Diwali Dhamaka 2014

Here’s wishing everyone a great Diwali and a prosperous new year ahead. With the Sensex touching a record high this year (incidentally it also had hit a then record high last Diwali), the momentum is finally here. And the one difference this year is the presence of a forward-looking Modi Sarkar which wasn’t there last year.

However, as I had mentioned last year, it would be a wise thing not to get carried away by this euphoria, however justified it may appear now. For one thing, most of it is based on things which are expected to unravel over the next few months/years (investments picking up, infra-focus etc.). And there are any number of things that can go wrong during this time, and not all of them under the govt.’s control. Oil prices for one. While they have dipped to very comfortable levels right now, tensions in Gulf region or Ukraine could lead to a sudden spurt which may lead to the govt’s plans of deregulating oil prices go haywire. Secondly the rupee has stabilized around the 60-mark for a while now. If it were to weaken further with the US economy picking up, it would be another setback from the govt. perspective. Of course IT and pharma companies would laugh their way to the bank, foreign-debt laden companies would go into a tail-spin. So in this current optimistic state, which are the companies which can still pep up your portfolio? The focus this time is on management quality, business domain and growth prospects. Here are a few I think make the cut:

MCX

I had written about this nearly a year back as a contrarian bet here when it was quoting around 445. And it has certainly justified my faith with a whopping return of nearly 78% over the last 1 year. With a stable promoter, and that too a man like Uday Kotak, at the helm now, things can only look up for MCX. I had recommended accumulation of this when it was in the 400-range simply because there was nothing fundamentally wrong with its business. The only thing going against it was its tainted promoter FTIL/Jiggibhai. With this impediment out of the way, the new management can now focus on growing its business. And this business is niche. After all it is not every day that someone comes along and sets up a commodity exchange. Given Kotak’s business acumen, this is one scrip which will surely go places with all the right ingredients in place – a pedigreed promoter, a niche business and lack of a listed peer, a point that does merit attention in the Indian market. And it is currently quoting around 790, way below its IPO price of close to 1000, about 2 years back. And the growth has not yet begun. What better time to board this scrip?

Snowman Logistics

Enough has been said about this earlier (for more info, refer this). And after the initial demand has died down (after all it was oversubscribed nearly 41 times by retail investors), some sanity has been restored in the price. Though it is way above its IPO price, its prospects appear bright if it is able to execute its plans listed in its IPO prospectus (like increasing its warehousing capacity of 58,543 pallets to 85,000 pellets in current financial year, FY15, and further to 1 lakh pellets by FY16).

Again the same factors as MCX, a promoter who is a leader in its business domain (Gatway Distriparks), a niche business, lack of a listed peer and also importantly faith shown by strong and credible foreign shareholders such as Mitsubishi, IFC, and established PE such as Norwest, lead me to believe that investment in Snowman at the current price of around 90, would certainly provide cool comfort.

Sintex Industries

This is the largest plastic processor in the country with the widest product range and highest margins among peers due to its focus on value-added products, most of which are in the auto parts domain. Plastic is strong, light and cost efficient and is therefore gaining ground over metals in engg. and auto parts. And Sintex manufactures and supplies a large number of products in this segment.

It has done many foreign acquisitions over the last few years. Last year, they bought a German company Poschmann which has marquee clients like Bosch. This year too they have acquired another French company SIMONIN which too has well known European clients. In earlier years 2007-08 also it had acquired about 4 companies which make similar plastic molding parts and supply to different auto and engg companies. 40% of the last year’s turnover of 5800 cr. consists of value-added products which offer better margins. Hence @16%, Sintex has one of the best OPM in the industry. And this was in the last year when the economy as well as the industry was not doing well.

This year with the oil prices coming down, those of polymers also have come down. And this is one of the main raw materials for Sintex. So their margins this year should further improve. And as their focus on value-added products improves, their margins will further look up.

And this is only the auto sector. Sintex also caters to a wide range of other sectors such as water storage (remember Sintex water tanks?), water transport, building, construction material, housing, interior products and the list goes on. So they are not dependent on only 1 sector for business, thus providing a de-risked business model.

FIIs have a 23% stake in this company. Notable among these are Goldman Sachs, Credit Suisse and Temasek.

Supreme Industries, a peer company is smaller in size than Sintex and also has lower margins, yet gets a discounting of about 20, while Sintex is discounted just about 8 times. So the outlook is certainly bright here. The current govt’s focus on agriculture, health, sanitation etc. where water storage and transportation, which are some of the key areas of Sintex, play a big role, would drive its growth in the coming years..

