Diwali Dhamaka 2018

Here’s wishing everyone a great Diwali and a prosperous new year ahead. After rising to new highs 2 months back, the market came crashing own in a heap in the last 2 months. Midcaps and small caps have borne the brunt of this fall with falls anywhere from 20% to more than 50% in some cases. While it is true that this category of stocks has always traded at a premium to the market at most times, everybody was taken aback by the severity and impact of the fall in such a short span of 2 months.

There were 3 major market-shaking events since last Diwali – the IL&FS default, crude price surge, and the rupee slide to record levels. The IL&FS fiasco led to a severe liquidity crunch for NBFCs leading to their massacre to the extent of nearly 50% in the stocks which were once the darlings of the stock market – DHFL, for one. While the govt. is going ahead with liquidity inducing measures for NBFCs, its spat with RBI is not helping matters much. It remains to be seen how much of a beneficial effect this has.

As I have never stopped crying hoarse over the last 4 Diwali blogs, it never pays to get carried away in the stock market, in either direction, especially in India. So any serious dip in quality stocks with proven managements should be considered as an opportunity to buy into those shares at lower prices, thus increasing the chances of reaping better gains, than would otherwise have been obtained.

As has been seen many times before, this gloom-and-doom is just a temporary blip and the upside will be far greater than the current downside, for a patient investor. In the last 2 months, though the mid and small caps have been dumped across the board, it is not something to really worry about. As has been seen several times earlier, these are knee jerk reactions of the market. And these very same stocks bounce back with a vengeance once the environment becomes benign, or at least there are no negative signs. The same is likely to be the case this time too. As they say, history does repeat itself.

Another heartening feature that has to the fore is the continuous support of DFIs to be markets, largely driven by SIP inflows. People have finally woken up to the fact that it never pays to get off the bus in bad conditions. In fact it is usually the other way round. It is true that the SIP growth may have slowed down from the levels seen earlier due to the current volatility, but the committed ones are still continuing.

In turbulent times like the current ones, the focus this year will continue to be on pedigreed companies with proven managements and great businesses, ones which are far more likely to withstand the market volatility than some of the others. Also, I have attempted to identify stocks which may have fallen out of favour due to management issues, or market driven conditions rather than any fundamental issues from their side. Needless to say, management quality, business domain and growth prospects should always be primary factors while deciding on buying any stock.  Some of the stocks have tried to re-coup some of their losses but are as yet way below the values and valuations they quoted a few months back

Yes Bank

This was once the darling of the markets and never seemed to put a foot wrong. Rana Kappor enjoyed a status next only to probably Aditya Puri of HDFC Bank and carried the bank on his shoulders most of the Way. Of course, Yes Bank (YB) did not let its promoter down by churning out industry leading numbers quarter on quarter. Then one fine day, RBI decided to end Rana’s term by refusing an extension to him much against the bank board’s wishes, for reasons not in public domain.

To add to its woes, YB showed dismal performance last quarter – PAT declined by 24% qoq (4% yoy) largely led by higher credit cost. Gross slippages escalated sharply for the quarter led by one large corporate account defaulting (most likely it expects upgrade in this account in Q3). Bank has a large exposure to IL&FS which is currently recognized as a standard account in the books of the banks. This could have an impact depending upon developments related to IL&FS.

However, it must be noted that it is currently trading at a P/BV of less than 2, almost half of what it used to trade earlier. With a new management in place early next year, YB should start its journey afresh, and if it is a renowned industry veteran who is picked to lead the bank, then there would be no stopping it.

We have seen management changes for the positive in recent times in the case of ICICI Bank, Axis Bank with markets liking the changes. And the people in both the cases come with a great track record, and hence a huge credibility. The same should also pan out with YB.

Maruti Suzuki

Another industry leader, Maruti Suzuki (MS) has been beaten down by about 30% from its levels of 10K reached a few months back. And this is due to no fault of it. With petrol and diesel prices reaching the skies, the impact on car sales was bound to happen and MS was no exception to it. Macroeconomic and regulatory headwinds have dampened the demand for passenger vehicles and impacted the performance of MS in the latest quarter.

However, things are slowly turning for the better. Improvement in product mix with focus on premium products such as Baleno, and a successful SUV in the form of Brezza should aid realisations and consequently margins. Other tailwinds include reducing JPY exposure and lower capex intensity as most of it has already been done.

With the oil prices stabilizing and the festive season starting this week, MS should regain the spring in its step. Today, MS is a very strong franchisee, with a market share of close to 57% in passenger vehicle market in India, led by strong dealership network, brand loyalty on the back of competitive prices and resale value. This coupled with reasonable valuation; it won’t be long before MS reaches its earlier levels giving at least a 25% return.

This should be looked at as a multi-bagger if held for many years to come rather than just  one-off 25% profit.

Max Financial Services

This is one of the NBFC which has seen collateral damage due to the recent shakeout in the NBFC space starting from IL&FS fiasco. It has come down by about 40% from its 52-wk high of close to 600.

Fundamentally, this is a strong company with sound financials and having operations in sunrise sectors such as Life Insurance, Health insurance and Senior living, all of which have a huge scope for growth in a country like India, where these sectors are either under penetrated or practically non-existent (like senior living).

