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The 5 hottest lifestyle stocks
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January 17, 2007

Economic liberalisation has transformed the landscape of India beyond recognition. The Indian economy has grown at an average 6% since 1991 with growth accelerating to 8% in the last three years, transforming it into the second-fastest growing economy of the world, next only to China.

Prosperity has percolated through many layers, especially to the huge middle-class population, which has been growing by 10%-12% a year to touch 300 million.

A recent white paper released by American Express Bank puts the estimated number of individuals in India with liquid cash of over $100,000 (approximately Rs 45 lakh) at 711,000. This number, it says, is likely to rise annually by 11.6% to touch 1.1 million by 2009.

Their changing preferences and cultural shifts are changing the demand pattern from restricted traditional products in favour of a variety of new products and services, across the country -- not just in large cities. What they are buying and where they are buying has undergone a tectonic shift.

From multiplexes to shopping malls, from expensive jewellery to high-end cars, all are targetted at capturing this young and rich Indian generation. The global real-estate consulting group, Knight Frank, has ranked India 5th in the list of 30 emerging retail markets and predicts a 20% growth rate for the organised retail segment by 2010.

A survey by KSA Technopak indicates that there are 1.6 million households in India earning around Rs 45 lakh (about $100,000) per year, who spend about Rs 4 lakh ($9,000) per year on "luxury/very premium" goods and services.

This number is likely to cross 3 million by 2010, growing at 14% per year. They spend money on housing, travel, education, high-end automobiles, entertainment electronics and home improvement products. The report forecasts that that in two-three years, the market for luxury goods will boom -- men's clothing, women's jewellery, women's accessories (including handbags and footwear), watches and gourmet food and wines.

This is already happening. Sample this cross section of news and events, culled from media reports of only 2006 to get a sense of how widespread the growth is, in both geographical and product terms:

Mercedes-Benz cars have sold faster in smaller cities than in the metros and Benz launched its next-generation E-class car in Kochi before Delhi, its main market. It is rolling out dealerships in unlikely places such as Bhubaneshwar, Calicut, Madurai, Jaipur, Kolhapur, etc. The luxury car company has discovered more individual buyers in smaller cities, compared to the metros. Earlier, people had to wait until their late 40s or early 50s to get a Merc. Now, Merc buyers are getting younger and coming from the ranks of entrepreneurs, doctors, lawyers and software professionals.

In just April to June this year, 219,000 Notebooks were sold thanks to a 438% growth in consumer Notebook sales and 102% growth among the small and medium business segments.

The premium paint segment accounts for 5% of the total paints market in India; it is growing at 25%-30% annually. Berger Paints claims that its premium umbrella brand, Lewis Berger, is doing flourishing business in cities like Lucknow, Coimbatore, Guntur, Durgapur and Silvassa.

According to Business 2.0, a magazine from the Time Warner group, import of fine wine to India has emerged as one of the 12 best new business opportunities in the world.

Tommy Hilfiger, retailer of apparels, expects to open one store each in Delhi, Ahmedabad, Lucknow and Bangalore over the next four months. Adidas plans to open around 60 outlets this fiscal to take the number of its outlets in the country to 170. Its growth in India in calendar year 2005? Over 97%.

India has become a hot market for luxury goods too. It may sell just a dozen cars a year for now, but heart-stopping Lamborghini is here. It is offering Rs 1.7-crore (Rs 17 million) Gallardo SE as well as Rs 1.5 crore (Rs 15 million) Gallardo and the Rs 2.5 crore (Rs 25 million) Murcielago. Lamborghini produces just 2,000 Gallardos a year.

Following Lamborghini, expect Bugatti, Ferrari and Maserati to drive in too. LVMH of France, the world's largest luxury goods retailer, Lladro Commercial of Spain, a top retailer in porcelain figures and Chanel, the French owner of high-end perfumes and accessories, have applied to the government to set up retail trade.

Swiss watch company, Swatch, has launched one of its most expensive watches in India. Each Breguet is handmade and a masterpiece in its own right, with "simple design and complex artwork." Only 15,000 pieces of this "most complicated watch in the world," are produced every year.

Austrian luxury goods major, Swarovski operates around 12 exclusive stores in India. It now plans to open another 16 exclusive outlets by 2008 in 12 to 15 Indian cities, like Mysore, Mangalore, Coimbatore, Ludhiana and Chandigarh, among others. Its current growth rate is a scorching 50%-55% per year.

According to a study by consulting firm McKinsey, the branded jewellery market in India would touch Rs 10,000-crore mark ($ 2.28 billion) by 2010.

When they want to go on an exotic holiday, international travellers come to India. The domestic traveller too now has enough money to join in. Among the choices? A cruise to Indian tourist destinations.

