Themes for 2021

 

Here’s wishing everyone a great 2021.

What a year 2020 proved to be. If nothing else, it will still be known as the year of the pandemic.

Economically, things weren’t really looking rosy and out of the blue the pandemic stuck, sending the already tottering economy into a tailspin. But world over, the Central banks got into action and what followed can only be marvelled at in hindsight. From the March lows, the markets indices have nearly doubled and some stocks have gone by many times over. And this is not only for the Mid and Small Caps. Even the biggies such as Bajaj twins have more than doubled from their March lows. They say that the stock markets usually look ahead and don’t reflect the current economy at any point but rather discount the future. Even accepting this argument, the market run-up has been far too fast and looks unrealistic. However, real money is usually not made in the indices but in the broader market and rightly so. It is anyway a wonder that the large caps have run up the way they have while the Mid and Small caps have yet to play catch up.

The current market rally is driven only by 1 thing – global liquidity leading to FII buying non-stop in the Indian as well as other emerging markets. The party will continue till the FII music plays on. The moment it stops, a lot of people will be left holding the parcel they so cheerfully bought earlier without a second thought. So it always pays to be a bit cautious rather than have FOMO. There will always be chances to buy things at more realistic levels once the exuberance dies down. So too will happen this time around. But given the mood the central banks all over the world are in, this doesn’t look like happening anytime soon and the party is likely to continue for a large part of 2021.

While the large caps led by Financials did extremely well this year till date, and were joined by Pharma (flavour of the year), and the defensive IT, there are large sectors which have not yet participated in the rally. Infrastructure and Logistics are some of such sectors which are yet to participate meaningfully as much as the others.

The govt. has certainly helped the economy to get back on its feet through various incentives, fiscal and regulatory measures. Prominent among these is the focus on Real estate which, since the festive season, has bounced back and is poised to grow from here, unless there is a major setback.

The key theme in 2021 would certainly be Infrastructure, Real estate and Divestment. The other strong trend which continues to be favourable is Consumption due to the normalisation of lifestyles following the opening of various sectors and some amount of pent-up demand which is now finding its way in the various businesses. This has been amply proved by the whopping gains given by the recent listings of Burger King and Mrs. Bectors Foods, the typical consumption plays.  This sentiment should help companies which have diverse products and businesses to cushion the adverse impact on a particular segment. So this year’s stocks are based on the above themes. Let’s take a look.

Shipping Corporation of India (SCI)

First off the blocks in the divestment drive would be SCI where there appears to be significant global interest for the govt’s 63.75% stake. During initial discussions players like Essar Shipping, Adani, GE Shipping, Vedanta, Dubai Port World have expressed interest.

The 58 year old SCI happens to be a ‘Navratna’ (one of the 16 jewels in the Indian crown) company. The plan, drawn up by a panel of secretaries, has now been cleared by the central cabinet so that the actual sale process can now commence. In 1992 an 18.5% of SCI's equity was sold to mutual funds, banks and foreign institutional investors. This was followed in 1994 by a second divestment of 1.37%, also in favour of financial institutions. In 2000, the government conferred on the company ‘Mini Ratna’ status, for enhancing the company’s Board powers for capital investment. In 2008, SCI achieved ISO-9000 certification, and was upgraded to the status of a ‘Navratna’. Bonus shares, in the ratio of 1:2 were issued.  It must be remembered that SCI has an extremely diversified fleet in its asset book. Just to name a few categories, SCI has containers, bulkers, passenger vessels and they also run offshore vessels for government agencies.

There is a lot of value in SCI waiting to be exploited by the incumbent management, and the best part is that the govt. will be totally out of it. Here is a company that could undertake a major strategy shift once it is privatized and that could be value accretive. Book value of the company is about 156 while it is quoting at close to half that price.

With a host of local and global players making a beeline for SCI with an eye on the future, this should keep buzzing in the months ahead. While the short-term trends would certainly give great returns,  the incoming management from the private sector, be it a conglomerate like Vedanta or a special ports operator like DP World or  PE fund, would drive efficiencies in the company which were hitherto missing under govt. control. This is what would dictate the long term trend in SCI.

ITC

 ITC is engaged in multiple consumer businesses ranging from cigarettes to food products, hotels and stationery. The company generates about 46.4% of its revenues from cigarette sales and has the highest market share in cigarettes (84%). The cigarette market has growth opportunities as the market moves from unorganized to organized segment which will result in market consolidation and huge market share gains for ITC. The organized tobacco market at just 10% indicates the immense growth opportunities in the segment. Its second largest segment FMCG is where the company has been putting efforts to derive the highest revenues and it has become its highest growth segment. Competition from the likes of HUL, Nestle, Britannia exists but ITC is expanding at a rapid scale. The structural drivers of long-term growth such as professionally managed teams, rising disposable incomes & consumer awareness, low levels of penetration of consumer goods, favourable demographics and increasing urbanization amongst others, remain firmly in place which augurs well for the FMCG business. Other products sold by the company include agri-products, paper products and IT solutions.

