Diwali Dhamaka 2015

Here’s wishing everyone a great Diwali and a prosperous new year ahead. With the Sensex doing a yo-yo with new highs as well as precipitous falls at various times in the year, it is a stock pickers market.

Now that Modi sarkar’s honeymoon period is over, and they have realized that things are easier said than done (with 2 drubbings in assembly elections, including the latest one in Bihar over the week-end), it is time to see where things are headed after the Modi sarkar euphoria which started around middle of last year, has nearly died down and the harsh reality has dawned on the people who were in that mood. To be fair, they have kick-started a lot of things which, if allowed to run their full course, should provide rich dividends. And this is the exact opposite of what was happening over the last few years. So it is not all gloom and doom yet, and acche din should eventually come, though not overnight.

As I have been mentioning over the last 2 Diwali blogs, it never pays to get carried away in the stock market, especially in India. Expectations are one thing and them becoming reality is another thing altogether as Mr. Modi has found out in the 18 months that he has been in power. And how true it has proved to be!

The one thing that I see at the current juncture is the high potential of large caps which are trading at very attractive valuations currently, a thing which doesn’t happen often. Large caps are supposed to be the elephants which will give u 10-15% annualized returns over a long time frame, often exceeding 10 years, if held on for the entire duration, which very few people actually due.

So given that this is a buyer’s market now, where should u place your bets? The focus as always remains on management quality, business domain and growth prospects. Add to it the valuation parameter now and you have a few stocks poised attractively, some of them due to a steep fall because of recent events not directly under their control, to multiply in the years ahead. The theme this time is on quality stocks impacted by near-term or one-off events leading to a distinct dislike for them by the market. As I have said many times before, this is the best time when you can buy these stocks like in a sale. And sales don’t happen every now and then.

Also, the government’s recent decisions will have a bearing on the performance of the stocks in the impacted sectors. Obviously, BFS and Infra sectors would be major parts of this universe.

Federal Bank

This, surprisingly, is a private sector bank which has been a victim of just its last quarter performance. The quality of its management is not in doubt here. They had no role to play in the increase in NPA, save for the fact that they probably should have seen this coming and acted to prevent, or at least minimize, it.

The overall loan slippage of Federal Bank in 2QFY16 was higher at 3.2% against 2.5% in the previous quarter. Five accounts in the large corporate segment slipped, totally amounting to Rs 170 crore. Three of the five accounts amounting to Rs 100 crore were already restructured earlier. Slippage in the SME segment was also higher at 4.6% per cent as against the earlier run-rate of 3%. Higher provision hit bottom line, with net profit falling 33% year-on-year in the September quarter. And market doesn’t take kindly to such events.

However, I would think of this as a one-off event. Surely FB management would have woken up after the hammering the stock got, and would work overtime to prevent a recurrence of such an event.

Federal Bank’s performance over past few quarters was marred by tepid revenue momentum and volatile asset quality. However, with the bank incrementally focusing on building revenue momentum (ammunition in place with Tier‐1 at 14% and strong liability franchise) along with a lower watch list suggests that a large part of the pain is over.

So this provides a good opportunity to get in at an attractive price at the current juncture. As soon as the next quarter or the one after that, shows a positive tilt, it should bounce back smartly. It should be remembered that FB is one of the, if not the, most sought after banks by Kerala NRIs and has one of the largest NRI accounts of Keralites working in the Gulf region. So it has a lot of forex to play around with. And with the Indian Rupee constantly depreciating against most global strong currencies, they should be able to utilize this cash chest smartly.

The other thing that I see going in its favor is its investor friendliness. It had announced a 1:1 bonus in May and is thus quoting at half the price it used to command a few months back. In 2004, it had given a 2:1 bonus (two bonus shares for every one held).

Over 93,000 small investors hold 8.45% stake in Federal Bank, while 1,457 high net worth individuals own 11.33%. Once consolidation starts, FB should be one of the targets for a larger bank, given its pedigree and client profile.

If you cannot buy Federal Bank at this price of around 55, you probably may not get it at this price again. So that is again, a call of faith, a leap of faith that you will have to take. The recent pain on asset quality notwithstanding, valuations are again extremely in favour.

ICICI Bank

Another name which was respected not so long ago has had a rough run over the last year or so. And the main reason appears to be the asset quality issue. Add to it the overhang of its loans to the troubled JP group, and the picture of adversity is complete.

How Ms. Kochar navigates thru this would be interesting to watch. Of course, the seasoned veteran that she is, I don’t doubt that she is quite up to the task, and probably more. So it should only be a matter of time before ICICI Bank regains its stature as a competitor to HDFC bank, which very few can claim today.

Currently quoting at around 265 it surely has a long way to go, considering that its 52-week high was around 400; clearly an upside of at least 50% from here, if not more.

Eros International

The story of Eros is again similar to that of Federal Bank.

