Diwali Dhamaka 2024

 

Here’s wishing everyone a great Diwali and a prosperous new year ahead.

With the benchmark indices going nowhere post reaching the ATH peak, it is time to sit back and take stock. By all counts, from traders, analysts et al, Indian markets are trading above their fair value and there are better options globally, and even in Asia. Nifty 50 index is trading at ~24x PE, which is in line with its 5-year average, but a tad higher than the 10-year average of 23.4x, as per Bloomberg data. The Nifty Midcap 100 index at 47x PE, too, is far away from its five-year average of 36.4x and 10-year average of 32.4x, data shows. In P/E terms, the Nifty 50, data shows, is trading at around 89% premium to the MSCI EM index, above its historical average of around 50%. Stable macros, broad-based earnings growth and robust banking/corporate sector health, analysts said, are driving this premium. That said, geopolitics, US elections and crude price remain key risks, especially post the recent escalation in the conflict in West Asia. Any shift in government’s fiscal priorities post state elections, can also emerge as a medium-term risk. While it is true that prospects of Indian markets look way better than most, at least on paper, as they say, proof of the pudding is in eating it. These are just notional and once the results are out, the reality will be there for all to see. The concern is that India will not be able to sustain the premium valuation it has held since 2021. And Q2 results have given a preview of things to come.

The good thing though is that Indian retail investors have matured big time as is seen by the steady stream of SIP flows over the last few years irrespective of the market trend. That is indeed a heartening prospect as DIIs, who actually use these flows, can act as a counter to the FIIs and in fact have actually been doing so for the last few years, and this trend looks unlikely to stop. (FII) have pulled nearly $7 billion from Indian stocks in October alone.

The other noticeable thing which has happened is the returns the precious metals Gold and Silver have given over the last few months. The gains in bullion (and Silver) have been on multiple levers including geo-political tension and hopes of more rate cuts by the US Federal Reserve, this year.
They have rubbed shoulders with equity returns, and in fact surpassed them. In 2024 so far, Gold has delivered returns of ~21% while silver has ~23% vs 12% yielded by the Sensex. And with the festive fervour having already started and peaking in the next few weeks, the party is likely to continue. So it makes eminent sense to have both of these in your portfolio for the next year or so, at the minimum, a point I have been making for more than the last 6 months. And there are a variety of instruments today which give you the flexibility to do that, the way you want to. For investors, looking for a lazy way out, you have the Multi-asset schemes which various AMCs have floated, which would serve the purpose very well, if one doesn’t want to spend own efforts in this area.

The major global events which are on the horizon now are the US prez. elections and the probable Fed rate cuts in the next 2 months. And adding spice to this heady mixture will be the state elections in India in some of the key states like Maharashtra & Jharkhand over the next 2 months. It remains to be seen when our very own RBI follows suits of the western world and kick-starts the rate cut cycle.

So this time, I will be leaning more towards stock picking than a top down sector approach as I usually do. As I have seen, there are sectors lie BFS which have headwinds while individual stocks have tailwind and that is where this theory plays out well. The stocks on my radar this time are likely to be the ones which have deep value within and could go the Raymond way as you will see in the later part. The thing is that these things are right there in front of everybody, but nobody has really noticed them from that angle. So here are the stocks I am betting on this year.

 

Edelweiss Financial Services (EFS)

EFS has a set of rich businesses which the market has completely ignored, a la ITC. By its own admission, here is the break-up:

 

And its current Mcap is only ~10500 Cr. It is quoting pretty much like a holding company, at a massive discounteven though it has an active participation in all its businesses, unlike a holding company which is usually a passive investor. It has openly declared that value unlocking will happen over a period of time. AMC & Insurance arms may be the first off the block considering market flavour.

 

 

So this can be an ideal SIP candidate to accumulate over the next few months taking advantage of the current market volatility. And to top it all, it is headed by a market & finance veteran Rasesh Shah, an IIM-A alumnus who I would rate in the same league as IDFC First Bank’s CEO Vaidyanathan, another from the same institute and who has earned his stripes over the years. I won’t be surprised if ESL doubles over the next couple of years with these tailwinds and steered by such able leadership.