Like Aditya Birla Capital, a buy-and forget stock, all things considered with a canny promoter like Analjit Singh at the head. This, along with the other flagship companies like ABC (of Kumaramangalam Birla) and Piramal Enterprises (of Ajay Piramal) should form the core long-term NBFC portfolio of any investor.

GNA Axles (GA)

This is a niche player in the auto-component segment with strong brand, long term relationship with clients, and sound financials.  The company posted a very strong set of numbers for the quarter-ended June, primarily on the back of strong industry opportunities. However, operating margin was marred by a significant rise in raw material (RM) cost.

GA has a significant presence in leading economies and plans to enter in the SUV and LCV axle shaft business. This, coupled with positive industry outlook and reasonable valuations, make the company worthy of attention. The company is already in the process of setting up a manufacturing facility with a capacity of 600,000 units a year, which may be increased depending upon market conditions. The company is targeting clients from North America, Europe and India in that order. This could be an Rs 100 crore opportunity for the company.

On the global front, there is a significant pick-up in demand for heavy trucks compared to last year on the back of stronger freight growth in the US. This has been propelling growth for the company. Continued renewal and fleet expansion along with a strong freight environment is supporting truck demand in Europe. Additionally, the management is targeting other geographies like Australia and South America which would help de-risk the business from a significant dependence on North America and Europe.

On the domestic front, with many of the regulatory headwinds behind, volume pick-up in M&HCV is continuing, riding on the positive impact of GST rollout and the government’s increased focus on infrastructure spending. Apart from the medium and heavy CV segment, healthy growth in domestic tractor sales on the back of normal monsoon and improved rural sentiments, have also improved the company’s domestic business.

It is currently quoting at around 390, at a P/E of just about 16, not too high for a company on the growth path.

Godrej Agrovet (GAg)

Godrej Agrovet (GAg) is a diversified farm-to-fork company with interests in animal feed, oil palm plantations, agri-inputs (crop protection), poultry, dairy and frozen foods segments. Majority of its business accrues from underpenetrated and high growth segments.

The company launched its initial public offering in October last year and the stock has been a decent performer since then. It has generated consistent returns and achieved high growth through both organic and inorganic routes over the years

·       The company has been able to curb de-growth in the animal feed (majorly broiler and cattle feed) segment, which constitutes almost 50% of the business and had seen some hiccups in past quarters.

·      With growing exports and improved domestic performance owing to new products launches, the company should deliver decent growth in the crop protection segment with high margins.

·      The  palm oil segment has been a strong performer for the company. This segment will be a growth driver with favourable policy support. Higher import duty on oil is helping improve domestic prices of palm oil, leading to improved realisation and margin.

·    The company has now launched value added product portfolio in the dairy segment which would usher better margins in upcoming quarters. The expansion in the frozen foods segment, with new product launches, also stands to aid margins.

The company’s balance sheet remains healthy with low debt, adequate cash and room for inorganic expansion. Currently quoting @525, down about 30% from its highs 6 months ago, this is a good price point to enter for the long term.

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

	Last year	This year	Diff.	%
SIB	32.1	14.72	-17.38	-54.14%
Balmer Lawrie Inv	402.3	390.5	-11.8	-2.93%
Aditya Birla Capital	183.7	106.15	-77.55	-42.22%
Automotive Axles	921	1178.3	257.3	27.94%
Piramal Enterp.	2757.24	2203.8	-553.44	-20.07%
Ashok Leyland	129.05	120.5	-8.55	-6.63%
Total	4425.39	4013.97	-411.42	-9.30%

So since last Diwali, this portfolio has given a return of -9.3% very close to the combined index equivalent of -8.7% based on the indices for the stocks in the portfolio. This can be considered as a reasonable performance considering that only 2 of the stocks (~33%) were large cap, where the index fell the least by about 1.13% while another 2 stocks (~33%) were from indices which fell about 20%.

Except for Automotive Axles, no other stock in the portfolio gave positive returns. However, as I have been saying every year, stock investing is not a 1-year game. You should ideally check a portfolio performance over at least a 5-year period and see the CAGR. Only then can the true worth of the portfolio be known. Just to prove how long investing pays, and to carry forward last year’s example, just look at the picks I had written about in Diwali Dhamaka 2015, in the table below:

	2015	This year	Difference	Gain/Loss
Federal Bank	54.05	80.10	8.68	16.07%
Motherson Sumi Systems	119.52	384.53	88.34	73.91%
L&T	911.05	2037.08	375.34	41.20%
ICICI Bank	240.00	388.41	49.47	20.61%
Ashok Leyland	90.50	120.85	10.12	11.18%
Eros International	263.95	105.50	-52.82	-20.01%
	1679.07	3116.46	479.13	28.54%

All prices in Rs.  & adjusted for Bonus as declared during the period

(L&T, Motherson Sumi & ICICI Bank have declared bonus during this period)

This portfolio has returned a CAGR of about 29% in this 3-year period. I am sure that if you sit down with a calculator, you will get similar figures for the picks in the year prior as well, as all of them are excellent stocks worthy of holding for the long term.

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

HAPPY INVESTING.