Their European acquisitions of auto component makers would be big trigger due to the weakening rupee and the revival of auto sector. They already supply to some of the auto biggies such as Ashok Leyland, M&M, Escorts etc. So coupled with volume growth, margin expansion would also follow.

At 82, @P/E of around 8, this is certainly going cheap currently. This has the conservative potential to double in a year’s time and even go on to become a multi-bagger in the years , if things mentioned above play out as expected.

Last Diwali, in the first week of November, I had recommended Eros International, Firstsource and L&T as the prime picks. These scrips have together given a return of 54% since last Diwali.

And my other promising picks last Diwali were

• Wockhardt, MCX, both troubled by different issues at the time but with sound businesses nonetheless
• IndusInd Bank and ING Vysya, both with excellent men at the helm (Shailendra Bhandari at IndusInd and Ramesh Sobti at ING Vysya), and
• promising IT companies with niche, focused businesses - KPIT Infosystems, Persistent Systems and Geometric

Together these 7 scrips have returned a whopping 46% since last Diwali, again playing out as I had expected them to. And all the above continue to look good going ahead, even though they have run up quite a bit. Though the returns from hereon may not be as whopping as over the last year, they certainly should be satisfying.

Besides the above, there are a couple of stocks which merit attention at the current time, mainly because of an increasingly favorable environment and successful turnaround:–

• Mahindra Holidays (MH) with an established brand and a turning economy would certainly do well in the period ahead. Another thing worth noting is that recently Thomas Cook, the global travels and tours company acquired Sterling Holiday Resorts, a much smaller player in the same industry. And if u consider the valuations and price at which this deal was done, MH is really quoting at dirt cheap levels. Added attractiveness stems from the fact that it is now quoting at around 285, way below its IPO price of 300, 5 years ago.

•  SKS Microfinance – Once touted as the darling of the MFI industry, this was a pariah a few years later, largely due to Andhra govt’s regulations. Andhra was where its main business was and in one swoop, the govt. wiped away its core business. But it restructured itself and expanded into other states with its core know-how intact. And now this seems well on its way to regain its lost glory. Currently quoting at around 315, again way below its IPO price of 935 4 years ago, this has the potential to reward handsomely from the current levels, in the years ahead.

HAPPY MUHURAT TRADING

Cool growth

The recent IPO of Snowman Logistics, at an issue price of 47,  was oversubscribed nearly 41 times by retail investors and listed at a huge premium of 68% today. Considering the over-subscription, very few people who would have applied even for more than 1000 shares would have received a few shares.  The response therefore is not really surprising. Snowman is promoted by a major logistics player, Gateway Distriparks. This is another promising company considering that the state of logistics infrastructure in India currently.  You just have to look at the valuations CONCOR (Container Corp) gets,  and that too with the govt. running it.

Other major shareholders of Snowman are Mitsubishi Corporation (9.4 %), Mitsubishi Logistics Corporation (2.18 %) International Finance Corporation (9.3 %), Norwest Venture Partners VII-A Mauritius (10.3 %).

Snowman is the largest cold chain solutions provider (also referred as an integrated temperature-controlled logistics services provider), currently in India. The company, which operates 23 temperature-controlled warehouses across 14 locations in India (including Kolkata, Mumbai, Delhi, Chennai and Bengaluru), proposes to set up another such 6 and 2 ambient warehouses at 6 cities.

It has a pan-India presence with warehousing capacity of 58,543 pallets and 3,000 ambient pallets, which is expected to increase to 85,000 pellets in current financial year (FY15) and further to 1 lakh pellets by FY16 (all this info is from their IPO prospectus). Revenue and profit growth of the company in last 4 financial years was very strong, up 40-50 % on compounded annual growth rate (CAGR) basis. Total income from operations and reported profit after tax in FY14 grew by 35 % to Rs. 153.41 crore and 18 % to Rs 22.48 crore while operating profit margin (OPM) expanded to 24.7% from 22.4 % year-on-year.

Even though it has listed at a huge premium, it still makes sense to buy it if u can get it in the next few days (once it comes out of circuit and stabilizes). The reasons are not too far to see:

1.  It is the only listed company in this space and hence would continue to command a substantial premium over similar companies (though there isn’t one in the same space, it would be compared with other logistics providers such as CONCOR, Sical, Gateway Distriparks - its promoter, etc. )
2.  GDL is an established player in the logistics business. Its experience and expertise in the logistic sector has instilled confidence in SLL’s customers, who prefer dependable and established service providers. Further, SLL  can leverage its corporate, institutional and banking relationships for its business operations.
3.  Its big expansion plan (of raising capacity to 1 lakh pallets by next financial year) is expected to boost the operating performance of the company over the next two years.
4. Strong and credible foreign shareholders such as Mitsubishi, IFC, and established PE such as Norwest.

