Themes for 2023

Here’s wishing everyone a great 2023.

2022 turned out to be one of the most volatile in recent years with the markets literally going up vertically one day and plunging down equally the next day. And the main culprit appears to be the FIIs and the US economy. With Fed making its intentions clear about the direction it was taking, tightening its belt and increasing interest rates to bring down inflation in the US, there was only 1 way the FIIs would have gone – away from Emerging markets including India. And the results are there for all to see. And from the look of it, this seems set to continue for some time to come.

However, India has been one of the best performing among the Emerging markets and with good reason too. Indian economy has shown its resilience in no uncertain terms. Agreed that the Rupee has declined considerably against the Dollar and oil prices continue to threaten to break the $100 barrier now and again. But the Indian markets seem to have taken this in their stride and have not shown a great plunge as some of the other EM have done.

With the fear of COVID now all but gone and normalcy having returned for all practical purposes, life has returned to pre-COVID times. Barring an occasional road bump (like we have seen in the last few days), with the occasional threat of a new COVID variant merging, we should be able to navigate this without too much pain. The overhang of the Russia-Ukraine war and US Fed’s stance will continue for some time but that is already factored in.

The focus therefore shifts to what is happening in our own country. As I had mentioned during Diwali time about 2 months back, Consumption will continue to be a great theme to play in the coming times. However that is not all. Some moves by the govt. have also given a fillip to the economy. This whole concept of Atmanirbhar Bharat has opened up multiple doors to industries which hitherto were unaware of what they could do. Though it is a bit too early for celebration, this certainly is a move in the right direction to boost local manufacturing. Add to that the continuing woes in China and the search for alternatives and India has all the right ingredients to prosper. There is this so-called China+1 strategy which has done wonders for the Chemical sector in the last 2 years and is all set to improve the prospects of some of the other industries where China is a dominant player.

Though the govt’s plan to monetise PSUs came a cropper, the silver lining to it was the emergence of Defence sector in the last 2 years which has given a whole new dimension to the Indian economy. With such initiatives, not only can India move towards becoming self-reliant but also serve as an export hub to the western economy which hitherto depended on China & Russia for their defence equipment supply chain. This obviously won’t happen overnight but the next few years should provide a glimpse of what benefits this can give to the Indian economy. In anticipation of these good times, Defence stocks have already run up with some such as Bharat Dynamics and HAL already turning multi-baggers over the last year. So they may take a pause for a while before continuing their upward trajectory over the next few years.

The other thing to bear in mind is the fact that we are in a pre-election year with the next parliamentary elections in 2024. And is generally the case, the govt. focus would be on spending and giving a boost to economy to ensure reasonable numbers on inflation and employment. This can only happen if the govt loosens its purse strings on infrastructure and capex, which have a cascade effect on the economy. After Defence, Railways, which is one of the biggest direct as well as indirect employers in India, may well be the next big theme to play out in the Indian markets. So these are the few things which will reward investors this year as well as the next.

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

IRB Infrastructure (IRBI)

This is one stock which was much maligned some time back due to its debt and governance issues. All that is history now. The company is improving and making its balance sheet strong as the company lately has got two big investors – Cintra and the GIC (the investment arm of Government of Singapore). Based in Austin, Texas, Cintra is a leading private-sector transportation infrastructure company in the world with experience spanning over 50 years of innovative highway development on four continents. Last year, Cintra acquires a 24.9% stake in IRB Infra. Cintra will be a significant minority shareholder, with a presence on IRBI’s Board of Directors, and will transfer its extensive international experience in highway management and analysis of possible new investments. And the funding will be taken care of by GIC.

The shifting focus of government towards infrastructure has led to allocation to NHAI to move up two-fold at ₹1.34 lakh crore in current budget versus previous year’s. The target set by the government to construct 25,000 kilometres of highways by FY23 has led to a positive atmosphere for road and infrastructure developers. Within this space, IRBI is a prominent player and is mainly focused on BOT (Build operate and Transfer) and TOT (Toll Operate and Transfer) projects where government gives an already operational project to private entity on long term contracts. The company is also involved in HAM (Hybrid Annuity model). This is a model where government puts 40% of equity whereas 60% equity is put up by the private developer. IRB Group’s portfolio (including Private and Public InvIT) comprises 24 projects which includes 23 highway projects that further include 18 BOT projects, 1 TOT project, 4 HAM projects and 1 Airport project in Sindhudurg district of Maharashtra.

