Themes for 2017

Here’s wishing everyone a very happy 2017 ahead. 

2016 was an interesting year with unprecedented events occurring especially in the later part of the year. First we had the shocking BREXIT vote which voted for Britain to separate from Europe, much against conventional wisdom. Next was another stunner in Trump defeating Clinton, going against most predictions of an easy Clinton win. And not to be left behind, our honourable PM Modi outlawed high denomination 5000 and 1000 notes as a war against corruption, terrorism et al.

These events, occurring in quick succession have left the markets going nowhere in the last 6 months. So the recovery which was in sight in October was wiped out by Modi due to the demonetization effect and the predictions are now for at least 1 or 2 more quarters (3-6 months) for things to return to the normal as it existed in October. Whether that actually happens, only time will tell.

On the positive side, we had the GST Bill moving forward and hopes are still alive that it will see the light of the day sometime this year though not in April as everyone, except the opposition parties, wanted it.

This also means that there were at least 3 opportunities when markets in their usual fashion collapsed in response to global events, irrespective of the fact that these had no impact whatsoever in quite a few of the companies which were knocked out of shape. That has been the speciality of Indian markets for as long as I can remember and there is no sign that such knee-jerk reactions will end anytime soon.

The Sensex continues to hover around the 25K mark, about 20% down from the 30K mark that it touched sometime last year. However, as has been seen in recent years, returns of Sensex have not been a true reflection of the stock market returns as is widely perceived theoretically, text-book style. There were many opportunities and there were stocks which doubled or gave returns in excess of 25-50% in some cases. Quite a few companies gave bonus shares (ITC, Berger Paints, PFC, Bajaj Finance) indicating strong confidence of the management in servicing the growing equity, and some are on their way to announcing it. So as has been said in many fora, India continues to be a stock pickers’ market and there are enough opportunities in individual stories to still earn excellent return if money is put in fundamentally sound stocks with proven managements who have seen teh ups and downs of business cycles and more importantly navigated them successfully.

The key theme this year in 2017 would certainly be Digital India and less cash economy (India is still some years away from cash-less economy whatever pundits may say). So most of my choices this time around are centred around this theme.

Sterlite Technologies (ST)

This makes it to the list this year too going by the developments over the last few months which augur acche din for ST.

What I had written about this stock last year still holds good. But the recent developments that I am talking about are the govt’s massive push towards a Digital India and e-payments (and not an optional one at that) which would necessitate a strong demand for ST’s for a long time to come.

The second development is that a few months back, they have demerged their Power products and Transmission Grid business (manufacturing products such as power conductors and high voltage and extra high voltage cables and providing turnkey solutions for power industries) into a separate company, Sterlite Power Transmission (SPT), and intend to focus completely on telecom business which over last 5 years has grown about 28% annually. SPT is for now an unlisted company.

The third important development is the entry of Reliance Jio in India and ST’s major role in this environment.

In 2015, ST acquitted another company called Elitecore Technologies which is into network management, operations and billing support as well as customer management products. ST expects the acquisition to help it look beyond the infrastructure vertical and build new capacities to fully tap opportunities from projects like Digital India and smart cities in the local market, and to expand to markets where Elitecore has a strong presence. ST now has a full end-to-end offering and would be better placed in creating deeper and longer customer engagements.

ST supplies optical fibre to the country’s top carriers that include Bharti Airtel and Reliance Jio to enable their ambitious fibre-to-the-home (FTTH) network roll outs, in addition to the government-driven initiatives such as the Smart City and BharatNet. It is doing several pilots with telecom service providers. They have also supplied products for Jio, and hope to have a far deeper engagement with the telco in future. Airtel is also spending on fibre as part of Project Leap.

These initiatives as well as govt’s moves have created a strong platform for ST to take off from here. Expect this company to do well over the next few years as there are very few companies in India currently who can match it in its offerings.

Currently trading around 96, this can very well give returns anywhere from 25% upwards annually over the next few years, if all the above things play out as planned.

Bharat Electronics (BE)

With Digital India as the govt’s recent motto, BE is likely to be one of the major beneficiaries as they are one of the leading producers of digital devices such as PoS terminals, swipe card machines etc. As is the govt. norm, most of the orders from PSU banks and govt. entities would flow through to BEL for such devices.

