Sweet as honey

If ever there is a true-blue bluechip in the Indian stock universe, it will have to be Honeywell Automation India (HAI). I came across this company way back in late 2009 when it was quoting around 2000, as a part of some research report published by one of the brokerages/analysts. What I read there was sufficient to perk up my interest in this company and I did some more digging. What I found certainly appealed to me and I bought a small quantity of it around Rs. 2000 in Oct ’09, and kept adding small quantities over the next 2 years till the price reached around 2300. I did book some profits intermittently, but by and large have held on to my small holding in this company till date and the results are there for all to see. I did mention this company to a few close friends back then. If they did take me seriously, they would be laughing all the way to the bank now!! For today the price quotes @9600, a CAGR of 30% over 6 years. What more can u ask by way of returns?

It must be remembered that 2009 was a year of nervousness following the collapse of Lehmann Bros. and AIG due to the sub-prime crisis in the US, which had a domino effect globally. So nobody was seriously looking at the equity asset class back then, making it the perfect time to buy blue chips, and those in the making, at very attractive prices. HAI was one of these companies. That time it was a blue chip in the making and I think the transformation is now complete. Some of the major points which are promising are:

1. Parent Honeywell holds 75% stake in the company currently, the maximum allowed, thus giving it access to the parent’s global strength in Automation and technology.
2. Astute domestic MFs - Birla Sun Life, Reliance and Sundaram, all fund houses with a proven track record in  stock picking as witnessed by the consistent performance of their equity funds over the years, have close to 12% stake together here
3. With the above 2 groups holding close to 87% of the equity only 13 % is available to the public, a very low floating stock scenario, so anybody buying or selling in any significant number, impacts the stock considerably.
4. The company has a very low equity of only 8.84 crores, less than 1 cr. Shares (fv 10/-). So a small jump in profits leads to a large jump in EPS, leading to a jump in price as well. This low equity base also makes it a prime candidate for a bonus issue, whenever they deem fit. There is no worry of having to service a large equity post the bonus issue, should the company decide to do so.
5. The price being unaffordable, in absolute terms, to most retail investors, the company may just decide to go for a stock-split to reduce the price thereby increasing the liquidity and public participation (people still have the mistaken notion about a stock being expensive based on its absolute price rather than the valuation).

The company is in all the right businesses from a futuristic perspective – Aerospace, Automation & Control Solutions, Transportation Systems& Specialty Materials. They have their manufacturing facility in Pune spread over 85000 sq. ft. Their major business comes from process (industrial) and building (commercial- airports, hotels etc.) automation. About 45% of HAI’s portfolio targets solutions that go into building needs, about 35% target industrial and work place solutions and about 20% are addressing homes. So with the govt’s thrust on creating smart cities, ‘acche din’ surely loom ahead of HAI. Around the time the govt. was announcing the smart cities project, HAI teamed up with E&Y and published a white paper on a universal framework for quick, comprehensive, and easy assessment of any building. It can be administered across countries with minimal adaptation. The framework of the Honeywell Smart Building Score™ is also flexible and adaptable for future enhancements as applications and solutions for smart buildings will continue to evolve. This is in the public domain, should u google it.

So this company is in the right place at the right time. While things may not happen overnight, the govt. would surely be more than happy to employ the services of tried-and-tested players in this domain such as HAI, which would ensure another revenue stream for HAI. Interestingly, Dave Cote, the CEO of Honeywell, has served as the co-chair of US/India CEO Forum which again should stand the company in good stead with Modi’s closeness to the US becoming obvious over the last year and a half.

The numbers for HAI appear to be quite expensive, but being a growth stock, it will continue to enjoy premium valuations such as those enjoyed by the defensive FMCG sector, over the years. However, given the business visibility ahead, the earnings should grow at a pace to justify the premium valuations. Any disappointment on this front can lead to a sell-off on the stock.

If there is going to be one beneficiary of the Smart cities project, along with Schneider Electric, another global technology company in the same mold as HAI, it will be Honeywell Automation India. And the govt. has gone far down the Smart cities road to now back down. So irrespective of which govt. comes to power in the next term, these companies will continue to benefit with their products and solutions meeting most of such requirements. This is one niche company which qualifies as a Buy-and-Forget category to reap benefits in the long run.

Say Cheers !!

Vijay Mallya’s, and along with him of United Spirits (US), cup of woes seems to be brewing over. Recently, Indian govt.’s Serious Fraud Investigation Office (SFIO) started probing alleged fund diversions by the long-grounded Kingfisher Airlines and sought details from United Spirits in this regard.

