Here’s wishing everyone a great 2024.
2023 turned out to be a path breaking year for the Indian stock market. Both the indices made new life-time highs in the last few days and don’t seem to be in any hurry to come down. There is a feel-good factor about Indian equity globally and this has rubbed off on the FIIs who have started coming back in the last few days and weeks. While the Indian market has long ended the FII money dependency, it enables more liquidity resulting in a buoyant market. So more the money coming in, the merrier the markets will be.
Indices though tell only one side of the story. While they are considered as the barometer of the economy, the real fun is in the broader market of mid-caps and small-caps. And it is this pocket which has beaten the main indices hollow over the last few months. Admittedly, there are overheated pockets in this space, and there are potential minefields, but for an astute stock-picker looking for value, this is as good as a time as any. And there certainly are value buys in this market too, even if not in the main indices. And these are the ones to focus on as we will see in the coming sections. However, one needs to carefully define what value in the current context means. Anything above a PE of 20 was once considered expensive and only the MNC kind of stocks were available at this or higher PE. These were also considered to have strong cash flows, governance and availability to tap into parent’s global technology and practices. Come 2022 post the pandemic and the normal has shifted. Now anything around a PE of 30-35 is considered attractively priced, growth stocks are available at a minimum PE of 40 and the IPOs are being priced at 40 and list at a PE of 80. And this situation has rubbed off on the PSUs too. The bluest of blue-chip PSE was available at single digit PE with a dividend yield twice that of bank account rate. And following their private sector counterparts, they are now quoting in higher teen PE, almost twice that of earlier. Given this PE expansion and re-rating of stocks across the board, one really needs to pick stocks carefully not to get one’s fingers burnt.
The one theme which has defined the markets over the last year or so has been the PSU story. It all started with Railways, moved on to PSB and then Defence. And the story is not over yet. PSU theme itself is so diversified that there are always some sectors which are in the limelight at any given time and there may well be a sector rotation here. Already many AMC have launched thematic funds focused on some of the above sectors such as Housing, Defence etc. There may well be more. And when this money starts chasing the same set of stocks, the rally in them is unlikely to stop anytime soon. Add to it the FII flows which are now re-starting and will only increase post Jan ’24. The entire manufacturing, industrials and infrastructure is not just a one-year theme, but a multi-year one. However, while the prospects are undeniably good for the hot sectors of Defence and Railways, they have run up too much too fast and their upward journey is highly likely to slow down significantly and there will certainly be a time correction over 2024 at least.
After multibagger years of 2021, 2022 amidst the post pandemic China+1 strategy adopted by global companies, 2023 was a much more sobering year where there was a de-rating amidst some signs of revival from China and the overall global slowdown in the Chemical industry leading to oversupply situation and crashing of prices. However, most of the good companies in the sector have used this sobering time to set their house in order and ramped up capacities of the right products. The results are likely to be visible from 2024 onwards. Add to that the emergence of new sectors like the EV batteries which require speciality chemicals which are not commonly available.
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. And while there will be specific companies in this area, what better way to play this than through financial and travel & tourism stocks which form the underlying bedrock over which this will grow and are supported by on-going events? Also, India story continues to play out not only locally but also internationally with FIIs waiting on the sidelines to pour in their funds. This should start in 2024 amid hopes of US Fed rate cuts.
So this year’s stocks are based on the above themes. Let’s take a look:
With consistent earnings normalization, controlled credit costs, and healthy asset quality, earnings for PSBs are expected to grow at a more sustainable pace. PSBs will continue to benefit from their established distribution network, strong geographical presence, and improved digital initiatives. After Covid-19, the asset quality of PSBs has been steadily improving, supported by improved underwriting and continued recovery. GNPA/NNPA ratios of PSBs have declined to 5.2%/1.3% in FY23 from the peak of 14.6%/8.0% in FY18. A large part of FY12-22 was spent cleaning up the balance sheets of financials.
