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.

Star cuppa

Formerly Tata Tea, this company has transformed itself into a global non-alcoholic beverages company with local and international brands in its kitty, the latest entrant being the global coffee chain Starbucks. It is the world's second-largest manufacturer and distributor of tea and a major producer of coffee. This company however spans almost the entire range of beverages:

• Tea (Specialty – green & herbal, in addition to the Tetley brand sold globally and local brands Tata Tea, Tetley, Kanan Devan,Chakra Gold,& Gemini in the branded boxed packed tea market). KANAN Devan, Chakra Gold and Gemini are regional brands with market leadership. ‘Tata Tea’ is the market leader in the retail tea market with above 20% volume market share.
• Coffee (thru the listed plantation and instant coffee subsidiary Tata Coffee -  Eight o’Clock and other brands under its fold)
• Water (thru a listed company Mount Everest Mineral Water with its Himalayan brand).

The company has thrived on brand acquisitions which have complemented its portfolio

• The company acquired Mount Everest in June 2007 to gain foothold in the niche naturally sourced packaged water. Himalaya has since grown its brand and per unit price in a bid to become the nation’s largest spring sourced packaged premium drinking water. The brand is now present in both India and Singapore. The company is focusing on export opportunities for the Himalayan brand. With Starbucks Himalaya has also got a new source to increase distribution.
• TGB has an equal Stake JV with Pepsi Co. in India, Nurischo, which will enable it to leverage on Pepsi’s distribution network.
•  Joekels in South Africa (third largest player)
•  Good Earth in US (21% volume share)
• Jemca, the market leader in Czech Republic
•  Vitax in Poland (16% share of fruit tea market)

The company recently increased stake in its US based JV Rising Beverages’ in the Water business to ~47%.

On a consolidated basis, TGBL derives 70% of its revenue from tea and balance from coffee segment. Tetley, its largest brand contributes 38% to the topline, main geographies being UK and Canada. Eight O'Clock is a gourmet whole bean coffee brand in USA. It contributes 17% to the topline.

TGB has a balanced market share globally:

•  India (22 percent value share of Tata Tea),
• Canada (Tetley)
• UK (27% value share of Tetley),

Not too long back, TGB ventured into the Indian cafe market with a 50:50 JV with Starbucks Coffee Company. The coffee shops branded as "Starbucks Coffee – A Tata Alliance" will source coffee beans from Tata Coffee, a subsidiary company of TGB.

Starbucks, which has just completed 1 year in India, is still in a start-up stage with only 25 cafes in the major metros – Mumbai, Pune and NCR. But from what has been reported, it has got a rousing reception wherever it has opened. Once this chain attains critical mass over the next few years, returns should start flowing in. This will benefit TGB in 2 ways – directly thru its stake in the company and from improvement in Tata Coffee’s financials on the back of this growth since Starbucks will be sourcing coffee directly from them.

And recently TGB announced the merger of its 50% subsidiary Mount Everest Mineral Water (owner of Himalayan brand) with itself. This will now give it full control over the Water portfolio as well. It remains to be seen if Tata Coffee goes the same way.

TGB stock has been moving up on investment buying based on the fact that international tea prices have been softening and demand for tea continues to grow as well as robust coffee business. From about 168 around Diwali, it has come down about 14% to 145 now in line with the general market sentiment. Considering its pedigree and the star brands it owns in a growing consumer space and with not too many listed players of the same ilk, as well as not too many focused players in this space (Georgia, Kinley from Coke and Aquafina from Pepsico are fringe players in the market and will continue to be so since they do not form the core focus areas of their respective parents) it is not expensive @ ttm PE of 24. It must be remembered that this is a branded consumption space with high growth rates; hence though in absolute terms, it may not be cheap compared to the market, it certainly is when compared with FMCG space focused on consumption though not in the same area. And the bonus is that this is a nascent space yet and TGB has a huge head-start over others planning similar forays. So things can only improve from here.

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 !