Here’s wishing everyone a great Diwali and a prosperous new year ahead.
After the carnage witnessed in March last year (2020) and the extraordinary
recovery since then, the market appears to be stabilising. The fears of COVID
are slowly receding with vaccinations on in full swing globally, economies
opening up, and people well on their way to leading their earlier lives, though
that may never be the same again with all that has happened in the last 2
years.
The newfound optimism has led to markets scaling new peaks in the last
few months before a healthy slight dip on the last few days. After all,
Newton’s laws are not just for the Physics books and what goes up has to come
down, though the extent may vary.
The other thing which stands out this time over the last few months is
the IPO frenzy which has gripped the Indian markets. And the type of companies
that are hitting the markets now are not just the run-of-the mill brick-and
mortar ones, but truly futuristic ones with digital business models. That also
comes with its own risks as the market is yet to evolve a valuation model for
such companies and is only betting on the future the new-age promoters of these
companies are promising.
Another driver of the market uptrend is that the corporate earnings have
actually surprised many observers among the doom and gloom scenarios which were
being predicted not too far back. Valuations are still expensive across market
caps. So the key question that still remains is the sustainability of these
earnings over the coming years. It is obviously natural to expect them to not
only sustain but also grow with the economy opening up and the advent of new
digital business models which have evolved out of necessity due to COVID in the
last 2 years. How far this turns out to be true will determine the future
direction of the market.
The year ahead therefore holds a lot of promise with a mix of old and new
business models and the world looking for alternatives, not only in business
models but also in areas such as energy which impact daily lives not only in
India but globally as well. The sharp run-up in the mid-cap and small-cap
stocks has come to a halt at least for the time being with valuations being
extremely high or unrealistic and with the real fear of signs of liquidity,
which was propping them up, drying up. Already, global economies have started
to sound out warnings of tightening the money flow. It is now a matter of time
when this is actually put in practise.
However, on the domestic front, there has been a sort of sectoral
rotation with the yesteryear’s favourites like Pharma now in a low gear and
more economy-oriented sectors like real estate and power looking up, aided by
govt. moves. With Air India out of the way, Indian govt. can now step on the
pedal and push thru the remaining ones which are in the last lap such as BPCL,
SCI and IDBI Bank. IT, which has been one of the biggest beneficiaries over the
last 2 years, and is a secular play, continues to play its role to steady the
ship when financials and others get hit by some global move or the other.
So with valuations expensive, the focus this time is on companies across
sectors which have great value and yet can prove to be amply rewarding unlike
the holding companies which have the potential which never actually
materialises. The other focus is on the new sectors and companies which have
the potential to do well due to their new age products and businesses in the
years to come.
Rane Holdings (RH)
This is the holding company of
Rane group which has a strong grip in the auto ancillary space. It has been in
existence since 1929 and is heavily present in the aftermarket space. This
stock has deep value embedded in it. It has a stake of about 47% in Rane
(Brakes) which comes to about 260/share, 68% stake in Rane (Madras), 54% in
Rane Engine Valves and 100 % in Rane Light Metal Castings and Rane TRW Steering
Systems (both unlisted as yet). Besides these, it has various unlisted
subsidiaries which has the potential of heavy value unlocking. The value it has
in the listed subsidiaries itself comes to more than Rs. 1850/share, which is about
3 times the CMP of Rs. 631, thus discounting the CMP by more than 65%. If any
of its unlisted subsidiaries comes out with an IPO/OFS, there will be huge
value unlocking for its shareholders. Promoters hold about 46% stake and DIIs
more than 10% gives a lot of confidence. Its market cap is about 900 cr. And it
quotes even below its book value (P/B < 1).
RH is one of the oldest auto
ancillary companies and the promoters’ credibility and track record is
impeccable. That is one of the reasons DIIs have great faith in it. The
greatest attraction for this stock is its value unlocking potential. If any of
its 2 unlisted subsidiaries lists in the market, the market cap will nearly be
equal to the current market cap of RH, thus making all the other investments
free.
The last trigger for this is its
unlisted subsidiary Rane NSK systems which makes airbags. From 2022, once
airbags become mandatory, there will be a captive market for this RH subsidiary
with all the OEMs becoming its customers.
