Diwali Dhamaka 2016

Here’s wishing everyone a great Diwali and a prosperous new year ahead. As with last year, the market has kept up its volatility with new highs as well as precipitous falls at various times in the year, and not every time for sensible reasons. It thus continues to be a stock pickers market. 

After the initial hiccups, and to some extent the belying of lofty, if unrealistic, expectations, Modi sarkar seems to be settling down with a few accomplishments on the national as well as the economic front. While the surgical strikes against Pakistan will come in handy for the govt. to show that it means serious business with notorious neighbors and won’t take things lying down as was done by oast govts., the passing of GST Bill (the Const. Amendment, not the actual one which will come up in the winter session shortly) will no doubt boost its morale as well as that of the industry no end.

As I have been mentioning over the last 2 Diwali blogs, it never pays to get carried away in the stock market, in either direction, especially in India. So any serious dip in quality stocks with proven managements should be considered as an opportunity to buy into those shares at lower prices, thus increasing the chances of reaping better gains, than would otherwise have been obtained. The recent Tata saga, which is still unraveling, is a classic case in point. Though spat between the top management is always a serious issue, if it doesn’t directly impact the businesses of the companies themselves, then it should be allowed to play its course without worrying too much about the company’s performance.  Tata Motors will not sell any less or more JLRs purely because either Cyrus Mistry or Ratan Tata is at the helm of the holding company. It would have been a different matter if either of them were directly heading the company.

In the last 1 year, the mid and small caps have outperformed the large caps by a wide margin. This has led to the situation where quite a few of these stocks are running far ahead of their fundamentals at elevated levels. This however should not be taken as a sweeping statement. There are pockets in midcaps which are still quoting at reasonable, even if high, valuations primarily because of their growth prospects going ahead. And these companies are likely to give rich dividends in the years to come if one has the patience to hold on to them for a few years through thick and thin. Some of the NBFCs like Manappuram Finance (which has tripled in the last 1 year) and SKS Micro are cases in point.

So given that this is a buyer’s market now, where should u place your bets? The focus this year has been on Consumption theme as well as the economy. Needless to say, management quality, business domain and growth prospects should always be primary factors while deciding on buying any stock. Some of these stocks have been beaten down due to a bad quarter here and there, but their pedigree remains unquestionable. 

Jain Irrigation Systems DVR (JIS)

Jain Irrigation Systems (JIS) is currently the world’s second largest and India’s largest micro irrigation company. Another little known feature is that JISL is the largest global player in mango processing. The stock was once the favourite of cognoscenti investors owing to its dominance in the Micro Irrigation systems (MIS) and soared to an all-time high of Rs. 265 in August 2010. However since then, it has been a downhill journey due to some ill-times moves by the company.

The reason the Company fell out of favour was because it changed its business model. It earlier used to sell irrigation equipment to farmers on credit which created severe stress on the working capital. To resolve the working capital problem, the Company demanded upfront payment from the farmers. However, the impoverished farmers had no money to pay for the equipment with the result that sales slumped and profitability went for a toss. To compound the problems, the Company availed of massive loans of up to Rs. 4,200 crore to enter into unrelated diversification. The huge interest burden itself crippled the Company.

However, that is now all set to be history. Over the last year, the Company has taken a series of strategic decisions which are designed to move it out of the unrelated businesses and reduce debt. The market has lost sight of these developments and has not given the Company any credit for its efforts.

Govt’s  ‘Pradhan Mantri Krishi Sinchai Yojana’ under which nearly Rs. 50,000 crore is be spent over the next five years on irrigation and allied farming related matters, will catapult Jain Irrigation back to the growth path. The fall in oil prices as well as polymers will also improve the margins for JIS.

The govt. has vowed to complete 99 major and medium irrigation projects by 2019 and bring 7.6 million hectares of land under irrigation in some of the most drought-prone regions of India. A long-term irrigation fund of Rs. 20,000 crore under the National Bank for Agriculture and Rural Development (Nabard) will also be created to fund irrigation projects.

All the above, with the addition of a good monsoon this time round, augur well for JIS, having a monopoly in drip irrigation.

The other 2 businesses of JIS – Piping products and Food processing are also high-growth areas due to govt’s initiatives in agriculture and food processing industries.

All the segments JIS is in are thus high-growth areas and have the potential to reap rich returns over the next few years.  Also, JAF Products Pvt Ltd (the promoter group company) infused capital worth Rs 112 crore in the form of equity (at a premium of Rs 78 per share on the face value of Rs 2) in FY16. It has already risen by 38% over that price and if things go as projected above, powered by its growth businesses, it could well be a multi-bagger in the years to come.

