Diwali Dhamaka 2013

Here’s wishing everyone a great Diwali and a prosperous new year ahead. With the Sensex touching a record high on Diwali eve, the momentum seems to be building up. However, it would be a wise thing not to get carried away by this somewhat unjustified euphoria. To understand my point, look at the environment – inflation levels remain elevated, GDP growth has shrunk below 5% (it used to be in the 8-9% range pre-2008), and investments have come to a standstill. And to compound all of this, the rupee dollar rate appears to have stabilized in the 60-62 band from 44-45 not too long back, a straight depreciation of nearly 25%. Of course, IT and pharma pack is laughing its way to the bank on the back of this external boost to its financials, while core economy companies who have large foreign debt on their books are reeling under the enhanced interest burden. So in this paradoxic state where one man’s meat is another’s poison, which are the companies which can still pep up your portfolio? Here are a few I think make the cut:

Eros International Media (EIM)

This is one of the biggest entities in the movie distribution space and has a proven track record of churning out block busters over the years. Eros acquires, co-produces and distributes Indian language films in multiple formats. Besides this, it is also in the TV channels business focused on movies. The company has a distribution network that spans over 50 countries, with offices in India (Mumbai, Delhi, Punjab, Mysore and Chennai), UK, USA, Dubai, Australia, Fiji, Isle of Man and Singapore.

In the Dec ’12 quarter, Eros’s parent, Eros International Plc made a joint announcement with HBO Asia to launch two new premium advertising-free movie channels, HBO DEFINED and HBO HITS in India, showcasing about 70% of Hollywood films from Time Warner and Paramount and 30% of Hindi films exclusively from Eros. This thus brings the best of Hollywood and Bollywood together to redefine the pay TV movie space in India.  It has recently signed a licensing agreement with Colors channels’ Viacom18 Media Pvt. Ltd. for new and forthcoming releases and library films to be shown exclusively on Viacom18's COLORS channel in India.

With the entertainment business being relatively free of daily issues such as recession and economy, to a significant extent, and Indian love for movies cutting across regional barriers, makes this industry a good one to bet on. It is this trait which has attracted western film and media entities to India and they are tying up with Indian entities such as Eros for expanding their reach in this lucrative market, in the process benefitting both.

The company’s story of growth started with the successful release of “Cocktail” in July 2012, which did a net box office collection of Rs. 100 crore worldwide. In H2 2013, it successfully released Sridevi’s return film ‘English Vinglish’ which not only earned kudos for Sridevi for her excellent performance, but also won critical acclaim from film pundits. Besides, another small one from its stable ‘Vicky Donor’ did pretty well. Following this, it rode on the success of films such as ‘Khiladi 786’, and ‘Son of Sardar’ which did pretty well at the box office.

In the latest quarter, EIM reported better numbers than most analysts’ expectations. Revenues were chiefly aided by the global success of its movies such as Grand Masti, Raanjhanaa, Yeh Jawaani Hai Deewani and some other regional releases. The company has several big banner movies like Ram Leela, Kochadaiyaan and Krrish 3 (overseas) scheduled for release in the upcoming two quarters, which may prop up its performance in the second half of the fiscal. Increasing number of overseas movie rights help Eros to reduce its dependence on the domestic box office performance. The company @162 is trading at a reasonable valuation of 19 P/E compared to other media businesses and should give good returns with its growing reach and tie-ups with local and international entities yielding returns in the coming period. Watch out for block-busters such as Kochadaiyaan, Krrish 3 and Ram Leela from the Eros stable.

Firstsource Solutions (FS)

This is a BPO company once promoted by ICICI Bank along with two investor firms - Metavante Investments and Singapore’s state investor Temasek Holdings’ Aranda Investments. Together these 3 entities held nearly 68% stake in the company. The company offers outsourcing services for customer management, data processing, and collection services. Firstsource targets customers belonging to BFS, Telecom, Media & Healthcare industries. Established by ICICI Bank, Firstsource started operations in 2001 as ICICI Info Tech Upstream. It changed its name to Firstsource Solutions in 2006 and went public in 2007.