In October 2021, the company raised funds from Cintra and GIC. Cintra was given 24.9% equity in lieu of ₹3,148 crore and GIC was given 16.9% equity in lieu of ₹2,167 crore. The shares were issued at ₹211.79 per share. Out of these issue proceeds, ₹3,250 crore worth of company debt has been paid off and now ₹3,000 crore debt remains which is self-liquidating as specific cash flows are attached to it. The deal gave a good boost to the company on the leverage front. In FY22 the Net debt to EBITDA came down to 3.32 from 5.07 in FY21 and the Debt/Equity improved to 1.09 from 2.43.

IRBI’s order book gives around 3 years of revenue visibility and with the infra push, more projects are expected to come up and growth prospects look decent. The company’s holding company net debt is zero. The company mainly has been transferring its assets in InvITs. Promoters hold a 34% stake. Government’s initiatives like Gati Shakti and projects in the infra segment will ensure firm visibility for IRBI over the next 2 years. Currently trading around 290 levels, with all the good things above, the stock should easily give at least 20% returns compounded over the next 2 years, from here on.

Mazgaon Dock Shipbuilders

This is one of the beneficiaries of the Defence them that I had mentioned earlier. The best part that I like here is that this is insulated from the usual worries of Inflation, oil prices, interest rates etc. And not only is there an assured market for its products in the form of Indian govt., but it can also start exporting its products (ships, submarines and the like) globally to other markets whether developed or emerging. And with the global peace always threatened with some country or the other raising fears of war, the demand front is well taken care of.

The company has so far built 799 vessels, 26 warships, and 6 submarines. The company has zero debts and a dividend payout of 37.9%. Shares of Mazagon Dock have given a multibagger returns in the last one year as it surged almost 144% and has jumped nearly 125% YTD. However, there is plenty of steam left in it yet. Just look at the financials. They made a PAT of 586 Cr last year, and for Q1 this year they have already made 217 Cr. If they maintain a similar run rate, and no reason they can’t, they could very well make 50% more PAT this year. You can imagine what this would do to their EPS, hence to the overall PE and hence the price by then. And we aren’t even talking about exports yet. Supported by the govt, if they can make a mark in the global markets where there is enough demand, then this is a potential multi-bagger in the making. This is currently trading around 790 levels and the 4-digit mark is not too far off the way it is going.

Texmaco Rail & Engineering (TRE)

Texmaco Rail & Engineering is a flagship company of the Adventz Group and is mainly in the business of heavy engineering, steel foundry and Railway EPC. The company has a total order book of Rs 10,000 crore and it recently got an order of supplying 20,000 wagons worth Rs 6,450 crore. Texmaco has to provide these 20,000 wagons over a period of thirty-nine months. The other important thing about the Texmaco is that it is completely debt free at a net level,

TRE has a market cap of 1,500 crore and sales of 1,800 crore. So the company has strong growth prospects. Even after completing its expansion plan, the company has 186 crore in cash. Another important thing is that that company has a very attractive valuation.

In line with the govt’s emphasis on infrastructure development, there is a lot of emphasis on the Railway sector and this is evident from the fact the government has planned modernisation plan worth Rs 1 lakh crore. And there aren’t too many companies like TRE who can execute such orders for the govt. In the 2022 Union Budget, FM Nirmala Sitharaman announced that the government would manufacture 400 more Vande Bharat trains over the next 3 years. The Railways had ordered 36,000 wheels for Vande Bharat train sets from Ukraine at a cost of US$16 million. Supplies were disrupted due to the 2022 Russian invasion of Ukraine. The Railways placed orders with companies based in the Czech Republic, Poland, Malaysia, China, and the United States for these trains.. The latest update here is that the govt. has already announced the launch of many such Vande Bharat trains across India (there are currently 5 of them running in India, 3 from New Delhi and 1 each from Chennai and Nagpur). These are semi-high-speed, electric multiple unit trains designed and manufactured entirely in India by ICF, Chennai.  The project is estimated to cost around Rs 26,000 crore and this spells great news for the likes of TRE.