For retail investors, I would always go for the DVR which though trades at a discount to the parent, gives a better dividend and would always rise in the same proportion, thus making it cost-neutral and a better option.

L& T Finance Holdings (LTFH)

With a pedigree such as the one it has, this has only flattered to deceive so far. Since its issue @52 in July ‘11, it languished below this price for quite a few years immediately following the issue. However, the last couple of years, it has managed to break its shackles and has given great returns to investors who entered it post the IPO at a lower price. It is only now that the original IPO investors have some reason to smile.

However things are changing for the better at a fast pace as LTFH has embarked on a restructuring drive over the past year or so, with advice from McKinsey. It has been looking to prune several of its unprofitable units, including the asset management and alternate investment business, to concentrate on its hardcore infrastructure, rural, and wholesale financing as the company aims to improve the RoE to 18-20 per cent by 2020. 

On valuations LTFH is trading at P/B of 2.65, cheaper than its peers such as Cholamandalam Finance (5) and  Shriram City  Union Finance (3.55). And the restructuring has started to yield results. Company has improved its asset quality with GNPA coming down to 4.58% in Q1FY17 from 5.45% in the same period last year. Net NPA also improved to 3.13% from 4.43% in the same period. As the company has started focusing more on retail financing and low yielding assets, the asset quality stands improved.

The NBFC sector has had a massive run in the last 2-3 years or so, with some such as Manappuram Finance (up 3 times in the last year alone) & Cholamandalam  (up 5 times in the last 3 years) running up massively and therefore have relatively less steam left, due to expensive valuations. With the economy on the verge of a turnaround in the next year or so, LTFH, with a renewed focus on its core areas should yield good returns.

Kokuyo Camlin (KC)

This is an MNC stock and has been lying low in the current bull market. And the surprise is that it is not even dependent on the economy per se. The kids will go to school no matter what the interest rates are and will need most, if not all, of the things which KC makes. Agreed that it has had a dismal quarter recently, but there are a lot of triggers for KC to give rich returns

• The company has set up an integrated, state-of-the-art manufacturing facility at Patalganga, spread over 56,600 sq.mts. (14 acres) of land and, supposed to be “the largest stationery plant in the Kokuyo Group”. This is likely to benefit KC as economies of size, scale and scope unlock immense new potential in procurement, logistics, production and delivery. This may well be the inflection point the company was looking for.
• Promoters (Japanese MNC Kokuyo S&T Ltd.) hold 75% of the stake and some astute HNIs , among them Ramesh Damani (one of the most astute investors on Dalal Street) and Anand Rathi hold about 8% in KC leaving only about 17% of floating stock.  The thus stock has low liquidity which can work out to the advantage of investors owing to “supply scarcity” and “mis-pricing” of the stock.
• With 75% stake, there is always the possibility of delisting at some point in time. Ricoh India, also a subsidiary of a Japanese behemoth, has already unsuccessfully attempted delisting on two occasions. If this materialises, KC will shoot thru the roof as has happened in other cases unfailingly.

 A good company in a bad time is always a catch. And such opportunities should be grabbed with both hands.

Aksh Optifibre

Aksh is a company whose time has finally come.  I had written about Sterlite Technologies earlier and at that time as well I had mentioned that optical fibre business is likely to see good times ahead. Other than Aksh, the other 3 players in this area are Sterlite (which is the leader), Vindhya Telelinks and Birla Ericsson.

In India from 2000 onwards there was a boom in cell phone/telecom and internet usage but sadly the required optical fibre demand did not materialize in that period.. But instead of foraying into real estate / infra the promoters of Aksh kept improving the company by expanding capacity, doing backward integration and focussing on various facets of the same business - more particularly becoming leaders in production of FRP rods and also FTTH (Fibre to the home). Another foray in a field similar to FTTH was the e kiosk business in Rajasthan.

Another noteworthy aspect of Aksh has been that capacity expansion has been undertaken in a slow and steady manner without adding much of debt...therefore, now that optical fibre cable demand has finally come to India due to Digital India, Smart cities, 4G, FTTH and e- governance. Aksh has some unique features which will serve as at least a temporary moat (for 5-7 years).

