12 stocks to make your child's future bloom

The rising cost of education and other needs of children has made it difficult for parents to raise resources. But systematic and intelligent investment at the right time can reduce the burden later.

What you need is an investment asset that grows faster than your kids, and gives you higher inflation-adjusted returns in the future.

Equity, as an asset class, has the potential to give great returns, although it does have a high downside risk. However, if you invest intelligently and knowledgeably, the risk can be minimised.

The Sensex has given a return of 19 per cent compounded annual growth rate (CAGR) since 1979, higher than any other financial investment instrument available to an average retail investor.

What this means is that Rs 1 lakh (Rs 100,000) invested in the Sensex in 1979 is worth Rs 14 crore (Rs 140 million) today, despite the ups and downs in the equity market. In the last three years, Indian equity markets have returned over 32.6 per cent return.

Making the portfolio: The first step of investment is to decide the maturity or the time horizon of the investment.

As you are making a portfolio for your kids, the horizon we are assuming is 10 to 15 years, when your kids will need funds for higher studies or for other purposes.

This is a considerably large amount of time, which further strengthens the argument that since you are making the portfolio for a long term, equity would be right choice. Also, with this kind of horizon, you need not worry about short-term downturns in the markets.

While your kids' portfolio must be balanced like any other portfolio, the bulk of investment should go into sunrise sectors and the rest should go to defensive sectors. As our economy develops, the growth sectors will emerge largely from services businesses.

So, in your kids' portfolio, the majority of investment should be in areas like IT, telecom, financial services, entertainment and media. However, do include defensive sectors like FMCG and pharmaceuticals, which also have potential to give high returns in the long run.

Other sectors like retail, tourism, education, biotech and healthcare are also poised for growth, but there aren't too many listed companies in these sectors, though some are expected to tap the stockmarkets soon. Keep an eye on the markets so that you can shift to bigger opportunities in the future.

We give you sector-wise analysis and also stock recommendations, thrown up by our internal research, to help you make an informed decision.

Infotech

According to industry association Nasscom, the Indian IT sector's revenue has grown 10-fold in the past decade, from $4.8 billion in 1997-98 to $47.8 billion in FY06-07. Its contribution to India's GDP is estimated to have grown from 1.2 per cent to 5.4 per cent over the same period.

India has been a clear beneficiary of global outsourcing. Given its advantage of human resources and talent pool, we expect this sector to do even better in the future. Almost every company in the sector has gained from offshoring and, consequently, investors have won big rewards.


Mar '04
PAT 1
Rs crore

Mar '05
PAT 1
Rs crore

Mar '06
PAT 1
Rs crore

8 Feb '07
Closing
Rs

8 Feb '07
P/E 2

Four Soft

5.12

2.83

4.19

70

21

HCL Technologies

312.47

325.72

329.27

660.15

28.92

Bharti Airtel

0.37

1,210.67

2012.08

766.80

44.80

Reliance Comm

NA

NA

5.65

489.00

56.58

HDFC Bank

509.5

665.3

870.78

1,100.55

32.72

ICICI Bank

1,637.11

2,005.2

2,540.07

997.90

33.44

Britannia Industries

118.8

149.86

146.43

1,178.80

29.55

Tata Tea

91.53

128.81

186.93

694.60

31.76

Apollo Hospitals

36.3

48.95

53.87

474.80

37.66

Cipla

295.59

409.61

607.64

255.70

28.15

Jetking INfotrain

1.81

2.27

4.14

380.00

13.69

NIIT

47.69

15.96

26.99

586.45

586.45

1 Profit after tax, 2 Price to earnings ratio. Source: CMIE

We believe the sector will continue to grow because of its comparative advantage over global competitors in terms of cost and efficiency.

Sector picks: HCL Technologies , Four Soft

Telecom

India is the fourth largest telecom market in Asia, trailing China, Japan and South Korea. The Indian telecom network is the eighth largest in the world and the second largest among emerging economies. Telecom services in India are the cheapest in the world and the growth of the industry has found worldwide acknowledgement. Though our teledensity has risen sharply, we still lag behind Brazil and China. This indicates the kind of growth the sector is waiting to witness in the near future.

Not only will call traffic increase, the Internet space and value-added services on mobile phones are expected to see heavy demand as well. With the government opening up this sector gradually, we expect more investment to come into this sector, and this will further drive its growth. Indian telcos are also looking at business opportunities overseas.