US, now controlled by the global liquor giant Diageo, stands to lose quite a bit due to the on-going litigations, locally as well as globally, due to its participation as either a guarantor of loans given to Mallya-affiliated entities or adverse ruling on several winding up petitions filed against Mallya-led United Breweries Holdings Ltd (UBHL) from which it had bought the shares. In such a situation, it would not be surprising if Mallya turned to his other cash cow United Breweries to cash out some moolah to get creditors off his back.

Dutch brewer Heineken is the single-largest shareholder in United Breweries (UB), maker of Kingfisher beer, with a 42.07% stake. Heineken indirectly acquired a 37.5% stake in UB following its takeover of Scottish & Newcastle in January, 2008. It subsequently raised the stake by buying shares in the open market. From recent reports, it appears that it now has plans to take that holding beyond 50% by buying shares from the indebted Vijay Mallya. In recent times, it has already started buying the pledged shares of Mallya from the lenders by paying them off.

India's beer market is growing significantly faster than the world average, largely because it is still very small. Indians consume on average about 2 litres of beer a year, compared with 18 litres in Asia and 57 litres in western Europe, a note from rating agency Moody's said in July. India does not boast many significant local brewers, leaving space for global giants to covet a spot, including Danish brewer Carlsberg A/S and South African SABMiller Plc. On the other hand, Asia-Pacific, which accounts for almost a fifth of Heineken's operating profit, was the company's fastest growing market in the first half of this year So what better time to increase its stake in a growing market? And considering that Mallya is in dire need of funds, he certainly wouldn’t mind offloading his stake if the price is right.

Given this background, US seems to be a story which has played out while UB is the one next in line. Of course US would certainly grow over the long term, but its growth would be much more sedate than what it has been so far.

So it may be a wise option now to drown that peg of whiskey from US move on to sip a refreshing glass of beer from UB. From its highs of close to 1200 when the market was booming, it has now come down by more than 25% to levels below 900. Accumulating it now and at lower levels in the on-going market volatility would certainly pay dividends in the not-so-distant future.

Mobile growth 2016 onwards

As a part of Diwali Dhamaka I had written about OnMobile Global (OG) as being a company with a good business model and in a growth sector then. Since then lot of things have transpired for OG. OG is a Mobile VAS player with significant presence in Latin America as well as domestically.

A bit of a background of OG is in order here. OG was incubated within Infosys in 2000, and had arguably the best pedigree in the Indian business world. It was co-founded by Arvind Rao, an IIT-B alumnus and Mouli Raman who headed the (then) Internet group at Infosys before quitting setup OG. Its customer list covered almost every operator, attesting to the value of its services. With over 100 million subscribers for its services, including for the once wildly popular ringback tune, it had grown rapidly from just over Rs 2 crore in income in 2002 to over Rs 500 crore by 2010. At 20-plus %, its profit margins were a source of envy and puzzlement to many, given the razor thin margins prevalent in the mobile value-added services (VAS) industry. Under Rao, OnMobile had gone international, generating nearly a third of its revenue from over 50 other countries. Nearly half of their revenue comes from Europe and Latam (South America).

OG came out with an IPO in Jan ’08 @450/share which went on to hit 700 sometime later. Since then they have also given a 1:1 bonus in Mar. ’11.

In Nov. ’10 Rao, already owned over 10% of the company’s shares, bought a further 6 lakh shares of from the open market, representing a little over 1% of the company’s total shares, with borrowed money. Rao felt it was just an aberration—the market hadn’t realised the value of his baby. The world was at the cusp of the mobile revolution; billions of people around the world had yet to experience phone services beyond voice; and OG was just getting started on its international journey. But the script didn’t play out as he expected. OG’s shares continued to fall from those levels, while Rao’s interest payments ballooned.

And then the inevitable happened. Rao could not come up with the funds to pay back his lenders who encashed his pledged shares. He had to quit and that plunged OG shares to their life-time lows. Rao was after all a respected industry figure and OG’s most well-known face to the world.

OGL witnessed steep decline in EBITDA margin over the last 7 years on account of following: (1) various international acquisitions done earlier (2) high integration costs, (3) consolidation of low margin or loss making business, and (4) high R&D expenses on new projects. The margins were further impacted by decline in revenue growth and increasing employee and other cost due to overseas expansion.

However, things are set to change. They have a new CEO, a telecom industry veteran and an IIT-D alumnus, on board and have a strategy in place to regain their lost profitability. They have divested some of their loss-making overseas businesses and also optimised their operations. Since 2014, their operations seem to be turning the corner with the graph showing an upward trend, from the downhill of earlier years.

