Themes for 2017

Here’s wishing everyone a very happy 2017 ahead. 

2016 was an interesting year with unprecedented events occurring especially in the later part of the year. First we had the shocking BREXIT vote which voted for Britain to separate from Europe, much against conventional wisdom. Next was another stunner in Trump defeating Clinton, going against most predictions of an easy Clinton win. And not to be left behind, our honourable PM Modi outlawed high denomination 5000 and 1000 notes as a war against corruption, terrorism et al.

These events, occurring in quick succession have left the markets going nowhere in the last 6 months. So the recovery which was in sight in October was wiped out by Modi due to the demonetization effect and the predictions are now for at least 1 or 2 more quarters (3-6 months) for things to return to the normal as it existed in October. Whether that actually happens, only time will tell.

On the positive side, we had the GST Bill moving forward and hopes are still alive that it will see the light of the day sometime this year though not in April as everyone, except the opposition parties, wanted it.

This also means that there were at least 3 opportunities when markets in their usual fashion collapsed in response to global events, irrespective of the fact that these had no impact whatsoever in quite a few of the companies which were knocked out of shape. That has been the speciality of Indian markets for as long as I can remember and there is no sign that such knee-jerk reactions will end anytime soon.

The Sensex continues to hover around the 25K mark, about 20% down from the 30K mark that it touched sometime last year. However, as has been seen in recent years, returns of Sensex have not been a true reflection of the stock market returns as is widely perceived theoretically, text-book style. There were many opportunities and there were stocks which doubled or gave returns in excess of 25-50% in some cases. Quite a few companies gave bonus shares (ITC, Berger Paints, PFC, Bajaj Finance) indicating strong confidence of the management in servicing the growing equity, and some are on their way to announcing it. So as has been said in many fora, India continues to be a stock pickers’ market and there are enough opportunities in individual stories to still earn excellent return if money is put in fundamentally sound stocks with proven managements who have seen teh ups and downs of business cycles and more importantly navigated them successfully.

The key theme this year in 2017 would certainly be Digital India and less cash economy (India is still some years away from cash-less economy whatever pundits may say). So most of my choices this time around are centred around this theme.

Sterlite Technologies (ST)

This makes it to the list this year too going by the developments over the last few months which augur acche din for ST.

What I had written about this stock last year still holds good. But the recent developments that I am talking about are the govt’s massive push towards a Digital India and e-payments (and not an optional one at that) which would necessitate a strong demand for ST’s for a long time to come.

The second development is that a few months back, they have demerged their Power products and Transmission Grid business (manufacturing products such as power conductors and high voltage and extra high voltage cables and providing turnkey solutions for power industries) into a separate company, Sterlite Power Transmission (SPT), and intend to focus completely on telecom business which over last 5 years has grown about 28% annually. SPT is for now an unlisted company.

The third important development is the entry of Reliance Jio in India and ST’s major role in this environment.

In 2015, ST acquitted another company called Elitecore Technologies which is into network management, operations and billing support as well as customer management products. ST expects the acquisition to help it look beyond the infrastructure vertical and build new capacities to fully tap opportunities from projects like Digital India and smart cities in the local market, and to expand to markets where Elitecore has a strong presence. ST now has a full end-to-end offering and would be better placed in creating deeper and longer customer engagements.

ST supplies optical fibre to the country’s top carriers that include Bharti Airtel and Reliance Jio to enable their ambitious fibre-to-the-home (FTTH) network roll outs, in addition to the government-driven initiatives such as the Smart City and BharatNet. It is doing several pilots with telecom service providers. They have also supplied products for Jio, and hope to have a far deeper engagement with the telco in future. Airtel is also spending on fibre as part of Project Leap.

These initiatives as well as govt’s moves have created a strong platform for ST to take off from here. Expect this company to do well over the next few years as there are very few companies in India currently who can match it in its offerings.

Currently trading around 96, this can very well give returns anywhere from 25% upwards annually over the next few years, if all the above things play out as planned.

Bharat Electronics (BE)

With Digital India as the govt’s recent motto, BE is likely to be one of the major beneficiaries as they are one of the leading producers of digital devices such as PoS terminals, swipe card machines etc. As is the govt. norm, most of the orders from PSU banks and govt. entities would flow through to BEL for such devices.

The added kicker is its presence in the Defence sector where too major spending by the govt. would directly benefit BEL as it is the major supplier for such equipment, as the private sector is not fully open for such orders yet.

Currently trading at 1375, this again has a long way to go. It gave a 1:1 bonus issue last year and prior to that it was trading around 3000. So the magnitude of where it can go can very well be appreciated.

