Acche din ahead...

With the onset of Acche din in the stock market for all types of investors, it is time to focus on Acche stocks which will also ensure that Acche din keep going. So here are my picks:

With the division of Andhra into 2, expect construction activity of all types to start picking up there. And with Modi sarkar trying to improve things for the infra companies, keep an eye on the likes of IVRCL, GVK, GMR among the most common ones besides a host of small names. However, don’t expect them to double overnight from here, though IVRCL has already doubled in the last 1 month and the other 2 also have run up quite a bit. Over a period of time, they should do well. However, considering the dizzying heights the markets have touched, more on hope than any real things on the ground, it might be prudent to spread your money over a period of time to benefit the most. Also remember that the budget is just round the corner. As has been seen, there will be bouts of profit booking occasionally in some of these scrips, at which time an entry can be made.

On the Infra side, again with Gadkari, Mumbai’s flyover man, at the helm, there should be a pick-up in road construction activity. And with good friend Gadkari running the show, Mhaiskar of IRB Infra should rightly feel pleased. So this would be a good time to board the IRB Infra train. Another one in the same league is IL&FS Transportation Networks, though for different reasons. With parent IL&FS, a known infra major, gearing up for putting things in shape, this also should be a beneficiary. And in this effort, its Spanish JV with Elsamax should certainly come in handy. Not only can they have access to better technology, but also participate in orders across the border with them.

And with Modi at the helm, can the Gujarat gang of companies be far behind? Already Adani Enterprises has doubled from where it was in April. But considering the diverse businesses it is in, a favorable environment should benefit it. And other Adani companies also have jumped quite a bit. While Adani Power has run more on sentiments than fundamentals, Adani Ports has not. With Modi sarkar’s stress on exports, ports should certainly get a leg up. Adani Ports will certainly merit attention but among the other 2, Gujarat Pipavav, with an MNC parent, should also reward its shareholders. Already it has doubled from where it was a few months back, and not only because of the election results. Its last quarter results were pretty good too. And they can only improve with a favorable environment in place. The dark horse here could be Essar Ports. Though it will also ride the infra wave along with the other 2, any additional triggers such as delisting buzz should only add to the zing. But keep in mind that Essar group is not known to be investor friendly. This time though they may not have much control on the price front with the environment also taking the scrip upwards (they pulled a fast one on Essar Steel shareholders when nobody wanted to touch steel stocks and they could easily convince investors to dump Essar Steel at a throwaway price. Now they are laughing their way to the bank.

With a separate ministry/dept. for renewable/non-conventional energy, keep an eye on Orient Green which specializes in exactly this. Also Suzlon can be a direct beneficiary, if it is able to bring its debt to manageable levels in the coming weeks/months.

With the govt. deciding to allow FIIs/FDI in Insurance, Max India has already jumped. However, AB Nuvo has still not joined in the fireworks. Even w/o the Insurance trigger, this is 1 scrip which has so many diverse businesses that it can only generate good returns for its shareholders once it starts unlocking values in these businesses.

And if you still have money left after buying all of the above stocks, buy the tried and tested blue-chips like ICICI Bank, L&T and Axis Bank among others.

CAREful investment

CARE (Credit Analysis and Research), another niche player in the ratings space, has been another favorite of mine for a long time now, right from its IPO days when it was launched @540 in Dec ’12, slightly more than a year back. It had also listed at a huge premium @900 then. You can read my initial post about it here.

As I had mentioned then, one of the attractive points about CARE is its lack of a strong foreign investor, in spite of having a good institutional shareholding from Indian banks and financial institutions. Moody’s has bought into ICRA and S&P has a big holding in CRISIL (53%). I had also stated that it may only be a matter of time when it catches the eye of international rating-related firms (Fitch for one, Bloomberg which is not strictly into rating but in related areas, for another) for investment, given its strong fundamentals. It looks like that time has now come. CARE is the most profitable ratings agency in India in terms of margins. It clocked a 48% profit margin for 9 months ending December 2013 more than double of ICRA's at 23% in the same period. Rival Crisil, the largest in India, posted 28% margins for 9 months ending September 2013.

IDBI Bank holds a 16.69% stake in the ratings firm, while Canara Bank owns 13.25% and SBI 6.31%.  While IL&FS Financial Services own 5.9%, a 3.4% block is owned by IL&FS Trust.

All these banks have crossed their one-year lock-in period (after the company's IPO in Dec ‘12) on December 23, 2013. They are now free to sell their ownership at their discretion. And they have decided to sell their stake jointly to monetize their investment so that they get a better price and better leverage. These banks, burdened by stressed assets on their books, want to complete the divestment by March 31^st and reflect the sale on their financials. Depending on the final offers, even IL&FS may join in and offload its shares.

