your stock portfolio.
ET points out that Brands that have been built up over the years with care and prudence hardly ever fail to deliver. When a seasoned and well-respected investor like Warren Buffett invests in brands like Coca Cola, Kraft, Gillette, and Johnson & Johnson, which are strong and formidable in their own right, it has a long purpose to serve. These brands have stood the test of the time and have delivered above average returns over a long period of time.
ET explains that strong management, good distribution network and extensive marketing have helped sustain the perception of such brands in the minds of investors. Hence, when there is a free fall in the market, investors like Warren Buffett make the most of their funds by making big investments in such brands. These investors believe in the mantra: make hay even before the sun shines.
ET argues that the present situation in the Indian markets provides a similar opportunity to investors. There are many strong brands which are available at a discount due to the general economic slowdown and a variety of other issues including operational problems. Today, when there has been a comprehensive fall across markets, the only differentiator that companies have is brands. Brands that elicit unwavering faith not only from the consumers, but also from prudent investors.
ET Intelligence Group has done fine work by highlighting some companies, which are strong brands in their sectors, and are now trading at economical valuations. These are companies which have outperformed the market consistently in the bull phase of the market. The steep fall in their stock prices present a good opportunity to investors to accumulate them.
Maruti Suzuki, ET’s first stock pick, is the leading player in the four-wheeler domestic passenger car segment. It was hit hard by labour trouble at its facilities, in both the first and second quarters of this fiscal. High auto finance rates also had an impact with many consumers delaying purchase of passenger cars.
ET states that as a result, during the first half of FY12, Maruti Suzuki’s total income from operations fell by 6.3% y-o-y, while its net profit declined 25.8%. Maruti Suzuki’s car sales in terms of units also fell 10.6% y-o-y during this period. This left Maruti Suzuki’s with an estimated 39% share of the domestic passenger car segment at the end of first half of FY12, a decline of almost 500 basis points from a year back.
Maruti Suzuki had also faced labour problems at its facilities for around two months during the later half of FY01. Total vehicle sales of Maruti Suzuki’s fell nearly 13.6% y-o-y during FY01 as a result. But Maruti Suzuki’s bounced back in subsequent years, says ET.
Despite the impact of the latest labour problems, analysts point to a possible revival in Maruti Suzuki’s performance over the next few quarters. Maruti Suzuki’s has received bookings for nearly 100,000 units of the recently-launched new model of its Swift car.
ET adds that the supply of diesel engines to Maruti Suzuki’s is expected to improve soon from about 20,000 units per month to 25,000 units at a time when diesel engine-run cars are in vogue. Another plus for Maruti Suzuki’s is its country-wide distribution network at the end of March 2011 it had 933 outlets in 668 cities. In addition, its service network reaches 1,395 cities.
SUN TV is ET’s second stock pick. Sun TV Network‘s dominance in the broadcast segment of the media and entertainment industry continues uncontested in South India. SUN TV is the largest media and entertainment company with 20 channels across four regional languages: Tamil, Telugu, Kannada and Malayalam, explains ET.
ET points out that in the September 2011 quarter, when most media companies faced a tough business situation, SUN TV reported a growth of 7.6% in its net profit. In the last five years, it is the only media and entertainment company to report an operating profit margin of over 75%.
Such consistent financial performance has been due to its strong business model argues ET. SUN TV sells airtime (prime time) slots to production houses with a stipulated clause of dispensing with the content if it fails to attract high television rating points (TRPs). According to a broad analysis of channels in the general entertainment category by the Television Audience Measurement agency (TAM) Peoplemeter System, SUN TV Network has the highest TRPs at 18, states ET.
ET argues that this supremacy gives SUN TV the power to command high advertisement rates and periodically increase them. Besides this, SUN TV ‘s foray into the direct-to-home (DTH) segment with its own brand Sun DTH presents a strong source of incremental revenues. This segment accounts for 17.5% of its revenues at present.
In the last one year SUN TV ‘s stock has been beaten down considerably, falling 52% to Rs 258 due to the perception of the alleged involvement of Dayanidhi Maran (brother of the company’s promoter Kalanidhi Maran) in the telecom 2G spectrum scam states ET. Even in times of slowdown beginning 2008, SUN TV demonstrated decent performance. Its operating profit margin continued to remain above 75%. SUN TV ‘s business model is independent of these factors and the current market price is quite attractive for long-term investors, says ET.
Hawkins Cookers is ET’s third stock pick.
Hawkins Cookers is one of the biggest brands in the Indian cookware industry. It is the oldest cooker manufacturer in the country with TTK Prestige being the only other organised player. As there is no real substitute for the pressure cooker in the Indian market, the demand for its products is huge, ET points out.