Last year, the number of international cruise vessels that call at Indian ports, jumped by 50%. Traffic on cruise liners, which operate only within Indian ports catering mostly to domestic tourists, rose by 28%. Mumbai Port handled 66,681 domestic tourists last season (October to March) and expects this number to cross 100,000 this season.

Country Club India, a Rs 250-crore (Rs 2.5 billion) leisure company, plans to invest Rs 600 crore (Rs 6 billion) in the construction of service apartments in Hyderabad and Bangalore apart from investment in its existing projects. The company recently launched five golf village properties across India with an investment of Rs 500 crore (Rs 5 billion) attracted by the growing demand for such services in the country.

All this signals the emergence of a significant lifestyle and leisure sector on the Indian corporate scene, one that we have been watching closely for its immense growth potential.

Which companies will capture this exploding consumerism and rising prosperity of a relatively young Indian population? Unfortunately, a large part of the business is happening in the unlisted and that too regional space. Kesari Tours of Mumbai may be growing at 50% -- far higher than Thomas Cook -- but remains unlisted.

Lifestyle stocks

Among the 1,122 companies spread across 49 sectors that we track at MoneyLIFE, the lifestyle and leisure sector accounts for 48 companies spread across various sub-segments.

Most of these are too small. Using our proprietary methodology, we have ranked all these companies, first, based on their operational performance, which includes growth in operational income and profitability as also their margins at the operating level. To further refine our findings, we have added the five-quarter price performance of these companies and arrived at a composite score.

This is, however, for the 39 companies which have a record of at least nine quarters of published data of their performance. The others are new, having been listed only recently.

The total market size of this segment is pegged at around Rs 8,000 crore (Rs 80 billion), with 100-110 million cases sold a year and growing at 10%-12%. Its market spans almost half the Indian population and is likely to grow further by 56% by 2011 adding an additional 115 million people.

These are the dynamics of the alcohol market in India where drinking as a consumer habit has undergone a sea change. From a social taboo, it has emerged to become an acceptable component of the lifestyle statement for the young (and rising) Indian population.

It is no surprise that companies in this segment are among the best performing in our universe of lifestyle and leisure stocks. Champagne Indage, with an overall score of 89, managed the top slot among 39 companies with a sturdy operational performance over the last five quarters.

Set up as a 100% export-oriented unit in technical collaboration with Champagne Technologies of France to make wines, the company restructured itself to become a dedicated wine company, manufacturing and selling wines in the domestic as well as the international market. Champagne Indage operates two wineries in Maharashtra and controls over 700 acres of land for plantations along with its associates; it has also tied up contract farming arrange arrangement for another 6,000 acres of land.

CIL's sales have been growing at an average 81% over the last five quarters while operating profit grew by a solid 54% thanks to rising demand from a culturally changing young and rich population. It has a healthy operating margin of 24%. The company expects to grow at 100% in FY07 and cross a turnover of Rs 300 crore (Rs 3 billion) by 2008. This is likely to come from the maturing wine in cellars, procured through contract farming.

Demand for wine in India is almost twice the supply with the current size of the domestic market at 4.5million-5 million litres. CIL is expanding its capacity from 6 million litres last year to 14 million litres this year, controlling almost 85% of the capacity including the new ones that are coming up.

One interesting aspect of its future plans is the retail thrust that it has for its products by setting up 2000-plus dedicated outlets to dispense its wines and also expanding its restaurant business. It currently has one restaurant -- the upscale Athena in south Mumbai.

United Breweries Ltd commands over 50% of the beer market with its flagship brand Kingfisher almost synonymous with beer. Every third beer sold in India is a Kingfisher. It also has a host of other brands which include UB Export, London Pilsner, Premium Ice and Kalyani Black Label. UB's Kingfisher is the only beer brand available in 52 countries and on international flights. UB was carved out of the de-merger of the beer business from the erstwhile United Breweries Limited to become the main brewing company of the UB Group.

The flagship brand sells almost 19 million cases in the mild variety while the stronger one sells close to 10 million cases and has become one of the fastest growing brands within five years of its launch. The company's sales grew at an average 48% over the last five quarters while operating profit was up by a massive 195%. UB has an average operating margin of 16%. The stock has run up 300% over the last five quarters.

United Spirits is the third largest spirits marketer in the world with around 15 brands selling more than a million cases a year; it has the largest-selling brandy and the fastest-growing whiskey brands in the world with sales of more than 6 million cases a year. United Spirits (earlier McDowell & Co), a part of the UB Group after the acquisition of Shaw Wallace, offers more than 140 brands at various price points attracting consumers of every preference.

The company ranked second on our list with a composite score of 84. Its sales have been growing an average 53% over the last five quarters while the operating profit zoomed an average 181% over the same period. USL has a surprisingly low operating margin of 14%.