A clutch of high street PE funds, General Atlantic Partners, Actis, Baring Private Equity Partners Asia and Apax Partners have been sounded out and have shown a keen interest in buying into CARE. The price negotiations too are expected to firm up shortly.  According to market sources, some of the lenders are looking at a price of around Rs 900/share as control premium. This would mean a 7-8% mark up on the current market price of Rs 845/share. It must however be remembered that CARE was quoting at around 725 when this process started. At that price, the premium amounted to about 25%.

Though it has run up since the announcement of change in promoter, considering the pedigree that CARE will acquire post this process, it will surely prove rewarding to shareholders who log on to it now. Just to illustrate my point, CRISIL was quoting around 50-55 10 years ago in Feb. ’04. And in the last 10 years it has multiplied 20 times to nearly 1100 now. And in this journey, it has attracted the attention of not only astute investors such as RJ, but also international ratings firm S&P which has a more than 50% stake in it currently. There is no reason why CARE should not go the same way from here on considering its fundamentals and likely promoters.

Regaining lost glory

MCX, being the niche player it is, and operating in a space where there are no listed peers, has been a favorite of mine for some time now. I had mentioned it as a contrarian bet in Oct '13 when it had plunged to levels around 400. You can read about it here.

It had run into rough weather a few months ago and had dipped to abysmal levels. But mind you, this had nothing to do with its own performance, but that of its promoter company Financial Technologies (FT). Both of these shares had crashed to a fraction of what they were quoting few days back from when the NSEL scam broke out. Much water has flown under the bridge since then. Though the investigations have pointed fingers at FT and its headhoncho Jignesh Shah, there has been some sanity restored with the tainted members in MCX board being given the marching orders. MCX thus sports a clean board now with a decent standing. And FT and Jignesh Shah have been declared ‘not fit-and-proper’ to run MCX, which has since been challenged in court and the decision awaited. Whatever be the fate of FT and Jignesh Shah, it can certainly be said that for all practical purposes, MCX is now starting with a clean slate.

With all that has happened in the last few months, it would have indeed been surprising if it had been business-as-usual (BAU) at MCX. MCX reported a substantial decline in earnings for a second consecutive quarter. For the 3 months to December 2013, both topline and net earnings dipped as trading volumes fell by nearly 65% against the year-ago period. The dismal performance has been attributed to the application of commodity transaction tax (CTT) and the Rs. 5,600-crore scam at the group entity NSEL, which impacted the sentiments.

With the regulator FMC ordering MCX to throw out FT and Jignesh Shah as promoters, and their respective stakes to be reduced to not more than 2%, all that is set to change now. The stage is also set for a new promoter to take its reins. So it would be fair to expect that with all the clean-up having happened, MCX will now regain the premium it commanded not too far ago.

And people who reposed faith in MCX over the last few months and bought into it at 400-430 levels (or even lower at its 52-wk low of 238 in Aug ‘13) would have been laughing all the way to the bank. Since hitting those levels about 6 months ago, with all these developments happening, it has splendidly bounced back to levels of 550 currently, an absolute return of more than 25% in close to 6 months. And with its murky past behind it, a new management in place, and a new promoter likely to come in, it wouldn’t be too much to expect MCX to go some distance yet. So those who did not board it earlier still have a chance to do so now. And this opportunity may not last too long since the market is likely to discount the new-found potential as soon as the new promoter comes in.

Themes for 2014

Here’s wishing everyone a very happy 2014 ahead. 2013 was a mixed year in that there was no defined theme and volatility was the order of the day for most part of the year. It was also a year which saw the key indices record their all-time highs, besting the previous ones in 2008. However, it must be remembered that this has not been a uniform rally but one driven by the stupendous success of select stocks primarily led by IT, Telecom and to a certain extent Pharma. FMCG pack was its usual self delivering stable returns. There were some key themes which played out in 2013:

1.     Optimism that the government would go full steam ahead with its reforms drive and that economy would rebound this year. This optimism has only partially materialized, with some reforms coming in and some major policy decisions announced (restriction on Gold to curb CAD, DTC bill, Insurance sector opening up which incidentally is being opposed by the so-called current front-runner, BJP, and new banking licenses), though their implementation is still in doubt. Also, the economy is far from what could be considered as reasonably good, going by the economic figures being published by the government. This is where a strong and stable government would be able to breast the tape and increase confidence in the economy.

2.     R. Rajan taking over as RBI Governor – He not only has been on the right side of the market with rate decisions as expected but has also publicly acknowledged the rationale for moderating rate hikes to encourage growth. This has been taken very positively by the markets. How he tackles the dual challenges of inflation and CAD without really hurting growth remains to be seen.