S H Kelkar & Company (Keva)

There are a lot of daily use FMCG products like soaps, shampoos, detergents etc which require fragrances of various kinds. S. H. Kelkar & Company (also known as Keva) is one such company which provides this smell or fragrance to the makers of these products. And it has been doing this for the last 50 years. This being a very selective and customized business, the customers tend to take time to gain confidence in the company and contracting is usually a long drawn process. But once Keva gets the fragrance and quality right, the client is theirs for life. The clients are unlikely to shift to another vendor in a hurry once the chemical set-up is achieved, resulting in long-term supply contracts with most FMCG companies needing their products.

Keva is one of India’s largest fragrance companies. Such is their popularity that some of the fragrances they developed decade ago are still market leaders. They have a reach over 90 countries, and their sensorial offerings span a large variety of flavours, fragrances and aroma ingredients. To address this global market, they have set up 7 Creative Development Centres across 3 continents. These serve more than 4000 local and MNC clients with ease. We’ve also achieved significant backward integration capabilities in our fragrances division through 6 manufacturing plants. Keva manufactures both fragrances and the aroma ingredients that go into them. This allows them substantial flexibility in effectively responding to changes in demand. This has enabled them to have a steady growth rate of 12-15% over the last several years.

The major risk factor for Keva is that this is a B2B business and is impacted by the rise in inputs costs which can’t be easily passed on to the clients. This has the effect of impacting operating margins for a few quarters before the cycle eventually turns.

Currently it is quoting at very attractive valuations. This being a stable quality business, has all the potential to grow and scale up in double digits for several years. While the SMID stocks are quoting at huge multiples and have gone up upwards of 3x, this has gone up less than 2x, and is quoting at around 36 PE which makes it a value play. It has a great long term potential and if one were to think of long term, this would be a prime pick at current levels. This being in the fragrances and food additives business, can be considered as a direct play on the Consumption theme. Add to it the China+1 strategy which is fast catching up in the western world, and the growth story is further reinforced. Keva will surely be able to capture a larger global market and has the potential to be a mutli-bagger.

Losing ground in the current correction to below 300, this provides a great opportunity to add such a niche stock to one’s portfolio.

Arihant Superstructures (AS)

I consider this as a proxy play on the new airport coming in Navi Mumbai. This is a mid-sized player in MMR. Its focus is on the MMR micro markets of Badlapur, Shilphata, Taloja, Kalyan etc. which are in close proximity to the upcoming airport as well as the prime pockets like Vashi, Kharghar and the upcoming Panvel. It also has 20% of its projects coming in from Jodhpur, another upcoming real estate pocket in Rajasthan. Panvel constitutes another 20% of its projects. It thus boasts of a blend of luxurious as well as affordable housing projects across these areas, with these 2 lucrative pockets constituting 40% of its strength. It has a launch pipeline of close to 1000 Cr. in the current financial year.

The current airport in Mumbai has a capacity of 50 million passengers/year while the upcoming Navi Mumbai airport boasts of a capacity of 20 million passengers/year. As with any such major landmark, this too has the potential to create a mini- Navi Mumbai once the airport becomes operational in 2025. For those of you who are not aware, you just have to look at how the property prices have mushroomed at the Maharashtra-Goa border of Sawantwadi and neighbouring areas, most of the land there being cornered by politicians of both sides. And guess the reason? The swanky new airport in Goa (its second, the first one being run by the defence establishment) at Mopa just across this border. And thanks to this, these areas have moved up from being sleepy villages they were not too far back to buzzing towns of economic activity. This is what a major landmark like airport has the potential of creating. The same fate now awaits the hitherto neglected area at the far end of what we currently know as Navi Mumbai, though after such a long time, it has become somewhat of a misnomer, Navi meaning ‘new’ in Marathi. Already, the signs of awakening are visible. The big boys of India Inc are already here with purchases of huge land banks. Reliance is setting up an industrial park in this area close to its existing DAKC, Adani’s Data centres are coming up at Taloja, new sea ports are coming up at Dighi in the same area and many such huge infrastructure projects are in the works. This obviously will give rise to prime real estate in the whole area and this could well be the next Powai.

