Triggered by weakness in the global markets and a massive selling from foreign institutional investors to the tune of Rs 10,000 crore (Rs 100 billion) since May 10, the Sensex has tanked 2541 points from its all-time high of 12617. To say the least, investors are jittery. And confused. Is it time to buy again? Or wait and watch?

Says Sivasubramanian K N, senior portfolio manager-equity, Franklin Templeton, "This is an inherent part of a growth market like India. The correction was widely anticipated, given that the strong run-up of the prices pushed valuations above long-term averages."

"While one cannot rule out further volatility in the markets, investors with a long-term horizon have nothing to worry, given the strong fundamentals on the economic and corporate fronts," he adds.

Those are soothing words, especially coming from Siva who is among the best fund managers in the country with a track record of delivering close to 30 per cent annualised return through the three market cycles over the past decade and a half.

Other experts concur that the recent correction has made valuations of Indian stocks more reasonable than in the recent past, enhancing the return potential for long-term investors entering the market at the current levels.

Their advice: consolidate your portfolio and keep it focused on only few sectors and stocks that restrict your downside in case the market falls further and, at the same time, give you an opportunity to capture the upside.

Further, market experts advise you to choose the stocks (from the select sectors) that look attractive currently after the correction (See table Top Picks).

TOP PICKS
Companies	May10, 2006	June 2, 2006	Chg	Trailing  12 month  P/E	P/E (FY07E)	P/E  (FY08E)
FMCG stocks
ITC	205.05	164.40	-19.82	26.40	22.22	19.34
Tata Tea [Get Quote]	862.15	715.15	-17.05	23.00	12.22	11.05
Colgate	423.75	358.50	-15.40	34.80	25.43	21.73
Auto stocks
Tata Motors [Get Quote]	974.95	789.00	-19.07	18.60	15.59	13.19
Maruti Udyog [Get Quote]	951.15	769.40	-19.11	16.60	14.60	12.39
Ashok Leyland [Get Quote]	50.45	38.95	-22.79	15.00	12.56	10.25
Cement Stocks
Madras Cement	3025.15	2315.25	-23.47	34.80	20.99	15.31
India Cement	215.85	155.65	-27.89	140.30	6.03	NA
Shree Cement	1131.35	855.20	-24.41	156.80	13.57	NA
J K Cement [Get Quote]	188.40	135.85	-27.89	30.00	13.32	10.14
Kesoram Industries [Get Quote]	295.25	214.50	-27.35	21.60	1.85	4.17
Birla Corporation [Get Quote]	360.30	240.00	-33.39	18.30	10.26	11.59
Capital Goods Stocks
Mcnally Bharat	148.45	107.80	-27.38	71.70	16.09	9.98
BHEL	2391.50	1995.05	-16.58	27.70	31.72	25.38
ABB*	3235.85	2344.00	-27.56	38.80	32.56	24.29
Siemens	5898.00	4830.90	-18.09	51.30	20.56	NA
Crompton greaves [Get Quote]	1181.15	992.45	-15.98	29.90	24.38	18.69
Larson and Tubro	2813.55	2191.00	-22.13	32.00	22.02	17.53
Construction stocks
Simplex	2499.25	1950.00	-21.98	38.30	16.06	8.97
Nagarjuna	373.85	316.75	-15.27	31.60	19.31	12.93
Sugar Stocks
Bajaj Hindustan [Get Quote]	528.05	394.65	-25.26	28.60	10.33	9.18
Shree Renuka Sugars [Get Quote]	1392.20	882.10	-36.64	39.60	9.88	6.47
Banking stocks
SBI [Get Quote]	1001.25	838.55	-16.25	9.80	7.77	6.30
PNB	486.45	407.80	-16.17	8.70	7.31	6.25
ICICI Bank [Get Quote]	661.30	551.00	-16.68	18.80	16.60	13.64
Technology stocks
Infosys [Get Quote]	3255.20	2886.25	-11.33	34.70	24.73	19.10
Wipro [Get Quote]	541.15	469.50	-13.24	31.40	25.52	19.73
Satyam [Get Quote]	783.65	688.30	-12.17	21.90	17.65	13.93
TCS [Get Quote]	2023.95	1788.10	-11.65	31.96	15.32	11.83
Miscellaneous
Bharat Bijlee [Get Quote]	1516.45	1122.00	-26.01	20.60	15.63	12.29
Aban Lyod Chiles	1416.45	970.10	-31.51	43.20	16.28	7.16
KSB Pumps [Get Quote]	600.40	507.00	-15.56	19.70	14.96	12.68
* CY

Sectors, whose growth is driven by the underlying domestic factors such as robust domestic consumption on the back of rising income levels, the government spending on the infrastructure and rural sectors and the current uptrend in the capex cycle, are the preferred lot.

Given the strong business growth in offshoring and a possible weakness in the rupee, technology stocks could well be strong candidates for a defensive posture.

Conspicuous by their absence in the list of defensive plays are pharma stocks. Experts suggest avoiding the sector considering the potential litigation risks in domestic drug-makers and the questionable practices of multinationals when it comes to giving minority shareholders a fair deal.