Rather than going for individual banks, which too would make good individual stock picks, a more intelligent strategy would be to go for a PSB basket. This can happen thru ETFs available on the exchanges from top fund houses such as Nippon, ICICI, DSP & Kotak. Since this tracks the PSB index, choosing one over the other doesn’t really matter. In early 2022, Nippon India ETF PSU Bank BeES had been my pick. That time it was ~@ ₹28 while now it is @ ₹62. So it has more than doubled in 2 years and still has a lot of steam left, even if it doesn’t double or grow at the same breathless rate. If Indian economy must gallop at a healthy speed, how can PSBs not come into play? The only thing that one needs to consider is the AUM of the scheme to ensure that it is not too small and hence carries a high impact cost.
Shriram Finance (SF)
Apart from the PSBs, some of the financial institutions from private sector are also worth a look. Post the restructuring within the Shriram group last year wherein they streamlined their corporate structure, SF has emerged as a financial powerhouse. SF is a retail NBFC offering credit solutions for commercial vehicles, two-wheeler loans, car loans, home loans, gold loans, and personal and small business loans. Through its cutting-edge technology, it is a digital financial institution that reflects the banking needs of Millennial and Gen-Z customers. It offers priority financial services to those in the unbanked and under-banked sectors. It offers fixed deposits and recurring deposits. It has recently tied up with SIDB for offering loans to MSME.
With a complete repertoire of products from lending (property as well as vehicles), financial products distribution (MF, insurance etc.), this can be considered as a complete financial marketplace.
SF has been up 95%, over the last 3 years, soundly beating the market return of 75% (not including dividends). This was also helped by the restructuring that took place. And the story is set to continue. In fact its attractiveness is further enhanced by its relatively lower valuations compared to its peer set. It is quoting at a P/B of ~2 compared to ~10 for Cholamanadalam, another southern biggie, and the segment leader Bajaj Finance which is at a similar P/B of 10. And it is in strong hands. Over 70% of its shareholding is with FII & DII and 25% with the promoters. So, public holds just 5% of the overall equity here. This can therefore be considered as a safe bet with steady compounding over the next few years.
L&T
With an election year starting, Infrastructure is often considered a favoured sector as govt. kicks off multiple public projects involving huge infrastructure. And here, need one look anywhere other than L&T, the infra behemoth in India? It has everything that an end-end infrastructure project requires and has successfully executed several of them. From Oil & Gas, Engineering, EPC, Railways, Defence, Space they have everything that you can name in the Infra space catering to private as well as govt. sectors. Already, Defence & Railways have been very popular themes led by govt. spending and reforms and these are well set to continue in 2024 and beyond with the likelihood of govt. continuity. The latest sector which has started to take off in India is the Metro trains (which though considered a part of Railways has a large part of other infrastructure such as roads also). One can see metro network being set up in tier-2 and tier-3 cities as well as the outlying suburbs of the major metros (Navi Mumbai being a case in point), And L&T has a strong presence here having already done the H’bad metro, part of Mumbai monorail (which unfortunately didn’t take off due to other reasons and not due to anything from L&T) and recently winning the contract for B’luru suburban metro rail network.
Though it has run up somewhat along with the market, there is still ample scope for it to give healthy returns over the next few years if one has faith in the India growth story.
Camlin Fine Sciences (CFS)
CFSL is a specialty chemicals manufacturer and is one of the world's leading producers of antioxidants and vanillin. It offers solutions across different verticals such as shelf-life solutions (which include antioxidants, blends, and additives), performance chemicals, aroma chemicals, and health and wellness solutions. Apart from offering high-quality traditional antioxidants for the food, pet food, and animal nutrition industry, the company has a product basket that can cater to a wide range of industries from food to fragrance to animal nutrition to pharmaceuticals and petrochemicals.
Camlin has manufacturing facilities in India, Italy, Mexico, China and Brazil with R&D centres at India and Italy and application labs in India, Mexico, Brazil, USA and Italy. The company serves customers in more than 80 countries across the globe with more than 100 products.
Dandekar family, the promoters of CFS, hold about 18% of the equity while Convergent Finance LLP, the private equity firm launched by former Fairfax India executive Harsha Raghavan, holds ~23% in CFS. In April ’23, Belgium-based Ackermans & van Haaren (AvH) entered into a cooperation agreement with the current promoters to become co-promoters and acquired a 6.6% stake in CFS thru an open offer @ ₹160/share. Post the open offer, the 2 foreign firms will hold ~30% stake in CFS and together with the Dandekar family, the total promoter holding is ~48%. Both the foreign entities should add significant value in terms of prudent capital allocation and better corporate governance along with a strong & wide global network to strengthen CFIN’s position as a diversified global supplier of specialty chemicals. A strong network might also open the doors for attractive M&A opportunities for CFS.