Shares of Eros International tanked 20% intraday on 19^th Oct. after its holding company was knocked off 45% last week on Wall Street. The fall came after Wells Fargo, in a report on Friday, said Eros had seen a "sudden spike" in hard-to-understand revenue booked from the United Arab Emirates, calling that a "red flag" for some investors and adding it was not fully comfortable with so much revenue coming from outside India.

Wells Fargo also said it was uncertain about Eros' user count for its ErosNow movie, TV and music streaming application, saying that numbers did not square with public web sites that track app downloads.

Eros, in its India statement, did not directly address Wells Fargo's concerns, but sought to reassure investors. So brokerages were not satisfied with Eros International's answers at the investors' call on 23^rd Oct. Eros' kitty consists of blockbusters like Salman Khan's Bajrangi Bhaijaan and Tanu Weds Manu 2. "Bajrangi Bhaijaan" earned more than $48.50 million in the initial days.

So again probably this is an issue of perception. Eros is a well-respected name in the Indian film industry and even if their UAE business is ignored, it still has a strong India-business to bank on. That is not going anywhere.

Eros shares were trading close to 440 not more than a month ago and have now come down to 275 levels, making them an attractive buy with a very favorable risk reward ratio. A couple of hits more and Eros will be back to where it was before it got into this mess, with a potential upside of close to 40%.

MothersonSumi Systems (MSS)

This is another example of a good company going thru bad times. We have seen this happen earlier in case of MCX and Wockhardt. And how these have turned multi-baggers since the lows they touched among the gloom-and-doom environment that engulfed them.

All MSS needs is a little bit of time because finally what is going to happen is its capabilities to start supplying to different OEMs, especially the Japanese, should start delivering.Post the VW fiasco, the obvious option for the Americans to turn to would be the Japanese cars. Anyway, Toyota and Honda are well entrenched in the US market. With this latest turn of events, they should do well above expectations.

In a way, this should be wake-up call for the company to reduce its reliance on a single customer group (21% of MSS' FY15 sales came from Audi and 40% from Volkswagen group) and diversify its client base.Let us not forget that MSS is not even remotely involved with the engine-related components where the problem is. It is just that it has suffered a collateral damage as the demand for these cars itself has gone down and with it its supplies, it is exactly the same situation that happened with MCX (the promoters and not the company itself ran into trouble) as well as Wockhardt (forex bet gone wrong). The company certainly has got the required capabilities;it should only be a matter of time before things turn for the better for MSS. They have invested in hardcore assets in terms of manufacturing capacities and strength. So that is going to augur well for them.

It has already corrected by about 25% from its price before the scandal and should not only be able to recoup its losses but also gain from that point once the current hullabaloo subsides. The other good thing that has happened due to this event is that its valuations have come down significantly. Though still not cheap by any yardstick, they certainly are not exuberant now. MSS being a pedigreed growth stock would continue to command premium valuations and should deliver in line with them.

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

·      L&T – This is a proxy for the Indian economy and has the major advantage of being in defensive sectors such as IT as well. Add to it its defense sector forays, and you have all the makings of a block-buster in the years ahead. Another positive thing would be the forthcoming IPO of its IT services arm, L&T Infotech which would further unlock value. Over the last few years, IT has become more of a defensive sector than the growth sector it used to be a decade or so back. Coupled with the rupee depreciation, IT sector is in a favorable spot right now. And the icing on the cake is the govt.’s focus on Digital India where IT companies can hope to get a substantial part of the pie in collaboration with global product majors whose products they will convert into solutions and implement.

·         Ashok Leyland – This is again a play on the economy in the auto space. The company saw a sharp growth in its net revenues in Q1FY16 due to a strong recovery in volumes. Its realization also improved on the back of favorable product mix. Expected recovery in the mining sector due to the recent coal allocation is expected to boost demand for new fleet of trucks which will prove positive for the company. Lower commodity prices leave further room for margin expansion. The company has also reduced its dependence on South India and has been focused on improving its geographical presence. Bonus will be its capability to expand in the defense sector where it is already present thru its 26%-owned subsidiary Ashok Leyland Defense Systems (rest being held by the parent Hinduja group). This offers end-to-end solutions around its Stallion vehicle platform to meet the logistical requirements of armed forces around the world. The defense vehicle solutions based on the various vehicle platforms include modular packages for driver training, vehicle maintenance, electronic publications and a fleet management system as a standard feature

Before concluding, let’s quickly look at the performance of last year’s recommendations:

Stock	Last Diwali	Current	Difference	%
MCX	806	838	32	4%
Snowman	101.5	83	-18.5	-18%
Sintex	89.5	100	10.5	12%
Mahindra Holidays	290	358	68	23%
SKS Micro	321	452	131	41%
Total	1608	1831	223	13.87%

All prices in Rs.

So since last Diwali, this portfolio has given a return of 13.87%. Given the circumstances, it is not a bad return, but could certainly have been better. However, I believe that the above set of stocks certainly has the potential to perform well going forward and should certainly be retained and even averaged by adding more at the current levels which have arisen because of recent events rather than any change in the fundamentals of the above stocks.

The current set of stocks will hopefully return a far better figure next year.

HAPPY MUHURAT TRADING