Exit on BREXIT ! Rather the other way round....

Another event, another knee jerk reaction.

Indian markets’ penchant for knee jerk reactions to sensational events, local or global, are well known and don’t need more discussion here. There have been umpteen cases where stocks have fallen more than 20% even, only to bounce back handsomely and reward investors who did not get swayed by such fickle events.

Friday only proved what I was saying above. BREXIT has finally happened. So what? The way it has been portrayed in the media would lead you to believe that it is the end of the world (it may be the beginning of the end of Euro zone as we know it today, but that is another discussion)!

Take the case of Tata Motors. It tanked 15% initially and ended up around 8% lower than its previous close. And for what? Are Brits or Europeans going to stop buying JLR cars because Britain is not part of the EU? Hardly likely. Agreed that JLR derives 24% of its volumes and sources 35-40% of its components from Europe. And post Brexit, import tariffs may make JLR’s vehicles more expensive than German luxury cars in Europe. JLR’s costs would also go up if it has to pay import duties on components sourced from the EU and adversely impact JLR volumes as well as margins. But seriously, do u really think the people who buy JLR card or for that matter German luxury cars would care for a few thousand pounds more for a car if they really wanted it? And that I think is the basic fallacy in this argument. And negotiations regarding trade between Britain and EU are yet to start and may only fructify 2 years down the line. By which time, I am sure the Tatas would surely have a back-up plan in place. So why worry about something which is only likely to happen 2 years down the line, today? Remember what happened to Hero Moto when it broke from its long standing partner Honda. It was as if the whole world has closed on Hero while what happened subsequently was exactly the opposite. And I won’t be surprised by a similar thing happening in TaMo. Ideally retail investors should go for the DVRs as they not only provide a higher dividend than the parent, but also the differential between the 2 is quite wide currently and will likely come down over the years.

Now look at the bright side of things, The CV market in India is looking up and TaMo is the leader here. Once the monsoon passes as expected, the rural economy will get a boost and that’s where TaMo’s strengths lie.

A similar case is being played out at Motherson Sumi. A while back, they were hammered due to the VW issue and for no fault of theirs, since they were in no way involved in any of the parts which were apparently falsified. And make no mistake about this. They haven’t gotten to the position they are in now by just doing what everybody else was. Instead of doing different things, they chose to do things differently. Apart from the VW group, they do have other global clients whom they can serve in addition to VW, unless VW itself closes down, which is unlikely. And recently they announced the merger of their profitable subsidiaries with themselves. The company will emerge stronger and will be able to pare a lot of its high cost debt, become much more efficient, and remove a lot of the duplication that exists in some of the subsidiary companies.

So, I think it is an opportunity for long-term investors to get in, but lower price levels make you feel more comfortable from a risk reward ratio.

Same argument holds good for the other 2 stocks which bore the impact of BREXIT yesterday - Vedanta and Tata Steel. It is public news that Tata Steel is getting out of its UK operations and it is only a matter of time when they will formally announce a deal in this regard. So how does it matter if Britain is a part of EU or not?

A couple of years down the line, people who have bought these quality stocks and retained them in their portfolio are the ones likely to be laughing their way to the bank than the ones who sold these today citing volatility. As for Vedanta, it is only a matter of time when the commodity cycle turns and this producer which mines all sorts of metals and minerals will be one of the biggest, if not the biggest, beneficiary.

A couple of years down the line, people who have bought these quality stocks and retained them in their portfolio are the ones likely to be laughing their way to the bank than the ones who sold these today citing volatility. 

Opportunities in the current crisis - 2

On Jan. 22, when the market was halfway thru its current meltdown, I had mentioned that there are opportunities which need to be capitalized on, and which would provide rewarding in the long run. Among the stocks I had picked then were Infosys, SKS Micro, Sintex, and DHFL, among many more, and these have become even cheaper today than they were 3 weeks back. And this margin is not small either with the exception of Infy which has fallen by only about 5% while SKS Micro has actually gained about 3% since Jan. 22. Sintex has fallen by 13% while DHFL has been hammered by about 18% since then. If these scrips were attractive then, then doesn’t it follow that they are even more attractive now after the recent fall? And when the recovery happens, u can bet that these scrips will recover way more than the fall that they have gone thru now. It is just that there is a fear psychosis in the market currently when people just don’t want to see their money go down further from what they already have lost, and which is not insignificant either. And it all comes down to your holding power and risk appetite. As I have repeatedly said earlier, equity is a long term game and 10 years is the average time someone should remain invested in a stock to really reap the rewards. And if u do hold a stock for 10 years or more, even if it is average, I can say with confidence that barring crooked or dishonest promoters, it would give u returns which would be way above any other investment would give u.

