Here’s wishing everyone a great Diwali and a prosperous new year ahead.
With the benchmark indices breaching the historic milestones the first
time ever (esp. Nifty crossing the 20K mark) a couple of months ago, there is a
gung-ho atmosphere all round, even though there has been some volatility in the
last few days (a dip followed by a subdued recovery). However, the consensus is
that this is a minor correction in the bull run and not a bear run. While there
are some naysayers citing overheated valuations in midcaps and smallcaps, and
probably rightly so, most people seem keen to ride the rally. And why not? With
Rs. 16K coming in every month through the SIP route, where else will this money
go? Add to that the NPS money, however miniscule it may be at the current
juncture, and the DII flows (insurance, PE etc), and there is a problem of
plenty. After all the gloom and doom in the western economies and China, India
seems to be the only one left standing for the moneybags to put their money in.
However, things are not as hunky dory as they seem. It is true that the
midcaps and small caps have indeed gone up anywhere from 50% to 2X-5X in the
last 6-8 months. Such a rapid rise is not healthy and is certainly unwarranted,
all the liquidity notwithstanding. One should certainly be careful in such
stories esp. in sectors like Defence and Railways which have gone up too much
too fast. Agreed that these are multi-year stories, but they need not discount
FY ‘28 earning in FY ‘24. While there may not be a price correction in them so
soon, there certainly will be a time correction now with the prices not going
up in a hurry now over the next few quarters and/or months. After some cooling
off, the journey may resume. And the major risk as always will be a bad quarter
which will bring the house crashing down in no time.
The major global events which were on the radar and have now more or
less played out were the stance of key global central banks, with US FED
leading the way. Since they have now pronounced their verdict of not increasing
the rates in a hurry (and also keeping the option of future rate hikes open),
and our own RBI also following suit, things on that front are more or less
clear. However, while there may not be any increase in rates as yet across the
globe, nobody including RBI is yet talking about lowering them. Higher for
longer seems to be the consensus mantra now. That also means, the debt
investors can look for reasonably decent returns across instruments for some
time to come. Inflation is still above the desired mark globally, even though
it may have come down somewhat lately. What might however queer the pitch for
India is the oil prices which are yo-yoing these days due to the Gulf war. That
may likely to have a much bigger impact on our economy than the rest of the
world as we import most of the oil. Add to it the elections and the freebies
that the regional parties are likely to unleash in the coming weeks and months
before the elections, and the risks are manifold. Nobody questions a winning
team but the same team’s performance comes under the scanner when a tournament
or series is lost. So too with the markets. It is usually seen that theories
are created to suit the result either on the way up or down. Both sets of
explanations are ready with the market pundits. So as always, there is no point
in getting carried away and having FOMO. Market always gives opportunities to
everybody and this time will be no different.
The usual suspects like the Consumption theme and Infra (including
Power) are very much likely to be in the fray in the coming year as well. Add
to that the PSU story which started this year and is likely to continue for a
while longer to play catch-up with all these years’ lag. Interesting to note
that the PSUs themselves are a kaleidoscope of myriad sectors and there are
enough overlaps with Consumption (IRCTC being a classic Consumption/Infra
intersection) with Infra at the core.
With the BJP expected to scrape through the elections next year, with
whatever margin, that should be enough to keep the markets ringing. One thing
which the market likes is stability irrespective of the political party and
that makes the choice obvious.
One sector which should do well over the next year or two is Paper. The
driver for this is the New Education Policy which has been rolled out as a
pilot this year but will certainly take wings next year after the learnings of
the pilot this year.
While Pharma as a sector fizzled out post COVID, there are green shoots
now as things have become overheated elsewhere. It may be a fait accompli
considering the valuations of other sectors currently. The other sector which
has largely been the victim of the much-hyped US recession is the IT sector
which should recover now. Midcap IT players and especially the niche ones, look
interesting now. Auto ancillaries are also another area where there is still
scope for upward movement with new car launches again picking up speed after
the semiconductor scare of last year and the EV theme gathering momentum across
both 2-wheelers and 4-wheelers.