The stock has seen a smart movement, especially after the restructuring of the spirits business of the UB group. After having captured a sizeable part of the domestic market and establishing its foothold in USA and Europe, USL is now looking to enter the Russian and Chinese markets. USL has been actively pursuing the inorganic expansion route having acquired the France-based wine manufacturing company, Bouvet Ladubay, which gave it a strong distribution network to sell its products in the European and the US markets while helping tap the rapidly growing market for wines in India.

With a 55% market share in the Indian Made Foreign Liquor category, this is one company that is well poised to play the growing lifestyle & leisure market. Keep an eye on this stock, though it has run up considerably in the last five quarters in line with its fundamental performance.

Favourable demographics and better economics are driving growth in the entertainment and media sector. From single-screen theatres to poly-screen multiplexes and from weekly family dramas to daily soap operas, film and television entertainment companies are riding the wave of changing Indian viewership patterns.

Media sector to grow

A recent research by Crisil has projected the media and entertainment sector to grow on an average 15.6% every year by 2010. Revenues are expected to double from the present Rs 36,100 crore to Rs 74,400 crore by 2010. The industry is estimated to grow at a CAGR of over 19% and, within that, the film industry will grow at compounded annual rate of 18%.

The domestic exhibition segment, which accounts for two-thirds of the overall industry, is likely to grow at a CAGR of 14%. Multiplexes, which are fast gaining share from single-screen cinema houses, are likely to benefit from this, especially because they are growing from a very small base. With just around 12,900 active screens in the country, it works out to only 12 screens per million of population -- compared to 117 per million in USA and more than 40 screens per million in Europe.

Estimates suggest that aggressive expansion by companies to set up multiplexes is likely to drive revenue growth at a CAGR of around 80% with the number of multiplexes likely to rise three times from the current level to more than 250 by the end of FY08 taking the total number of screens to 1,035 from the present 328. Rationalisation of the tax structure is likely to drive up volumes further and, in turn, improve profitability and margins.

One company that has been a fast mover in the film exhibition space is Adlabs Films, now controlled by Anil Ambani. Adlabs used to be a film processing company, which got into production, distribution and exhibition in a measured way.

In fact, it is the pioneer of the multiplex culture in the country and also for providing a corporate backing to movie making. It is attempting to take a major leap forward after Ambani gained control. Its sales grew at an average 70% over the last five quarters while operating profit was up 38% over the same period. Adlabs operates at a healthy margin of 35%. Not just on the domestic scene, the company has been actively pursuing foreign shores too. It has recently set up wholly-owned subsidiaries in the UK and USA for its overseas distribution of Indian films, film co-production and post-production business.

This company transformed the small screen completely and created a brand with the highest recall among Indian television viewers for itself.

Balaji Telefilms has a presence on almost every satellite channel that is being aired today -- whether mainstream or regional -- and this is reflected in its performance as well. Its net income from operations rose an average 33% over the last five quarters while the operating profit was up 36% over the same period. Balaji has been operating at an average margin of 34%.

The last of our picks from this sector is Titan Industries, part of the Tata Group, India's leading manufacturer of watches and jewellery and the world's sixth largest watch manufacturer. Titan manufactures over 7 million watches per annum and has a customer base of over 65 million. The company's sales have been growing at an average 37% over the last five quarters while its operating profit grew at 43%.

The problem is that its two businesses suffer from two kinds of problems. The margins from its watches are low and Indians still haven't got around to cutting their ties from their jewellers and embracing the more reliable, hallmarked jewellery of Titan. So, while it keeps investing on its brands to make its presence felt, operating margin is 9%.

Some companies are also benefiting from being a supplier of lifestyle products to the world. Crew BOS Products manufactures and exports fashion accessories and home decoration products such as belts, bags, portfolios, business cases, footwear, wallets, boxes, furniture and home furnishings.

It sells to reputed international brands like Next Plc, Espirit, Zara, Massimodutti, Armani Exchange, Tesco, H&M in Europe and Gap, Banana Republic, Old Navy, Chico's and Fossil in USA. Its sales have been growing at an average 49% over the last five quarters while operating profit grew by a solid 63% over the same period. Crew BOS enjoys an operating margin of 19%.

The stocks we have discussed above have been around for a while and their recent track record gives investors an idea about the consistency of operations, management quality and capability to execute expansions. There are two other kinds of companies in the lifestyle sector.

Those that have been around for a while but are not able to take advantage of the leisure boom. In this category are companies like Saregama, Nicco Parks and Mukta Arts.

The other category of stocks are new entrants -- Inox, PVR and Shringar. We have excluded them because they do not as yet have a track record of performance. But that is not to say that they are not worth looking at. These companies may turn out to be big beneficiaries of the booming lifestyle sector over time and are worth watching.

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