Themes for 2022

 Here’s wishing everyone a great 2022.

What a year 2021 proved to be. It can truly be called a year of recovery.

From the depths it touched in 2020, 2021 staged a remarkable turnaround and we are on the cusp of taking that growth forward this year. There may be some hiccups along the way with the emergence of new variants of COVID, but that should not be a reason now to lose sleep over. It will be like any other cyclical disease which occur in waves and then recedes. The big difference now and 2 years back is that there is a lot more knowledge and awareness and the dread has significantly gone down. Add to this the medical advances over the last 2 years with vaccinations picking up speed globally and with large parts of the world vaccinated, at least to some extent, this is not something which is likely to block the economic recovery now under way. Barring an occasional road bump (like we have seen in the last few weeks), we should be able to navigate this without too much pain.

One thing which everyone needs to remember now is that there has been a phenomenal run-up in stock prices, most of which is on hope of economic recovery. While that will happen is not in question, it is the when which is bothering the markets which have discounted earnings well into 2023, more than 1 year ahead. And that is a long time for things to go wrong.

However, this year 2022 should be considered as a year of consolidation. We are highly unlikely to see the unbridled exuberance led by ample liquidity globally, once again this year. The gains will be much more measured this time round as the central banks the world over have publicly announced liquidity tightening measures (US Fed for one) and some have even started implementing them (UK leading the way). So one certainly needs to tone down the expectation of a repeat of 2021 this year.

Focus therefore this time is on baskets of stocks which can reduce the risk to a large extent and yet give excellent risk-adjusted returns. And the Indian Capital markets/Financial services industry has helped this by bringing in products in all flavours catering to almost all segments of the population. And the product I like most in this basket is the ETF. There are a variety of ETFs launched by various fund houses catering to the varied tastes, not only on the equity side, but also on the debt side. And it is the Equity basket that is my focus this time. I would strongly recommend everyone to visit the website of ICICI Prudential AMC and explore their basket of ETFs which practically caters to every taste not only from debt to equity but also to the more exotic thematic and sectoral bouquets including global funds. There surely must be others too who have done similar things and are worth a look.

Apart from the above, there are some stocks which have the potential to be compounders with credible management changes coming in and the older promoters making way. This is likely to lead to a re-rating of such companies giving huge returns. We have already seen what a good management can do to companies like CG Power which has gone from 20 to 195 in about a year and a half.

So this year’s stocks are based on the above themes. Let’s take a look:

Nippon India ETF PSU Bank BeES

This is a basket of PSU Banks with all the major PSBs represented here. Everyone is gung-ho about SBI  only but there are others too like Canara Bank and Bank of Baroda which have the potential to give good returns over the next few years. This is one group which has massively underperformed over the last few years and is now ripe for a turnaround. India’s economy just can’t grow without the support of this much maligned group of banks, and not only SBI. Having such a basket will also reduce the concentration risk in SBI which in most years has only flattered to deceive and is now more of a trading stock than an investment one, though recommendations of most pundits are to the contrary.

With the economy on the cusp of recovery, there is no way that this group will not perform. However, one can’t expect fireworks from this basket. Rather, this should be looked at as an alternative to a 3 to 5 year FD with way better returns, at least 100% more than what an FD would give if booked currently.

There is another PSU Bank ETF from Kotak AMC but its AUM is very low and hence Nippon is my preferred option.

ICICI Prudential Private Banks ETF

I was on the lookout for such a product in the MF space when I came across this. If you look at the portfolio of this ETF, you will find all the top private banks under one roof here. It is really an excellent idea to sell of all your individual private bank holdings and move them to this ETF thus giving the same returns with much less risk. It really would be cumbersome to manage a portfolio of so many good private banks (all of which certainly are investment worthy) when you get the whole bouquet in this neat package. And you don’t have to keep a track of the ups and downs in the stock prices of individual banks; this will automatically take care of it.

Besides ICICI Pru AMC, SBI AMC also has a similar ETF. But there too, the AUM is very low and this is a much better alternative.