On the corporate side, some of the groups have regained their mojo, 2 of
them being the Adani and Shriram. I am particularly bullish on Shriram group
which has clearly reinvented itself over the last few years, with a lot of
restructuring and having a clear structure and focus on the sectors they are
betting on. 2 of the companies this time are associated with Shriram group
So here are the stocks I am betting on this year. Let’s start with the
Infra sector.
SEPC
This was formerly Shriram
EPC and is a service provider of integrated design, EPC and project management
services for renewable energy projects, process and metallurgical plantsl and
municipal services sector projects. It is also one of India's leading 250KW
wind turbine generator ('WTG') manufacturers.
It came out with an IPO in Jan
‘08 before the global financial Lehman Brothers crash (GFC) later that year when
the Infra frenzy was at its peak, at a whopping price of 300/share. And by the
time of its listing the market sentiment had already turned weak and it listed
below the issue price. And what a wealth destroyer it has been. Since GFC, it
could never recover and come anywhere close to its IPO price. Even Shriram
group couldn’t bail it out over the years and in the next few years after the
GFC and its IPO, it plunged below Rs. 50 and debt became a major overhang. It eventually
became a penny stock as the downward trend continued, even slipping below Rs.
10/- earlier this year. During the course of this journey, as was the case with
most Infra companies, it ran up heavy debt from a clutch of private and public
sector banks, which they later converted into equity. The result is that these
banks including the PSB biggies like SBI, BoI, Indian Bank and the like and
private bank biggies like Axis Bank & Federal Bank have significant stake
in it totalling about 40%. Shriram group still holds about 15% stake in this
company.
The company has been making
losses over the last few years and the worst part was that they were increasing
every year. COVID only made matters worse. From 30 Cr. in 2019, the losses
ballooned to 263 Cr. in 2022. The promoters viz. Shriram group had
infused Rs.736 Cr. into the Company from FY15-FY20. The infusion of funds by
the promoters went more into servicing of debt obligations rather than being
used for growth of the Company. Given this state of affairs, it was
no wonder th at Shriram group was looking for a white knight to bail out their
EPC company who could infuse funds and simultaneously reduce the debt
level and to sustain and grow. And they found it last year in Mark
AB Capital, a leading investment firms in the Gulf region. Mark AB is an
investment company established in Kuwait in 1998 and reorganised in Dubai, UAE
in 2020. Mark AB manages $ 1.09 Billion and has experience in 9 EPC companies
in Kuwait, UAE, North Africa and Russia. Shriram EPC’s footprint in the
Sultanate of Oman in the Middle East and in Tanzania, Africa can also be used
for mutual benefits by the companies. Mark AB Capital LLC invested 350 Cr. and
has 26.48% of fresh equity in SEPC. This was part of a restructuring of SEPC
under the Stressed Asset Provisions of the RBI. As a result of this, Mark AB
capital became the promoter and the largest shareholder of SEPC. The existing
promoter (Shriram group) ceased to be a promoter. As part of the rejig, the
consortium of bankers converted part of their debt into CCDs and NCDs.
This move will also enable a constant flow of funds from Mark AB to SEPC
and also provide the necessary financial support with the lenders. The results
are already visible. The company’s debt has reduced from 981 Cr. in FY 22 to
409 Cr. in FY 23, a huge 58% reduction. Consequently, the interest cost
reduction has followed with it coming down from 125 Cr. in FY 22 to just 60 Cr.
in FY 23. The company has order book of ~100 Cr. with a bid pipeline of ~3000
Cr. The largesse provided by this year’s budget of 70,000 Cr of Jal Jeevan
mission would ensure a steady bid pipeline and order wins.
This is a microcap stock with a MCap of ~1500 Cr. and is a re-rating
story. With fund infusion from a Gulf-based investor, huge stake of banks as
well as Shriram group (though not a promoter, they still hold a 15% stake), and
infra boom already in progress and set to accelerate in the coming election
year, things couldn’t be better for SEPC. Though it has more than doubled in
the last few months from 10 to 24 now, this is a potential multibagger. Of
course, it is not realistic to expect it to double at the same pace as the
current, but with the baggage behind, it certainly has all the classic signs of
becoming a multi-bagger in the next few years.