 As they say history repeats itself, and I believe in this adage from personal experience,  and in the last 15 years, this has happened twice already, and I am sure the ground is well set for a third time in a few months time. The first time was in 2001 when people had assumed that the markets will close down any moment and then again in 2008 when nobody wanted to touch equities with a barge pole, only to regret a few years later when these very same stocks bounced back with a vengeance, more than wiping out the earlier bitter experience. And the stage is set now for an encore.

Since the last time I had written, as explained above, market has further gone down in the last 3 weeks, and more stocks are joining the potential multi-bagger list. And even if they do not turn out to be multi-baggers, they would surely make u smile all the way to the bank.

So let’s look at some of the stocks, which I personally believe would bounce back with a vengeance, once dust settles on this gloom and doom environment.

ICICI Bank

One of my Diwali picks, this has been hammered out of shape by a whopping 27% in just 3 months since then. Though there have been concerns about the asset quality for this bank, I have full confidence in the management to turn it around in the coming months to more than regain the lost ground. As I had said, the recovery would be far in excess of the current fall.

The main reasons for the hammering that ICICI Bank has been experiencing over the last few months, has been due to it reporting highest NPAs in past five years (jumped 33% q/q, 62% y/y), three-fold spike in provisioning and tepid profitability. And the ride may not be smooth immediately either especially in the light of the new RBI directive and the bank’s meaningful exposure to the leveraged corporate and troubled sectors of the economy.

The other factor, as I see it, which ICICI Bank has going for it is its multiple businesses which are as yet its majority owned subsidiaries - MF, Insurance arms, Broking, Home Finance etc. which will unlock tremendous value when the time comes. On a SOTP (Sum Of The Parts) basis, I believe ICICI Bank is valued at more than at least 50% from current levels and will start reflecting over the coming years, if not months. And it is again a scrip which is not likely to be impacted by global developments, be it China or oil, other than a pessimistic view by FII who hold a major hunk of it.

Axis Bank

This bank, one of New Year picks, is also following the same script as ICICI Bank. This is another one which has been hammered due to concerns over its asset quality. This is primarily because nobody expected a bank like Axis to go the way it has. And market doesn’t take kindly to unexpected/unpleasant surprises as has been seen numerous times, past and present. However, what Axis has going for it is its strong retail franchisee and healthy operating metrics. So once the economy is back on track, this again should go by at least 50% in the next couple of years if not earlier. In the last month alone, since the beginning of the year, it has fallen about 9% and gives a very good opportunity to buy for rewarding returns.

Wockhardt

The only way to describe the downward spiral in this pharma major’s price is that it has cracked down the middle. Impossible as it may sound, it is down by 50% since the beginning of the year. Volatility has been a major feature of this stock over the last few years, and it has made a lot of investors laugh as well as cry in this period. So it has become more of a trading stock rather than an investment grade one, much as I would like to consider it as otherwise. This is not a reflection on the promoters by any standard, but the reality is that it has happened. This has gone up and down by anywhere between 25-50% over the last few years which can’t be a feature of an investment grade stock.

And I think currently it is at a juncture where money can surely be made if u can wait for a few months. This is not to say that it won’t go down again in the current market mayhem, but that will only be another opportunity to accumulate. And in a few moths time I won’t be surprised to see this quoting at levels of 1200 or more, as it has done several times in the past. That in itself is 50% gain from the current level, and this is a conservative estimate. Chances of going even higher are much more, at which point money should be taken off the table.

Zicom

Another niche company which has been cracked similar to Wockhardt by close to 50% is Zicom. Again this is another company which is totally unrelated to china, oil etc., the very factors causing the current market upheavals. But the one thing which this company and some others like it would surely benefit from is the govt’s actual move on the Smart cities. I expect Zicom to have a large role to play here along with the likes of Schneider which are specialists in this area. So very good levels to enter Zicom and average out the earlier buys, if done, to reap net benefits, when the turnaround happens.

