Pearls in the Sensex – Dheer Kothari

In the current year till date (from Jan 2, 2012 to November 9, 2012) the BSE Sensex gained 20.4 per cent while the BSE Midcap did even better with a gain of 29.8 per cent. During the same period, the top five Sensex stocks which outperformed the Sensex by a huge margin are all top performers in their respective sectors.

In order of capital appreciation, these stocks were L & T (60.6 per cent), Maruti (55.3 per cent), Tata Motors (52.7 per cent), ICICI Bank (52.1 per cent) and HDFC Bank (49.6 per cent).

The performance of L & T is particularly noteworthy because the capital goods sector has been languishing in an environment where demand for capital goods has slowed down in line with lower industrial production overall in the economy. The market fancies L & T for its management quality which is world class. Value investors always prefer stocks which are run professionally and are constantly adding value by better utilization of assets. About L & T, the Economist magazine wrote recently: “It is seen as a beacon of competence and probity in an infrastructure industry that is vital but troubled.”

Maruti and Tata Motors stand out in the auto industry as they get ready to cash in on the growth opportunities the auto sector will provide as the Indian economy gets back to the high growth phase in the remaining years of the 12th five year plan. The auto sector has survived the difficult period of high interest rates and inflation which clearly suggests that the market leaders like Maruti, Tata Motors and Mahindra & Mahindra will be the stocks to watch in the coming years. If inflationary pressures ease and growth momentum picks up these stocks will provide decent capital appreciation to any value investor.

As for the other two stocks, both ICICI Bank and HDFC Bank continue to be investor favourites for their aggressive business strategies. All said and done, they have survived fierce competition in the banking space and steadily grown their asset base in the last five years. Their financial ratios are healthy and both have high quality management and the wherewithal to steer their ships in troubled waters.

Disclaimer: I have no stake in the companies mentioned in this post. Investors should exercise caution and invest only if they are prepared for the long haul. By long haul, I mean at least five years or more.