AS is already here with 37 projects of which 21 are low inventory, ready-to-move ones, which usually sell like hot cakes. AS is also into the much sought after affordable housing. They are known for being customer-friendly with no transfer pricing and lock-ins. However the icing on the cake is the Arihant‘s luxury villas project called as Arihant World Villas spread over 76 acres, just 30 min away from the new airport. The plan is to have 362 villas with a gross development potential of ₹1000 Cr. for the discerning few. Needless to say, 5* amenities like Golfing, Spa resort, Clubs, Riverside promenades, Mall etc are all planned for a complete well heeled experience. Along with this, 2 big 5* 200+ room hotels managed by Indian Hotels (Taj), are also proposed. Market cap of the company is just ~₹1400 Cr. And all this when it has shown a 5-year PAT CAGR of 40%.And the stock price too has delivered a CAGR of 20% in this period. The thing to note is that all of this has happened prior to the airport being started. So considering all of the above factors, this looks like a big re-rating candidate. Even after the current run-up, even if it takes a pause for a while, with the opening of the airport in a year’s time, I am sure smart hands will start accumulating soon, if not done already.

Indigo Paints (IP)

This is the smallest paints company among the listed ones with a MCap of less than 10K Cr. while most of the others are upwards of 20K Cr. with only Akzo Nobel slightly below this. And yet IP is half the size of the smallest of the established players. Yet, it is holding its own among strong competition from the larger players and few of the big houses entering it recently – Birla Opus, JSW Paints etc.

IP was incorporated in year 2000 and manufactures and sell decorative paints. MS Dhoni is its brand ambassador which fits in quite well with its image as a cool brand. It is the 1^st company in India to introduce category creator products like metallic emulsions, tile coating emulsions etc. in the decorative paints segment. The company has a market share of 80-90% in some of its differentiated products. Its product basket comprises of emulsions, enamels, wood coatings, cement paints and putties, premiere distempers etc. They have a distribution network in 28 states with 18000 active dealers, 7000 tinting machines and 53 depots in India. The company also has 5 manufacturing sites.

Its sales have nearly doubled in 3 years, and OPM has gone up from 13 to 22%, a no mean feat in a competitive environment. ROCE has consistently been above 20% over the last few years. And as is the trend, public holding has been decreasing over the last few years while institutional holding is increasing, so much so that the public holds just 17% currently. It is therefore safe to conclude that it is in strong hands.

Given the state of the economy, govt’s push for housing and infrastructure, paint industry despite multiple players has string tailwinds which will benefit a smaller, agile player like IP much more than the biggies. This has been consolidating over the last 2 years and has gone nowhere. It therefore looks like an opportune time to board this and play with patience over the next few years to really get the compounding benefit. Add to it the ever present option of consolidation or sell-out to one of the biggies with deep pockets, gains can still be made.

India Glycols

This company has a Distillery business where Ethanol is manufactured, a Liquor business and finally, the Speciality chemicals business. All 3 r not only going great guns at present, but their future looks equally bright. Speciality chemicals sector has taken a beating in the last 2 years and can now be considered to have bottomed out. We all know how close Ethanol is to Gadkari’s heart and Liquor is an evergreen business, especially the IMFL one. You just have to look at Associated Alcohols in the last 1 year or so to understand what I mean.

Having said the above, I believe that there is a great scope for value unlocking here as all the 3 businesses is strong in their own right. And as has often been seen, SOTP is usually way higher than the individual parts together. So even though it has doubled over the last year, there r enough tailwinds for it to go higher. And this will unravel over the next few months/years.

Since last Diwali which was celebrated on November 12, 2023, the headline Nifty index so far has risen by a sharp over 26%. Nifty Midcap 100 index also reportedly gained 39% during the review period, with the recent debutant IREDA leading with gains of as much as 232%.

During the period under study, Nifty Smallcap index also buzzed and gained 37%. And as we are set to usher in a new Samvat 2081 this Diwali, here's a look at how our portfolio has performed.