Now that the open offer euphoria is over, the stock has come to its pre-offer price of ~₹136 and is a good entry point here. Also remember that the new investors have paid ₹160 for this to the promoters as well as in the open offer in the first half of 2023. This year (FY ’24) may not produce any great fireworks but once their vanillin supply starts from Jan ’24 and Europe demand improves, with help from AvH, things should start looking up from FY ’25. This is one for the patient investor as chemical demand is currently muted due but will gradually improve in the coming 2 quarters as stated above.
Dreamfolks Services (DS)
Consumption need not be restricted to FMCG sector only but can also be considered for Services sector. We have seen how the boom in travel sector (revenge tourism) resulted in boom time for travel services companies like Thomas Cook, EasyTrip Planners etc. Extending this logic further, there is a unique listed company in India called Dreamfolks Services. Not many have heard of this company, but it is a dominant player and India's largest airport service aggregator platform facilitating an enhanced airport experience to passengers leveraging a technology driven platform.
DS facilitates customers’ access to services like Lounges, Food & Beverage, Spa, Meet & Assist, Airport Transfer, Transit Hotels /Nap Room Access and other services. Over the years, they have transformed from being an airport lounge access aggregator to an end-to-end technology solutions provider for designing and delivering services that enhance the airport experience. They have crafted their service proposition to provide their clients the option of offering a wide-ranging bouquet of services to their consumers.
Their asset-light business model integrates global card networks operating in India, credit card and debit card issuers and other corporate clients in India, including airline companies with various airport lounge operators and other airport related service providers on a unified technology platform.
Through their partnerships with other service providers, they have a global footprint extending to 1,500+ Touch-points in over 100 countries across the world out of which 268 touch-points are present in India and 1,232 Touch-points overseas. One of the key aspects of their business model is a strong focus on technology.
In early November, DS announced its entry into Malaysia, as a service to partners at three airports: Kuala Lumpur International Airport, Kota Kinabalu International Airport, and Kuching International Airport. And some time back, it announced its collaboration with Grey Wall, one of the largest airport and lounge service aggregators in Russia. DS’ clients and their end consumers can now gain access to Grey Wall's comprehensive ecosystem of lounges and services in Russia’.
Closer home, DS has set its sights on the railway industry as a key area for future growth. They now operate 12 railway lounges across India. These lounges offer a range of services to railway passengers, including comfortable seating, refreshments, Wi-Fi, and more.
Earlier this year, they acquired Vidsur Golf, one of the leading golf privileges providers in the country. Through this acquisition, DS has developed the capability to offer exceptional luxury services and experiences to travellers globally, thereby expanding its ancillary provisions as well as diversifying its portfolio of value-added services
With a unique service offering and the only listed company in this space, DS offers a great way to ride the travel boom not only in India but globally as well. If they play to the script of doing the right things at the right time (they have already made the right moves in terms of adding to their offerings as detailed above), they may well be the Titan of travel industry offering lifestyle travel solutions. At this point, since it is a growth story, valuations may not be that relevant, as long as they ensure good topline and positive bottom-line in the near future.
Praveg
I am sure hardly anyone has heard of this company. Established in 2005, this pioneer and leader in experiential tourism in India offers exhibition, event management, non-permanent luxury accommodation and hospitality services in India. It has recently forayed into wedding management, a particularly niche area with ample scope but no organized players, or at least listed ones. This is a niche play in the travel, tourism, and hospitality sector and hence I consider it as a hidden gem in this space amid the boom in hotel stocks which have become the consensus stories.
Praveg’s events business grew with the ‘Vibrant Gujarat’ campaign, which was first held in 2003. Given its expertise in advertisements and campaigns, it was awarded multiple event management and turnkey exhibition contracts by the government as well as private players over the years. The company secured its first contract from Gujarat Tourism in 2013 to develop a tent city in the Rann of Kutch for the Rann Utsav festival. In 2018, it bagged a tender to develop a similar tent city near the Statue of Unity. Driven by the success of this model, the government floated tenders across states, with Praveg successfully securing contracts in Varanasi, Daman, and Diu in 2023.