Quoting around 57 now, this should give solid returns over the next 2 years and more if things go as planned.

RBL Bank

This is another one which had to bear the brunt of a knee-jerk market reaction. So much so that it fell about 25% in just 1 week in June, hitting a yearly low. It brought back memories of how Yes Bank had collapsed 2 years back. Investors were worried that RBL Bank might turn out the next Yes Bank.  Its most recognizable face Vishwaveer Ahuja, the former CEO of Bank of America who had led and grown the bank for the last 11 years, had gone. The bank grew multifold under the management of Mr Ahuja. Deposits grew 46x, Advances grew more than 50x, Net worth 35x, from ₹350 Cr. to over ₹12,500 Cr., Net Profit from ₹12 crores to ₹508 crores in FY21. Stellar growth numbers indeed. The incumbent, Mr Subramaniakumar, is an ex-PSU banker with 40 years of experience with the likes of PNB & IOB and considered as a 'Bad loan expert'. Historically such appointments at financial institutions have been associated with weak asset quality and governance structure. And to top it all, Mr Subramaniakumar himself was the administrator of the Dewan Housing Finance Corporation which was caught in an epic money laundering case by its management and had turned insolvent.

This sudden turn of events spooked not only the domestic investors but also the institutional biggies who dumped the stock at the first opportunity. Add to this the effect of asset quality issues from the fallout of concentrated bets on select corporate portfolios and losses on the credit cards business during the last 2 pandemic years, and the gloomy picture is complete. From levels of 200+, it fell to below 100 last year and only now has recovered splendidly from there..

But now it appears that most of the bad news is behind it. The bank has clarified that it does not foresee any asset quality challenges going ahead and has built adequate provisions to tide against bad loans. This should soothe investors’ nerves somewhat. On the positive side, it has reported impressive growth in profits and NII in the September quarter even as its credit and deposit grew at a slower pace than most of its peers. The new MD’s strategy on prioritising management stability, accelerating profitable growth, and NPA recoveries is also comforting. The bank’s regulatory compliance should also improve and, thus, reduce the risk of regulatory friction. And most importantly, it is the cheapest among the new age private banks which have come in the last few years, with P/B at just 0.5 at a 30-40% discount to even the mid-sized PSB like Union Bank and BoI who would in all likelihood have a similar risk profile and way less agility than RBL Bank.

Given all the above, though RBL Bank can’t be considered to be out of the woods yet, things are certainly moving in the right direction and over the coming quarters, it should certainly bounce back to its earlier glory. Remember how ICICI Bank had become untouchable few years back with the Chanda Kochhar mess and had touched new lows only to bounce back smartly over the last few years and becoming a multi-bagger from those levels. A similar story seems to be playing out here. Currently quoting at around 180, it should certainly cross 200 levels in the next few quarters on the back of improving Indian economy and stability at the top.

ITC

I had picked this 2 years back  (for 2021) and the reasons I had mentioned then still remain valid today - multiple consumer businesses ranging from cigarettes to food products, hotels and stationery. All of them are a great play on India’s consumption story and ITC gives a complete consumption package, all under 1 roof.

With a 50% rise (excluding dividends), shares of ITC are on verge of logging their best yearly gains in 17 years. Though this was the subject of multiple memes in 2021, astute investors who got in when it was down in the dumps before 2022 and remained patient over the last 2 years or so, have had the last laugh with the stock going up by more than 50% over the last 2 years, something which not many stocks can boast of today. The scrip is also ending calendar 2022 being the second-biggest Nifty gainer.

A stable tax environment for cigarettes in recent years has allowed ITC to calibrate price increases and this trend should continue, driving earnings visibility over the medium term. ITC’s growth will be fuelled by a better-than-expected demand recovery and a healthy margin outlook in cigarettes, healthy sales momentum in the FMCG business, and a smart recovery in the hotels business.