This strategy is similar to what Maxwell Industries about whom I had written in the same article, adopted, and has successfully implemented, doing wonders to their stock price. If OG also goes the same way in its strategy implementation, its growth story should unfold over the next few years and it should regain its lost glory.

The only risk being that in a highly technical niche telecom field, OG will have to be on its toes to keep abreast of the technology as well as its peers and competitors. But the advantage is that they have no listed peer in the Indian market, have cash-flow positive operations, have been in the field for the last decade and hence know the industry well and are a turnaround story, all factors which most sharp investors would like and latch on to. The stock price has already nearly tripled from the 30-40 range to 100-110 range now, but still far from its earlier days. With all-round improvement, they should be able to regain their past glory.

Colourful growth

I had written about the potential of Kokuyo Camlin (KC) here in June ’12, just as Kokuyo of Japan has bought out a majority of the Indian promoters stake a year back, making it their majority-owned subsidiary. They have subsequently increased their stake to around 70% currently, while the Indian promoters (the Dandekar family) still hold a 5% stake. It was then trading @38. Kokuyo is 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. At that time, Kokuyo had paid Rs.110/share for Camlin based on its brand strength and its distribution reach. However, post the deal, KC struggled for quite some time, getting to grips with their new owners. And they were not helped by the environment in general, and their industry scenario in particular which is still dominated by the unorganized sector. However, in the last year or so, things seem to have settled down for KC and the story is playing out to script. And Kokuyo seems to have broken even as far as their investment was concerned. It remains to be seen how Kokuyo plans to take it to the next level in order for their investment to be really profitable.

From the range of 30-40 and below at which it was languishing then, 3 years back, it has risen nearly 4-fold in this period, giving a compounded annual return of 40% in this 3-year period, a commendable feat indeed.

And promoter group holding has reached the maximum level of 75% now from 64% then, showing the confidence of the Japanese promoters in the company’s prospects. In fact after losses last year, it has come back in the green this year. With the Japanese promoters holding around 70% shares, it could also be a potential candidate for de-listing.

With India’s ever-increasing population and Modigovt’s stress on education for all school children, the demand scenario for KC’s products will continue to be good. The main risk is the undercutting by price-sensitive unorganized sector. But quality will continue to rule at least with the rowing middle-class.

However, even with all the good things likely to happen in the future, it is always prudent to take a part of the money off the table and retain the rest for the longer term to participate in the growth. So people who have entered at really low levels of sub-30s and 40s can surely book some profits and hold the rest for the longer term. And as always, it is always good to buy the share back if it falls significantly in line with the general market or after having run up a bit post some good news.

First among equals

Capital First (CF) is a Warburg Pincus (WP) company with WP holding close to 70% of its stake. And it has a top class management team led by ex-ICICI honcho Mr. Vaidyanathan. The coming together of these 2 top class entities, one bringing its global reach and expertise and the other sound leadership is already doing wonders to this company, and it can only prosper from here. 

I had written about this as a theme for 2015 and it has justified its faith, moving up by close to 22% from 366 in Jan. ’15 to 446 this week, a return of 22% in 6 months. However, I believe that there is more to come yet.

This company missed out on bagging a banking license this year which ultimately went to IDFC. Last four years, they have shown very good growth, beating the expectations and their own guidance and that too not at the cost of quality of assets, one of the things which have hit ICICI Bank badly in the last 2 years. So gross as well as net non-performing assets (NPA) numbers are minimal (net NPA of 0.17%). They appear to be taking a leaf out of the book of Baja Finance, another superb growth story over the last 3-4 years. 

CF has not only defined its strategy well but is also executing it systematically. As a part of this strategy, they 1) moved out of non profitable business like securities and commodity broking, 2) focused on core business of SME financing and 3) ensured best in class asset quality with higher provisioning than regulatory requirement. CF has steadily increased the composition of retail financing from 10% in FY10 to 84% currently, while it has grown its AUMs at 25% CAGR over FY12-FY15.

Also, it hasn’t failed to move into all the right areas at the right time, the latest one being into Housing Finance, thru a subsidiary Capital First Home Finance Pvt. Ltd (CFHFPL). As can be seen, housing finance companies have been on fire on the bourses for the last 2 years with many of them even tripling from their levels then. And with the Modi govt.’s thrust on housing with schemes such as Housing For All, affordable housing etc., this run should continue for a long time. The other major factor that is likely to work in favour of CF is the falling interest rate scenario which will lead to an increase in the demand for loans and disbursements.

