Wednesday, December 31, 2014

2015 themes

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Here’s wishing everyone a very happy 2015 ahead. 2014 was a blockbuster year in terms of the market returns generated and any and every stock gave returns (good and the bad), making everyone happy. However, it must be remembered that much of this euphoria has been based on what the Modi Sarkar will do in the coming years rather than on any ground realities. This is not to say that the govt. has belied expectations, in fact far from it, they have actually started making positive moves which over a period of time will indeed set things right. However, discounting the future is something that the markets are really fond of doing, and you have the Sensex closing in on 30K mark. So it will be a good strategy now to focus on themes and sectors which will see their prospects improving dramatically due to 2 reasons – govt. moves and the resulting cascade effect these will have.

The key themes to watch out for in 2015 will be:
  1. Crude oil prices – These have come down close to half their value not too long back, and the general view is that this will continue for the better part of the next year. So it will be a good strategy to focus on companies that will benefit from this. While OMCs are the obvious choices for this rebound, I personally don’t favor companies whose reins are in the hands of the govt. of the day. There is no framework that a govt. follows, however well-meaning it  might be, and quite a few times, it has to look at populist measures which most often are not rational. While the govt. has done a good thing by utilizing this event to free diesel pricing, there is no saying when this decision can be reversed based on global factors. So if u have to ride the OMCs do so, with proper monitoring. You should be able to jump off with your profits when things start getting shaky. A better option would be to focus on paint companies who are the direct beneficiaries of this event. My picks here would be Berger Paints and Kansai Nerolac. Both will give good returns over the next few years. I am not picking Asian Paints, purely from a returns perspective, its pedigree has never been in doubt. When u are the top, the only way u can go is down, is my favorite maxim :)
  2.  Power sector – This is another one sector where govt. has really put its thinking cap on. While the govt. does not have a magic wand to remove all the ills of the sector which have been accumulated over the years, the benefits of these moves are likely to follow sooner than later. In this area, NTPC, the largest and the most efficient power producer should be a direct beneficiary.  Distribution woes and functioning of SEBS, once corrected, would do wonders for this company. Last year, I had mentioned that PTC twins (PTC India and PTC FS) would be huge beneficiaries of the power sector reforms. And how they have zoomed (PTC nearly 40% from about 65 to 95 currently and PTC FS nearly 5 times making it a clean multi-bagger. However, I believe that with the reforms coming thru, these stocks should soar further from current levels, albeit with intermediate ups and downs. But for a long-term investor, which is what this article is meant for, this should not matter at all. Check after 3 years and see where these are.
  3. GST Bill – This has been in the works for quite some time now and only now looks to be getting thru. Chidamabaram’s half-hearted attempts at getting it passed notwithstanding, and Jaitley’s the exact opposite, the direct beneficiaries would be the sectors with a high percentage of the market occupied by unorganized participants, as the latter are forced into the tax net and the competitive positioning of organized companies improves. So look for FMCG companies like Pidilite and the paint companies where unorganized segment plays a significant role. Also watch out for logistics companies Allcargo Logistics and Gateway Distriparks as uniform taxation would result in higher distribution of goods across the country and development of hub and spoke model. And the government is unlikely to face stiff resistance from Congress party for the passage of the GST Bill.
  4. Banking, Finance & Insurance – With the Modi govt. determined to pass the Insurance bill where the foreign partner will be allowed to hold 49% will be a major booster for the industry. Already Standard Life has announced plans to increase stake in HDFC SL by buying stake from HDFC. More are likely to follow. Here the insurance companies where banks are major partners should benefit greatly. So HDFC and ICICI Bank should do well.
  5. Auto sector – If the economy improves, can the auto sector be far behind? My pick here would be Ashok Leyland whose bad days appear to be behind it. Also Tata Motors DVR should be a good bet, purely from a differential valuation perspective, the discount is too large currently; once Tata Motors starts moving, this should follow at a higher speed to narrow the gap.

Having listed the sectors and the scrips within them where money can be made, here are some other specific companies I expect to do well:

Zicom Security Systems
This is the largest e-security provider growing @55% for the last few years. Though this has revenues of about 1200 cr. and profit of 70-80 cr., its market-cap is only 360 cr. At the current price of about
Zicom also caters to individual needs. Now, it has also diversified into mobile solutions for women, children and senior citizens in collaboration with Samsung exclusively on their phones, under the name Ziman. The solution has been designed to help the target audience to quickly reach out for assistance in emergency and distress situations. This seems to be a really great idea in today’s environment and should be a big hit among urban audience. In recent times, it has changed its business mode l from being a product company to a services company where the margins are much better. This has already resulted in an improvement in its bottom-line. Its subsidiaries in UAE and Qatar are also doing very well. Analysts expect an EPS of 35 for the next year. And at that valuation it is still a very attractive buy.
The main promise I see here is based on the Modi sarkar’s focus on smart cities. Zicom is likely to be one of the biggest beneficiaries of these projects. A smart city would definitely need smart security solutions, and on all counts, Zicom fits the bill (check with any of your IT colleagues who provides office-wide security, and chances of Zicom being that company are very high). And the other thing which goes in favor of Zicom is the govt’s recent ‘Make in India’ mantra. So my reasoning is that the first choice in most such cases would be Zicom.
I have always liked companies with a niche focus and this has also reaped dividends – Four Soft, MCX, Acrysil, Astra Micro to name a few, all focused on niche businesses. This is another addition to that list. Unless something goes drastically wrong, this should provide secured returns going forward.

Kalyani Steels
This scrip has been attracting the attention of a lot of analysts lately and with good reason too. From the Baba Kalyani stable (of Bharat Forge fame) wherein they hold about 60%, management pedigree is a foregone conclusion.
It manufactures special carbon alloy steel used in engineering and auto industry, with a fully integrated facility. And it does this in a very cost efficient way too! With iron ore and coke prices at 5-year lows, its basic input costs are coming down. Even in the first half of the current year, which is usually a lean period, it did well with bottom line rising 73%. Second half should be much better with margin expansion due to low raw material cost as mentioned above. It has come down from its highs of around 180 to about 160 now and provides a good entry point.

Capital First
This was a Kishore Biyani company till 2012 when Warburg Pincus (WP), the marquee PE investor, boarded it in June ’12. Pantaloon Retail, the KB flagship, which was struggling under a huge debt burden, sold its 54% stake to WP @162/share for nearly 800 crores, when the company was quoting @137. Then WP increased its stake further to 70% (thru convertible shares etc.) where it stands currently. So WP thought it fit to pay an 18% premium for this firm more than 2 years back, and with the promise of investing more since it now owned the company and could run it in its own way. And the first smart things WP did was to rope in V. Vaidyanathan, then ICICI Bank ED to lead the firm. And look what this pedigreed duo has done. From then on, the price has more than doubled to about 366 at today’s closing in about 2 and half years. This was the largest deal of its kind involving an NBFC. Late in 2012, the company renamed itself to Capital First from Future Capital.
Capital first has a comprehensive product suite to meet multiple financial needs of customers including Consumer and Corporate Lending. It is an NBFC offering personal loan, loan for consumer durables, gold loan, two wheeler loan, and loan against property and distributing various insurance products. CF is present in 40 cities through its 164 branches.
CF’s CAR is a healthy 24%. Due to management’s prudent decision to concentrate on retail lending, its gross NPA is just 0.45 % and net NPA is only 0.08 %, respectable figures by any standard.
In addition to this, recently HDFC Standard Life Insurance Company Ltd infused Rs.50 Cr by taking a 4% stake in this company. This surely is a huge vote of confidence.

With the economy on the mend, interest rates expected to come down next year and a top quality management team, this should go places in the years to come.

Hindustan Zinc
This is a Vedanta group company and the only integrated zinc player in the country. It enjoys a high profit margin among metal players. Last year, its profit was 7000 cr. on a topline of 13000 cr. Unlike the reputation of its promoter, this is an investor friendly, dividend paying company. Zinc market globally is expected to remain tight, so prices of Zinc will be good. HZ is a cash-rich company with cash of 65/share (one of the reasons why Vedanta wants to gain full control and utilize this cash to retire their huge debt). As can be seen from recent announcements, Modi sarkar is keen to divest its minority stake at a premium to the market price of 170.  So a reasonable upside (around 20%) from current levels is a reasonable possibility.

Larsen& Toubro (L&T)
This was my pick last year too and it has indeed justified the faith I had reposed in it. From about 1100 this time last year to nearly 1500 at today’s closing, it has indeed returned close to 40%. However, with the economy on the cusp of improvement, it should continue its rewarding ways. As I had said last year also, this continues to be an Indian economy bellwether with its engineering output directly dependent on the state of the Indian economy. And not to forget that it enjoyed levels of 4000 a few years back (before it announced 1:1 bonus). Keep the faith and add more.

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

Price as on

Diff. %
Elantas Beck
ING Vyasa Bank
Amtek Auto
Amtek India
Sona Koyo
PTC India
Coal India

As seen from the above table, auto ancillaries and power companies turned out to be multi-baggers last year. And this trend should continue this year as well, though the returns may not be as huge as last year’s. However, the long term prospects of these companies and the sectors themselves are still bright, the results of which will surely be visible in the coming years, not necessarily next year.

So here’s wishing all investors a very profitable 2015.