Diwali Dhamaka 2020

Here’s wishing everyone a great Diwali and a prosperous new year ahead. After the carnage witnessed in March this year and the extraordinary situation that has prevailed since then, the market appears to be stabilising. Dalal Street saw the indices rise till January 2020, before they saw a sharp drop due to panic selling on COVID breakout. Even as the world came to a standstill and markets plummeted worldwide with crude even entering a negative zone in one contract closing, a semblance of stability, and the feeling that things are not so bad, started to emerge. The stimulus measures announced by various central banks across the globe and the Indian government kept the market from completely losing ground. In fact, since the unlock process started, the benchmark indices started recovering. Robust liquidity and better-than-expected Q2 earnings eventually helped the indices come back to their all-time high levels and even break the earlier pre-COVID highs. The news about progress on the vaccine front for COVID-19 has provided the right tailwinds for the market to touch new record highs in the coming period.

The year ahead however looks more promising for the broader market. While the indices have run up most of their course and appear fully priced in, even somewhat expensive at this juncture, the broader market has a long way to go before it can reach or surpass its previous years. The last few 3 years have been extremely challenging for the mid-cap and small-cap stocks and since the large caps appear to be fully priced, the action should now shift down the hierarchy.

The govt. has been in the thick of action over the last 8 months and with the latest stimulus focusing on the housing and real estate sector, the core drivers of employment and economy, things should certainly start looking up. Also, some of the major uncertainties are behind us. The US election is over, moratorium decision has been delivered by Supreme Court and the way forward for the banking sector looks clear. The new US admin may eventually make life slightly easier for the Indian IT sector compared to what it has been in the last 4 years. Also, the pandemic has brought the Pharma sector to the fore as nothing else could. The last thing to be highlighted is the collateral effect of this pandemic i.e. global hatred of China and the ensuing shift towards alternatives especially in Chemicals. How India makes the best of this sentiment remains to be seen, but the Atmanirbhar scheme is a step in the right direction. The devil is in the details and execution of this strategy is what needs to be closely watched.

Another effect of the pandemic has been on the way of life for most people, in India and globally. Physical proximity and ways of working have been replaced completely by remote working (WFH for IT and other service sectors). This has had the effect of benefitting telecom and related companies which provide the backbone for this. Also, personal mobility has taken a sharper meaning with people wanting to avoid physical contact to prevent COVID infection. However, since remote working has already proved effective in providing uninterrupted service globally, it has come to stay for good and will be an integral part of organizations’ employment strategies.

So the focus this time is on the above 2 themes (on-line activities and mobility) which should play out well for the next couple of years till a stable vaccine is found and people start getting over their fear of the virus to resume travel and mobility. Pharma sector has already run up a long way and going forward, may not give the kind of returns others could, though there will be some long term stories here too.

BSE

The lockdown, and the ensuing WFH mode, has had a surprising effect in invoking people’s interest in trading. So much so that lakhs of accounts have been opened in the last 8 months and people of all ages are joining the online investing bandwagon. BSE is the only listed stock exchange in India and hence enjoys a scarcity premium in the listed space. Most of the other listed exchanges are in the commodity (MCX) or power sector (IEX). Not only does it provide a platform for stock trading but also for MFs through its STAR platform, which is gaining popularity.

It is currently quoting close to its book value and has a cash balance of nearly 360/share on its balance sheet. The value of its holding in CDSL itself comes to about 105/share. So, at the CMP of nearly 507, the core stock exchange business is available nearly free (42/share can easily be considered free considering the volumes and cash it generates).

The major re-rating for this will come when NSE is listed over the next few quarters. As per the latest rating of the NSE, its valuation is at Rs 40,000 crore while BSE stands at just Rs. 2200 crore @CMP of around 507. Now, comparing the valuation of BSE with the NSE, the former stands way ahead and hence, at the time of NSE listing, re-rating of the BSE would definitely happen.

And from a business perspective, irrespective of whether market goes up or down, BSE will continue to earn its brokerage, listing charges and other fees (such as from educational courses). All in all, one of the few debt-free businesses not really impacted by the pandemic and quoting at an attractive valuation with a definite possibility of re-rating in the near future.

ICICI Securities

With the listed exchange going great guns, how can the ancillaries supporting it be far behind?