An HDFC Sec report points out that Capital First is quoting at ~2.3x FY16E ABV (adjusted book value) and 19.5xFY16E EPS which compares favorable with its larger peers Bajaj Finance (3.4-3.5xFY16E BV and 16-17xFY16E EPS) and Sundaram Finance (3.6-3.7xFY16E BV and 19.5-20xFY16E EPS). Of course, the larger peers deserve the premium because they have higher RoEs and RoAs. However, there is a chance for the gap to narrow under the stewardship of V. Vaidyanathan. In an earlier interview in November 2014, V Vaidyanathan, CMD, CF, asserted that he is confident of achieving 25-30% over the next 2-3 years.

All in all, all the ingredients for a superb growth story are firmly in place.

Maximum growth

Post my comment on Maxwell on 14 Jan ’14, Maxwell has continued its relentless march forward and has gone up by nearly 30% in the last 1 week from around 41 to 53 today. The stock has nearly tripled in less than a year and as things improve, can only go up from here.

I had written about this first in Feb ’12 here and later re-affirmed my faith during Diwali ’12 (here) when it expectedly hadn’t gone anywhere since Feb. However, all the things which I had mentioned in both of my posts still hold good and are slowly starting to fall in place for Maxwell.

Maxwell can be called what is known as an Inner-wear company (a much polished way than otherwise) much in the same category as Page or Loveable Lingerie, though not in the same class as yet. Maxwell owns the inner-wear brand VIP which most Indian would be familiar with.

Back in the old days it had the ad – “What's he got that I don't?” for the VIP franchisee brand. However, that has changed since then with the advent of Page (with its Jockey brand) which transformed the inner-wear market.  An interesting insight I read is that a few years back, there was the trend of low denims which made it a must to have a good inner-wear brand to be visible. And this is exactly what Jockey capitalized on and gave VIP a run for its money, so much so that what VIP was to the public earlier, Jockey became to the market.

To be fair, Maxwell hasn't seen any growth in the last 10 years, with a stagnant topline of 200-225 crore over this period, largely its own doing. And one of these was that it tried to move into the spinning segment which took quite a toll on its resources. Maxwell also had another set of problems over the last few years namely, power problems and labor unrest. But these are now a thing of the past

Now over the last few years, they have charted out a new path with the following strategy:

-       hiving off the resource sapping spinning business

-       focus on branded garments business

-       tie up with international brands

-       moving into new segments such as signature collections

-     also look at product extensions into women’s wear (Eminence), sportswear (Frenchie and Frenchie X) and thermals

As a part of the implementation of this strategy, in June ’11, they sold one of their spinning plants for 39 cr., then in '14 they sold the Navi Mumbai unit for 9 cr., and they have plans to plan to sell their Tamil Nadu unit for 12-15 cr. Also in the sale pipeline is their Gujarat unit. This will reduce their working capital from 80 cr. to 60 cr., a gain of 20 cr. which in turn will reduce the interest outgo.

Analysts expect it to post an EPS of 5.5 for FY 16, giving it a forward PE of about 7.5 while Page and Lovable trade at upwards of 20; of course they are much bigger players and have different strengths but they have been able to make a mark for themselves in this nascent industry.

So the success of Maxwell largely depends upon the execution of their strategy. They have a strong brand VIP but that has got completely overtaken by Jockey in the last few years. So they couldn’t keep a strong brand going in a large market. They are also targeting a market share of 30% for the women’s wear segment from the current 15%, in the next 3 years.

With the above steps executed, they should see a significant margin expansion; margins have already improved to about 10% in the first half of the current year. In the last 1 year itself, from Feb '14, the stock is up more than 200%.With the right steps taken this could well be a multi-bagger in the years to come.

Buffetisms

A recent discussion with a friend triggered this post. While discussing some stock recos, one of the questions he asked was regarding the price targets I expected for the stocks I had recommended to him over next 2-3 years – Aditya Birla Nuvo, L&T and CARE. If you read Warren Buffet’s quotes, you will realize that simple thinking or a simple solution to a problem is often the best solution. And I for one, do try to follow his philosophy, where possible and more importantly applicable.

Let’s just see the stocks I have written about and see which of Buffet’s philosophies went into them:

Buying a stock is about more than just the price

"It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price."

For this reason alone, I have avoided Page Industries and Eicher Motors. Given that they have good businesses which have done well over the last few years, but they certainly don’t quote at fair prices. I would rather go for Ashok Leyland or Tata Motors which are much more reasonably priced than Eicher Motors. When u are at the top, the only way u can go is down.

The next few are some of my favorites.

The best time to buy a company is when it's in trouble. 

"The best thing that happens to us is when a great company gets into temporary trouble...We want to buy them when they are at the operating table."