Orient Green Power (OGP)
Orient Green Power is an India-based company, which was founded by SEPC (detailed
above) in 2006 and is engaged in the business of generation of power from
renewable energy sources, which is wind energy. The Company has a portfolio of
402.3 megawatt (MW) of wind assets spread across the states of Tamil Nadu,
Andra Pradesh, Gujarat and Karnataka. Its portfolio also includes a 10.5 MW
wind farm in Croatia, Europe. The management is also exploring opportunities in
solar power segment through a hybrid model of wind and solar with the objective
of attaining 1 GW of installed capacity in the next 2-3 years. The company
counts US-based Bessemer Venture Partners and Olympus Capital Holdings Asia
amongst its major partners.
This company too came up with its IPO when the world was just settling
down post the Global Financial Crisis (GFC) in 2010. And as was the case with
SEPC, it too made a weak listing debut. The company has done a major debt
refinancing of 721 Cr. from IREDA which will reduce interest cost by 3% by
FY24. The company has been constantly reducing its debt over the years from
~1500 Cr. in FY19 to ~1100 Cr. in FY23. This will reduce further by FY24. Add
to it its receivables from discoms and the picture further brightens. And to
top it all, it recently made a Rights Issue which was fully subscribed by its
existing shareholders. So this fund infusion will further reinforce its
finances.
All this is makes it a very strong re-rating candidate.
The other thing which appeals to me regarding OGP is its strong
management. Mr. T. Shivaraman is the founder & Vice Chairman of the company
since 2010. He has a Master’s degree in Chemical Engg. from IIT-Madras. Another
director Mr. R. Ganapathi is also from IIT-Madras.
With the govt. as well as global focus on renewable energy, OGP has
tailwinds going for it. Once it settles its finances with multiple fund
infusions as mentioned above, it should be on a growth path. The backing of
Shriram group and the PE funds is the icing on the cake, This has also doubled
from sub-10 levels to around 18 now, in tandem with SEPC, it still has a lot of
stem left and its upward journey should continue once the re-rating happens,
after a few string quarters.
These twins (SEPC & OGP) should continue to progress in tandem, given
the close association between them, and being in the right sector at the right
time.
Raymond
If ever there is a stock which can be compared to ITC over the last few
years, it is this one. After lying in deep slumber for quite a few years (a la
ITC), it has suddenly woken up and started its restructuring in right earnest. For
the last couple of years, it appears Raymond has relentlessly been trying to
simplify its structure & create value for shareholders. The group announced
a couple of internal restructurings by calling a step towards creating value
for its shareholders, which however didn’t materialize. In yet another similar move in Sep ‘23,
Raymond announced internal restructuring to list its apparel business
separately. But this time they also announced selling of their identified
Fast-Moving Consumer Goods (FMCG) business to Godrej Consumer Products (GCP) to
deleverage its balance sheet.
Raymond is a leading Indian textile, lifestyle, and branded apparel
company with a wide network of operations in local as well foreign markets. It is
also engaged in the development of residential commercial real estate
projects.
Raymond’s turnaround can be a classic turnaround case study for
B-schools.
Pummelled by the pandemic and, especially, the lockdowns, Raymond’s
businesses had seen some of the toughest times in its 98 years post the
pandemic in FY ‘21. Sales of its traditional businesses—branded textiles,
branded apparel, garmenting, high-value cotton shirting and, to a lesser
extent, engineering & auto components—plunged between 7% and 59% that
fiscal, and the company’s bottom line slumped to a loss of RS 297 crore. But
Raymond boss Singhania was not the one to give up. He hired a bunch of grizzled
professionals in leadership positions including the heads of the real estate
and lifestyle businesses, a new CFO, and a Vice Chairman with multinational
exposure, between July 2020 and July 2022.