Given all the above, it would be a good idea to keep an eye on this, and buy it when it stabilizes after the pent-up demand is done.

Also, as a proxy, get into GDL. It is equally promising and also holds 40% in Snowman. So u can ride bith the growth stories.

Smart Movers

Smart movers

With Modi’s call for developing 100 Smart cities, there are some players which would likely benefit most as they would cater to the high-tech infrastructure requirements which form the building blocks of these cities.

At the moment 100 cities remains a tentative figure, with much still to be pinned down. The budget speech only officially identified cities along the Amritsar-Kolkata Industrial Master Plan, which covers seven states. Although they weren't named in the budget, seven cities have also been named along the Delhi-Mumbai Industrial Corridor, some which would overlap with the Amritsar-Kolkata plan.

Officially, the budget only pointed out three cities in the Chennai-Bengaluru Industrial Corridor: Ponneri in Tamil Nadu, Krishnapatnam in Andhra Pradesh and Tumkur in Karnataka.

So what would be the companies that would benefit from this move? Here’s my take:

Sterlite Technologies (ST):- This is a leading global provider of Telecom (Optic Fibre and Cables) and Power Conductors, from Anil Agarwal’s Vedanta stable. These products and solutions would typically form the backbone of any other components that would make up the smart cities. As things stand today, not many cities are geared up for this sort of thing yet. And if things have to be built from scratch, there would be a huge surge in demand for optical fibre and transmission lines which are ST’s forte.

D-Link: - This company is household name in networking items such as routers, switches and wireless products (in fact they have a near monopoly with MTNL’s broadband service). These products would also be a key component of Smart cities from a technology infrastructure perspective. Again, Smart cities would be a boost for this company due to its critical products.

These are 2 of the most obvious choices which come to mind. Of course there would be other firms such as those in construction industry (IRB, L&T) which also would greatly benefit from this initiative.

Turning around fast

While researching investment ideas over the last year or two, I was drawn to the BPO sector mainly because of the news of Firstsource Solutions buyout by Sanjeev Goenka group. 

This was a much vaunted stock once upon a time (in early 2000) when ICICI Bank was its parent. This was then the BPO arm of ICICI Infotech, the IT arm of ICICI Bank. It then renamed it as ICICI Onesource. Over the next few years, it did well enough to attract the attention of PE investors such as Sequoia and Temasek (Govt. of Singapore). Even then, it has a significant strength of 5000+ employees.

Over the next 5 years, from 2005, it prospered thru global strategic partnerships and acquisitions such as Metavante (a Fidelity arm) and Med-Assist of US. It renamed itself a FirstSource Solutions (FS) and focused on the healthcare sector thru its acquisitions. It also got listed on the Indian markets in 2007. By then, it had become one of the biggest BPO in the country with strength of nearly 15000+ employees and had diversified into other verticals such as Telecom & Media and BFSI.  Its growth continued with big deals such as USD 80 million outsourcing deal with BarclayCard US.

Post the global meltdown in 2008, FS also suffered along with its peers. It had FCCB related issues which was a big drag on the stock and rising finance costs had a huge impact on the bottom-line of the company. There were hardly any dividends paid since its IPO. 

The company has multiple delivery locations in India, USA, UK, Philippines and Sri Lanka through its various subsidiaries. Some of the services offered by the company include transaction processing, collections and receivables management, customer relationship management (CRM), claims processing, pricing and adjudication in healthcare sector, etc.

In FY2013, RP-Sanjiv Goenka Group acquired majority stake in the company (@12/share) and the company raised Rs. 274.55 crores through preferential allotment of shares to the new promoter group. Among its other investors, it has its former parent ICICI Bank with nearly 5% stake and Rakesh Jhunjunwala with nearly 4%. Along with surplus funds and with the capital received from new equity infusion, the company was able to redeem outstanding FCCB’s which were due on December 4, 2012. And with this redemption the company currently has very comfortable debt to equity.

The current market capitalization of the company is nearly Rs. 2500 crores and @38, it quotes @P/E of nearly 17. Driven by improved financial and operational performance coupled with new management, the stock price has more than tripled in the past few months. However, once the management stabilizes the company, and there are clear signs of the same, the company should start on a growth trajectory again.