Profitable smoke

This development is not new and first occurred in Sept. ’15.  It has only in recent weeks started making the rounds again indicating that the end game is near.

The beleaguered Lalit Modi, hounded by ED for alleged financial irregularities, is looking to sell his family’s (K. K. Modi group) 47% stake in the cigarette major Godfrey Phillips. Philip Morris Global Brands (PMGB), a subsidiary of global cigarettes major Philip Morris International (PMI), holds 25% stake in the company and may be open to the idea of buying out Modi family and taking a controlling stake in GP. Since Sept. last year, when this first got out, the stock of GP has more than doubled in the last few months from 557 to the current more than 1200.

Though ITC dominates the cigarettes market with an 80% market share, with brands like Wills Classic and Gold Flake, GP is a distant second with reasonably well known brands like Four Square, Red & White and Cavanders. Additionally, GP also manufactures and distributes Marlboro brand of cigarettes under licence from PMI. The company has also forayed into the pan masala segment under the Pan Vilas brand.

Lalit Modi has been out of the country for 5 years because of the alleged financial irregularities in IPL and ED has been investigating the matter for quite some time now. And because of his continued absence from GP board meetings, he had to lose his board seat as well.

However, this deal may not simply sail thru. This is because govt. has been discouraging FDI in this sector for quite some time now. FDI in cigarette manufacturing is no longer allowed; moreover, activity relating to these products, including wholesale cash and carry and retail trading, are governed by restrictions laid down in the FDI policy. Smoking has been under the govt’s scanner for a while nnnow, so much so that there have been some far reaching measures such as ban on smoking in public places and sale of loose cigarettes, not to mention this being a favourite sector for the govt. to raise taxes annually. This has also led to the cigarette companies losing significant ground in the markets in the past few years, with the exception of ITC which, though earning a major part of its revenue from cigarettes, has other diversified interest as well which have served as a good hedge for it not to fall as much as its sectoral peers. So there may be a provision for special permissions to be taken by foreign companies if they do want to invest in manufacturing cigarettes here, and this condition may come under to PMGB’s rescue if the deal does go thru.

So in the current market turmoil, it may be a good idea to start accumulating this stock steadily. Once the news of Modi family’s interest in selling stake gets out, there may be other suitors also who may line up for the substantial stake, leading to a bidding war (remember Mangalore Chemicals and Fertilizers?). Already, the name of Japan Tobacco (JT), the world`s third-largest listed tobacco company and maker of popular brands like Camel and Winston, is doing the rounds, as a probable suitor for the stake on offer. JT surrendered its manufacturing licence and left India in 2011 after revised FDI regulations halted further foreign investments in the tobacco manufacturing sector, but has now been scouting for a re-entry into India. And even if there are no other suitors, the Lalit Modi family, by virtue of their controlling stake, would certainly expect a hefty premium over the market price. Also, since the stake on offer is more than 25%, it would inevitably invite an open offer from the acquirer. As has been seen earlier in numerous cases, the ultimate beneficiary would be the investor who latches on to it at a very early stage and enjoys the heady ride.

The caveat here is that the stock has more than doubled in the last few months since the news of stake sale has started circulating and a regular accumulation rather than a lump sum investment would be the way to go in such circumstances to minimize the risk, by averaging the net price of the total holding.

This is a tactical opportunity and should be viewed as such. Long term investment in a sector such as cigarettes is certainly not a winning proposition.

Opportunities in the current crisis

The current market meltdown has created a golden opportunity for investors (not traders). Quite a few of the blue-chip stocks, though they may not look blue now, are trading at their yearly lows, for no apparent reason. For e.g. it beats me as to how oil prices or for that matter Yuan devaluation will impact the business or profitability of a Sun TV or for that matter NBFC like SKS Micro or Manappuram Finance. It must be remembered that these are purely India-focussed companies and are not impacted by any of the 2 major issues facing the global markets currently – oil prices and Chinese economy and currency. It is only the traders who punt daily who are bearing the brunt of this fall.