HDFC
If there is an evergreen company
with deep value embedded in it, it is HDFC. It is present in all the right
places and what better time than now. Look at its listed subsidiaries : HDFC
Bank - banking icon and bellwether, HDFC Life – the second largest listed life
insurer as a JV with Standard Life Aberdeen (further strengthened
by its recent acquisition of Exide Insurance), HDFC AMC - a leader in the
listed AMC space, Besides these its
unlisted subsidiaries include HDFC Ergo (General insurance including the
booming Health space which it recently acquired from Apollo Munich) where it
holds a 51% stake and HDFC Credila – education loan provider.
With real estate on the cusp of a
boom in the coming period, real estate developers getting re-rated, driven by
liquidity, all-time low housing interest rates and demand due to WFH models being
adopted across the country (people realizing the importance of owning their own
home, however small, and the current owners looking to upgrade to higher sizes
to adapt to the WHF model), market leader HDFC as strong tailwinds going for
it. This can be a classic SIP stock and can easily grow at least 20% CAGR from its
CMP of about 2900, over the next year or 2, if there are no major upheavals in
the world and the markets.
Tata Power (TP)
Tata Power is India's largest
Integrated power company, present across the entire power value chain of
conventional & renewable energy, power services and next-generation
customer solutions including solar rooftop and EV charging stations (the last 2
being recent forays).
With Tata group getting its act
together and leveraging multiple capabilities across different businesses, TP
has got a strong base to capitalize. In the emerging EV business, it has a
ready captive market in Tata Motors’ EV products where it is an undisputed
leader currently. It has also collaborated with automakers such as MG Motors
India & TVS Motor (besides its own vehicles including JLR) to develop EV
charging infrastructures for their customers and dealers. Its recent tie-up
with HPCL also augurs well for expanding this business.
The other right box it has ticked
is its foray in renewable energy. The company had kicked off the fund-raising
process by clubbing its entire renewable portfolio under an umbrella entity.
This includes operating and pipeline independent power producer (IPP) assets,
charging stations, rooftop solar, microgrids, panel manufacturing, engineering,
procurement and construction (EPC). The unit is one of India's largest
renewable energy businesses with an operating capacity of 2.6 GW comprising
wind and solar in a 32:68 ratio spread across 11 states. TP is looking to raise
$500 million for this unit ahead of a planned IPO for this, and is in talks
with large pension and sovereign asset managers, including Canada Pension Plan
Invest Board (CPPIB) and Government of Singapore Investment Corp. (GIC).
Tata Power has said it plans to phase out
coal-based capacity and expand its clean and green capacity to 80% by FY30.
Renewable energy currently comprises over a third of its total capacity of 13
GW.
With focus on the right areas with an eye on the
future, TP is set for a transformation into a complete energy player than just
power player it is today. Though it has already run up 4 times in the last
year, there is still steam left and this will play out over the next few years
when the funding starts rolling in.
Max Healthcare Institute (MHI)
Max Healthcare Institute (MHI) is
the second largest listed healthcare provider in India and operates 17
healthcare facilities (total 3,400 beds). MHI enjoys dominant position in
northern India. The company is also present in preventive &
pre/post-hospitalization care at home and diagnostics services segments. Its
focus on premium markets (Mumbai, Delhi NCR) augurs well for its Average
Revenue Per Occupied Bed (ARPOB). In the last 2 years, Nanavati, a mid-scale
hospital in Mumbai which was run by Radiant (PE KKR company) came under Max
fold post Radiant’s merger with MHI.
With the decline in Covid cases, MHI
is witnessing strong bounce-back in the non-Covid business, which has also resulted in an improvement in its
overall ARPOB (Covid ARPOB is lower than non-Covid ARPOB due to pricing regulations,
and thus was detrimental to MHI’s total ARPOB). Its plans to add another 1,630
beds by FY28 lend high visibility to future growth. Company is also looking for
strategic inorganic opportunities. Overall, it is well placed to capture
emerging opportunities in the healthcare space. Further, management is focusing
on
- Optimising capacity
utilisation in existing facilities/resources
and patient mix
- Increasing
ARPOB
- scaling up capital-light
businesses (Max@Home and MaxLab diagnostics where it has forayed not too long
back), and
-
potential targets
for M&A..