	2023	2024	Difference	Gain/Loss
SEPC	24.25	26.15	1.90	7.84%
Orient Green Power	17.45	19.04	1.59	9.11%
Raymond*	1880.88	1635.85	-245.03	-13.03%
Raymond Lifestyle	8.02	1768.88	1760.86	21962.97%
TNPL	286.00	178.30	-107.70	-37.66%
Federal Mogul Goetze	358.60	396.45	37.85	10.55%
Total	2575.20	4024.67	1449.47	56.29%

 ^*Since Raymond underwent a demerger with Raymond Lifestyle, the demerged entity has also been considered for comparison in 2024 since the whole of Raymond (including this entity) was considered in 2023.

Apart from the underperforming TNPL, rest of the stocks performed well in line with expectations. 2 of the 5 are from Infra (SEPC) & Power sectors (OGP) which are potential multibaggers in the next few years. Even the underperformer TNPL holds a lot of promise which should emerge in the years to come and I would not write it off just yet. To be fair, most of the gains in the current portfolio were driven by Raymond, and this only shows how badly the market had underestimated its deep potential over the years. I have written on it in depth last year and the story has certainly played out to script. As I have said, Raymond is not done yet and there is still steam left. 2 of its businesses are ripe for demerger and it will be a matter of time when it happens. It is more a question of when rather than if. This is exactly the kind of value unlocking story one should look out for. 2 of the current year’s stocks (ESL & India Glycols) are exactly these, and could go the Raymond way if one has the patience to hold them thru ups and downs (which would certainly come due to unforeseen events).

This year was highly satisfactory with an overall return of ~56%, well above the Small cap index returns of 37%, the category to which all of them belong and way better than the returns of other indices, as expected.  Of course, there are a host of other stocks on both sides, ones which gave 2x, 3x returns and ones which lost a lot of ground, mostly among large caps like IndusInd Bank which lost close to 30%, most of it in the last few days since its results. And the other set of stocks which took a beating was the Defence and Railways pack which has retreated anywhere from 20-40% from their peaks. However, there is nothing to feel sad about for them as they have gone up by 400-500% (or more in some cases) in just 2 years and so a loss of 40% should not worry one unduly. Even after retreating so much from their highs, one would still be sitting on multibagger returns in most of these stocks.

The current picks are again a bet on India’s Infra & Consumption story which should play out in the coming years, once the current volatility subsides. The risks obviously are more geopolitical than local, the major worry being the spill over of the geopolitical issues on us primarily in oil which have the potential to cascade and spoil the local party. Only time will tell how it all pans out. Considering that all of them are small caps, you may certainly expect volatility in the coming quarters and year but also steady compounding (probably market-beating) over a longer timeframe with this lot.

Though Banking stocks have taken a beating for some time now, and are not likely to recover in a hurry, it is the rest of the FS space that merits an attention for 2 reasons – 1) Banks have lending issues, be it the cost of funds or the quality of borrowers 2) rest of the FS space is under penetrated. Look at Insurance. There is still a long runway for these stocks as people, especially youngsters, become more educated about insurance, and govt. makes some types of insurance mandatory or easily accessible for these firms to market it. 3) Equity investing as a cult is still to make a mark in India, even though the no. of people and demat accounts have doubled and tripled in the last 4 years. There is still a vast population who haven’t dabbled in direct equities yet, for various reasons. And this is a huge market.

The last thing that I want to leave you with is that though equities as an asset class are considered as inflation-beating over the long term, which is certainly true, we are at the cusp of debt asset class resurgence as well. It is only a matter of time, a quarter or two, when RBI will start the rate cut cycle and this will lead to double-digit inflation beating returns in debt as well. Already, market pundits have sounded a note of caution on expectations from equity markets this year due to all the things mentioned above. It is time to rebalance the portfolio with a generous slice of debt and leave the equity class as-is w/o being too adventurous. One should ideally try to lock into the high yields of NCDs/FDs etc which are available now (even considering the tax angle) and also consider long duration and Gilt debt mutual funds which will start giving the expected double digit returns over the next 2-3 years, depending on when the rate cut cycle starts.

 

HAPPY MUHURAT TRADING!!

Themes for 2024

 

Here’s wishing everyone a great 2024.

2023 turned out to be a path breaking year for the Indian stock market. Both the indices made new life-time highs in the last few days and don’t seem to be in any hurry to come down. There is a feel-good factor about Indian equity globally and this has rubbed off on the FIIs who have started coming back in the last few days and weeks. While the Indian market has long ended the FII money dependency, it enables more liquidity resulting in a buoyant market. So more the money coming in, the merrier the markets will be.