If anything, India is heading into a period of lower interest rates and that will add heft to economic growth and corporate earnings. Most of the current turmoil in the Indian markets can be attributed to FII selling. These are the guys who are most impacted by the global issues and hence are pulling out their money from Emerging Markets, irrespective of their fundamentals, and moving to safer havens, or sitting on cash. What is surprising is that the DII haven’t really counterbalanced them by aggressive buying, in spite of attractive valuations.

So here are my picks from the beaten down stocks (except Infosys):

Infosys – Though IT industry has been facing a tough time in recent years, Infy has got its mojo back with Vishal Sikka at the helm. This man has really done wonders for the floundering firm. At this juncture, Infy is any time a better bet than TCS and should do well going ahead mainly for 2 reasons:

·    Rupee depreciation – this should certainly help it in rupee terms cushioning the fall in revenues due to reduction in IT spends by clients. And I don’t think rupee is done yet. Levels of 70 seem likely in the next few months.

·    Focus on niche and futuristic technologies – By his own admission, Sikka has clearly said that new technologies like machine learning analytics and automation are gaining traction. This is a good sign as it will reduce dependence of the revenues on human resources billability. Also, visa issues and costs will also get reined in, if less manpower is required to do the same things now.

SKS Micro – This is another one which has got absolutely nothing to do with China or the world economy at large. But in the current turmoil, this also has got hit, down about 20% from its yearly high, for no apparent reason other than market sentiment.

Sintex Industries – Another victim of market sentiment. Again, same logic as SKS Micro applies. No obvious reason to go down 25% from 100 levels to 75 now. Sintex’s business model is strongly connected with macro-outlook and boost in government spending. The company will be a major beneficiary from government’s strong focus on wide range of infrastructure and social improvement plans viz. education, healthcare, sanitation, housing etc.

Dewan Housing Finance (DFHL) – Another victim of market sentiment. Again, same logic as SKS Micro applies. It continues to perform well on growth and asset quality front and this parameter is under the microscope of the market and everybody else. Look at Axis and ICICI Bank, yesterday’s bluechips and today’s pariahs, solely because of this factor. The stock is trading at a steep discount compared to other HFCs (all trading above 2.4x P/B). Also, it is into Tier 2 and 3 cities where the ticket sizes are small but the reach is wide. All conducive factors for growth. It has come down by about 15% from Diwali i.e. in about 2 months for no apparent reason. 

Textile MNC

Textile was not a fancied sector by investors over the last few years. However, in the last 2 years, it has again caught the fancy of the market and quite a few of the textile stocks have doubled or tripled – Welspun India, Indo Count Industries, Trident and Arvind being among the top ones. It isn’t that these players produce everything that they sell as their brands. They have a set of suppliers to whom they outsource their requirements along with the designs and stringent quality specifications. Then it is these garment manufacturers who do all the hard work of manufacturing to the stipulated quality standards. So while the likes of Welspun and Arvind are players with strong brands, it would also be worthwhile to take a look at their suppliers. If these companies do well, it stands to reason that their suppliers would also benefit. This is exactly what happened in the auto ancillary market and these stocks, riding on the back of a Maruti or Eicher Motors who have done extremely well over the last few years, have given tremendous returns. Subros, Gabriel etc. are some examples. The same story could now unfold with textile sector.

In the recent market volatility, a lot of mid-cap and small-cap stocks have been beaten down quite a bit from their highs touched not too long ago last year. Among them is E-Land Apparels, an integrated  textile player, and an MNC to boot (a rare case of a textile MNC, and one which not too many would have heard of). It has been hammered from its highs of above 60 to below 50 now, more than 20%, in the current market volatility

This was formerly known as Mudra Lifestyle. It started operations in 1986 and is in the textile industry having facilities for fabrics & garments manufacturing, processing, design, development and sampling etc. It manufactures fabrics and garments for domestic and export market. Its product portfolio includes finished fabric, processing and garments – men’s, ladies’ and kids’.