MHI could very well follow in the
footsteps of its illustrious peer Apollo Hospitals which has been a compounding
story over the years.
Sterling & Wilson Solar
(SWS)
This is a Shapoorji Pallonji group
company which went public about 2 years ago, a first from the SP group stable.
And like LTI did in 2016, this too opened below its offer price on the listing
day. What LTI has done since then is history. The reasons for the thumbs-down
to this IPO were not far to see - the expensive valuations it had quoted at the
issue price and the huge debt it carried (incidentally given to the promoters
themselves). At that time there was no open tap of liquidity as is the case
now. SWS’ troubles started soon after its IPO when promoters SP group want back
on their loan repayment promise within 3 months. When the company’s promoters,
Shapoorji Pallonji and Co, set out to raise ₹4,500 crore by selling a part of
their stake in the IPO, the stated plan was that part of the proceeds would be
used to clear the loans they had taken from SWS. But less than 3 months since
the company’s shares listed, there was a change in plans, with an extension
sought for the loans. This fact was known during the IPO but the promoters’
assurance that the loan would be repaid within 90 days of listing helped the
IPO to scrape through. But when the promoters went back on their word, the
investors saw red with the result that the stock tanked 60% from the IPO price
of 780/, 36% of which came in just 2 sessions. However things have since
improved over the last 6 months. Some time back, Reliance has bought a 40%
stake at 375/share.
SWS is the largest solar panel
maker and MEP executor in the world. With the entry of Reliance as the promoter
and the traction solar energy has gained globally, this company would do
exceedingly well over the next few years. The market has already given a
thumbs-up to this development with the stock now trading at 438, well above even the price Reliance bought into it.
The other reason for being
bullish on this stock is its huge global order book and debt free status,
leading to attractive valuations. It is quoting at a PE of less than 15 on next
year’s earnings, which gives valuation comfort. The other positive development
is the heavy reduction in debt that the company has been able to do. From about
Rs. 2300 cr. debt in Mar ’19, it now has reduced to just Rs. 800 cr. in Feb
’21. And even out of this 800 cr., 700 cr are the ICDs which the company is
well on its way to repay. So with a debt of just about 100 cr, it can be
considered as virtually debt free, a far cry from its situation 2 years back.
With its past troubles behind and a strong promoter like Reliance behind it,
the stock is all set for a re-rating. This is truly a great turnaround story
and a multibagger in the making.
Before concluding, let’s look at
how last year stocks have performed:
|
|
2020
|
2021
|
Difference
|
Gain/Loss (%)
|
|
BSE
|
523.65
|
1352.20
|
828.55
|
158.23%
|
|
ICICI Securities
|
451.40
|
743.15
|
291.75
|
64.63%
|
|
SBI Cards& Payment Services
|
789.70
|
1105.80
|
316.10
|
40.03%
|
|
Hero Motocorp
|
3117.15
|
2641.45
|
-475.70
|
-15.26%
|
|
Shree Digvijay Cement Co
|
61.30
|
81.10
|
19.80
|
32.30%
|
|
Total
|
4943.20
|
5923.70
|
980.50
|
19.84%
|
Apart from the lone Auto sector
representative Hero Motocorp, others have fired on all cylinders with BSE more
than doubling and still looking good. And its ancillary stock ICICI Sec. has also
shot up more than 50% in the last year. With a good monsoon and the pick-up in rural economy, I expect that Hero Motocorp will also pick up speed and deliver good returns in the coming year. The overall return of 19.84% can be
considered good by any yardstick, considering the alternatives available. All these are fundamentally sound stocks and
can continue to grow and provide good returns over the next few years.
The current picks are somewhat futuristic
in nature and considering that they have already run-up quite a bit along with
the market, the pace may slow down a bit but their growth potential is not in
doubt. You may not get market-beating returns every year, but can surely expect
steady compounding (probably market-beating) over a longer timeframe.
HAPPY MUHURAT TRADING!!