Operating for the past 65 years and creating its presence across the country, ICICI Securities is part of ICICI Group and India's top financial service provider offering banking and other financial services. It trades with its retail investment scope with ICICI Direct. It presents e-trading and investment services to customers through ICICI Direct. Since its commencement, the company has earned a total of more than 4.5 million customer base through this platform electronic brokerage platform markets over 4,600 sub-brokers, authorized persons, independent financial associates, and independent associates.

During the lockdown which lasted for close to 4 months before the gradual re-opening started, brokerages were operating as usual & maybe in higher capacity than usual. As more and more people staying/working at/from home wanted to try their hands in the market, 12 lakh new accounts were opened in March and April 2020 compared to 9 lakh in Jan-Feb 2020. Along with that, trading activity has been all time high.  Other than the COVID related factors, there has been structural shift in how Indians invest which is quite visible from the inflows to the Indian equity markets (in particular mutual funds). All these will lead to the growth in the equity brokerage market.

ICICI Securities Ltd came out with its IPO in March 2018, a couple of month post the stock market euphoria was over i.e. Jan 2018 @520/share @P/E of 35. Its business enjoys operating leverage i.e. in order to further grow the business the capital investment required would be quite low. Given, the high profitability of the business (on an average 30% profit margin), any further capital required to grow can come from internal accruals. Because of this, they keep giving out handsome dividend of 50-60%. And like BSE, their earnings is independent of market direction as they earn brokerage for every trade, profitable or otherwise.

In term of institutional segment, their parentage with ICICI bank helps where they are able to execute block deals among large wealthy customers and institutes. They are the second largest non-bank mutual fund distributor in India. Strong parentage of ICICI Bank and ICICI brand name helps to win over competition to some extent. Also, the focus of the parent to grow the subsidiary business is of immense value. Reaching out to existing customer of ICICI Bank (especially wealthy ones) to open an account with I-sec is likely to source quality clients and can be a potential game changer. Opening the ICICI direct platform to other bank’s customer opens up a big untapped opportunity.

The company is rightly placed with all the products and have been able to grow despite the headwinds. Everyday 1000+ accounts are getting added and of which 30% are different bank account holders other than ICICI which is an encouraging sign. Going forward they want to be viewed as a one-stop shop for anyone’s financial need and have products across all age groups and classes rather than just a brokerage houses. In short this can be India’s Charles Schwab, a leading US financial services and investment firm.

SBI Cards& Payment Services (SCPS)

A direct beneficiary of the record-breaking robust reports from on-line retailer Flipkart and Amazon over the last month’s festive sales is SBI Cards & Payment Services. And with more sales expected till year-end and new year, the current quarter should also be positive for SCPS.

From a dismal listing below the offer price in March amid the pandemic and beginning of lock-down, despite being oversubscribed 26 times, SCPS has indeed come a long way, up about 30%+ in last 8 months. The dismal listing and continued fall can be attributed to investors’ fear that the lockdown leading businesses to a standstill and resulting large scale unemployment and job losses may lead to defaults by credit card holders. However, that proved only partially right.

A unique listed play on cards and payment services, this has strong tailwinds in the current digital economy. There is headroom for long-term growth as there are only 4 credit cards for every 100 persons in India. That’s an abysmally low and the penetration level can only go up from here. SCPS is the second largest card issues behind HDFC Bank in India. The government has been in favour of non-cash transactions and promoting digital payments in a big way. This opens huge prospects for companies like SCPS. And with the current pandemic discouraging physical presence and promoting eCommerce in a big way, the road ahead seems smooth for SCPS.

The other tailwind for SCPS is its strong OPM of over 15%. This will shield it from whatever losses it may bear due to the COVID-19 defaults that may occur.  This can be a consistent compounder over the next few years similar to what MCX is today as a unique listed commodity exchange.

Hero Motocorp

The company is a key beneficiary of domestic two-wheelers (2Ws) upcycle.

Strong rural presence with a wide distribution network (over 7,200 outlets) is likely to aid market share gains in the near term for the company, from 36% in FY20 to 38% in FY21. In predominantly rural top 7 states (urbanisation rate below 30%), Hero Moto has the best presence among peers and a higher market share.

Hero MotoCorp continues with its market dominance in the motorcycles segment despite the competition and retains its number 1 spot in entry and executive motorcycles. It has been able to defend market share due to its strong brand equity, solid product portfolio and extensive distribution network.

The company has been working on strengthening presence in premium motorcycles, and the recent launch of Xtreme 160R is a positive step. Refreshes are expected from FY22 and multiple products are expected to be launched in the premium segment (150-400cc) over the next three-five years.