The brand “MUDRA” has built a strong goodwill for itself in the domestic market and commands a premium. The company is gradually moving towards garment manufacturing mainly in the designer shirts and ladies wear segments to capitalize on the huge opportunity unleashed by the removal of quotas. It has positioned itself as an integrated multi product, multi-fibre and multi-market player covering the entire textile value chain at length. It ensures that its target market is a diverse mix of the domestic market, garment export trade and international market (exports) to ensure risk diversification and stability of earning. This integrated textile player has clients like Arvind, Raymonds and ITC in the domestic market for brands such as Allen Solly, Van Heusen, Elements, Lee, Excalibur, Arrow, Zodiac, Killer, Notting Hill, Wills Lifestyle, John Player and Peter England, and caters to Wal-Mart, Carrefour among others in the international market. It has production capacity of 5.4 million garments per annum in manufacturing facilities spread across 4 locations at Bhiwandi, Bangalore, Daman, and Tarapur.

This company was promoted by Agarwal family, led by Murarilal Agarwal, who held 54.5% stake. It came out with an IPO in Feb. ’07 at Rs. 90/share. But within a year, by Mar. ’08, it was quoting at 36, about a third of the issue price. However there were 2 interesting points to note at that time- the promoters, Agarwals, subscribed to warrants at a huge premium to the prevailing market price at @120/share, and the company had only utilised 9 out of the 86 cr. that they got in the IPO with the rest in the bank. That itself amounted to Rs. 23/share of the market price of 36!

Agarwals had aspirations to enter into the retail market, from being just a supplier to the big names, where big investments and deep pockets would be required, and were open to the idea of a strategic partner.  And this is where South Korea’s E-Land came into the picture.  At the end of 2010, they sold out to the South Korea-based $7-billion textile chain E-land, the largest fashion enterprise in Korea, a rare instance of foreign investment in India's textile sector. The whole acquisition was completed in 2011. E-Land is famous for strong brand equity, well-established fashion retail network with around 4,000 retail shops in Korea and same numbers in China, and strong management capacity with profound experience in fashion industry.

Founded in 1980, E-land had initiated franchisee model in South Korea to expand its retail reach before expanding into garment manufacturing. E-Land has more than 1000 fashion designers with fashion design being one of the most important valuable capacities for textile and garment business. E- Land is now successfully operating a lot of oversees subsidiaries in USA, China, Vietnam, Srilanka, etc. among others, E-Land China is a leading apparel company operating in China and one of the largest companies in apparel sales in China.

In Feb. ’15, Mudra Lifestyle was formally renamed as E-land Apparels reflecting its promoters. Post the takeover, E-land first spent the initial few years in stabilizing the company’s operations and financials. And the results are there for all to see. From a loss-making entity, E-Land is expected to make a profit of 20 cr, this year. So this appears to be a clear turnaround story and is at an inflection point for great returns once it starts generating profits. Once the turnaround becomes obvious, it will surely be re-rated and will be difficult to catch.

Themes for 2016

Here’s wishing everyone a very happy 2016 ahead. 2015 was a dismal year and a big let-down after the huge expectation created the previous year from Modi govt. The year was marked by volatility and quite a few initiatives launched by the govt. which should show positive results after some time. I think Modi has realized that campaign rhetoric is one thing, implementing those things quite another. Add to that the fact that this govt. doesn’t have the numbers in the Rajya Sabha, a must-have to pass any meaningful legislation, and the result is there for all to see. Very little business has been allowed to be conducted by the Opposition (mainly Congress) in the 2 parliament sessions held so far – Monsoon and winter. So much so that even the GST bill where most of the points had been agreed upon could not make it through. Now the govt. strategists would need to think of new ways to cross this hurdle of lacking numerical strength to pass the bills which it desires and which are dear to it. As can be seen, quite a few of the govt.’s election promises hinge on this solution, as they require the necessary bills to be passed in both the houses of legislature.

One of the things which I was betting on and which did not materialize was the GST Bill in spite of everybody agreeing in principle to its provisions and the govt. also accommodating the demands of the Opposition parties. As a result, the stocks which I had mentioned – Pidilite and Gateway Distriparks haven’t gone anywhere over the year. The only exception was Allcargo Logistics which has moved up smartly by about 20%. But that is due to its inherent business strength and not due to a conducive environment.

The Sensex continues to hover around the sub-30K mark. However, that doesn’t mean that there are no good stocks available at good valuations and more importantly good prospects, in spite of the prevailing environment. So it will be a good strategy now to focus on themes and sectors which will see their prospects improving dramatically due to 2 reasons – focus on domestic market, govt. moves and the resulting cascade effect these will have.