Indices though tell only one side of the story. While they are considered as the barometer of the economy, the real fun is in the broader market of mid-caps and small-caps. And it is this pocket which has beaten the main indices hollow over the last few months. Admittedly, there are overheated pockets in this space, and there are potential minefields, but for an astute stock-picker looking for value, this is as good as a time as any. And there certainly are value buys in this market too, even if not in the main indices. And these are the ones to focus on as we will see in the coming sections. However, one needs to carefully define what value in the current context means. Anything above a PE of 20 was once considered expensive and only the MNC kind of stocks were available at this or higher PE. These were also considered to have strong cash flows, governance and availability to tap into parent’s global technology and practices. Come 2022 post the pandemic and the normal has shifted. Now anything around a PE of 30-35 is considered attractively priced, growth stocks are available at a minimum PE of 40 and the IPOs are being priced at 40 and list at a PE of 80. And this situation has rubbed off on the PSUs too. The bluest of blue-chip PSE was available at single digit PE with a dividend yield twice that of bank account rate. And following their private sector counterparts, they are now quoting in higher teen PE, almost twice that of earlier. Given this PE expansion and re-rating of stocks across the board, one really needs to pick stocks carefully not to get one’s fingers burnt.

The one theme which has defined the markets over the last year or so has been the PSU story. It all started with Railways, moved on to PSB and then Defence. And the story is not over yet. PSU theme itself is so diversified that there are always some sectors which are in the limelight at any given time and there may well be a sector rotation here. Already many AMC have launched thematic funds focused on some of the above sectors such as Housing, Defence etc. There may well be more. And when this money starts chasing the same set of stocks, the rally in them is unlikely to stop anytime soon. Add to it the FII flows which are now re-starting and will only increase post Jan ’24. The entire manufacturing, industrials and infrastructure is not just a one-year theme, but a multi-year one. However, while the prospects are undeniably good for the hot sectors of Defence and Railways, they have run up too much too fast and their upward journey is highly likely to slow down significantly and there will certainly be a time correction over 2024 at least.

After multibagger years of 2021, 2022 amidst the post pandemic China+1 strategy adopted by global companies, 2023 was a much more sobering year where there was a de-rating amidst some signs of revival from China and the overall global slowdown in the Chemical industry leading to oversupply situation and crashing of prices. However, most of the good companies in the sector have used this sobering time to set their house in order and ramped up capacities of the right products. The results are likely to be visible from 2024 onwards. Add to that the emergence of new sectors like the EV batteries which require speciality chemicals which are not commonly available.

As I had mentioned during Diwali time about 2 months back, Consumption will continue to be a great theme to play in the coming times. And while there will be specific companies in this area, what better way to play this than through financial and travel & tourism stocks which form the underlying bedrock over which this will grow and are supported by on-going events? Also, India story continues to play out not only locally but also internationally with FIIs waiting on the sidelines to pour in their funds. This should start in 2024 amid hopes of US Fed rate cuts.

So this year’s stocks are based on the above themes. Let’s take a look:

 PSB ETF (Nippon India ETF PSU Bank BeES or any from ICICI, DSP & Kotak)

With consistent earnings normalization, controlled credit costs, and healthy asset quality, earnings for PSBs are expected to grow at a more sustainable pace. PSBs will continue to benefit from their established distribution network, strong geographical presence, and improved digital initiatives. After Covid-19, the asset quality of PSBs has been steadily improving, supported by improved underwriting and continued recovery. GNPA/NNPA ratios of PSBs have declined to 5.2%/1.3% in FY23 from the peak of 14.6%/8.0% in FY18. A large part of FY12-22 was spent cleaning up the balance sheets of financials.

Rather than going for individual banks, which too would make good individual stock picks, a more intelligent strategy would be to go for a PSB basket. This can happen thru ETFs available on the exchanges from top fund houses such as Nippon, ICICI, DSP & Kotak. Since this tracks the PSB index, choosing one over the other doesn’t really matter. In early 2022, Nippon India ETF PSU Bank BeES had been my pick. That time it was ~@ ₹28 while now it is @ ₹62. So it has more than doubled in 2 years and still has a lot of steam left, even if it doesn’t double or grow at the same breathless rate. If Indian economy must gallop at a healthy speed, how can PSBs not come into play? The only thing that one needs to consider is the AUM of the scheme to ensure that it is not too small and hence carries a high impact cost.

