Sunday, December 31, 2017

Themes for 2018

submit to reddit
Here’s wishing everyone a very happy 2018 ahead. 

Calendar 2017 proved to be a spectacular one for the domestic equity market, with the benchmark equity indices touching their all-time highs on the last trading and gaining nearly 28% on the back of high liquidity in global as well as domestic markets (investors putting in as much as 5000-6000 crore every month thru SIPs in equity MF) and expansion in PE multiples even as corporate growth faltered due to events like demonetization and GST implementation. The real effect of these measures will be felt in the next 2-3 years. The other factor which has driven investors to equity, and hence the inflows which has led to a buoyant market, are the abysmal rates offered by debt instruments, especially from banks and small savings schemes from the govt. Private players haven’t fared much better on this front either. Given this scenario, 2018 should continue to do well. However, it will be really sensible to temper one’s expectations given the already high levels the indices as well as a large number of good quality stocks are trading at. It will really be a surprise if 2017 performance is repeated in 2018 as far as indices are concerned.

As has been the trend in the past few years, Indian markets are no longer immune to the global events and any news on such events, like the N. Korea crisis, are bound to bring volatility home. This also provides an opportunity to stock up on the fundamentally strong stocks which have lost irrationally without any change related to their business. The good thing going into the new year is that the  twin demons of demonetization and GST are behind us and things have more or less returned to normal, press reports of traders/SME suffering notwithstanding. These are probably the guys who have never paid a single paisa as tax in their life and hence are inconvenienced now, since they can’t escape the tax net any longer. This must be viewed as a good change which is here to stay. For long, these people had it too good and as always, all good things come to an end.

The Sensex has convincingly scaled the 30K peak and is more than 28% higher than the same time last year when it was hovering around 26K mark. But there are plenty of stocks which have given returns many times that of Sensex, especially the small and midcaps, which is where u are likely to find multi-baggers (though elephants can dance, it doesn’t come as easily to them as monkeys who are much lighter J).

Last year’s trend of companies giving bonus issues continued and the good thing is that most of these are sound companies and can be expected to show continued growth over the next few years. Some of the pedigreed names who gave bonus shares are Mahindra Holidays. Petronet LNG and the elephants, Reliance, L&T and M&M. In fact Reliance has gone from strength to strength and with Jio being a resounding financial success, is poised to continue its good run after going to sleep for a few years. For L&T, this is the 4th bonus in the last 11 years. And we are at the cusp of economic recovery which may start in a couple of quarters. Need I say more?

The key theme in 2018 would certainly be Infrastructure, govt’s move towards affordable Housing, and post-GST movement from unorganized to organized sector. Infra itself is a vast subject and covers everything from Cement to Finance! So most sectors would benefit from the govt’s thrust in this direction. So most of my choices this time around are centred on this theme.

Formerly Hindustan Sanitaryware & Industries Ltd, this was re-christened as HSIL in March ‘09. With govt’s declaration of Housing for all, HSIL is likely to be a big beneficiary. Every house requires sanitary-ware in some form or the other and HSIL is well poised to cater to this demand. This is one stock which hadn’t participated in the rally in ceramic and sanitary-ware stocks like CERA, Kajaria Ceramics etc. which went on to become multi-baggers in the last couple of years. Now this will make up for the lost time. Already it has risen 50% in the last year and a half and looks set for more

The other big trigger for HSIL is about the proposed demerger of its consumer and building products undertakings into separate legal entities. The board of HSIL approved this about a month back. The Consumer Products Distribution and Marketing undertaking of the company shall be demerged into ‘Somany Home Innovation Limited, which is a wholly owned subsidiary of the company. The Building Products Distribution and Marketing undertaking of the company shall be demerged into ‘Brilloca Limited’, which is a wholly owned subsidiary of ‘Somany Home Innovation Limited’. As per the proposed scheme, ‘Somany Home Innovation Limited’ will, on behalf of itself and its wholly-owned subsidiary, ‘Brilloca Limited’, issue and allot equity shares, to the shareholders of the company in the ratio of one equity share of Rs 2 of ‘Somany Home Innovation Limited’ for every one equity share of Rs 2 of the company. HSIL will retain the manufacturing of all the building and consumer products in addition to manufacturing and sales of packaging products. The companies will have a mirror shareholding of 1:1 ratio for HSIL and SHIL.
Typically, consumer products businesses are traded at a higher PE than manufacturing businesses. You just have to look at the recent mega listing of Shankara Building Products which made the issue at 460 in April ’17, listed at more than 630 and is now quoting at around 1800, all in 6 months. This was mainly because it had a unique business which few listed companies today have. The same may well be the case with HSIL post the demerger.
HSIL is the market leader in the sanitaryware segment with 32% market share and is the second largest container glass player in India after HNG. HSIL always traded at a discount to its peers despite its strong brand franchise, but now the situation will change.
With its strong brand, variety of product portfolio, and very strong distribution network across the country, and the proposed demerger, good times are certainly ahead for HSIL and consequently its shareholders.