The icing on the cake is its recent tie-up with the iconic Harley Davidson. While it always has a strong presence in entry-level and mid-tier bikes, there was always a gap on the premium side where Bajaj Auto has a stranglehold thru its Pulsar range. Also, BA’s collaboration with Kawasaki, Triumph and KTM (where it has a nearly 50% stake) for premium range of bikes (Husqvarna and the like) gives it the option of introducing high-end bikes from KTM (Performance/Off-road) and Kawasaki (Sports) stables. And all this is done thru BA’S ProBiking showrooms, a dedicated space for niche and premium bikes.

The major plus points for Hero Moto - debt free balance sheet (a major positive in current times), consistent cash generation (another bonus in current times), and investor friendly robust dividend pay-out, make it a must-have in the portfolio. It is still about 10-15% away from its 52-wk high and 3 years back, it was at 4000+ levels.  So still some way to go to catch up with previous highs.

Shree Digvijay Cement Co. (SDCC)

This is the only brick-and-mortar selection this time. And it is driven by the surprise performance of Cement sector post the lock-down in Q2, which caught most people unawares. It has a market cap of less than 900 Cr and is debt-free. It has a manufacturing facility at Sikka, Jamnagar, of 1.20 MT/annum housing a fully automatic modern cement plant. They have a Gujarat-wide network of over 1,000 channel partners selling their cement under the brand name “KAMAL CEMENT “.

There are 2 main drivers which I see propelling this company forward. First is that since last year i.e. 2019, they were acquired by the PE firm True North and are now a part of its portfolio companies. True North took control of SDCC by buying out Brazilian company Votorantim Cementos’s interest in the listed entity. This itself will ensure that the company is run efficiently and maximises returns for its shareholders. This is already visible on the ground, as the company reported a profit in the March ’20 quarter which was more than 10 times the loss in the same period last year. And this trend has continued over the full year with the profit growing more than 25 times over the whole year.

The second heartening this is that true North appointed Anil Singhvi as the Exec. Chairman of this company. And this is the same person who ran Ambuja Cement for 23 years and made it the most profitable cement company in India.

So this potent combination of efficiency is likely to bear fruit in the coming period, helped by govt’s focus on infrastructure where cement is a key component. And the recent thrust of housing, real estate and infrastructure provides just the right tailwinds for SDCC to take off.

Quoting at around 62 currently, this should certainly bounce handsomely in the coming quarters driven by profitability focus of its management, and the market will discount it accordingly.

 

Before concluding, let’s look at how last year stocks have performed: 

	2019	2020	Difference	Gain/Loss (%)
Nippon Life AMC	330.40	286.00	-44.40	-13.44%
Aditya Birla Fashion & Retail	208.55	158.30	-50.25	-24.09%
Zee Learn	22.60	11.24	-11.36	-50.27%
Finolex Cables	380.90	273.10	-107.80	-28.30%
Spencer Retail	76.20	72.70	-3.50	-4.59%
Total	1018.65	801.34	-217.31	-21.33%

So from last Diwali to the current one, this portfolio has lost about 21%. To give a perspective, Sensex has gained 11.22%, BSE Mid-cap 8.5% and Small-cap index 14.82%. But both the indices are still 17% and 32%, respectively, away from their record high levels seen in January 2018, while the large cap index has crossed its previous high formed at the same time. This shows the disparity in the distribution of gains across market caps.

While things were just beginning to settle down in Jan ’20, COVID stuck and the world turned 180^0.  However, 8 months down the line, the large cap indices have not only  re-couped all of their losses but have made new highs. However, this rally has largely been driven by a few stocks, Reliance being in the forefront. And with the weightage of 14% it enjoys in the index, it is no surprise that it has single-handedly pulled it up from the March lows. This also means that the broader market has not yet regained its losses while the large caps are distinctly fully valued. Of course, while it is quite logical that in uncertain times as we are now going thru, it is the larger players with solid balance sheets which will be able to still stay in business, the green shoots visible now do give hope of the euphoria spreading deeper into the market. And it is this that needs to be tapped at the right time, well before the train has left the platform.

The current set of stocks is also from mid-cap and small-cap categories and considering that they have retraced quite a bit of their losses and are waiting for take-off, the only way for them could be up.

 

HAPPY MUHIRAT INVESTING.