Hawkins Cookers was grappling with a labour strike at its plants till some time back, and hence could not continue its growth momentum in FY11. It could not add capacity in time to take advantage of the strong growth in demand. Capacity utilisation also fell by 20-25%., says ET
ET points out that Hawkins Cookers’ peer TTK Prestige showed strong growth despite not having as strong a brand pull. This is also rereflected in the stock price performance of the two companies.
The stock prices were running almost parallel before Hawkins Cookers was hit by labour problems. Hawkins Cookers‘ stock is available at a price to earnings multiple of 20. And since the company’s financial numbers or base of previous year is low and it has resolved all labour issues, which had been going on for over a year, it is expected to see a huge growth in sales volumes and earnings this year.
Titan Industries is ET’s fourth stock pick.
ET points out that Titan Industries‘ stock has corrected by almost 30% from its peak in the last five months on concerns about a slowdown in volume growth and the recent fall in gold prices which could impact Titan Industries‘ profitability. Titan Industries faced a similar situation in FY08, where the growth in sales volumes declined for consecutive four quarters.
ET explains that like now, Titan Industries’ stock price sharply corrected then. But post that, Titan Industries has posted strong numbers since FY09 and its stock price has risen seven times. India’s appetite for gold and the Indian jewellery market have grown at a CAGR of over 20% in the last ten years. Titan Industries has the one of the most powerful brands Tanishq in the jewellery industry. This unparalleled brand equity assures that it will continue to grow faster than the industry growth rate, says ET.
Titan Industries’ stock is one of the most consistent and best performers in the bull markets since 2000. Even in 2000, during the dot-com bubble, Titan Industries’ stock underperformed the broader market and post that gave a return of more than 12 times in six years. The long-term outlook for Titan Industries remains positive and the corrections in the company’s stock price provide an opportunity for the investors, says ET.
STATE BANK OF INDIA (SBI)
SBI, the banking behemoth, is ET’s fifth stock pick.
ET explains that the banking sector has been facing several challenges. High borrowing costs have deterred potential consumers from buying retail assets, consumer durables, homes and cars. With domestic economic growth slowing more than expected annual credit growth, especially for public sectors banks, is at risk. The situation has also affected State Bank of India where credit offtake has been moderate, and NPAs (non performing assets) have increased by 40% year-on-year.
ET points out that in the September 2011 quarter, State Bank of India (SBI)‘s improvement in NIM or net interest margin was eclipsed by higher loan delinquencies. Also, State Bank of India (SBI) has been unable to go ahead with its rights issue for over a year now due to unfavourable market conditions. The management is now counting on the government to infuse Rs 3,000-4,000 crore to help improve its liquidity situation.
ET states that as the largest Indian bank with a 59% government stake, State Bank of India (SBI) is the most preferred choice for consumers as the safest and most credible lender. It is in the top 10 brands of India as per the survey conducted by Brand Finance in 2010. It has the widest reach in terms of branch network with a strong presence in urban as well as rural areas.
The problems that State Bank of India (SBI) is currently facing are more to do with the banking sector as a whole than with its operational efficiency. Therefore, for retail consumers who want to borrow, the government’s largest bank is still likely to be the preferred choice, says ET.
ET adds that historical trend suggests that State Bank of India (SBI)’s stock has underperformed the broader markets in the bear markets but has always outperformed in the bull market. The recent correction of 45% in its stock price provides an opportunity for investors to buy the stock.
Castrol, the lubricating giant, is ET’s sixth stock pick.
ET points out that not many brands survive, let alone continue flourishing for a century. The brand Castrol has celebrated 100 years in India with ever-improving performance. Castrol has invested heavily in building its brand over the years. In the last 12 years the company has associated the brand with cricket in a major way and has Sachin Tendulkar as its brand ambassador. Castrol was a leading sponsor of the ICC World Cup earlier in 2011 and is also one of the sponsors of the London Olympics 2012.
ET explains that these concentrated efforts have made Castrol a dominant brand in the Indian market. This in turn has enabled Castrol to weather the economic turmoil over the last 2-3 years and maintain its market leadership as well as profitability. But things were not always this good. Between 1999 and 2004, its profitability was shaky. It was only from 2005 onwards that Castrol was able to post a double-digit profit growth consistently till 2010.
ET adds that the year 2011 has again turned out to be tough. Castrol‘s financial performance in the first three quarters has deteriorated due to high base oil prices and the rupee’s depreciation. This has caused its stock to correct heavily in line with overall market weakness.
The overall lubricants industry suffers from limited volume growth. As a result, Castrol‘s efforts to safeguard and improve its profits focus on a combination of cost reduction, price hikes, new products and upgrading customers to superior products.
Castrol will be relocating its global motorcycle product development activities from the UK to India from January 2012 says ET. This is expected to improve its ties with the two-wheeler makers by introducing customised products for Indian needs. The increasing number of vehicles in the country is set to benefit it in the long run once raw material cost pressures diminish.