•  It is fully integrated Optical fibre cable manufacturer focussing solely on this business and having developed considerable expertise and reputation and supplying quality goods to a host of big guys.
• It has very less debt and that combined with backward integration makes it a low cost producer of Optical fibres
• Its capacity expansion is perfectly time and will enable the company to grow rapidly, while there is no significant capacity addition by other two players Vindhya and Birla Ericcson.

Currently trading at 23, this has the potential to be a multi-bagger going by the prospects ahead.

Aditya Birla Fashion & Retail (ABFR)

This is a play on the brands in the premium apparel segment. Arvind has already multiplied manifold in the last 2 years and so has Raymond. This will be a beneficiary of the re-rating of brands the way it happened with Arvind and Raymond. Post its split with AB Nuvo, this hasn't really established its own identity. This is one stock in the Textile segment which is waiting to be discovered.

This company emerged from Madura Garments which was already known for its premium/upmarket brands such as Louise Phillipe, Van Heusen and the slightly lower Peter England. These brands have now come under ABFR fold. After firmly establishing themselves in the shirts and trousers category, these brands have now also expanded into other related segments of men's dressing such as belts, handkerchiefs and shoes, thus providing a complete wardrobe for a man. And now the logical expansion currently being targeted is women. Van Heusen already has a women's range and is probably only one of the few brands in the women's wear category which is generally catered to either by proprietary brands launched by the retail store chains such as Shoppers Stop or the unorganized sector. So there is ample scope for establishing themselves into this segment. And these brands have already learnt the ropes of marketing premium brands to the white-collar population.

The other major advantage that ABFR has is the recent merger of Pantaloons with itself. Now Pantaloon caters to the unbranded mid-market/economy segment which again is a big market. Here the competition is from local/regional brands such as Cambridge in Mumbai. Given the reach Pantaloons has, due to its long presence in this segment, expanding its share in this market also shouldn't pose major problems.

All in all, here is a company which straddles the entire segment from mid-market to premium in men's as well as women's wear waiting to catch market's eye. And the good part is that this segment is a high-margin business which augurs well for this company.

Though the fundamentals are not anything great to write about currently (it is making losses but these have reduced sequentially), this should be accumulated now as well as on occasional dips for great returns as market re-rates this stock..

Before concluding, let’s quickly look at the performance of last year’s recommendations:

Stock	Last Diwali	Current	Difference	%
Federal Bank	53.70	81.95	28.25	52.61
Motherson Sumi Systems	265.65	331.10	65.45	24.64
L&T	1347.45	1477.90	130.45	9.68
ICICI Bank	262.40	276.85	14.45	5.51
Ashok Leyland	89.50	90.25	0.75	0.84
Eros International	256.15	194.95	-61.20	-23.89
Overall	2274.85	2453.00	178.15	7.83

All prices in Rs.

So since last Diwali, this portfolio has given a return of 7.83% slightly less than 8% which is what Sensex returned. Over the same period Nifty gave 10% and mid-caps a whopping 22%. Given the circumstances, it is at best an average return, and could certainly have been better. While Federal Bank and Motherson Sumi delivered on expected lines, couple of stocks like ICICI Bank and Ashok Leyland didn’t perform as well as expected giving muted returns and in the process bringing down the overall portfolio returns. However, I believe that this set of stocks, except for Eros International which has not yet set its house in order and governance issues still haven’t been settled, certainly has the potential to perform well going forward and should certainly be retained and even averaged by adding more at the current levels as their growth prospects remain strong.

The current set of mid-cap stocks will hopefully return a far better figure next year.

HAPPY MUHURAT TRADING

Colorful future

Kokuyo Camlin (formerly Camlin), owner of the well-known Camel and Camlin brands, is one of India's leading stationery companies with a wide product range and strong pan-India distribution network. Established in 1931 by D. P. Dandekar with a single product (ink powder), today it is a company manufacturing over 2000 products, including variants. Its wide distribution reach and quality products have made it household name in school and education stationery products. Camlin’s products have been used for generations and enjoy strong brand loyalty. It is a market leader in art materials product segment like crayons, sketch pens, water colors, oil pastels etc. besides school education products such as pencils, gel pens, erasers, sharpeners, maths sets/compass boxes and notebooks among others. It is also present in the office stationary segment (stamp pads, ink etc but primarily markers) as well as fine art and hobby products segment (glass colors, fabric colors etc). The company was the first to launch the Hobby Range of colors in India, and introduced color categories such as fine art colors, hobby colors and fashion colors. It has 4 manufacturing units, 3 in Maharashtra (Tarapur, Taloja & Vasai) and 1 in Jammu where the goods produced enjoy excise exemption leading to competitive pricing and higher profitability.

