As the domestic economy marches on the high growth trajectory, leading Indian companies may be better bets than fixed-income options.
The public provident fund is considered the safest investment option. Rightly so. Where else can you get 8 per cent return each year and be capital protected?
But if one is able to identify stocks that can provide a higher rate of return and give a similar CAGR for five years at 8 per cent and above, PPF can be put on the backseat.
However, after the markets have touched new highs, it's getting to be an increasingly arduous task to pick stocks that will race ahead with minimal risk.
But there still are some that are capable of providing attractive returns with limited downside and that is what The Smart Investor has attempted to do.
We arrived at a consensus after speaking to market players who suggested blue-chip stocks that have very strong and sustainable business models. Interestingly, most of these stocks are a play on the economic growth.
State Bank of India
SBI has always been perceived as a proxy to the Indian economy. The largest bank in the country gets thumbs up from marketmen since its growth will be directly related to the economy.
The signs of high credit offtake are indicative of SBI doing well in growing loans and expanding margins. The play will consist of a combination of retail and corporate programmes.
There exist concerns over how SBI's bond portfolio will fare in a rising interest rate scenario but the key to watch for will be the core earnings growth.
Also, consolidation exercises will help it leverage its nation-wide network. The stock looks cheap at the current valuation of 8.48. It now trades at a P/E of 5.1 times its FY05 earnings and 4.38 times FY06 earnings.
ITC
ITC is changing to become a full-fledged FMCG powerhouse - with products ranging from toffees and cigarettes to bakery and agri-focused retailing. Though non-cigarette businesses are growing, cigarettes still contribute close to 80 per cent of the company's revenues.
The hospitality business, too, is expected to perform well in the next three-five years, which is clear from rising occupancy rates. The food business, however, will take a while to show results as it is still in an investment phase. The stock looks cheap at the current valuation of 18.72. It now trades at a P/E of 17.71 times its FY05 earnings and 15.79 times FY06 earnings.
HDFC
HDFC scores because of its legacy - first biggest mobiliser of home loans. Even though HDFC has lost its leadership in terms of market-share in new loans dispersed, the market is big enough and continues to grow at 30 per cent.
HDFC has been doing well considering competition from banks in the mortgages business. Demand for housing loans is on a rise and with construction activity picking and extensions being developed, the only way for HDFC is to go up.
Though the stock may not look cheap at the current valuation of 19.98, the growth in earnings justifies the premium paid. The stock now trades at a P/E of 19.72 times its FY05 earnings and 17.09 times FY06 earnings.
Bharat Forge
Bharat Forge is the largest forging company in Asia and the second-largest in the world. It is also one of the most technologically advanced commercial forge shops in the world.
India's largest exporter of auto components, Bharat Forge has established its first overseas manufacturing facility, CDP-Bharat Forge in Ennepetal, Germany.
This gives Bharat Forge a wider market presence, larger product offering, deeper penetration into the passenger car market and a developed country location.
India's auto ancillary industry is expected to be the next big outsourcing story and Bharat Forge is ideally poised to ride the wave. The stock now trades at a P/E of 20.47 times its FY05 earnings and 13.4 times FY06 earnings.
Bhel
Bharat Heavy Electricals is the biggest equipment manufacturer in the country. With a surge in investment in infrastructure driven by reforms, Bhel stands to be a direct gainer.
It is a dominant player in the power plant equipment business. About 64 per cent of total generation capacity in India is installed by Bhel and the company still boasts of a high order book figure - Rs 30,000 crore (Rs 300 billion) as of November 2004.
It remains insulated to competition since there are entry barriers in the field - for instance, high ash content in Indian coal acts as a restraint to international equipment majors.
Since Bhel has adapted technology to suit this condition, it scores in terms of pricing power. The stock currently trades at a P/E of 24.95 and 19.66 times its FY05 earnings and 14.75 times FY06 earnings.
L&T
L&T is the country's largest engineering and construction company. After the demerger of cement business, L&T now offers exclusive exposure to the domestic infrastructure segment.
It is a leading player in the design and manufacture of plants for oil and gas industries, refineries, petrochemicals and process industries. It is also the market leader in civil construction works.
The company stands to benefit further with the revival in the domestic industry. It is well-equipped to capture growth and benefit from an upswing in the current investment cycle.
In October 2004, L&T's order-book stood at Rs 18,200 crore (Rs 182 billion), the highest in its history. Though the business is a low margin play, L&T has a good mix of contracts, which help it attain better margins.
In last year's run-up, all construction company stocks fared very well with infrastructure spend increasing, and are expected to continue the performance. The stock currently trades at a P/E of 14.59 and 16.41 times its FY05 earnings and 12.59 times FY06 earnings.
Bharti Tele-Ventures
The telecom major is a clear choice since it is the only large listed company if one needs to cash in on the telecom boom, which has only begun as India lags behind other developing countries in terms of penetration of mobile telephony.
Currently, the mobile telephony penetration is only 4 per cent in the country. Bharti is the second-largest mobile service provider with nine million subscribers and a market-share of over 20 per cent currently.
Its integrated business model outweigh any concerns that emanate in a telecom business. Its outsourcing deals with equipment vendors have lowered per subscriber addition costs, helping it save capital. Mobile customer additions will be the key growth driver.
Though service providers find it difficult to attract customers due to rising competition, Bharti has been able to provide value-added services in different niches and attract customers.
Valuations do not look cheap right now, but considering the growth ahead, the stock is worth a look. The stock currently trades at a P/E of 34.81 and 26.07 times its FY05 earnings and 16.27 times FY06 earnings.
TCS
Tata Consultancy Services, the largest IT company in the country, stands to be one of the major beneficiaries of IT services outsourcing. The Indian outsourcing story is expected to last at least for next six-seven years without any threat.
There are some concerns on slower growth in business from GE (TCS' largest client), but TCS is expected to grow at a decent pace with stable margins for the next three-five years. The company has a higher share of onsite revenue as compared to its peers.
According to analysts, as more IT outsourcing deals (large size but low margin) come to India, the company's margins may decline. But sheer volumes will drive profitability and TCS - being the largest player with expertise in executing large contracts - will emerge successful.
TCS currently trades at a discount to Infosys but analysts believe that going forward the valuation gap may get bridged, making it a better play. The stock trades at a P/E of 26.71 times its FY05 earnings and 21.54 times FY06 earnings.Powered by 
