Themes for 2014

Here’s wishing everyone a very happy 2014 ahead. 2013 was a mixed year in that there was no defined theme and volatility was the order of the day for most part of the year. It was also a year which saw the key indices record their all-time highs, besting the previous ones in 2008. However, it must be remembered that this has not been a uniform rally but one driven by the stupendous success of select stocks primarily led by IT, Telecom and to a certain extent Pharma. FMCG pack was its usual self delivering stable returns. There were some key themes which played out in 2013:

1.     Optimism that the government would go full steam ahead with its reforms drive and that economy would rebound this year. This optimism has only partially materialized, with some reforms coming in and some major policy decisions announced (restriction on Gold to curb CAD, DTC bill, Insurance sector opening up which incidentally is being opposed by the so-called current front-runner, BJP, and new banking licenses), though their implementation is still in doubt. Also, the economy is far from what could be considered as reasonably good, going by the economic figures being published by the government. This is where a strong and stable government would be able to breast the tape and increase confidence in the economy.

2.     R. Rajan taking over as RBI Governor – He not only has been on the right side of the market with rate decisions as expected but has also publicly acknowledged the rationale for moderating rate hikes to encourage growth. This has been taken very positively by the markets. How he tackles the dual challenges of inflation and CAD without really hurting growth remains to be seen.

3.     The continuing show of confidence from MNC companies in their listed as well as unlisted Indian arms – Rs. 4800 cr. By GSK Consumer, a mammoth Rs. 20K crore by Unilever and the recent announcement by GSL for raising stake in their listed pharma arm. Whether this is a preamble to an eventual delisting, though being denied by the respective parent companies remains to be seen.

4.     The much-awaited announcement of bond buying tapering by Fed which initially led to a major sell-off followed by an equally swift recovery when some of the assumed fears were out to rest. However, this doesn’t mean that the tapering will not happen, only that it will happen gradually, which should suits markets like India just fine.

From the last year’s basket, other than AB Nuvo, the other stocks – Max India, Pipavav DOC, CARE, Wockhardt have not gone anywhere in the year. In fact, Pipavav and Wockhardt are close to their 52 week lows currently. But I believe that they still hold the potential to appreciate from current levels and may be accumulated.

This year I believe the focus will continue to be on companies that are expected to benefit from a stable government at the centre and continuing reforms drive, which has been initiated by the current government to a certain extent. How this plays out in an election year, only time will tell. So here are a few themes which should do well:

1. Engineering/Capital goods
2. Auto ancillaries
3. MNCs
4. Media & Entertainment
5. Private banks

 The themes which will not do well at least in the next year are:

1. Autos -  With economic outlook still not really bright, both the major segments – passenger cars as well as CV, will not be in demand for the next year or so, or till such time the economy improves and there is money in the hands of the people.
2. Public sector banks - With the government in election mode, expect more freebies to be doled out with the PSBs being the brunt of it – agri loans (it has already started with sugar and more may follow), loan wavers etc. So if u have a longer horizon of 3+ years, as it rightly should be, go for the big names here.

Technology stocks have run up ahead of their fundamentals mainly driven by the sharp depreciation of the rupee from levels of 45 to 60s now. And this is not expected to change in the near future. The positive side is that the demand situation seems to be quite positive after the muted growth in the last year or two. However, this should benefit 2 types of companies – the larger ones who have the pricing power and deep client relationships and niche companies who will continue to do well due to their inherent nature. The small and mid-tier ones are the ones which will suffer the most as the spoils will be divided between the above 2 types. The only silver lining for them would be M&A of the kind witnessed earlier – Patni by iGate, Hexaware by Barings PE and Four Soft by Kewell group of UK.

Having listed the sectors where money can be made, here are some companies I expect to do well:

Larsen& Toubro (L&T)

This has somewhat recovered from the lows of 800s to 1070 now, a near 35% upside in about a quarter. However, this continues to be an Indian economy bellwether with its engineering output directly dependent on the state of the Indian economy. It is quite telling that this is still a far cry from the levels of 2000+ it enjoyed a few years back. If the economy improves in the second half of the year, expect this to rebound strongly from current levels. And not to forget that this year they gave a bonus of 1:2 also. A must have long-term pick for anyone’s portfolio.

Elantas Beck

This MNC was a much sought after scrip in late 2012 on hopes of delisting. From levels of 2500 then, it is now quoting at around 560, the price reflecting the disappointment of the market that the delisting did not go thru. However, it is now quoting at a really attractive valuation, though it has risen more than 25% from levels of 400s not too long ago. A few key points in its favor:

1. A market leader in electrical insulation systems with a share of nearly 40%.
2. Strong technical support from parent Elantas GmBh, the German parent who is a global leader in the sector, for expanding in the Indian market.
3. Cash rich - 50% of balance sheet is cash
4. Cheap valuations – a ttm of about 13, too low for a market leader MNC

PVR

PVR is the largest and the most premium film entertainment Company in India and is listed as the “Most Trusted Brand” in the Category of Entertainment by the “Brand Trust Report”, 2013. This multiplex operator has had a dream run over the last 2 years tripling in value since then. The main reason that can be attributed to it its meteoric rise over the last year or so, is its acquisition of Cinemax chain which will not only expand its reach not only in Mumbai, but also in other cities where they may not have a presence but Cinemax has. The merger saw a 17 percent increase in its footfalls (YoY). They have done a couple of smart things:

1.     Focus on F&B business. It is a widely known fact that the margins in this segment more than make up for any shortfall that may occur in the distribution business. They have seen a growth of 87% in this segment.

