Important Caveat: The article below mentions the names of some Stocks. These are not recommendations. The investor is requested not to blindly act on these suggestions and do one's research in the companies and industries mentioned in the article before investing in the same.
The Indian stock market is currently trading at historical highs. According to experts, Indian markets are in the middle of a 'Long Term Bull Run' which can take the Sensex to 100000 from the current levels.
These are the kind of markets that can make one rich almost overnight. However, to make money in these markets, and to keep the same, one has to play the investment game well. That means that one has to eschew certain behaviours and inculcate certain money habits. I will talk about the same in another post.
The current post is more prosaic. As an introduction to this post, let us look at the three step logic below.
1. To make money in stocks, you have to buy stocks whose price will grow during your planned timeframe.
2. Since growth in stock prices depend on the growth in profits, one has to buy stocks of companies whose profits are expected to grow.
3.Which means that sales have to grow.
4. Sales will grow if there is a demand. The objective of the investor is to find companies whose sales will grow over the planned timeframe.
As a part of that exercise, one has to look at the demand drivers of an industry / company. One of the major drivers for demand is the demand from the government . In any economy, Government is a major purchaser of goods and services. Policy decisions by the government can alter the industry landscape almost overnight.
Currently government of India is focusing on certain themes and will be budgeting to provide funds for those themes. A smart investor can identify good companies that can benefit from these themes and can make good returns in a span of 5-10 years.
Following are the top 10 themes that one can play in the India Market now.
- Goods and Service Tax (GST)
Riddled with a mix of central taxes, the state taxes and the associated exemptions, the taxation system in India is very complicated. By forcing the business to keep extensive records the tax policies can cause significant downstream costs for the company, breed corruption and make the entire taxation system complex and inefficient. One of the major challenges with the tax system is that it leads to inefficient supply chain. Companies are forced to build small warehouses in each states to 'gain' the system.
Government of India has announced the introduction of Goods and Services Tax (GST) to streamline the entire tax regime in the country. Almost all the states have agreed on its introduction from April 2016. The companies that benefit from this tax change are mainly the supply chain and logistics companies. Some of the companies in this sector include Gati, Transport Corporation of India Limited, Snowman Logistics, Vijayanand Roadlines and Chartered Logistics.
Currently, companies in the area of Internet Commerce enjoy the highest valuations worldwide. With Sociological trends moving towards families where both partners work, the trend towards E-Commerce in India is bound to strengthen. While there are hardly any listed companies in Indian markets in the space of E-Commerce, an investor can benefit from investing in industries that support the E-Commerce industry. Two such industries are Packaging and Logistics. While we have discussed the Logistics companies in point above on GST, Essel Propack is one company in the Packaging Industry that one can look at.
- Make in India
This is the pet theme of the current government of India. The idea is to facilitate the manufacturing sector in India to strengthen production capability. This theme plays across a wide variety of industries, the key ones being manufacturing, engineering, capital goods, infrastructure and defence. Some of the companies in these sectors are L&T, Crompton Greaves, Voltas, NTPC, Havells, Engineers India Limited, BEL, BEML etc.
- Swacch Bharat, including Clean Ganga
This is a personal priority of Prime Minister of India. The idea is to make India into a very clean India in five years. The key aspect to this is to bring Sanitation to many parts of the country where it doesn't exist. Companies in the Sanitation space like Cera Sanitaryware, Hindustan Sanitaryware, Somany Sanitaryware etc will benefit from these initiatives. A part of the Clean India initiative is to clean river Ganga (Ganges). This is a sacred river for Indians and is currently highly polluted with effluents from various Industries on the banks of the river. Being a sacred river, the Clean Ganga project touches an emotional cord in the minds of Indians. The companies that could benefit from 'Clean Ganga' project include Vatech Vabag, Jain Irrigation Systems etc.
- Railway Modernisation
Indian Railways, while being one of the largest in the world, is not as modern as the railways of the developed countries. While countries like Japan boasts of modern, high speed trains, India do not have a single high speed train. The whole railway infrastructure is old and calls for high levels of modernisation. This is one key focus of the Government. Some of the companies in this sector include Texmaco, Titiagarh Wagons, Kalindee Rail Nirman, BEML, L&T etc.
- Interest rate reduction
This theme is not specific to India. While globally the interest rates currently at near zero levels, it continues to be high at about 8% in India. The trend over the last year appear to be towards lower inflation levels which could lead to lower interest rates. Lower interest rates will lead to increased credit offtake and the creditors and the downstream industries will benefit out of lower interest rates. While lower interest rates will benefit the entire economy, some industries like Banks, Automobiles and Real Estate could be major beneficiaries. Companies include SBI, HDFC Bank, ICICI Bank, Axis Bank, Shoba Developers, HDIL, HCC, Maruti, Hero Motocorp, Bajaj Auto and TVS Motors.
- Power Shortage
Right from Independence, the energy availability India has lagged the demand sometimes by huge margin. For the planned initiatives of the Government to work, sufficient availability of electricity is a sine qua non. Power Industry in India comprises of two sub-sectors, vis.Power Generation and T&D (Transmission and Distribution). Ensuring supply efficiency will call for increasing Generation and Transmission Capacity and improving T&D efficiency by cutting down losses. Key companies that could benefit from focus on the industry include NTPC, Tata Power,CESC, Alsthom, Siemens etc.
Compared to the potential of the country, the growth in its population and the expected economic growth, the infrastructure in India is woefully inadequate. And therein lies opportunity. The infrastructure include roadways, railways, ports, bridges and digital connectivity. The government is committed to investing resources in India's infrastructure. The companies that could benefit from the investment are L&T, GMR Infrastructure, HCC, IRB Infrastructure, Asoka Buildcon, Sterlite Technologies etc
- Domestic Consumption
The proportion of working couple, especially in the cities in India is increasing. The disposable income in the country is increasing. With a middle class of over 200 Million, the consumption theme is a sure winner. The theme covers various industries including FMCG, Consumer Durables, Jewellery, Food and Clothing, Travel, Eat Out, Movies and Entertainment etc, The investor is spoilt for choice when it comes to stocks in this sector. HLL, ITC, Marico, Dabur India, PVR Cinemas, INOX, Speciality Restaurants, Thomas Cook, Cox and Kings, Titan, Whirlpool, Bata India, Shoppers Stop etc are some of the companies that come to mind
- Smart Cities and Digital India
The current government in India wants to build 100 cities across the country. In addition it also want to digitize the public services across the country. Both these initiatives will need huge investments that the government has committed to. While construction companies like HCC, NBCC etc will benefit from the infrastructure spend for this initiatives there are some niche players in the Smart Cities and Digital space like ABM Knowledgeware and Sterlite Technologies that could stand to benefit from the spend in Technology. Of course one should not forget the biggies like TCS, Wipro and HCL Technologies that are already working on Government projects and could benefit from this spent.
That is it. I have covered most of them, I think. However do not forget the cement companies. For any of these initiatives to bear fruit, Cement is a key ingredient. Currently cement industry is highly fragmented but over the long term will have to consolidate. Investing in big cement companies like ACC, Ultratech Cement, JK Lakshmi Cement etc could prove to be a boon for investors. One of the problem with investing in cement companies is the regional nature of the industry. The price of cement fluctuate across regions. This means that investing in Cement companies call for much more research and understanding of the industry than investing in other sectors like Domestic Consumption.