ICICI Bank was looking to sell its stake in Firstsource for quite a while but could not get its asking price. They had mandated Goldman Sachs to sell their stake in late 2008. There were finally three bidders in the race which included the major PE firms like KKR, Blackstone and Providence Capital. They had bid close to about Rs 13-14 per share, which was not at all at a significant premium to the then MP of Rs 12.45. This forced CICI Bank to call off its stake sale. Later in early 2012, Infy was supposedly in the race to acquire stake in FS. However, that did not materialize.

Over the years, ICICI Bank continuously reduced its stake in FS to about 20% by Sep. ‘13. Finally when they had nearly given up hope, CESC came to their rescue and bought not only their stake but also that of the other 2 promoters. However, it doesn’t look likely that ICICI Bank would have got its desired price. CESC in Oct. ’12 bought 34.5 per cent stake at Rs 12.10 per scrip and additional 15 per cent stake for Rs 12.20 from one of the promoter companies ICICI Bank and the two investor firms - Metavante Investments and Aranda Investments. As of 31 March 2013, Sanjiv Goenka-RP group held 56.86% shares in the Company.

FS had been going thru tough times over the last few years, but post the buying of stakes of ICICI Bank and the other 2 investors by Sanjiv Goenka-RP group owned CESC in October 2012, things have started to look-up for this. From a price of Rs 12, it is now quoting at nearly 21. Post this deal in July this year, RJ bought a near 4% stake in FS for Rs 10. He is also laughing his way to the bank by now.

In the last few quarters, the company’s financial performance has shown consistent signs of improvement with OPM increasing from 8.25 % to 11.15 % and NPM improving from 4.37 % to 5.70 %. This has been possible partly on account of greater penetration in the EU market which resulted in higher realizations and partly because of an improvement in the telecom & media and healthcare verticals. 

The company had run up a huge debt due to the FCCB it had raised in earlier years. The company has an obligation to repay $44.5 million USD of debt every year, which works out to nearly USD 11.1-11.2 million every quarter. With the money raised from CESC, and its improving cash flows, it appears that the company is well on track to achieve this. At 21, it currently quotes @11.55 PE. The company has a cash of nearly Rs 3.5/share. Considering this, it quotes at less than 10 PE.

With improving financials and a high rupee-dollar rate, the company is sure to give good returns in the coming quarters. It must be remembered that is has run up nearly 75% from its lows of a few months back. So it might be a good idea to accumulate this now and every time it falls.

Larsen & Toubro (L&T)

What this company does is common knowledge. If there is one company which spans the entire economic spectrum in India, it is L&T. After spending a better part of its life in the core economic brick-and-mortar sectors, it has over the last few years diversified into Financial Services (thru its listed subsidiary L&T Finance which itself covers General insurance, Asset Management and Lending and is in the running for a banking license early next year) as well as Infotech (thru its unlisted subsidiary L&T Infotech).

Again, this is a play on the economy, but with Financial Services seeing a revival of sorts and Infotech doing well on the back of rupee depreciation, its performance is expected to get a boost in line with the economic revival. Already it has run up 20% in the last month or so from close to 800 to nearly 1000 now. But the true potential is yet to come. Any news on its restructuring across the different verticals it is present in will only be an icing on the cake. This could very well go the Reliance way once this happens. As people know, investors in Reliance Industries have seen their investment multiply manifold thru the listing of the various verticals (Financial Services thru R-Capital, Infra thru R-Infra and R-Power) which were previously housed under the Reliance Industries banner.

Again for investors (as against traders who play for days or weeks), price should not really matter for an iconic player such as L&T as it will deliver sooner than later. And in the turbulent times of the last few years, there will not be a better opportunity. And if nothing else, its bonus record (1:1 in ’06 and ’08 and 1:2 in ’13) will ensure that the holding price remains at a competitive level to give superior returns over the long term. A must have in the portfolio.

Besides the above, there are some stocks which merit attention at the current time – Wockhardt and MCX on whom I have written in detail here. Also in the banking space, other than the usual evergreens (ICICI,  Axis), one could look at IndusInd Bank and ING Vysya, both with excellent men at the helm (Shailendra Bhandari at IndusInd and Ramesh Sobti at ING Vysya) who have seen their revival from their previous status as also-rans to one that counts them among the most promising ones. Besides these some IT companies which merit a look due to their attractive business model are KPIT Infosystems, Persistent Systems and Geometric.

HAPPY MUHURAT TRADING !