The steps started with a reduction in inventory resulting in lower
working capital (WC) requirements and debt levels. Next was the cutting down on
non-performing branded apparel stores, and focus on efficiency. The money
released by cutting costs, enhancing productivity, managing inventory better,
and from reducing the WC was used to repay debt. All these initiatives helped
Raymond’s net debt fall from Rs. 2,378 crore in September 2019 to Rs. 689 crore
in March 2023, with a subsequent fall in the debt-equity ratio from 1.1x to
0.23x in the same period. In FY22, Raymond’s bottom line returned to black, and
in FY23, net profits doubled and revenues notched up its highest-ever value of
Rs. 8,337 crore, making it a freshly minted billion-dollar organisation. The
sale this April of its FMCG business to Godrej Consumer Products for Rs. 2,825
crore has given Raymond significant cash in hand to invest in its lifestyle
businesses and pare debt further if necessary.
The real turnaround happened due to Raymond’s focus on its realty
business. Harmohan Sahni, a qualified CA and a real estate veteran was brought
in to head the Realty business. He had led various initiatives in real estate,
starting with GE Shipping’s realty venture, then Mahindra Lifespaces, then his
own venture, and then running Edelweiss’s realty lending business. So he knew
the game inside out. Post the pandemic, real estate, which had been in a
decadal slump, suddenly sprang to life when people realized the importance of
home. And now it is in a virtuous upcycle which is likely to last for a few
years. And it also helped that Raymond had prime land bank in Thane a part of
which housed the Sulochanadevi Singhania School. A small part of the bank was sold to a mall developer, so a mall is also
being built and there is a hospital nearby. So all the good things that a real
estate project needs are well in place besides being in a prime area of Thane,
which has had nearly 50% share of all residential unit sales in Maharashtra in
recent years.
Besides the realty part, Raymond’s traditional business of everything to
do with clothing is also chugging along just fine. So are the denim and
engineering & auto components businesses. All the businesses related to clothing clocked high growth in FY23—sales
of branded textile, branded apparel, garmenting (which is an export-oriented
B2B business where Raymond supplies ready-made garments to international
brands) and high-value cotton shirting grew upwards of 20%. This growth has
come on the back of an explosion of pent-up demand after the pandemic.
And the road ahead appears to have a long runway. China-plus-one strategy
by global brands will benefit India. Compared to competitors like Vietnam and
Bangladesh, Raymond can offer end-to-end vertically integrated, very strong
world class facilities, people to the global players which look for exactly
that.
Indian consumer trends like casualization and hybrid formals, where
people go to work wearing attire that is not strictly formal, yet not totally
casual either, is also a great market
for Raymond. Add to that the start-ups, the tech crowd and millennials, and
their approach to dressing, and Raymond couldn’t have had it better. And
Raymond has covered its flanks well by bringing in its ethnic apparel brand
Ethnix. The “smart ethnic”, bundi, kurta and other ethnic wear, are becoming
fairly common in the workplace, and remain popular in weddings and festivals.
While there is competition from the likes of Vedant Fashions (of Manyavar fame)
in this segment, there are also a lot of unorganised players in this segment,
which would help the overall ethnic portfolio in terms of consumers wanting to
buy branded ethnics. Raymond, starting from a lower ase, can scale up
profitably here.
Raymond also has a Rs. 1,000-crore-plus business of denim, which it runs
through a 50:50 joint venture with UCO of Belgium. Apart from supplying to other premium Indian brands,
Raymond UCO Denim now also supplies denim fabric and readymade jeans to Raymond
brands such as Parx
The final piece is engineering and auto components, a not so commonly
known business area of Raymond. The engineering company JK Files, has strong products such as engineering
files, drills used in manufacturing, and power tools used by electricians and
plumbers. And two, auto component maker Ring Plus Aqua, manufactures a host of
products such as engine and transmission components to global OEMs such as
Cummins, Caterpillar, BMW, among others, and in India to practically all OEMs
in both passenger and commercial vehicles. Ring Plus Aqua is now getting into
new products such as dual clutch transmission and dual mass flywheels. About 60%
of its revenues comes from exports.