Similarly, oil stocks are still a 'no-no' option, given that the government does not seem to be helping their cause.

Defensive plays

Consumer goods

Consumer goods sectors like FMCG, retail, multiplex and hotels are expected to be the largest beneficiaries, thanks to the changing demography and lifestyle of people on the back of rising income levels.

Moreover, it is not affected much by the global factors such as a slowing US economy and rising interest rates. Sreesankar, head of research, IL&FS Invesmart, rightly points out, "Rising crude prices won't stop a consumer from watching a movie in a theatre."

Vinay Kulkarni, fund manager, Deutsche Asset Management, says, "FMCG is a good bet at the current levels, as the companies in the sector operate on low capital base and generate huge free cash flows. Moreover, after a long time, there is resurgence in volumes and the companies have regained pricing power in some segments like detergents, soaps and detergents."

Information technology

With the rising interest rates looming large on the global economy and the possibility of a weakening rupee, the IT sector could be perverse winner.

Moreover, IT companies are debt-free and generate huge free cash flows. Says Kulkarni, "Going by the earnings guidance put forth by the companies for this fiscal, there is clear visibility in top line and operating profits."

No doubt IT companies are facing an escalation in wage costs. However, Krishna Kumar Karwa, managing director of Emkay Shares and Brokers, believes that they have enough business to be able to post "sufficient growth" despite rising costs.

Mid-size companies such as Hexaware [Get Quote], MphasiS BFL and KPIT Cummins will face challenging times. So, experts suggest sticking to top-tier companies.

Domestic growth

Automobiles

The domestic automobile industry is expected to clock high growth, going forward, given the rising income levels and expectation of a high GDP growth of more than 7 per cent.

Karwa is bullish on the domestic commercial vehicle industry, as he feels: "The current share prices of the companies are not reflecting its (the industry's) growth potential."

He adds, "The industry is expected to grow at a 12-15 per cent CAGR over the next four years, given the low base of the last year's poor growth, ban on overloading of trucks leading to the requirement of more vehicles and higher connectivity due to improved infrastructure, for example, in the form of roads."

Thacker of UTI Securities says, "Both Maruti and Tata Motors have corrected sharply in the recent fall and are attractively valued."

The passenger car leader Maruti is expected to benefit additionally from the commissioning of its diesel plant by the end of this year. Rival Tata Motors is expected to cash in on the robust growth of both the commercial vehicle and passenger car segments.

Capital goods

Investments in the domestic infrastructure sector are likely to be in the range of $300 billion over the next six years - and this figure is fairly conservative.

Equipment, construction, transmission tower and capital goods companies are expected to be the largest beneficiaries of the robust infrastructure spending.

"Although all the positive macro factors are already priced into these stocks for the next two years, one can still choose to buy these stocks due to their long-term earnings visibility," says Shriram Iyer, executive vice-president, Edelweiss Securities.

For example, both Siemens and BHEL have three-year order books.

Possible re-rating

Cement

Cement stocks have corrected sharply - partly because of the government intervention in controlling escalating prices - and now look attractively valued, say experts. The real estate and infrastructure boom in India will keep cement prices buoyant.

Sreesankar feels that most of these factors are already discounted into the prices of cement stocks and there are good chances of a bounceback.

Says Sandeep Nanda from Sharekhan, "Investors need to pick a basket of cement stocks to take advantage of growth prospects and developments of different regions."

The southern region is expected to see some action in prices, as capacity utilisation has increased significantly and it will take at least two years for new capacities to get commissioned. Prices in the northern region are expected to remain firm but any growth, going forward, could happen mainly on account of higher volumes.

A fund manager prefers mid-cap cement stocks such as Birla Corporation and Kesoram Industries as EV per tonne for these companies is less than $100 a tonne.

Banking

Overall, the banking sector has underperformed the broader index. Banks could not gain on the market rise; rather they have fallen sharply with the downslide.

However, one of the fund managers among the top five mutual funds says, "The outlook is good because of a hike in the PLR rates of at least 50 bps and strong credit growth. PSU banking stocks look attractive, as most of them, on an average, are quoting at a price-to-book value of close to one time vis-a-vis more than 1.5 times for their private sector counterparts."

Sreesankar, however, says, "Those banks, which have higher proportion of CASA (current account and savings account) and are strong in shoring up fee-based income, will be the winners. Thus, private banks look more interesting."

Dark horse

Sugar

Sugar stocks have corrected significantly, though prices of the commodity have remained firm. Most sugar companies are quoting at a valuation of less than 10 times for FY07E, points out a fund manager. But, Sreesankar feels they are not reasonably valued.

In his opinion, the sector would be viewed more as an alternative fuel power and ethanol story rather than just a commodity and, thus, could see a re-rating with higher P/E multiple.

Moreover, the biggest challenge for sugar companies would be how the realisations will move in the domestic market and how they would  cope with the expected rise in the sugarcane prices since a lot of sugar capacities are coming up in UP and even elsewhere.

Nanda from Sharekhan is also bullish on specific stocks such as Bharat Bijlee, Aban Lyod Chiles and KSB Pumps.

Sensex Rise and Fall: Complete Coverage

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