Shriram Finance (SF)

Apart from the PSBs, some of the financial institutions from private sector are also worth a look. Post the restructuring within the Shriram group last year wherein they streamlined their corporate structure, SF has emerged as a financial powerhouse. SF is a retail NBFC offering credit solutions for commercial vehicles, two-wheeler loans, car loans, home loans, gold loans, and personal and small business loans. Through its cutting-edge technology, it is a digital financial institution that reflects the banking needs of Millennial and Gen-Z customers. It offers priority financial services to those in the unbanked and under-banked sectors. It offers fixed deposits and recurring deposits. It has recently tied up with SIDB for offering loans to MSME.

With a complete repertoire of products from lending (property as well as vehicles), financial products distribution (MF, insurance etc.), this can be considered as a complete financial marketplace.

SF has been up 95%, over the last 3 years, soundly beating the market return of 75% (not including dividends). This was also helped by the restructuring that took place. And the story is set to continue. In fact its attractiveness is further enhanced by its relatively lower valuations compared to its peer set. It is quoting at a P/B of ~2 compared to ~10 for Cholamanadalam, another southern biggie, and the segment leader Bajaj Finance which is at a similar P/B of 10. And it is in strong hands. Over 70% of its shareholding is with FII & DII and 25% with the promoters. So, public holds just 5% of the overall equity here. This can therefore be considered as a safe bet with steady compounding over the next few years.

L&T

With an election year starting, Infrastructure is often considered a favoured sector as govt. kicks off multiple public projects involving huge infrastructure. And here, need one look anywhere other than L&T, the infra behemoth in India? It has everything that an end-end infrastructure project requires and has successfully executed several of them. From Oil & Gas, Engineering, EPC, Railways, Defence, Space they have everything that you can name in the Infra space catering to private as well as govt. sectors. Already, Defence & Railways have been very popular themes led by govt. spending and reforms and these are well set to continue in 2024 and beyond with the likelihood of govt. continuity. The latest sector which has started to take off in India is the Metro trains (which though considered a part of Railways has a large part of other infrastructure such as roads also). One can see metro network being set up in tier-2 and tier-3 cities as well as the outlying suburbs of the major metros (Navi Mumbai being a case in point), And L&T has a strong presence here having already done the H’bad metro, part of Mumbai monorail (which unfortunately didn’t take off due to other reasons and not due to anything from L&T) and recently winning the contract for B’luru suburban metro rail network.

Though it has run up somewhat along with the market, there is still ample scope for it to give healthy returns over the next few years if one has faith in the India growth story.

Camlin Fine Sciences (CFS)

CFSL is a specialty chemicals manufacturer and is one of the world's leading producers of antioxidants and vanillin. It offers solutions across different verticals such as shelf-life solutions (which include antioxidants, blends, and additives), performance chemicals, aroma chemicals, and health and wellness solutions. Apart from offering high-quality traditional antioxidants for the food, pet food, and animal nutrition industry, the company has a product basket that can cater to a wide range of industries from food to fragrance to animal nutrition to pharmaceuticals and petrochemicals.

Camlin has manufacturing facilities in India, Italy, Mexico, China and Brazil with R&D centres at India and Italy and application labs in India, Mexico, Brazil, USA and Italy. The company serves customers in more than 80 countries across the globe with more than 100 products.

Dandekar family, the promoters of CFS, hold about 18% of the equity while Convergent Finance LLP, the private equity firm launched by former Fairfax India executive Harsha Raghavan, holds ~23% in CFS. In April ’23, Belgium-based Ackermans & van Haaren (AvH) entered into a cooperation agreement with the current promoters to become co-promoters and acquired a 6.6% stake in CFS thru an open offer @ ₹160/share. Post the open offer, the 2 foreign firms will hold ~30% stake in CFS and together with the Dandekar family, the total promoter holding is ~48%. Both the foreign entities should add significant value in terms of prudent capital allocation and better corporate governance along with a strong & wide global network to strengthen CFIN’s position as a diversified global supplier of specialty chemicals. A strong network might also open the doors for attractive M&A opportunities for CFS.

