Sunday, September 19, 2010

>INDIA STRATEGY: Identifying emerging winners for 2015

Are leaders born or made? It is clear that in the context of a dynamic, rapidly evolving stockmarket like India, both can be true. Some have indeed been born out of favourable social and regulatory changes, but most have been made from anticipating major themes and evolving strategies to take them well ahead of their peers. This report selects an Indian XI for 2015 - a set of 11 stocks that will become market or sector leaders in the next five years. Some will leap from being small/mid caps today to large caps.

India is a true ‘emerging’ market and comparisons with developed economies like the USA, as well as some in Asia, underscore the contrasts in evolution. The benchmark BSE Sensex has seen two-thirds of its constituents change over the past decade. While much of this can be attributed to a fast-changing economy, modifications in corporate structure have also contributed. For
investors, the meaningful alpha-generation potential from anticipating who the new market leaders will be makes this very much relevant.

The rise of the metals and mining, and capital-goods industries are the best
reflection of large thematic shifts over the past decade. However, changes to
the leading stocks in the market or in specific sectors are also a function of
initial conditions, including the extent to which indices accurately reflect
economic activity, and prevailing biases towards sectors. Thus the impact of
the consumption boom has been relatively diffused and richly valued staples
have been among the worst performers. Within sectors, high or rising ROIC
appears a key factor for stocks to sustain or ascend to leadership positions.

While the first wave of the consumption/investment story may have played
out, specific dimensions of the investment themes - the J-curve impact and
the gains from lagged infrastructure spending - will remain significant stockprice
drivers. Regulatory arbitrage will be limited to niche opportunities. India
Inc’s newfound urge to redefine boundaries, through M&A or otherwise, will
also be a significant driver of market-leadership transformation, as will be the
final wave of public-sector-undertaking (PSU) listings.

We have selected our Indian XI for 2015 - a basket of stocks that are likely to
move towards market or sector prominence - by identifying those geared into
these themes and those well positioned strategically to run ahead of peers.
We have set the threshold Cagr for expected stock performance at 20%.

To read the full report: The new leaders