The company has delivered strong operational performance over the years, with consistent profit and revenue growth of 14.3% and 11.3% CAGR over the past 10 years while delivering a 5-year average ROE of 26.3% and ROCE of 38.9% over the same period. The company has delivered a strong EBITDA/Operating Cash Flow of 72.8%, indicating a high level of operating profit convertibility into cash flows. It also offers investors with a strong dividend yield of 5.2%. Unlike its peers, ITC is undervalued despite delivering a similar rate of growth as compared to its peers, with P/E of 18.9x vs industry average P/E of 43x, the primary reason being its cigarette-maker tag, even though it is well diversified in other areas (financials is another matter  altogether, with cigarettes having half the share).

With things slowly coming back to normal, one of the major hangovers on ITC should recover to some extent. Its hotels business is showing some signs of bouncing back from the lows it hit due to the pandemic. Also, the opening of schools, colleges and educational institutes should help its stationary and paper businesses. So here is another stock which ticks all the boxes – presence in hitherto underperforming sectors such as hotels, paper and travel, all of which are poised to do well in the year ahead. Already, green shoots are visible in these sectors and with the right kind of hand-holding by the govt, which it has already professed, these sectors should certainly look up.

One might do well to remember that there were multi-year periods when FMCG giants like HUL didn’t do anything of note and remained at the same price over the long stretch. And a comparable conglomerate like Reliance too didn’t do anything of note till the last 2 years but has since then become a multi-bagger. And at the end of the lull period, which they obviously put to good use – HUL to fine-tune its Power brands strategy and Reliance to set up its Telecom operations (with Jio), both of which paid rich dividends in the next few years, they multiplied manifold. ITC at this point is probably at the same juncture, poised for growth over the next few years which may bring it on par with the other FMCG players. And in recent times, there are noises from the management about a potential restructuring being considered which may give a sharper focus to the many business under the ITC roof. This could be a key trigger, as and when it is announced.

This is a dark horse this year and all going well, should certainly surprise investors positively.

Tata Consumer Products (TCP)

This has been another favourite of mine for a number of years now. Though it started out as a pure-play tea company in its earlier avatar of Tata Tea and then expanded its portfolio into other beverages like coffee, flavoured water etc. through niche acquisitions (Tata Coffee, Eight O'Clock Coffee, Mount Everest Mineral Water with its Himalaya brand, NourishCo Beverages etc). Lately, in a reorganisation of Tata group in the consumer-focused businesses, staples such as salt, pulses and spices from Tata Chemicals were transferred to TCP, thus making it a complete FMCG company followed by its renaming to underline the renewed focus. The contribution of tea and coffee in Tata Consumer’s revenues has fallen from 88% to 70. The re-org also doubled its household reach and raised the share of the more profitable and high-growth India business from 48% to 61% while EBITDA margins have also shown an upward trend.

Another masterstroke of Tatas was to bring in Sunil Alaric D’Souza, under whom Whirlpool India delivered strong performance, as its MD and CEO. D’Souza’s experience in the consumer goods industry augurs well for the company.

There is a high chance that TCP will soon be a part of Nifty in the next revision, scheduled around March ‘21. This should certainly ensure continued interest in the stock followed by foreign fund flows in March when most ETFs would have to rebalance post its Nifty inclusion and include it in their portfolio.

All going well for TCP, it is well on its way to be India’s answer to Unilever.

Indiabulls Real Estate (IRE)

Real estate is one sector which has been battered out of shape in 2020. It was anyway not doing well before March. The pandemic literally broke its back across the country. With economic uncertainty due to pay cuts and job losses, buying a house was the last priority for a lot of people, salaried as well as business class. However, in finding opportunity in adversity, the WFH culture which was spawned by the pandemic and is well on its way to become mainstream, came to the rescue of this industry. With people realising the need for their own home due to the WFH, which saved a huge amount of rent esp. in metros like Mumbai, real estate has got a new lease of life.

The govt. has played a key role in ensuring that the tailwinds for the industry are well supported. With the home loan rates at a multi-decade low, and developers falling over themselves to clear their inventory, the govt. has made their life easier with a slew of fiscal and regulatory measures both at the state and central level. A direct beneficiary of this is Indiabulls Real Estate.

Apart from the favourable winds, another key point which merits attention for IRE is the interest of the global PE player Blackstone and B’luru based real estate group Embassy in its business. Indiabulls Group had started the process of exiting its real estate business with an aim to merge with Lakshmi Villas Bank. As a part of the process, it had also sold a 14% stake in IRE to Embassy in 2019 at 150/share. As per the original plan, Embassy had to buy the remaining 24% held by promoters in IRE and follow it up with an open offer. However, that plan did not pan out as expected after the RBI blocked the merger of Indiabulls Group with Lakshmi Villas Bank.