3.     The continuing show of confidence from MNC companies in their listed as well as unlisted Indian arms – Rs. 4800 cr. By GSK Consumer, a mammoth Rs. 20K crore by Unilever and the recent announcement by GSL for raising stake in their listed pharma arm. Whether this is a preamble to an eventual delisting, though being denied by the respective parent companies remains to be seen.

4.     The much-awaited announcement of bond buying tapering by Fed which initially led to a major sell-off followed by an equally swift recovery when some of the assumed fears were out to rest. However, this doesn’t mean that the tapering will not happen, only that it will happen gradually, which should suits markets like India just fine.

From the last year’s basket, other than AB Nuvo, the other stocks – Max India, Pipavav DOC, CARE, Wockhardt have not gone anywhere in the year. In fact, Pipavav and Wockhardt are close to their 52 week lows currently. But I believe that they still hold the potential to appreciate from current levels and may be accumulated.

This year I believe the focus will continue to be on companies that are expected to benefit from a stable government at the centre and continuing reforms drive, which has been initiated by the current government to a certain extent. How this plays out in an election year, only time will tell. So here are a few themes which should do well:

1. Engineering/Capital goods
2. Auto ancillaries
3. MNCs
4. Media & Entertainment
5. Private banks

 The themes which will not do well at least in the next year are:

1. Autos -  With economic outlook still not really bright, both the major segments – passenger cars as well as CV, will not be in demand for the next year or so, or till such time the economy improves and there is money in the hands of the people.
2. Public sector banks - With the government in election mode, expect more freebies to be doled out with the PSBs being the brunt of it – agri loans (it has already started with sugar and more may follow), loan wavers etc. So if u have a longer horizon of 3+ years, as it rightly should be, go for the big names here.

Technology stocks have run up ahead of their fundamentals mainly driven by the sharp depreciation of the rupee from levels of 45 to 60s now. And this is not expected to change in the near future. The positive side is that the demand situation seems to be quite positive after the muted growth in the last year or two. However, this should benefit 2 types of companies – the larger ones who have the pricing power and deep client relationships and niche companies who will continue to do well due to their inherent nature. The small and mid-tier ones are the ones which will suffer the most as the spoils will be divided between the above 2 types. The only silver lining for them would be M&A of the kind witnessed earlier – Patni by iGate, Hexaware by Barings PE and Four Soft by Kewell group of UK.

Having listed the sectors where money can be made, here are some companies I expect to do well:

Larsen& Toubro (L&T)

This has somewhat recovered from the lows of 800s to 1070 now, a near 35% upside in about a quarter. However, this continues to be an Indian economy bellwether with its engineering output directly dependent on the state of the Indian economy. It is quite telling that this is still a far cry from the levels of 2000+ it enjoyed a few years back. If the economy improves in the second half of the year, expect this to rebound strongly from current levels. And not to forget that this year they gave a bonus of 1:2 also. A must have long-term pick for anyone’s portfolio.

Elantas Beck

This MNC was a much sought after scrip in late 2012 on hopes of delisting. From levels of 2500 then, it is now quoting at around 560, the price reflecting the disappointment of the market that the delisting did not go thru. However, it is now quoting at a really attractive valuation, though it has risen more than 25% from levels of 400s not too long ago. A few key points in its favor:

1. A market leader in electrical insulation systems with a share of nearly 40%.
2. Strong technical support from parent Elantas GmBh, the German parent who is a global leader in the sector, for expanding in the Indian market.
3. Cash rich - 50% of balance sheet is cash
4. Cheap valuations – a ttm of about 13, too low for a market leader MNC

PVR

PVR is the largest and the most premium film entertainment Company in India and is listed as the “Most Trusted Brand” in the Category of Entertainment by the “Brand Trust Report”, 2013. This multiplex operator has had a dream run over the last 2 years tripling in value since then. The main reason that can be attributed to it its meteoric rise over the last year or so, is its acquisition of Cinemax chain which will not only expand its reach not only in Mumbai, but also in other cities where they may not have a presence but Cinemax has. The merger saw a 17 percent increase in its footfalls (YoY). They have done a couple of smart things:

1.     Focus on F&B business. It is a widely known fact that the margins in this segment more than make up for any shortfall that may occur in the distribution business. They have seen a growth of 87% in this segment.

2.     Flexi-pricing - They have taken a leaf out of airlines’ book here. From Monday to Thursday they have one price band, then Friday they have another price band and then Saturday, Sunday which is the peak time, it is another price band. So overall, though they have reduced prices in some cases, and increased in others, the cumulative impact is 10% overall growth.