Now that the open offer euphoria is over, the stock has come to its pre-offer price of ~₹136 and is a good entry point here. Also remember that the new investors have paid ₹160 for this to the promoters as well as in the open offer in the first half of 2023. This year (FY ’24) may not produce any great fireworks but once their vanillin supply starts from Jan ’24 and Europe demand improves, with help from AvH, things should start looking up from FY ’25. This is one for the patient investor as chemical demand is currently muted due but will gradually improve in the coming 2 quarters as stated above.

Dreamfolks Services (DS)

Consumption need not be restricted to FMCG sector only but can also be considered for Services sector. We have seen how the boom in travel sector (revenge tourism) resulted in boom time for travel services companies like Thomas Cook, EasyTrip Planners etc. Extending this logic further, there is a unique listed company in India called Dreamfolks Services. Not many have heard of this company, but it is a dominant player and India's largest airport service aggregator platform facilitating an enhanced airport experience to passengers leveraging a technology driven platform.

DS facilitates customers’ access to services like Lounges, Food & Beverage, Spa, Meet & Assist, Airport Transfer, Transit Hotels /Nap Room Access and other services. Over the years, they have transformed from being an airport lounge access aggregator to an end-to-end technology solutions provider for designing and delivering services that enhance the airport experience. They have crafted their service proposition to provide their clients the option of offering a wide-ranging bouquet of services to their consumers.

Their asset-light business model integrates global card networks operating in India, credit card and debit card issuers and other corporate clients in India, including airline companies with various airport lounge operators and other airport related service providers on a unified technology platform.

Through their partnerships with other service providers, they have a global footprint extending to 1,500+ Touch-points in over 100 countries across the world out of which 268 touch-points are present in India and 1,232 Touch-points overseas. One of the key aspects of their business model is a strong focus on technology.

In early November, DS announced its entry into Malaysia, as a service to partners at three airports: Kuala Lumpur International Airport, Kota Kinabalu International Airport, and Kuching International Airport. And some time back, it announced its collaboration with Grey Wall, one of the largest airport and lounge service aggregators in Russia. DS’ clients and their end consumers can now gain access to Grey Wall's comprehensive ecosystem of lounges and services in Russia’.

Closer home, DS has set its sights on the railway industry as a key area for future growth. They now operate 12 railway lounges across India. These lounges offer a range of services to railway passengers, including comfortable seating, refreshments, Wi-Fi, and more.

Earlier this year, they acquired Vidsur Golf, one of the leading golf privileges providers in the country. Through this acquisition, DS has developed the capability to offer exceptional luxury services and experiences to travellers globally, thereby expanding its ancillary provisions as well as diversifying its portfolio of value-added services

With a unique service offering and the only listed company in this space, DS offers a great way to ride the travel boom not only in India but globally as well. If they play to the script of doing the right things at the right time (they have already made the right moves in terms of adding to their offerings as detailed above), they may well be the Titan of travel industry offering lifestyle travel solutions. At this point, since it is a growth story, valuations may not be that relevant, as long as they ensure good topline and positive bottom-line in the near future.

Praveg

I am sure hardly anyone has heard of this company. Established in 2005, this pioneer and leader in experiential tourism in India offers exhibition, event management, non-permanent luxury accommodation and hospitality services in India. It has recently forayed into wedding management, a particularly niche area with ample scope but no organized players, or at least listed ones. This is a niche play in the travel, tourism, and hospitality sector and hence I consider it as a hidden gem in this space amid the boom in hotel stocks which have become the consensus stories.

Praveg’s events business grew with the ‘Vibrant Gujarat’ campaign, which was first held in 2003. Given its expertise in advertisements and campaigns, it was awarded multiple event management and turnkey exhibition contracts by the government as well as private players over the years. The company secured its first contract from Gujarat Tourism in 2013 to develop a tent city in the Rann of Kutch for the Rann Utsav festival. In 2018, it bagged a tender to develop a similar tent city near the Statue of Unity. Driven by the success of this model, the government floated tenders across states, with Praveg successfully securing contracts in Varanasi, Daman, and Diu in 2023.