The parameters to consider would be return of equity (ROEs), return on capital employed (ROCEs) to judge the quality of the businesses the company is in. These are available in the public domain in the balance sheet of the company for the previous year. Stocks with reliable business model, strong anticipated sales growth, sustainable operating margins and cash flow generation and attractive ROEs and ROCEs should be on one’s radar.

The key themes to watch out for in 2016 will be:

1.   Crude oil prices – The positive downward trend of Crude is expected to continue this year as well and will continue to benefit sectors which use it as a key raw material, for e.g. paints, plastics, speciality chemicals etc.

The OMCs have made full use of the low crude prices to come back to profitability and the stock prices have doubled or tripled reflecting the positive sentiment. However, I think the story has run its course and the returns from hereon will be much more subdued than before.

2.   Power sector – The first concrete move from the govt. to address the ills of this sector came in the form of UDAY (Ujwal DISCOM Assurance Yojana) for financial turnaround of Power Distribution Companies (read more about it here. This should start showing early results this year onwards. However, it must be remembered that this sector suffers from structural issues which can’t be either wished away or removed in a couple of quarters. As has been seen before the real challenge before the govt. has been implementation of its well-meaning schemes and ideas. A positive start has been made and time will tell the story of the progress made. After zooming significantly last year, PTC twins have come down to more sedate levels now.

3.   Telecom sector – While the service providers are battling for market share and reducing margins due to intense completion and the likely emergence of Reliance Jio as a price warrior, the main beneficiaries in this sector will be the ancillary companies which don’t actually provdei the services but cater to the service providers themselves. For e.g. Bharti Infratel and Sterlite Technologies. Combine this with the govt. moves on Smart cities, where telecom is a major backbone, and u have a winning formula.

4.   Banking & Finance – With the insurance bill passed, the Insurance story is already on its way and the prices of the leading players reflect it. The next big thing which happened this year was the concerns of the public as well as private banks on the asset quality front. As a result, even private leaders such as ICICI and Axis have taken a severe beating. However, with the pedigree of the management in these 2 banks, they would surely get their act together in the year ahead. Axis Bank has been beaten down way too much for its asset quality concerns and once these are addressed, should be the first off the block. The other major area to keep an eye on would be Housing Finance. With the govt.’s moves on housing (Housing for all, Smart cities etc), these HFC should see good demand in the year ahead.

5.   Auto sector – This is one sector which flattered to deceive. Other than Maruti, on the back of its reach and new launches, no player can really claim to have done well. However, all is not gloom and doom here. Most of the players have certainly recovered from the lows they reached the prior year on the back of green shoots being visible. It remains to be seen if these shoots actually go on to become plants in the year ahead. I expect that the CV sector will certainly improve on the back of govt.’s initiatives in the Road sector. So Tata Motors and Ashok Leyland should do well here.

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

Axis Bank

This was one of the most promising banks till a year ago and has been beaten out of shape in the last year on the back of asset quality concerns. Much higher than expected slippages - sale to ARC of Rs1830 crore for Rs 650 crore, Rs 463 crore of restructuring and about Rs1500 crore of 5:25 refinancing diluted asset quality led to a steep fall in Axis Bank over the last year. However, PAT growth aided by a strong retail loan book growth has helped stem the fall and inspires confidence for the period ahead.

Considering the pedigree of its management and the economic recovery expected, I think it will be safe to buy into this at the current level which is close to its 52-week low of 430. Close to 90% of the stock is held by the promoters, DII and FII thus leaving close to about 10% of the stock for the retail public. This also shows the confidence long term players have in this stock. I would consider this a reliable bet for a long term portfolio.

MCX

This has been one of my favourites for a long time now. I have no doubt regarding its niche position and it provided the perfect opportunity when it suffered collateral damage due to the FT fracas. It has doubled since then, but recent developments have again made this a potential high flyer.

Some time back FMC was merged with SEBI. And MCX would be the biggest beneficiary of this move.

Coming to the valuations, it has a market cap of less than 4400 crore whereas it has cash equivalents of close to 1200 crore on its books. NSE, which has issues shares but is as yet unlisted, has a market cap of close to 30K going by the valuations its investors paid to get into it. Of course, NSE is much bigger player than MCX while MCX is purely into commodities. This also gives MCX a huge window of opportunity to expand the commodity trading space itself. And its only competitor is NCDEX which is again unlisted. Thus MCX has all the good things going for it – a niche business area, no listed peer and hence a listing premium, the opportunity to grow its business on its own terms and finally a reputed promoter Mr Uday Kotak who needs no introduction.

