Something interesting happened in 2012. For the first time, foreign institutional investors (FIIs) have invested more money in India compared with other Asian peers (excluding China). The liquidity versus valuation theme is coming up once again as FIIs have pumped in over $21 billion in a market bereft of significant earnings change. Little wonder, then, that the Nifty rose by about 27%, the second highest after Thailand. However, this time, the action has been more stock-specific as nearly 50% of the stocks have under-performed and 15% of the stock values declined on an absolute basis.
Against such a backdrop our recommendation is to pick stocks that have: (a) strong earnings growth (more than 15% every year); (b) companies that are using their cash flow (either operating or by selling assets) to reduce their debt; and (c) companies with a high free cash flow yield (of more than 4%).
Cement is one such sector where earnings visibility seems to be good and also most companies are debt free. Besides, this business enjoys high return on capital employed and return on equity — which can grow between 15% and 20% per annum through internal accruals. Therefore, I believe Grasim is a good proxy not only to play the cement business but also for the company’s cash generating and healthily-growing viscose staple fibre (VSF) business.
Grasim is set to chart a steep growth trajectory over FY12-15 with an i