In terms of its inventory, the company operates in 10 properties spread across Gujarat, Daman & Diu, and Uttar Pradesh, boasting an inventory of 685 keys. This comprises 446 luxury tents, 163 cottages, and 76 luxury hotel rooms across four, five, and one property, respectively. Looking forward, the company plans to add 52 keys at three properties by the end of FY24. In FY25, another 250 rooms will be added across eight properties, bringing the total inventory to 1,000.

The big event to watch in Jan. ’24 will be the opening of Ram temple in Ayodhya. Ayodhya is expected to see a huge tourism boom. In 2022, Varanasi, a popular pilgrim spot, attracted 7.2 crore visitors which dwarfed the 85 lakh visitors snared by Goa.  Praveg has already built a resort at Ayodhya which will start from 15^th Jan. onwards. This very near to the Ram mandir and almost 75% occupancy has been pre-sold.

Its Balance Sheet is healthy given its minimal capex and asset light model. Against an investment of ~₹ 1 cr./room, Praveg’s luxury tents require just ₹ 15–20 lakhs to set up. Its semi-temporary cottages need an investment of ~₹30 lakhs. Time to market is also extremely short as it has the capability to set up a tent city in just two months. Owing to limited capex, its luxury tents/cottages can break even in the first year itself, at an occupancy level as low as 20%/40%.

All in all, this is one company which is in the right place at the right time. With Modiji exhorting the world to come to India for every major event they want to host and also requesting the Indian moneybags to spend it on destination weddings in India rather than abroad, “acche din” are surely around the corner for Praveg. The only risk is that it has run up quite a bit over the last year or so. Nevertheless, considering what lies ahead, it will surely reach far greater heights over the coming years.

Let’s now pause a bit to see how my last year’s picks did.

 

Stock	Price (31-Dec-22)	Price (31-Dec-23)	Difference	%
IRB Infrastructure	29.09	41.52	12.44	42.75%
Mazgaon Dock Shipbuilders	793.15	2280.30	1487.15	187.50%
Texmaco Rail & Engineering	56.70	171.25	114.55	202.03%
RBL Bank	179.40	279.20	99.80	55.63%
ITC	331.55	462.35	130.80	39.45%
Total	1389.89	3234.62	1844.74	132.73%

 

This time the performance has been rocking compared to last year, primarily because of the focus on promising sectors like Infra (Road construction and related projects), Defence, Railways, beaten down Banks and Consumption, all of which boomed beyond expectations. The performance is especially heartening when compared to the Nifty SmallCap Index (since 4 of the 5 stocks are from small cap space, comparing with this index is only fair) which gave a return of 54.82% over the last year. So this basket has given more than double the returns of the Small cap index.

Some of last year’s stories have played out for the time being, moving up too much too soon, Mazgaon Dock, ITC being the cases in point. All the neglect they suffered in the earlier period has been more than made up last year with multi-bagger returns. It is highly likely that they may pause in 2024 to get their breathe back after such an astounding run at a blistering pace, but the long-term story is still intact. So, one can take a call considering their own situation, risk appetite and this perspective.

There always is sector rotation in the market and no one sector keeps going forever. Same will be the case in 2024 too. Apart from the ones mentioned above, watch out for the much-maligned IT pack, especially the niche ones (for e.g. Cyient, Tata Tech) and the product companies (for e.g. Newgen Software, Intellect Design) etc. Similarly, PSBs will continue to thrive to make up for the lost time over the years. Another sector to watch out for will be Auto ancillaries (I have already highlighted FMG in my Diwali Dhamka) esp. the ones catering to the EV sector. And lastly the beaten down Chemical sector which after a sparking run in 2021-22, cooled down significantly in 2023. A lot of the EV sector requirements are catered to by Chemicals and some of the biggies like Tata Chemicals have invested in setting up capacities here, besides some of the smaller ones.

 Also watch out for corporate developments in ZEE, Delta Corp, FMG and few others, especially the Tata pack where a lot of rationalization is being done.

 Here’s wishing all investors a very profitable 2024.