Between the above 2 ETFs, you get all the banking sector exposure that you can possibly need and without any fund manager bias which you would find in an actively managed B&FS sector fund available with most AMCs. The above 2 can also be considered in SIP mode, in whatever proportion you feel apt, to get excellent returns over a 5 year period.

ICICI Prudential FMCG ETF

This is another one from the ICICI Pru AMC stable which gives you all the top FMCG names right from Asian paints to Bata under one roof. And given the cost of owning individual FMCG stocks, most of which are MNCs, this is a much more prudent option with limited capital.

Considering the run-up that has already happened, FMCG is one sector which is likely to provide reasonable risk-adjusted returns compared to any other sector. After all, a growing Indian economy would have consumption as its underlying theme, without which it will simply not happen.

Look at this as a stabilising or defensive component in your portfolio rather than any return-boosting one.

Kotak NASDAQ 100 ETF

Continuing the current ETF theme, my next preferred pick is this ETF based on NASDAQ 100, which is the gold standard in technology companies globally. USA is at the forefront of all changes globally in terms of technology, research and innovation and this index perfectly mirrors it. With Indian markets trading at euphoric valuations, this ETF can help you diversify and create sector-agnostic portfolios to garner stable returns.

This ETF offers investors in India an opportunity to invest in US tech stocks which otherwise would be very expensive unlike trading/investing in Indian markets/stock exchanges. Retail investors can’t invest in ETFs because of the high ticket size. The NASDAQ 100 majorly constitutes the big tech players from the USA like, Facebook, Google, Netflix etc. This makes it a very technology sector specific index. However, the quality of stocks and companies in this index is unmatched by any other ETF in India.

Till some time ago, in India, you didn’t have easy direct access to such ETFs. However, there are few of the top AMCs which have launched local MF schemes which invest in NASDAQ 100 ETF from India. Motilal Oswal (MO) was the first AMC to recognize this gap 10 years back and launched the first NASDAQ 100 ETF. And it has given 25% CAGR since then. No Indian MF across sectors or categories has been able to match this performance.

The benefits of investing globally could be manifold. Robust performance of the US markets and impact of currency depreciation are some of them. The Indian Rupee has been depreciating against the US dollar for the last 20 years, which additionally adds to an investor’s return.

Taking a leaf out of MO’s book, some of the top Indian AMCs have also launched MF schemes based on NASDAQ 100. These include Aditya Birla Sun Life and ICICI Prudential besides Kotak. Since all of them track the same index, the performance will be the same irrespective of the fund house, so you can choose as per your preference for a fund house among the above.

Here again, you can either buy these ETFs directly from the stock exchange (like any other stock) or through the AMC directly as in any of its other local schemes.

Besides the above 3, there are 2 restructuring stories that caught my attention.

Indiabulls Housing Finance (IHF)

I have already published a detailed post on this a few days back here.

In its new avatar, led by pedigreed investors managing it, I believe this has all the ingredients to become a great compounding story over the next few years. As usual, the trading-focused Indian markets have apparently not recognized the potential this has, and therein lies the opportunity. Considering the sell-off that has happened since this news broke out, it is indeed surprising, more like shocking, to see that the Indian market is unable to see what Blackstone and other top financial investors can see in IHF, and have put their money where their mouth is.

ZEE Entertainment Enterprises (ZEE)

On similar lines as IHF, ZEE also is trying to come out of the shadow of its erstwhile promoters the Subhash Chandra’s Goenka family. While its merger with Sony Picture Network India (SPNI), a subsidiary of the $82 billion Japanese conglomerate, has been recently approved by the companies, the objections of its largest shareholder Invesco (which owns 17.88% stake in ZEE), need also to be addressed. And in all fairness to the minority shareholders, Invesco does have very valid points in not letting the promoters get a backdoor entry post the merger with SPNI. That it has taken Sony 3 months to do a due diligence and agree to this merger speaks a lot about the potential it sees in ZEE. Sony will hold majority stake in the merged company, ZEE promoter family will own 3.99% with an option to increase it up to 20% from market.