The cherry on the cake is likely to be any news of demerger of its hotel and/or other businesses such as FMCG, paper etc. With strong tailwinds, crossing 400 and more from the current 330 levels should not be too much of a problem next year and later.

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

 

Stock	Price (31-Dec-21)	Price (31-Dec-22)	Difference	%
Nippon India ETF PSU Bank BeES	27.61	47.81	20.20	73.16%
ICICI Prudential Private Banks ETF	178.36	217.35	38.99	21.86%
ICICI Prudential FMCG ETF	377.52	452.22	74.70	19.79%
Kotak NASDAQ 100 ETF	12.30	9.14	-3.16	-25.73%
Indiabulls Housing Finance (IHF)	218.00	154.70	-63.30	-29.04%
ZEE Entertainment Enterprises (ZEE)	320.80	240.05	-80.75	-25.17%
Total	1134.59	1121.27	-13.32	-1.17%

This time the performance has been dismal compared to last year, primarily dragged down by the turnaround stories which did not come through as expected. Of course the portfolio composition was very different last time than this one. But the stocks in each of these portfolios (ITC, TCP, IRE in 2021 and the set of ETFs in 2022) are strong growth stories which will pan out over the next few years. In fact some like Snowman Logistics are ahead of their time in terms of what they offer, leading to huge underperformance in the near term.

The significant lesson to learn from last year (2022) portfolio is that ETFs consisting of a basket of niche/theme-specific stocks not only provide excellent diversification, but also greatly reduce stock-specific risks as can be seen. They should therefore form a core part of any portfolio depending on one’s outlook and preferences towards sectors and stocks.

The other noteworthy thing is the performance of PSU banks last year. This is a much-maligned set of stocks which has been in the doldrums the last few years. Significant recoveries aided by govt. policies and Indian economy’s resilience have been primarily responsible for their stupendous performance. PSU banks of all hues and sizes have performed exceedingly well in 2022 and even the elephants like SBI, PNB & BoB have danced this time and beaten down their private sector peers hands-down. And they were amply supported by India’s private banking stocks which too have returned a handsome ~22% this year. FMCG brought up the solid middle order with the consumption story too playing out well in this opening up year. No wonder then that India stands head and shoulders above any other global market (including Big Brother US) this year. It is therefore only a matter of time before the FIIs see sense in putting their money in the best performing market in the world, signs of which are already visible.

It is also true that the turnaround stories of IHF & ZEE that I had expected this year have not come true. But I still strongly believe that it is only a matter of time when these will start giving returns, much like what ITC did in 2021 and 2022.  And the returns they will generate will more than compensate for the lacklustre performance this year. The biggest media conglomerate post ZEE-SONY merger and the housing demand in India will ensure that. It could take some time, but happen it will.

The only sore thumb in this list is the IT pack which returned -25% in 2022. And NASDAQ was even worse. But again, this is the best time to accumulate the beaten down NASDAQ for 2 reasons – technology will surely lead global (and US) growth in the times to come, not necessarily in 2023, and the Exchange rate tailwinds that Indian investors have. So even if the NASDAQ performs modestly over the next few years, the returns are likely to be far better for Indian investors in the NASDQ ETFs.

And lastly, while the long term focus is rightly on equities, debt at the current juncture is very attractively placed, and there may not be a better time than now to invest in it. And there is a wide variety to choose from – NCDs of companies like Indiabulls Housing Finance, Muthoot group, Target Maturity Funds maturing in 2027-2030 are some of the best option with yields (equivalent of Returns in Stocks) close to 7% which for a debt instrument is very good. I have intentionally not included Bank FDs in this lot though they are giving returns as high as 7.5-8%, as they are highly tax inefficient for people in the 30% tax bracket due to the interest income being considered as taxable income and charged at the same slab rate. This period may last for about 3-6 more months while the inflation cools down before the downward journey of the interest rates starts.

Here’s wishing all investors a very profitable 2023.