Among the listed entities in the sector, Bharti Airtel and Reliance Communication have performed exceptionally, both in terms of financials and gains in the market.

Idea too is all set to hit the equity markets in the near future.

Sector picks: Bharti Airtel , Reliance Communications

Banking

Development of any economy depends largely on its financial system and strength. Indian banks are still small by global standards (case in point: no domestic bank was able to finance Tata Steel's purchase of Corus).

Our banking industry is in transition and is moving from a regime of 'large number of small banks' to 'small number of large banks'. Successive governments have played their part in opening up the sector, resulting in a better banking system and a more robust economy.

New private sector banks have been set up and foreign banks can now expand operations in India. Banks have also been allowed to set up Offshore Banking Units in Special Economic Zones. Banking business now includes financing insurance, credit cards, infrastructure financing, leasing, and gold banking.

There have been regulatory changes too -- cap on foreign direct investment in private banks has been increased from 49 per cent to 74 per cent and the 10 per cent cap on voting rights has been removed. Also, the limit for foreign institutional investment in private banks is now 49 per cent. With so much going for it, the Indian banking industry is all set to cash in.

Sector picks: ICICI Bank , HDFC Bank

FMCG

FMCG is a classic 'defensive sector'. As their products are more or less essential daily living, they have a relatively inelastic demand. The sector's revenues do not dip when prices rise or incomes contract, and they do not expand very rapidly when prices fall or incomes expand.

It is always advisable to have FMCG stocks in your portfolio because of this steady demand proposition. FMCG companies enjoy a wide and diversified market in India. They have successfully made inroads to rural markets with economy packs.

We expect the sector to profit from rising incomes in the future. Though FMCG companies will not see exponential growth in terms of profits like IT and telecom sectors, it would continue to grow at its own pace.

FMCG stocks are not only defensive but also give high returns in long run. Between 1991 and 2006, ITC gave 37.3 per cent returns and HLL grew 30.2 per cent CAGR, excluding dividend payouts.

In the past, large FMCG companies like HLL, Nestle and Colgate were foreign-owned. Now, Indian FMCG companies like Dabur, Britannia, Marico and Tata Tea have become big players too. The long-term advantage of Indian-owned FMCG companies is that as they acquire scale they can go global. The first to have done this is Tata Tea.

Britannia may also move in this direction, as they sort out their turf battles with Danone. In comparison, foreign-owned FMCG companies will always have restrictions in their areas of operation.

Sector picks: Britannia and Tata Tea

Pharmaceuticals

Pharmaceuticals is again a defensive sector as it is attached to a basic necessity -- healthcare. Over the last couple of years, pharma stocks have suffered in India because they have found it difficult to handle the costs and complications of growing overseas coupled with price restrictions at home.

But economic development in India will reflect well on the fortunes of pharma companies. The industry, that currently has $3.1 billion in revenues, is growing at a rate of over 14 per cent per year.

Pharma companies in India have competent and cheap workforce, cost effective chemical syntheses that provides variety of bulk drugs, and a sound IT base.

Experts believe that India has the potential to become an outsourcing hub for pharma products also.

Some pharmaceutical companies, such as Ranbaxy, have dual advantages. It has a thriving pharma business as well as ownership in Fortis hospitals. How well the hospital business in India will do is directly related to level of income in the economy.

Fortunes of major pharma and FMCG companies do not fluctuate too much as these are linked to daily needs

Sector picks: Apollo Hospitals , Cipla

Education

Government-aided meaningful education continues to elude India. Though policies in this area are now being re-worked, they would take a long time to deliver results. In the meanwhile, the workforce and prospective employers are looking at quick-fix solutions to enhance employability.

Standalone classes have mushroomed all over India, offering computer diplomas to airhostess training and acting classes. While the sector is fragmented today, it will soon corporatise and consolidate.

Sector picks: NIIT , Jetking Infotrain


Snapshot

  • As the portfolio is for the long term, choose equity to invest in. You need not worry about short-term downturns in the markets
  • Keep a horizon of 10 to 15 years, by which time your children will need funds for higher studies, setting up a business, or marriage
  • Put bulk of your investment in sunrise sectors (IT, telecom, financial services, entertainment and media). The rest should go to defensive sectors (FMCG and pharmaceuticals)

-- 
best regards
 
B.V.RAO,
CRM, HADEED
 

 


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