Portfolio

Four stocks to own

BL RESEARCH BUREAU | Updated on February 19, 2011 Published on February 19, 2011

They have little to fear from rising interest rates, have high profit margins and enjoy pricing power too. That's why the stocks of the following consumer goods makers make good defensive bets for your portfolio. Mind you, trading at PE multiples of 20-35, none of them come cheap. Buy them with a 20-25 per cent return expectation.

ITC

An 80 per cent share of the cigarette market, proven pricing power and low input pressures ensure that ITC is well-placed to weather inflation. ITC's core cigarette business does face regulatory risks- excise levies have gone up with monotonous regularity in every budget. But ITC has comfortably held on to operating profit margins of 35 per cent-plus (on net sales), either by hiking selling prices or altering its product mix. Even a 22 per cent VAT-related hike in 2008 saw barely a blip in volumes. This year, cigarette price hikes taken in January could pre-empt any Budget action. While ITC's cigarette business (50 per cent of net sales) will face demand headwinds in 4-5 years, its other consumer businesses (25 per cent) may make up. At Rs 156, the stock trades at 28 times trailing 12-month earnings, down 13 per cent from November.

Titan Industries

Indian jewellery demand has proved resilient to rising gold prices this year, but with gold prices likely to turn more stable, Titan Industries may enjoy strong demand. In any case, Titan has brands catering to every price segment in watches and branded jewellery, allowing it to retain customers even if they down-trade. A vast retail footprint spanning 11,000 dealers, exclusive showrooms andjewellery stores give it a market reach unmatched by rivals. Titan's overall margins don't compare to other consumer companies, but it still has pricing power. Titan's revenues and net profits grew 41 and 74 per cent in the nine months ended December 2010. Even at a trailing twelve-month valuation of 36 times at Rs 3,224, the stock is a gilt-edged bet on the India consumption story.

Jagran Prakashan

Publishers of language dailies are an offbeat play on rising affluence in India's Tier 2 cities. Newspapers make up a small share of the consumer's wallet and derive much of their revenues from sale of advertising space. Jagran Prakashan, given its large readership in the Hindi newspaper market stands to benefit both from healthy circulation growth and rising ad volumes and rates. Jagran has seen a 20 per cent growth in ad sales and a 10 per cent improvement in circulation volumes in the nine months ended December 2010. While competition is increasing in the Hindi heartland with the entry of Dainik Bhaskar, cover prices have held. The addition of the acquired Mid-Day Multimedia may help Jagran make greater inroads into Mumbai's English and Gujarati readership. Down 17 per cent in three months to Rs 114, the stock is available at 19 times its trailing 12-month earnings.



Bajaj Auto

At a time when profitability of automakers is taking a hit because of commodity price inflation, Bajaj Auto has been able to maintain operating margins at 20 per cent. The company's ability to hold on to profit margins stems from its strong brands in mid-to-premium motorcycles as also its hold on the three-wheelers market, where margins are in excess of 30 per cent. An expanding export presence also aids margins and sales. This premium focus also means that the company has better pricing power and is well-positioned to pass on cost hikes to customers through periodic price increases. Although volumes may witness moderation due to base effect and interest rate hikes, pricing power, coupled with a good volume outlook emanating from its brand-centric strategy make the stock a superior bet in the auto sector. Bajaj Auto trades at a PE of 17.

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