In the last 3-4 years or so, a couple of my recommendations have been Wockhardt and MCX which fit this philosophy to the t. Both are excellent businesses but ran into grave trouble, some of their own making and some not. As I had written in my blog, there was nothing wrong in MCX’ business then (Aug. ’13) and nothing is wrong now. But then, it quoted close to 300 and today it is quoting close to 840. And the cause of this trouble was not the business but the parent company which was in deep trouble over irregularities in its subsidiary NSEL.

Same is the case with Wockhardt. With a seasoned Khorakiwala at the helm, it made some wrong bets on foreign currency derivatives way back in 2008. Saddled with a debt of over Rs. 3700 crore, Wockhardt had gone in for the corporate debt restructuring (CDR) process. Following that, it defaulted on redemption of $110 million (around Rs540 crore then) of bonds in October 2009. To add to its troubles, a group of 3 FCCB holders filed the winding-up petition against Wockhardt in January 2010 which was admitted by Bombay HC. The fact of the matter was that Wockhardt was slammed from 2 sides – one was the INR appreciation (Wockhardt’s business was heavily export-centric, accounting for as much as 80% of its turnover) and the other was the inability to pay back the FCCB amount. This led to a run on its share price which collapsed from above 1000 closer to 100 in no time.

The company made some wise moves to get out of this trouble – it sacrificed a part of its hospital business, the entire nutrition business and animal health business. With this, some amount of sanity was restored. In 2009-10 Wockhardt’s debt equity ratio was at an alarming level of 5.5 which now reduced to just 0.4.  During this period, the share price moved from less than 100 to close to 1500.

Once there was some clarity on how it wanted to move forward, I boarded it at a reasonably good price and made good money. Again, there was nothing fundamentally wrong with its business; it made some wrong moves and more importantly put together plans in place to get out of the mess it found itself in. I still hold it from around 700 levels and expect that it will move much higher from here onwards, though it has appreciated by close to 50% in the last 2 years or so. Of course there may be bouts of ups and downs but then it can’t be a 1-way street can it? I am sure that the able Mr, Khorakiwala would have learnt his lessons and is putting in place a structure to prevent such mishaps, leading the company to more assured and stable growth.

Stocks have always come out of crises.

"Over the long term, the stock market news will be good.”

In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497."

The one company which fits the bill above is JSPL.

If you see the price action in the recent times, it seems clear that people have accepted that the damage has been done to the extent that any improvement on the coal auction side would help them come back which is one of the reasons they lost this entire ground. Also the penalty issue which is still hanging fire could start abating if they were to get some sort of a respite which is likely.

At the same time the ordinance for the mining side could improve even the steel business for them. So all in all, they can come back from this much stronger, much like Wockhardt. If you are patient enough with this, returns could be manifold.

Take the next 2 together.

Think long-term

“If you aren't willing to own a stock for ten years, don't even think about owning it for ten minutes.”

Forever is a good holding period

"When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever."

As I have written in my blog, when you invest In equity u should have a minimum holding period of 3-5 years, the longer the better. If u catch a good company, the returns over a longer time-frame can easily be 20% compounded annually. And very few instruments will give u that kind of return in India, now or in the future.

For e.g. take Aditya Birla Nuvo (ABN) which I wrote about in Nov. last year. With a young KM Birla at the helm (he is less than 50, so unless something untoward happens, has a long way to go; and he has running the Birla group splendidly for the last 19 years from the age of 28), ABN can also flourish from hereon. Once it starts hiving off its subsidiaries into separate companies, real value-unlocking will happen

Same with L&T the only diff. being there is no defined promoter family behind L&T, but there is a professional board which will ensure its wellbeing.

 I started buying ABN from ’05 when it was called Indian Rayon and was around 350. Since then, I have bought it at various levels over the years, even at levels of 1000 thus getting an average price of around 700. And I have no intention of selling it off anytime soon, unless I need the money.

Same with L&T – started in ’99 when it was around 200 and kept adding at various levels. Since then, it has given 3 bonus issues, 2 of them 1:1. Can you ask for more?

CARE is a new entrant since it came with an IPO only in 2012 @750. Now it is around 1600. But compared to its peers, it is still not expensive. I have already written about it earlier. This is the only stock among the listed rating peers which as yet hasn’t been grabbed by any rating MNC (CRISIL has S&P, ICRA has Moody’s, and now IDBI wants to get out of CARE to monetize its holding, giving any other MNC exactly the entry it may be looking for). And mind u, being a niche stock, it will never be cheap on the valuation front (not the price). But if u stick to it, returns are likely to be secure and manifold.