2.     Flexi-pricing - They have taken a leaf out of airlines’ book here. From Monday to Thursday they have one price band, then Friday they have another price band and then Saturday, Sunday which is the peak time, it is another price band. So overall, though they have reduced prices in some cases, and increased in others, the cumulative impact is 10% overall growth.

Recently, PVR Cinemas has entered into a 5 year strategic partnership with BookMyshow.com to be its online ticketing partner across India. The multiplex targets to sell tickets worth of Rs. 1000 crores over next 5 years exclusively on BookMyshow.com besides its existing sale of tickets from its Box Office and other channels. It proposes to add another 30 screens in the current financial year and expected to add 70-80 screens every year to change the cinema viewing experience of the people.

The recent blockbuster Dhoom 3 beat the highest opener record of Chennai Express and Krrish 3 grossing Rs 35 crore on its release day. As per the management, if the movie runs for around 3 weeks in multiplexes and cinemas, the company may add Rs 40-50 crore to its kitty. Another expected block-buster slated for release is Jai Ho, which again should benefit PVR.

The biggest advantage of this company is that this is fairly recession proof. People haven’t been seen to curb down movie-going over the last 2-3 years, when the economy was touted to be in bad shape.

Given the restrictive policies of multiplex operators such as PVR, whereby food & beverages aren’t allowed inside but are required to be brought within the theatre, a hit movie augurs well for companies like PVR.

And finally, S&P BSE Teck Index (which includes TMT stocks) will include PVR effective Dec. 23. So this should also some on the radar of institutional investors, if it has not already done so.

Another stock which has not yet followed PVR but is in the same league is Inox. People, who may have missed the bus for PVR, though it still has steam left, can consider this one. From close to 60 in Sept, Inox has moved to 109 now. If it follows PVR, and there is no reason why it shouldn’t, there is surely a long way to go. See the detailed analysis here.

ING Vyasa Bank

This is one of the few listed International/MN banks in India, with the Dutch financial services group ING holding 44% stake in the company following the merger in 2002 of Vysya Bank with ING Group in India, with whom it had several long-term strategic alliances. There may be a case of ING getting out of this bank in line with RBI’s policy of no major entity holding more than 5-10% stake in a listed bank. Already, ING Group has announced plans to divest itself of its Indian insurance and investment management businesses through the sale of its 26% interest in ING Vysya Life Insurance Company Ltd. to its JV partner Exide Industries. And ING certainly needs the money to fulfill its obligations in Europe where things are still in turmoil.

As of March 2013, ING Vysya is the seventh largest private sector bank in India with a large institutional holding, counting Aberdeen Asset Management, PE firm ChrysCapital, Morgan Stanley, and Citigroup, among its shareholders. However, since 2009, it is ably led by Shalendra Bhandari, an IIMA-A alumnus, the erstwhile head of PE business at Tata Capital Ltd. and prior to that, CEO of ICICI Prudential Life Insurance Company Ltd. and Centurion Bank which was taken over by HDFC bank.

ING Vysya Bank has delivered a good operational performance in tough times. The bank’s 35% YoY net profit growth was higher than market expectations. Provisions saw a noticeable increase primarily due to slippages in the wholesale banking book. As per the management, there could be some stress in the mid-corporate segment and the smaller accounts within the large corporate segment. Other segments, like large corporate & multinationals, SME and retail are performing well. ING continues to deliver well on most P&L metrics also asset quality held up well with limited slippages.

As the economy improves, the bank can be expected to deliver handsomely given its current ratios.

And now for some uncommon names (and not very expensive ones in absolute terms at that) for uncommon gains not only for the next year but a long time after that:

From the Auto ancillary pack, watch out for Amtek Auto (quoting at 75 @ttm PE of 4), its group company Amtek India (quoting at 65 @ttm PE of 10) and Sona Koyo Steering (quoting at 19.60 @ttm PE of 17). They have built huge scales with international acquisitions over the last few years (Amtek India was in the news recently for its acquisition of substantial business interests in Kuepper group of Germany, through its 100 per cent subsidiaries for about 1700 crore. Kuepper is the market leader in machine casting industry and is likely to bring synergy with Amtek's core expertise in casting and forging operations thus strengthening its market position). It is payback time now. And domestic auto sector is not a factor in their scheme of things. Quite a lot of their business is now driven by export orders. And with rupee being what it is, and stabilizing at these levels, the scenario couldn’t be better for them.

The much-maligned Power sector (what with problems on every front from environmental clearances to fuel supply) is the dark horse, in that it could see better days ahead with the government’s reforms push in an election year. And the new government would only be too happy to continue that.

Watch out for the PTC twins (PTC India and PTC Financial Services) which would be great beneficiaries of the power sector reforms. Also Coal India would be another beneficiary owing to its monopolistic status, notwithstanding government’s interference in its operations. After all, who else will provide coal to the thermal power plants in the country?

And here’s wishing all investors a very profitable 2014.