With the real estate business again looking up, Indiabulls group is close to a deal that will see its exit from the real estate development space. This would be a three-way deal involving Indiabulls group, Embassy and Blackstone. This would create the second-largest listed real estate entity in India after DLF. Each IRE share has been valued at Rs 92.5 against the CMP of 82.2 giving a clear margin of about 13%. After the merger, the listed entity will be re-named Embassy Developments, in which Sameer Gehlaut, who is currently the  main promoter of Indiabulls, will hold a little less than 10% and cease to be a promoter. Jitendra Virwani, the main promoter of Embassy group and some associated entities, will become the promoters of the new entity and hold nearly 45%. Public shareholders will have about 26% while Blackstone will hold 19%. The merged entity will have a balanced mix of commercial and residential assets. While the residential properties will be sold to individuals, the commercial properties will feed into the already listed REIT.

With such focussed promoters including global PE giant, also focussed on real estate in India (Blackstone has emerged as the most aggressive institutional investor in India’s real estate sector with a commitment of over Rs. 38,000 crore in property markets of Mumbai, Noida, Pune, Bengaluru, Chennai and Hyderabad), the future looks bright for IRE. Added to this is the clean image it would acquire post the separation from the somewhat dodgy current promoters (Indiabulls) and instead have real-estate focused promoters. It may well be another Godrej Properties (supposedly one of the cleaner real-estate companies) in the making given the above developments. This is another case of value unlocking.

 

Snowman Logistics (SL)

This is another niche stock I like whose time has now come. This is a classic example of opportunity in adversity.

Promoted by the logistics facilitator Gateway Distriparks (GD), Snowman is India’s leading integrated temperature-controlled logistics service provider, specializing in providing warehousing, distribution, and other value-add services across the country. Its state-of-the-art temperature-controlled warehousing facilities in prime locations like Mumbai, Chennai, and Bengaluru coupled with integrated distribution solutions, allow it to ensure product quality and temperature integrity of customers’ products from point of origin to the consumption point.

There has been a growing demand for single-point end-to-end cold chain services by large MNCs. This has led to the emergence of organised private players such as SL. Furthermore, to cater to the increasing demand for e-commerce logistics in the food and pharma sector, the company created a separate vertical in FY21.

 

There is an increasing demand for temperature-controlled services by the food industry, due to increasing urbanisation and changing consumer consumption patterns. India Ratings and Research (Ind-Ra) expects the company to benefit from increasing presence of QSR (Burger King, McDonalds, Dominos etc.) and demand for newer avenues such as pharma and healthcare sectors after the outbreak of Covid-19.

The immediate key trigger for SL however is its role in vaccine distribution and related logistics. The govt’s plan is to distribute around two billion doses of vaccine throughout the country. With the current immunisation programme of the government, 20-25% can be distributed. For the rest, private contribution will be required where companies like SL come in with pan-India warehouses and refrigerated transportation services

SL has tied-up with the airline SpiceJet for jointly engaging in storage, transportation and distribution of Covid-19 vaccines from various manufacturers, across India and internationally, in the required temperature-controlled zones. As per the understanding, SL will handle the ground services which includes activities such as transportation to/from manufacturers, warehouses, airports and consumption points, packing, storage & warehousing, in the required temperature zones, while SpiceJet will provide the air connectivity for temperature controlled distribution of the Covid-19 vaccines across India as well as internationally.

The results of all the above ventures should start showing in the coming quarters and the stock will be re-rated due to its unique proposition and monopoly in the listed space. This could well be another compounding story if held patiently over the next few years.

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

 

Stock	Price (31-Dec-19)	Price (31-Dec-20)	Difference	%
Ujjivan SFB	53.85	39.30	-14.55	-27.02%
Sudarshan Chemicals	407.10	479.40	72.30	17.76%
Ashok Buildcon	102.45	92.65	-9.80	-9.57%
Reliance Industries	1499.83	1985.30	485.47	32.37%
Camlin Fine Sciences	84.05	122.45	38.40	45.69%
Total	2147.28	2719.10	571.82	26.63%

This time the performance has been much better than the disastrous Diwali one. And had it not been for Ujjivan SFB and to some extent Ashoka Buildcon, this portfolio would have done a lot better. Yet, thanks to Reliance Industries and Camlin Fine Sciences, this has managed to beat the weighted average index (20.72%) considering that Reliance is a large cap while all others are small caps.

This is also a reality check on a small-cap tilted portfolio. While this category is the fastest gainer, the fall is equally swift. Both the laggards above still have good potential in the years to come. Ujjivan SFB has recovered quite well from its March lows and so has Ashoka Buildcon. With govt’s focus on road building and construction, Ashoka Buildcon’s prospects look pretty good, considering that it is till about 31% off its 52-wk high of about 122. And Ujjivan SFB has managed to control its asset quality pretty well in the turbulent year 2020.

Besides the above, there would also be the new economy Digital stocks like InfoEdge, IndiaMart Nivesh etc. which would continue to do well in the newly embraced digital way of life.

 

 Here’s wishing all investors a very profitable 2021.