NBCC (India)

This is one of the few stocks in the real estate and construction sector which stands out. Being a govt company has its own advantages.

NBCC has been getting orders across the board resulting in a strong order book all up till 2021 which very few real estate and construction companies can claim at the current juncture.

The icing on the cake is the announcement of a bonus issue to be declared on 04-Jan-17.

Engineers India

This is one stock which has given excellent returns over the last 1 year, going against the market trend which has either remained flat or been negative.

But being in the hydrocarbon consultancy sector, EI‘s business largely depends on the oil sector. With OMCs (HPCL BPCL, IOC) giving a bullish outlook on their business and planning capex over the next few quarters due to lower subsidy burden due to market-linked oil prices, EI is assured of good business from them as it enjoys a healthy relationship with all of them. Besides, once the oil prices start stabilizing or even moving up slightly (considering that they had nearly touched the bottom a few months back, have just recovered some lost ground, but are still trading at half their prices a year or so back, this is not an impossible situation), its fortunes would again turn positive.

This is again a bonus candidate.

ICICI Bank

This is one stock which has been classified as a fallen angel due to its lacklustre performance over the last 2 years. Once considered as the no. 2 bank behind HDFC Bank, it has ceded this position to the likes of IndusInd Bank and Kotak Mahindra Bank, thru poor management of NPA  and hence concern over the lack of quality of its credit book/loans.

But it must be remembered that it still has sound management headed by Mrs. Chanda Kochhar who has proven credentials and sooner or later is bound to get her act together. And the other major bonus point with this bank is that it has a lot of sound businesses in its fully-owned subsidiaries – Mutual Fund where it is in the top 3 fund houses in the country and some of its schemes have been consistently topping the charts over the last few years, General/non-life Insurance business, Broking business, Home Finance and a few other minor ones which have ample scope for value-unlocking over the next few years. Due to the turbulence over the last few months, its newly listed life insurance business has also not commanded the kind of premium valuations that it most likely deserves. But with the Max Life-HDFC Life merger coming thru in the near future, this situation is bound to get corrected as it will provide a benchmark for the sector as a whole which was missing all this time.

Currently trading at 255, this surely has a long way to go even to get back to its earlier levels, and provides an excellent opportunity for investors to get in at an opportune time. This can well be called a contra or value buy in the current scenario and the patient ones who can wait it out for a year or two are likely to reap rich rewards at the end of that period.

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

	Price as on 31-Dec-15	Price as on 30-Dec-16	Gain/loss
Axis Bank	449.50	450.00	0.11%
MCX	925.75	1266.55	36.81%
Sterlite Tech	96.65	96.15	-0.52%
Jamna Auto Industries	139.60	168.45	20.67%
Surya Roshni	142.50	174.40	22.39%
Sun TV	426.15	490.00	14.98%
DCB Bank	81.55	107.50	31.82%
Overall	2261.70	2753.05	21.72%

As seen from the above table, except for Axis Bank and Sterlite Tech, most of the stocks have done well giving a healthy overall return of close to 22% YoY.

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I still believe that Axis Bank is going thru a loss of form but needs just 1 knock to regain its old form, as they say in cricket. As to when that will come, the jury is still out. Again, I have faith is Shika Sharma’s management capability and this is a bet on that. She has steered it well over a long period and only over the last 2 years, it has floundered along with its close cousin ICICI Bank. But law of averages will catch up soon and its recovery should start from the overall economy’s turnaround.

I think enough has already been written about Sterlite Tech’s potential and let’s wait for it to unfold. So it figures in this year’s list as well.

All in all, a healthy return of more than 20%, which is way more than the indices and most of the MFs. So after a dismal 2015, here is something to celebrate and I hope that the celebrations continue this year as well. Here’s wishing all investors a very profitable 2017.

Happy investing in 2017!

Diversified profits

Aditya Birla Nuvo (ABN) has been one scrip which has been one of my favorites over the last few years and one I believe one can really buy and forget. I had written about this at the end of Dec’ 12 here and more recently here and here.  From 1100 on 31-Dec-12, this is now quoting at 1800 an annualized return of nearly 30% over the last 2 years. And the story is not over yet. In fact, things have only improved in the last 2 years. Look at the businesses it is in and the prospects of each in the next few years.

With AB Nuvo (ABN) acquiring Pantaloons from Future group, the retail foray now looks more promising than before. They now have a play on all segments of the market from the upmarket Louise Phillipe/Van Heusen to the mid-market Pantaloons (which I can say from personal experience, does offer value for money clothing).

And the talk of Birla being interested in e-comm foray (the latest happening thing in India right now) also augurs well for ABN. This is yet a nascent market, and whoever moves first s likely to get a firm grip on the buyers (just look at Flipkart, Myntra etc). 