As and when this merger finally happens over the next few months, it will create India’s second-largest entertainment network by revenue and spawn an entity with 75 TV channels, two video streaming services (ZEE5 and Sony LIV), two film studios (Zee Studios and Sony Pictures Films India), a digital content studio (Studio NXT), and programming libraries. And shareholders of the current ZEE will get shares in this media and entertainment MNC.

Sony as a broadcaster in India has always been a distant third behind Star and Zee, even though it kicked off in the late 1990s. Sony has tried everything. It bought out KBC rights, and went aggressively after cricketing properties. However, it failed to achieve the audience following Star and Zee have. The takeover of Zee and the emergence of a unified programming of over 100 channels, with combined revenues of over $2 billion will be a game changer, not only for Sony but also the M&E industry in India.

There is hardly any completion to this M&E behemoth currently with only Star as the real competitor. I expect the M&E industry in India to go the telecom way with only 2-3 large players remaining and others either shutting shop or getting gobbled up by the 2-3 larger players who will remain standing.

Given that the shares of ZEE have been surprisingly subdued despite the positives in the deal, maybe due to the legal overhang brought by Invesco, it is an opportune time to board the ZEE train and reap the benefits over the next few years.

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

     

Stock	Price (31-Dec-20)	Price (31-Dec-21)	Difference	%
SCI	88.35	134.80	46.45	52.57%
ITC	209.00	218.00	9.00	4.31%
Tata Consumer Products (TCP)	589.90	743.60	153.70	26.06%
Indiabulls Real Estate (IRE)	82.20	157.30	75.10	91.36%
Snowman Logistics (SL)	66.40	40.50	-25.90	-39.01%
Total	1035.85	1294.20	258.35	24.94%

 

This time the performance has been slightly lesser than that of last year (26.63% last year vs 24.94 % this year). Of course the portfolio composition was different last time than this one. And the 2019 portfolio has given a return of 16.79% this year i.e. if one were to hold the same stocks of 2019 this year, against which last years’ return of 26.63% was calculated, this is the return one would have got this year. And because of the higher performance of last year, the CAGR of 2019 portfolio till this year is 21.61%, primarily driven by the great performances of Reliance and Camlin Fine Sciences the year before. This also goes on to prove that the same stocks will not give the same high returns year after year and will have their share of spurts and downs. As long as the spurts are much higher than the downs, one should not really complain. The heartening thing for me is that in both the years, the performance is > 20% which is my internal benchmark for satisfactory performance, irrespective of how the benchmark indices fare.

And this time, had it not been for Snowman Logistics and ITC, this portfolio would have done a lot better. 3 out of 5 have really justified the faith I had in them last year. And they are not done yet. SCI has the divestment tailwinds to take it forward, not to mention attractive valuations (it quoting at P/B of less than 1). TCP is a consumption growth story with an ever-growing portfolio and its entry into newer segments is all set to take it to the 4-digit mark in the next few months. IRE is all set to be re-rated with a pedigreed management now in place and tailwinds of real-estate growth supporting it. Coming to the laggards, Snowman Logistics is a long term story and is in a very nascent sector. So one needs to give it time to really start giving returns, as happens with most sunrise sectors. When loss-making new-age digital companies are commanding eye-popping valuations, it is unfortunate that SL in a futuristic industry is not able to do the same. But its time will also come and will make up for this long gestation period. This is established by the fact that retail in India is growing by leaps and bounds. And a large part of this requires cold storage transportation facility which hardly any other player offers. So it is only a matter of time when SL will catch the attention of an MNC who is into related areas and make the leap. And ITC has for the first time publicly announced some sort of intent at restructuring and value unlocking. It remains to be seen when this actually materializes. Like SL, this too is one for the patient ones.

 

Here’s wishing all investors a very profitable 2022.