The added kicker is its presence in the Defence sector where too major spending by the govt. would directly benefit BEL as it is the major supplier for such equipment, as the private sector is not fully open for such orders yet.

Currently trading at 1375, this again has a long way to go. It gave a 1:1 bonus issue last year and prior to that it was trading around 3000. So the magnitude of where it can go can very well be appreciated.

NBCC (India)

This is one of the few stocks in the real estate and construction sector which stands out. Being a govt company has its own advantages.

NBCC has been getting orders across the board resulting in a strong order book all up till 2021 which very few real estate and construction companies can claim at the current juncture.

The icing on the cake is the announcement of a bonus issue to be declared on 04-Jan-17.

Engineers India

This is one stock which has given excellent returns over the last 1 year, going against the market trend which has either remained flat or been negative.

But being in the hydrocarbon consultancy sector, EI‘s business largely depends on the oil sector. With OMCs (HPCL BPCL, IOC) giving a bullish outlook on their business and planning capex over the next few quarters due to lower subsidy burden due to market-linked oil prices, EI is assured of good business from them as it enjoys a healthy relationship with all of them. Besides, once the oil prices start stabilizing or even moving up slightly (considering that they had nearly touched the bottom a few months back, have just recovered some lost ground, but are still trading at half their prices a year or so back, this is not an impossible situation), its fortunes would again turn positive.

This is again a bonus candidate.

ICICI Bank

This is one stock which has been classified as a fallen angel due to its lacklustre performance over the last 2 years. Once considered as the no. 2 bank behind HDFC Bank, it has ceded this position to the likes of IndusInd Bank and Kotak Mahindra Bank, thru poor management of NPA  and hence concern over the lack of quality of its credit book/loans.

But it must be remembered that it still has sound management headed by Mrs. Chanda Kochhar who has proven credentials and sooner or later is bound to get her act together. And the other major bonus point with this bank is that it has a lot of sound businesses in its fully-owned subsidiaries – Mutual Fund where it is in the top 3 fund houses in the country and some of its schemes have been consistently topping the charts over the last few years, General/non-life Insurance business, Broking business, Home Finance and a few other minor ones which have ample scope for value-unlocking over the next few years. Due to the turbulence over the last few months, its newly listed life insurance business has also not commanded the kind of premium valuations that it most likely deserves. But with the Max Life-HDFC Life merger coming thru in the near future, this situation is bound to get corrected as it will provide a benchmark for the sector as a whole which was missing all this time.

Currently trading at 255, this surely has a long way to go even to get back to its earlier levels, and provides an excellent opportunity for investors to get in at an opportune time. This can well be called a contra or value buy in the current scenario and the patient ones who can wait it out for a year or two are likely to reap rich rewards at the end of that period.

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

	Price as on 31-Dec-15	Price as on 30-Dec-16	Gain/loss
Axis Bank	449.50	450.00	0.11%
MCX	925.75	1266.55	36.81%
Sterlite Tech	96.65	96.15	-0.52%
Jamna Auto Industries	139.60	168.45	20.67%
Surya Roshni	142.50	174.40	22.39%
Sun TV	426.15	490.00	14.98%
DCB Bank	81.55	107.50	31.82%
Overall	2261.70	2753.05	21.72%

As seen from the above table, except for Axis Bank and Sterlite Tech, most of the stocks have done well giving a healthy overall return of close to 22% YoY.

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I still believe that Axis Bank is going thru a loss of form but needs just 1 knock to regain its old form, as they say in cricket. As to when that will come, the jury is still out. Again, I have faith is Shika Sharma’s management capability and this is a bet on that. She has steered it well over a long period and only over the last 2 years, it has floundered along with its close cousin ICICI Bank. But law of averages will catch up soon and its recovery should start from the overall economy’s turnaround.

I think enough has already been written about Sterlite Tech’s potential and let’s wait for it to unfold. So it figures in this year’s list as well.

All in all, a healthy return of more than 20%, which is way more than the indices and most of the MFs. So after a dismal 2015, here is something to celebrate and I hope that the celebrations continue this year as well. Here’s wishing all investors a very profitable 2017.

Happy investing in 2017!