Last week, Raymond acquired a 59.25% stake in Maini Precision Products
(MPL). MPP is engaged in manufacturing precision engineering products for
aerospace, EV, and defence sectors, with 11 manufacturing facilities in India. With
this acquisition, Raymond's engineering business will emerge as a large‐scale provider of engineering, automotive, electric
vehicle (EV), aerospace and defence components, distinctly positioned to target
high‐growth precision engineering products with a significant presence across international
as well as domestic markets. This acquisition will also provide an impetus to the
‘Make in India’ initiative & China Plus One strategy.
Going ahead, Raymond is restructuring and streamlining its businesses to
drive further growth. This April, Raymond Group exited its FMCG business by
selling its condom brand Kama Sutra and deodorant brands Park Avenue and DS, to
GCP for Rs. 2,825 crore in an all-cash deal. However, Raymond will retain its
condom manufacturing plants and contract-manufacture them for others.
In parallel, the businesses of Raymond have now been shuffled into a new
structure. The lifestyle businesses are being demerged from Raymond into
Raymond Consumer Care (RCC), and Raymond’s main business will be real estate,
with investments in engineering-auto and denim.
All in all, with all growth drivers well in place, Raymond as a
conglomerate can now start rubbing shoulders with other corporate flagships
like ITC and Tata Consumer Products and have a long runway ahead. This is
likely to be a multi-year story similar to ITC, where further value unlocking
of engineering and auto components is a
distinct possibility over the next few years, once the effect of current
re-structuring stabilizes.
This too has nearly doubled from levels of 1000 to the current 1800 but
with all that described above bearing fruit, I don’t see any hiccups in its
upward trajectory after some consolidation at the current level, given the rise
in a short period. After all, the street also needs to digest the value it is
unlocking over the quarters. It should give a return of at least 25% over the next
year or so. The bonus will be further value unlocking thru the listing of its
multiple businesses such as engineering & auto components.
This is a combination of Paper and Cement both of which are in demand
now. It is engaged in the manufacture of newsprint and printing and writing
paper by using bagasse as a raw material. The company caters to the needs of
multifunctional printing processes like sheet-fed, web offset, and digital
printers. The company also manufactures writing paper and markets them under
the name Eezee Write. TNPL manufactures a range of eco-friendly notebooks. The
company also in the business segment of Paper, Cement, Energy.
Not only is this a leading paper maker, but also is a small cement player
with a 3.3 lakh TPA capacity which though miniscule compared to the sector
biggies, is a lucrative by product of their waste and fly ash. Besides it also
has 140 MW captive power plant. Few months back, they commissioned a pulp mill
which has improved their margins. FII& DII own about 20% here while TN govt
holds about 35% stake which also could be up for grabs at some point with the
consolidation on in the sector.
On the valuation front too, this ticks all the boxes. With a PE of around
5 (less than 3, 5 and 10 Year PE) and close to its BV, it is certainly going
for a song. As paper and cement demand picks up TNPL should continue to do well
in the coming period. Though it too has run up along with the small-cap segment
of the market in the last 3-4 months, it hasn’t run away over the full year and
is still available around the same price as a year ago. There are enough
tailwinds for TNPL to give good and stable returns going forward.
Quoting at ~285 at an astonishing PE of ~5, this must be one of the
cheapest stocks with significant growth potential in the market. Of course, the
govt. stake in it could play out either way – as a spoiler in tapping the
potential growth areas or as a bonus if govt. were to sell this to strong hands.
Federal Mogul Goetze (FMG)
Not many people have heard of this MNC auto
ancillary company. It was a subsidiary of US based activist investor Carl
Icahn-owned Federal Mogul. It makes pistons, piston rings, sintered parts and
cylinder liners covering a wide range of applications including
two/three-wheelers, cars, SUVs, tractors, LCV, stationary engines and high
output locomotive diesel engines. It is a market leader both in OEM and aftermarket.
It exports to many countries.