In terms of its inventory, the company operates in 10 properties spread across Gujarat, Daman & Diu, and Uttar Pradesh, boasting an inventory of 685 keys. This comprises 446 luxury tents, 163 cottages, and 76 luxury hotel rooms across four, five, and one property, respectively. Looking forward, the company plans to add 52 keys at three properties by the end of FY24. In FY25, another 250 rooms will be added across eight properties, bringing the total inventory to 1,000.
The big event to watch in Jan. ’24 will be the opening of Ram temple in Ayodhya. Ayodhya is expected to see a huge tourism boom. In 2022, Varanasi, a popular pilgrim spot, attracted 7.2 crore visitors which dwarfed the 85 lakh visitors snared by Goa. Praveg has already built a resort at Ayodhya which will start from 15th Jan. onwards. This very near to the Ram mandir and almost 75% occupancy has been pre-sold.
Its Balance Sheet is healthy given its minimal capex and asset light model. Against an investment of ~₹ 1 cr./room, Praveg’s luxury tents require just ₹ 15–20 lakhs to set up. Its semi-temporary cottages need an investment of ~₹30 lakhs. Time to market is also extremely short as it has the capability to set up a tent city in just two months. Owing to limited capex, its luxury tents/cottages can break even in the first year itself, at an occupancy level as low as 20%/40%.
All in all, this is one company which is in the right place at the right time. With Modiji exhorting the world to come to India for every major event they want to host and also requesting the Indian moneybags to spend it on destination weddings in India rather than abroad, “acche din” are surely around the corner for Praveg. The only risk is that it has run up quite a bit over the last year or so. Nevertheless, considering what lies ahead, it will surely reach far greater heights over the coming years.
Let’s now pause a bit to see how my last year’s picks did.
|
Stock |
Price (31-Dec-22) |
Price (31-Dec-23) |
Difference |
% |
|
IRB Infrastructure |
29.09 |
41.52 |
12.44 |
42.75% |
|
Mazgaon Dock Shipbuilders |
793.15 |
2280.30 |
1487.15 |
187.50% |
|
Texmaco Rail & Engineering |
56.70 |
171.25 |
114.55 |
202.03% |
|
RBL Bank |
179.40 |
279.20 |
99.80 |
55.63% |
|
ITC |
331.55 |
462.35 |
130.80 |
39.45% |
|
Total |
1389.89 |
3234.62 |
1844.74 |
132.73% |
This
time the performance has been rocking compared to last year, primarily because
of the focus on promising sectors like Infra (Road construction and related
projects), Defence, Railways, beaten down Banks and Consumption, all of which boomed
beyond expectations. The performance is especially heartening when compared to
the Nifty SmallCap Index (since 4 of the 5 stocks are from small cap space,
comparing with this index is only fair) which gave a return of 54.82% over the
last year. So this basket has given more than double the returns of the Small
cap index.
Some of last year’s stories have played out for the time being, moving up too much too soon, Mazgaon Dock, ITC being the cases in point. All the neglect they suffered in the earlier period has been more than made up last year with multi-bagger returns. It is highly likely that they may pause in 2024 to get their breathe back after such an astounding run at a blistering pace, but the long-term story is still intact. So, one can take a call considering their own situation, risk appetite and this perspective.
There always is sector rotation in the market and no one sector keeps going forever. Same will be the case in 2024 too. Apart from the ones mentioned above, watch out for the much-maligned IT pack, especially the niche ones (for e.g. Cyient, Tata Tech) and the product companies (for e.g. Newgen Software, Intellect Design) etc. Similarly, PSBs will continue to thrive to make up for the lost time over the years. Another sector to watch out for will be Auto ancillaries (I have already highlighted FMG in my Diwali Dhamka) esp. the ones catering to the EV sector. And lastly the beaten down Chemical sector which after a sparking run in 2021-22, cooled down significantly in 2023. A lot of the EV sector requirements are catered to by Chemicals and some of the biggies like Tata Chemicals have invested in setting up capacities here, besides some of the smaller ones.