The company has ventured into pre-school business from the year 2009 and has commenced 3 pre-schools till date in and around Mumbai. The schools, branded as Alpha Kids, have received good response, in terms of number of enrolments. How they scale up this business remains to be seen.

Last year around this time of the year, Camlin promoters, the Dandekar family, sold a major part of their stake (20.3% out of the total 38%) crore to Kokuyo S & T Co Ltd., a leading company in Japan with over 100 years of experience in stationery and furniture products, design and construction of office and store interiors, mail order business, lifestyle retail and distribution having an annual turnover US$ 3.2 Billion. This was followed by an open offer to the other minority shareholders @110/share. Post the stake buy, the foreign promoter Kokuyo holds nearly 51% in the company and the erstwhile promoters the Dandekar family holds nearly 13%. So the promoter holding in the company is a robust 64% which gives a great comfort as an investor.

However, as in any business catering to a wide market, there are challenges. The company operates in an extremely competitive environment, wherein the size of the unorganized market is supposed to be about 40%-45%. The company faces tough competition from both the organized and the unorganized segments of the industry. The company’s business is also cyclical to a certain extent with Q1 (when the schools and colleges open) being the strongest and Q4 (when they close) being the weakest. However, as the company gets into the expansion mode with the financial and technology backing of its Japanese parent, it is poised to exploit several new opportunities and create & maintain its competitive edge in many of the new as well as existing products. Kokuyo may introduce own products such as Campus notebooks (where it is a strong player in Japan), Airofit scissors, Dotliner adhesive dispensers and its furniture line, as these will either be new products or brand diversifications. There are many high-growth areas such as schoolbags and notebooks where Camlin is not present and Kokuyo’s know-how is expected to help. At $2.2 billion or roughly Rs 10,000 crore, the Indian stationery market is big.  That the company has its task cut out is clear. The space has evolved over the last few years with the entry of new players like writing majors Cello, Reynolds, Linc and Luxor at one end and ITC with its Classmate brand of notebooks and allied products at the other. International brands, like Faber Castle and 3M, are also consolidating their presence here. Acquisitions of domestic companies by global brands are also on a rise: Societe BIC of France had acquired 40 per cent stake in Cello in 2009, the same year when Japan's Mitsubishi formed a joint venture with Linc Pens, and recently bought a stake in it. So it may not be a cakewalk for Camlin, its strong brand equity notwithstanding.

Rising disposable income, growth of the private sector and increasing government spending on primary education would increase the consumption of quality stationery products. The education and literacy drive of Government of India is creating the platform for growth in the stationery business. The biggest boost in the education sector has been the historic "Right of Children to Free and Compulsory Education Act, 2009". Camlin is all set to align its resources to gain advantage of various government initiatives on education such as 'Sarva Shiksha Abhiyaan'.

Camlin @38 is available right now at 33% (nearly 1/3^rd) of what the foreign promoter actually offered for the company. What the promoter bid for 54% odd levels of the total market-cap right now is available for 30%. M-cap/sales for the company is at a paltry 0.6x while most FMCG companies command it in excess of 2x+. So there is some catching up to do yet. Some time back, PE fund New Vernon is said to have picked up a small stake through open market deals. So here is a company with a strong Japanese promoter who brings in vast technological expertise to the table, and is looking to integrate its operational strength with the company's strength, where the balance-sheet clean up is already done. Things can only look up from here though short term challenges due to the deteriorating economic conditions remain. This provides an opportunity to accumulate the stock at attractive levels and wait for a turnaround.

Japanese firms appear to have finally learned their lessons in the Indian consumer market. After Sony and Panasonic were laid low by the Korean onslaught of LG and Samsung, they have quietly regrouped themselves and are now giving the Koreans a run. Similar is the case with Ranbaxy. A few years back, Dai Ichi Sankyo paid what then was thought to be an astronomical sum for buying out Singh brothers’ stake. However, they believed in the company’s core strength and did not mind the expensive buy. All was not rosy along the way, though. There were many regulatory issues faced by the company with the US drug authorities which affected them significantly resulting in the share price crashing from 600 levels to around 200. In the last year or so, it has slowly clawed back to around 500. A similar thing could happen with Camlin. It is in fact at the same level it was before the stake sale happened. From here on, an investor who has got patience and has a longer timeframe has hardly anything to lose because the insider himself is paying a very high premium valuation because they know what they will do with the company in the longer timeframe.