Diwali Dhamaka 2021

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

1. Optimising capacity utilisation in  existing facilities/resources and patient mix
2. Increasing ARPOB
3. scaling up capital-light businesses (Max@Home and MaxLab diagnostics where it has forayed not too long back), and
4. 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!!