In 2018, US-based Teneco, a Fortune 500 automotive
components OEM and an aftermarket ride control and emissions products
manufacturer, acquired Federal-Mogul, the parent of FMG, in a deal worth approximately $5.4 billion.
Following this, as per Indian laws, it made an open offer to acquire an
additional 25% stake from Indian minority shareholders at ₹400/share. Here
comes the twist. As per SEBI rules, if a counter is liquid (having the
prescribed trading volumes), the open offer has to be at the 6-month average
price. If however, the counter is not liquid, or if the Indian company
contributes more than 15% of the enterprise value of the parent, then the open
offer has to be done at a fair value price arrived through an independent
valuer. Accordingly, Teneco came out with an open offer at ₹400/share. This was
however rejected by the Indian minority shareholders as too low a value for FMG
share. The matter went to SAT, following which SEBI appointed Haribhakti &
Co, a reputed accounting (audit, tax, risk etc.) and business advisory firm in
India, as an independent valuer to assess the fair value of shares of FMG. They
too opined that this value of ₹400/share was lower than the fair value. They in
turn arrived at a fair value of ₹608.5/share which was nearly 50% more than the
open offer price. Following this, SEBI directed Teneco to make the open offer
at this price of ₹608.5/share in 2019. There was also an interest component
included here due to the delay in the open offer from the date of acquisition,
resulting in the open offer price going to ₹667.5/share. This was finally
completed in Jan ’20.
The twist doesn’t end here. The successful
open offer led to the promoter Teneco’s stake going beyond the SEBI’s
prescribed limit of 75%, which meant that they had to come out with an OFS to
bring it down to 75%.They complied with this at a throw away price of ₹250/share.
Once the dust had settled down on this, there was yet another twist. The
initial acquirer and now the parent of FMG, Teneco, itself was acquired by a PE
biggie Apollo Global early last year. And this acquisition happened at $20/share,
a 100% premium to the then local Teneco price of ~$9/share. The price of FMG in
the Indian market when this happened was ₹235/share. So the new parent Apollo
Global came out with an open offer at ₹275/share as a fair value for FMG shares.
When the last open offer 3 years ago was at ₹608.5/share, which was considered
as a fair value then, how could the fair value now be nearly half of that? The
minority shareholders have again gone to the regulator SEBI against this price.
Few weeks back, SEBI has appointed MM Nissim & Co as an independent valuer
to assess the fair value of FMG shares. The minority shareholders have a valid
reason to be sore. FMG is a debt free company trading at a PE of 17.5 times FY
24 earnings with cash of ₹48/share on its books. And to top it all, Auto sector
is booming, Auto index is at an all-time high. Given this background, it looks
highly likely that this open offer price of ₹275/share will pass muster with
SEBI which holds shareholder interest as paramount. Even at a conservative
discounting of 30-35 for a debt free MNC stock in a booming sector (the median
PE of small cap stocks itself is around this range, so this should certainly
command a premium, but for the purpose of this conservative estimate, let’s
take it the PE at 30-35), the price should be anywhere upwards of 650, which is
nearly double (~1.8 times) of CMP of ~360. Add to that the interest part as was
done last time, and it well be at last 2.5-3 times the CMP. So it is a
reasonably safe bet to expect multi-bagger returns from FMG over the next few
months.
Before concluding, let’s look at how last year stocks have performed:
|
|
2022 |
2023 |
Difference |
Gain/Loss |
|
Lemon Tree Hotels |
86.25 |
113.25 |
27.00 |
31.30% |
|
Devyani International (DI) |
194.25 |
183.10 |
-11.15 |
-5.74% |
|
Associated Alcohols & Breweries (AAB) |
473.95 |
472.50 |
-1.45 |
-0.31% |
|
L&T Technology Services |
3524.95 |
4265.00 |
740.05 |
20.99% |
|
Nifty Auto ETF |
129.51 |
165.18 |
35.67 |
27.54% |
|
Total |
4408.91 |
5199.03 |
790.12 |
17.92% |
HAPPY MUHURAT TRADING!!
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