Recently, PVR Cinemas has entered into a 5 year strategic partnership with BookMyshow.com to be its online ticketing partner across India. The multiplex targets to sell tickets worth of Rs. 1000 crores over next 5 years exclusively on BookMyshow.com besides its existing sale of tickets from its Box Office and other channels. It proposes to add another 30 screens in the current financial year and expected to add 70-80 screens every year to change the cinema viewing experience of the people.

The recent blockbuster Dhoom 3 beat the highest opener record of Chennai Express and Krrish 3 grossing Rs 35 crore on its release day. As per the management, if the movie runs for around 3 weeks in multiplexes and cinemas, the company may add Rs 40-50 crore to its kitty. Another expected block-buster slated for release is Jai Ho, which again should benefit PVR.

The biggest advantage of this company is that this is fairly recession proof. People haven’t been seen to curb down movie-going over the last 2-3 years, when the economy was touted to be in bad shape.

Given the restrictive policies of multiplex operators such as PVR, whereby food & beverages aren’t allowed inside but are required to be brought within the theatre, a hit movie augurs well for companies like PVR.

And finally, S&P BSE Teck Index (which includes TMT stocks) will include PVR effective Dec. 23. So this should also some on the radar of institutional investors, if it has not already done so.

Another stock which has not yet followed PVR but is in the same league is Inox. People, who may have missed the bus for PVR, though it still has steam left, can consider this one. From close to 60 in Sept, Inox has moved to 109 now. If it follows PVR, and there is no reason why it shouldn’t, there is surely a long way to go. See the detailed analysis here.

ING Vyasa Bank

This is one of the few listed International/MN banks in India, with the Dutch financial services group ING holding 44% stake in the company following the merger in 2002 of Vysya Bank with ING Group in India, with whom it had several long-term strategic alliances. There may be a case of ING getting out of this bank in line with RBI’s policy of no major entity holding more than 5-10% stake in a listed bank. Already, ING Group has announced plans to divest itself of its Indian insurance and investment management businesses through the sale of its 26% interest in ING Vysya Life Insurance Company Ltd. to its JV partner Exide Industries. And ING certainly needs the money to fulfill its obligations in Europe where things are still in turmoil.

As of March 2013, ING Vysya is the seventh largest private sector bank in India with a large institutional holding, counting Aberdeen Asset Management, PE firm ChrysCapital, Morgan Stanley, and Citigroup, among its shareholders. However, since 2009, it is ably led by Shalendra Bhandari, an IIMA-A alumnus, the erstwhile head of PE business at Tata Capital Ltd. and prior to that, CEO of ICICI Prudential Life Insurance Company Ltd. and Centurion Bank which was taken over by HDFC bank.

ING Vysya Bank has delivered a good operational performance in tough times. The bank’s 35% YoY net profit growth was higher than market expectations. Provisions saw a noticeable increase primarily due to slippages in the wholesale banking book. As per the management, there could be some stress in the mid-corporate segment and the smaller accounts within the large corporate segment. Other segments, like large corporate & multinationals, SME and retail are performing well. ING continues to deliver well on most P&L metrics also asset quality held up well with limited slippages.

As the economy improves, the bank can be expected to deliver handsomely given its current ratios.

And now for some uncommon names (and not very expensive ones in absolute terms at that) for uncommon gains not only for the next year but a long time after that:

From the Auto ancillary pack, watch out for Amtek Auto (quoting at 75 @ttm PE of 4), its group company Amtek India (quoting at 65 @ttm PE of 10) and Sona Koyo Steering (quoting at 19.60 @ttm PE of 17). They have built huge scales with international acquisitions over the last few years (Amtek India was in the news recently for its acquisition of substantial business interests in Kuepper group of Germany, through its 100 per cent subsidiaries for about 1700 crore. Kuepper is the market leader in machine casting industry and is likely to bring synergy with Amtek's core expertise in casting and forging operations thus strengthening its market position). It is payback time now. And domestic auto sector is not a factor in their scheme of things. Quite a lot of their business is now driven by export orders. And with rupee being what it is, and stabilizing at these levels, the scenario couldn’t be better for them.

The much-maligned Power sector (what with problems on every front from environmental clearances to fuel supply) is the dark horse, in that it could see better days ahead with the government’s reforms push in an election year. And the new government would only be too happy to continue that.

Watch out for the PTC twins (PTC India and PTC Financial Services) which would be great beneficiaries of the power sector reforms. Also Coal India would be another beneficiary owing to its monopolistic status, notwithstanding government’s interference in its operations. After all, who else will provide coal to the thermal power plants in the country?

And here’s wishing all investors a very profitable 2014.