Century Plyboards India
Another stock which is poised for growth due to the housing theme is Century Plyboards India (CPI). It is a plywood manufacturer dealing in plywood, laminates, MDF (Medium Density Fibreboard) and others with presence across India and overseas. CPI is also engaged in logistics business through management of a container freight station. The Company's units are spread across India in Joka (West Bengal), Guwahati (Assam), Kandla (Gujarat), Chennai (Tamil Nadu) and Karnal (Haryana).

Housing for all and shift in trend towards organized plywood sector post GST are the key triggers to propel growth in CPI. Expecting this, CPIL has recently added capacity across segments - new MDF plant, laminates and particle boards. The company plans to manufacture value-added products such as laminated MDFs, flooring and doors, among others from this. This would boost company’s revenue and profitability going ahead.

Pradhan Mantri Awas Yojana (PMAY) is a key trigger for Plywood & MDF segment. This objective would increase demand for plywood industry (for making doors & furniture). Also, CPIL has been continuously focusing on strong brand visibility, by spending 3-4% (% of sales) on ad spends to increase brand visibility. CPI’s products are available across the country through 31 marketing offices covering over 630 cities and towns addressing 1,800 dealers and ~16,500 retailers.

The way tile and sanitary-ware makers have boomed in the last few years (Cera, Kajaria, Somany etc.) it is now the turn of the interior makers to shine and Century is poised to benefit from the favourable environment. Currently trading around 340, this should easily cross 400 in the days to come.

MIRC Electronics
With new houses being built, can the demand for consumer durables be far behind?
It is a fact that Korean MNC – LG and Samsung control most of the market, be it in TV, refrigerators, washing machines or air conditioners. They have also recently diversified into small appliance categories such as water and air purifiers.
However, one Indian brand which has re-invented itself amidst this competition is Onida which is controlled by Mirchandani-owned MIRC Electronics. After the success it enjoyed with TVs before the Korean onslaught, with its devil ads, it suddenly slipped into hibernation with no new products like microwaves which have made a splash not only in urban areas but also in rural areas.
MIRC Electronics can be a “compelling story brewing” owing to the perseverance of the management in trying to make a name for the Company in the hyper-competitive electronics market. The latest Sept. Quarter results bear a testimony to this. The company has returned into green from loss in the same period last year. However, one needs to be cautious with this company as it has often flattered to deceive. But this time management appears to be serious about maintaining its good run. They are keen on taking the place vacated by Videocon as a dominant Indian brand. And there is no other Indian brand in sight as of now (the products being sold by retail stores under their own brands are not in the same league anyway). In the current year, they have already clocked sales of more than 500 crore and as per management conviction, they are talking about a sales of Rs 5,000 crore odd plus by 2020 which is a approximately 5-6 times from current level.
Recently, its board has approved raising of equity investment of Rs 144.12 crore from marquee investors to meet its long-term working capital and corporate requirements. The company would issue warrants convertible into equity shares on preferential basis at issue price of Rs 37.53. The current share price is already 30% more than the conversion price 18 months down the line Promoters hold a healthy 58% in the company.
 Introduction of GST which has strengthened the move towards organized branded players will also benefit the company in the months to come. Vijay Mansukhani, the MD of MIRC Electronics, has also hinted that there could be a strategic sale to the Chinese and Korean behemoths which are looking for a toehold into India.
It needs to be noted that the stock has almost trebled from sub-20 levels to close to 60 now. If all goes as planned, then the upward trajectory of this stock should continue. This surely is one for the patient investors.

Dredging Corporation of India
This is a mini-ratna PSU where the govt. is planning to get out lock, stock and barrel. It will sell off its entire 73.47% stake to the highest bidder in the soon-to-happen divestment through an auction. Once this happens, a strong private player will come in which will do wonders for this company.

It is one of the niche companies operating in a business area with high entry barriers and is the biggest dredging contractor in the country. It is involved in maintenance dredging, capital dredging, beach nourishment, land reclamation, shallow water dredging, project management consultancy and marine construction. Dredging is not a simple activity and globally Dutch and Belgian contractors are leaders in this area. Some of these are Van Oord, Jan De Nul, Royal Boskalis and Dredging International.

Though DCI comes with its own set of inefficiencies, the number of equipment DCI has would require a few thousands of crores for someone to buy new ones. Plus, the waiting period to get those equipment is at least 18 months. With the acquisition of DCI, the equipment is readily available. In dredging, the equipment is the cash earner. That becomes the selling point for DCI.

For many years, DCI survived on assured business given by the Central government-owned port trusts on nomination basis (without tenders). This system was scrapped in the last decade. DCI now has to compete with other firms, both Indian and foreign, to win contracts at State-owned port trusts and elsewhere. In fact, more than half of DCI’s annual revenues came from the maintenance dredging contract at Kolkata Port Trust and a big portion of the other half from Cochin Port Trust.

Dredging Corporation is now facing stiff competition from local rivals such as Adani Group, Mercator, Dharti Dredging and other global firms for securing jobs. Intense competition has resulted in dredging contractors quoting way below estimates to clinch contracts, hurting their margins.