With Modi Sarkar’s reforms push, I believe it will only be a matter of time before Insurance reforms come in when foreign players with deep pockets can have a majority stake in their JV with Indian partners. And Birla Sun Life is doing reasonably well in this market, though it can’t be called a top player. Birla may well monetize his stake in this by selling some of it to Sun Life, who having been in the Indian market for a decade or more now, may well be happy to go for it.

Add to that the sound performance of Idea over the last few years. It has certainly earned its place among the cellular service providers in India. And from the results over the last few quarters, Indians are taking more to data on the Net than voice. And here, Idea has certainly done well. With e-commerce boom and more e-governance etc. the e-boom should continue for some time to come and players like Idea can certainly ride on it.

So all in all, most of the businesses of ABN are well positioned for excellent prospects in the coming time and should bring a lot of cheer to the shareholders, something which is long overdue.

Also, any value unlocking they do thru demerger/listing/spin-off of one or more of their numerous subsidiaries, Financial Services and Insurance being at the top of the queue,  will be an added bonus.

Profitable holidays

Mahindra Holidays & Resorts (MHR) is a Mahindra  group company with a very strong franchise in vacation ownership under the brand name Club Mahindra. Mahindra group holds 75% stake, FIIs hold about 12.5% stake and DIIs hold another 5%. So together more than 90% of the shares are owned by promoters and institutions. There can’t be any other comforting factor than these figures. This also means that the public holds merely 7-8% of the shares.

This is a very attractive company with 41 resorts and nearly 2500 rooms. Recently they have acquired a 19% stake in a leading European vacation ownership company Holiday Club. This company also has 32 resorts and 2800 rooms. And the agreement between the 2 is that in the next 2 years, Mahindra Holidays can own upto 74% stake in the company, thus making it a majority owned subsidiary. If this were to happen Club Mahindra will become a vacation ownership company not only in India but also globally.

This company had launched in IPO in June 2009 and has been growing ever since. 5 years ago, it had a turnover of merely 390 crore which has grown to nearly 770 crore today.And considering India’s demography, this growth can only accelerate in the coming years.

This company operates in markets where there is a huge young population with high aspirations. This has resulted in their membership count growing annually by about 18000. And considering the new govt’s focus on travel and tourism, MHR is bound to grow handsomely.

5 years ago, they had launched an IPO @300 per share. And despite growing ever since, this is now quoting even below that value at about 275 This only goes to show the Indian market’s utter disregard for fundamentals - management as well as growth quality. And they haven’t given any bonus or split since then.

Another thing worth noting is that recently Thomas Cook, the global travel and tours company acquired Sterling Holiday Resorts, a much smaller player in the same industry. And if u consider the valuations and price at which this deal was done, MHR is really quoting at dirt cheap levels.

This can only mean that with a very low floating stock, excellent growth prospects and cheap valuation,  Mahindra Holidays will only give handsome returns in the months and years ahead.

Smart Movers

Smart movers

With Modi’s call for developing 100 Smart cities, there are some players which would likely benefit most as they would cater to the high-tech infrastructure requirements which form the building blocks of these cities.

At the moment 100 cities remains a tentative figure, with much still to be pinned down. The budget speech only officially identified cities along the Amritsar-Kolkata Industrial Master Plan, which covers seven states. Although they weren't named in the budget, seven cities have also been named along the Delhi-Mumbai Industrial Corridor, some which would overlap with the Amritsar-Kolkata plan.

Officially, the budget only pointed out three cities in the Chennai-Bengaluru Industrial Corridor: Ponneri in Tamil Nadu, Krishnapatnam in Andhra Pradesh and Tumkur in Karnataka.

So what would be the companies that would benefit from this move? Here’s my take:

Sterlite Technologies (ST):- This is a leading global provider of Telecom (Optic Fibre and Cables) and Power Conductors, from Anil Agarwal’s Vedanta stable. These products and solutions would typically form the backbone of any other components that would make up the smart cities. As things stand today, not many cities are geared up for this sort of thing yet. And if things have to be built from scratch, there would be a huge surge in demand for optical fibre and transmission lines which are ST’s forte.

D-Link: - This company is household name in networking items such as routers, switches and wireless products (in fact they have a near monopoly with MTNL’s broadband service). These products would also be a key component of Smart cities from a technology infrastructure perspective. Again, Smart cities would be a boost for this company due to its critical products.

These are 2 of the most obvious choices which come to mind. Of course there would be other firms such as those in construction industry (IRB, L&T) which also would greatly benefit from this initiative.