From nearly 230 5 years ago to around 853 currently, this share has given a CAGR of  nearly 30% till date. Post the move into strong private hands, and with high entry barriers into a niche business, this is one company one should get into now and wait for the returns to come in.

Kridhan Infra
This is a little known micro-cap with a market capitalisation of about 900 crore. which is well poised to take advantage of the great infra boom that will happen in India over the next few years. The unique aspect of Kridhan Infra is that it is a specialist in foundation work and tunnelling and holds a couple of patents in the field. In fact, such is the level of specialization of Kridhan Infra in tunnelling and piling work that it has licensed the technology to HCC, L&T and Metro Rail contractors.

Kridhan Infra through its Singapore subsidiary KH Foges Pte has acquired a majority stake of 56% in Swee Hong Ltd., a Singapore leading public listed EPC company. Swee Hong’s order book as on 31st March 2017 is $80.9mn. Its revenues grew by ~76% YoY which shows financial turnaround and this would significantly drive new order inflows in the next couple of quarters. Kridhan would see an upsurge in order book due to higher inflows from overseas and better bidding capacity for EPC contracts due to this acquisition.

Multibase India
Multibase India is a specialty and technical chemicals manufacturing company. It is engaged in the manufacture and distribution of is engaged in manufacturing and selling of polypropylene compounds, thermoplastic elastomers, silicon master batches and thermoplastic master batches. The Company produces a range of both commodity and specialty products which are used in a wide range of applications in markets such as automotive, personal care, personal hygiene, stationery, telecommunications and engineering polymers. Thus this is pure play industrial products company.
Dow Corning Corporation, a global player in silicon based technology and the global leader in Silicon based specialty chemicals holds 75% stake in MIL through its subsidiary Multibase SA. Last year, the parent Multibase SA tried to buy it out unsuccessfully. Then, its price was around 300. In the last 18 months, the share price has more than doubled.
The company now appears to be on a growth path as evidenced by its growing EPS over the last few years. In FY 16, it recorded an EPS of Rs. 8, in FY it was 10.55, and now in the first 6 months of FY 18, it is nearly 8. Thus for the full year, it can be approx. 16. Thus the EPS growth is close to 50% consistently in the last 3 years. On top of this, the company has nearly 33 cr. of cash on its books. At the current price of around 730, it is quoting at a PE of about 45, including the cash on its books.
The company’s thrust area is automotive segment where company is concentrating mainly in safety products – specifically in Air bags. Currently, more than 75% people in India use passenger cars/ vehicle without air bag and the use of air bags are predominantly attached to high end vehicles. However, this year, the govt. has made it mandatory for all cars rolled out after Oct ’17 to have air bags. This is a niche area and one which while hugely benefit Multibase with assured business.
Given all these factors, and industrial recovery on the cards in the next few years, this share can surely give huge returns going forward if it continues its growth trajectory. This is not impossible given that it has strong support from its parent which is a global Chemical giant.

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

Price as on 31-Dec-16
Price as on 29-Dec-17
Sterlite Tech
Bharat Electronics
Engineers (I)

This time the performance has been really great with more than 60% returns YoY, compared to 22% last year, of course with a different basket of stocks. As seen from the above table, all the picks have done exceedingly well with no exceptions. In fact, Sterlite Tech (ST) which had not performed the year before, more than made up for it by giving stupendous returns. As I had said last year, enough has already been written about Sterlite Tech’s potential and let’s wait for it to unfold. And unfolded it has and how. But its run has not ended yet. With the likes of Jio trying to spread connectivity throughout the country, and govt’s obvious encouragement to connect remote villages as a part of Digital India, there is still steam left in ST. As I had mentioned then, this is a multi-year growth story and has just about reached the halfway mark, if that.  The fibre optic industry in India is an oligopoly which is dominated by 2 players – ST and Aksh Optifibre (AF). And AF also has not been left behind in this race. It too has returned about 50% in the last 1 year.

As I had written during Diwali, 1 year is too short a time period to judge any equity portfolio, small or large. It is only over a period of 3-5 years, or even more, that the true worth of the basket of stocks is proved. Just to prove how long term investing pays, just look at the performance of the picks I had written about in ‘Themes for 2017'), in the table below.

Price as on 31-Dec-15
Price as on 29-Dec-17
Axis Bank
Sterlite Tech
Jamna Auto
Surya Roshni
Sun TV

The same portfolio last year had returned 22% from a year-ago period with Axis Bank and Sterlite Tech as the laggards. Though ST has more than made up for it, Axis Bank has been much more sedate. I still think it is a good long term bet and should be retained in the portfolio. Like ST, it may take another year to have a great knock from which there will be no looking back.

All in all, the year has indeed ended on a great note. However, as I firmly believe, India is a stock picker’s market and the astute ones will continue to generate returns way above the indices. I hope the trend will continue in the time to come.

Here’s wishing all investors a very profitable 2018.