Due to the impending merger of FMC with SEBI, there were no new products of MCX which were granted approval. Now that it is a thing of the past, MCx should be able to launch new products and gain market share. Currently it has a market share of 80% in the commodities market. With new products, this should get a fillip.

Due to the market volatility over the last year, it has again come to sub-1000 levels and is quoting at attractive valuations. A must buy for any long-term portfolio.

Sterlite Technologies (ST)

I had first written about this company here on 21-Aug-14. 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.

Also, the govt. has re-initiated NOFN (National Optic Fibre Network), with the aim of providing broadband connectivity to over 2 lakh gram panchayats at a cost of Rs 20,000 crore. It aimed to leverage the existing fibre optical network of central utilities — BSNL, RailTel and Power Grid — and laying incremental fibre wherever necessary to bridge the connectivity gap between panchayats and blocks. This in itself will spur the demand for Optic Fibre which is a key product of ST. This is besides the demand from private players for broadband which again will require Optic Fibre.

With the Digital India initiative under which NOFN falls, dear to the govt., they would leave no stone unturned to see it successful, leading to a robust demand for ST in the period ahead.

The other booster for ST would be the govt’s official notification of the Smart Cities initiative (plans have been submitted by close to 100 states in Dec. ’15 for the development of Smart cities).

All in all, ST should be in a sweet spot, unless things go horribly wrong like in the case of the GST Bill which was near and yet so far.

Jamna Auto Industries

I came across this company during my research on the auto ancillary space. This is a very low profile company, though with strong strength in its core area of auto suspension products. It is the largest manufacturer in India of tapered leaf, parabolic springs, air suspensions and lift axles for Commercial Vehicles and third largest in the world. It has very strong international collaborators with NSK Springs of Japan for parabolic springs, and Ridewell Corp of USA for air brakes and lift axles.

Over the last quarter, all of their valuation parameters have shown a tremendous jump – revenue, earnings as well as ROCE (Return on Capital Employed). ROCE jumped 25% from 12% to 15% over the last year. And the management commentary is heartening in saying that they will focus on ROCE in the coming periods. ROCE is the parameter which indicates how well a company utilises its capital in running its business.

This company supplies to over 25 countries including global names such as Volvo, Suzuki etc. Back home, its clients include the CV biggies Tata Motors and Ashok Leyland. It has 6 plants in India with facilities in the vicinity of these companies for timely supplies.

The demand for company’s products remains strong in spite of the CV cycle not fully recovered yet. With the expected recovery in the CV cycle in the coming months, the demand for the company’s products should remain strong. The company is wisely expanding its capacity at its Hosur plant to cater to this growing demand.

The debt of this company is negligible. And the management has reiterated that all its future expansions would be dne thru internal accruals only and not thru borrowings.

The other positive thing about this company is that it has decided to pay out 33% of its net profit as dividend to its shareholders.

The company recently split its fv from 10- to 5/- to improve liquidity.

Considering the positive business outlook and management’s investor friendly approach, this should give good returns over the next few years.

Surya Roshni

This is a company which is into 2 major areas – Lighting and Steel. This would be a beneficiary of the government’s recent push to sell LED bulbs. The lighting industry is expected to do well in the period ahead, with the govt.’s push for housing, including Smart cities. Within that, the LED segment should contribute 30% over the next couple of years. Fans and other appliances business of the company has been doing well. The steel business has been a drag, but the lighting business is performing very well and the debt levels have actually come down.

The steel business again is a dark horse and is dependent upon the economic recovery. So both the areas hold promise in the year ahead.

This could very well go the Havell’s way if things play out well.

Besides the above, there are a couple of more stocks which are on my radar, purely because of situational reasons.

Sun TV – This fell out of favour mainly on extraneous factors rather than any fundamental concerns related to the business. The reason this time was the union home ministry denied security clearance to the company's 33 channels in early June, a move that could have resulted the cancellation of their broadcasting licence. Security clearance for the group's cable TV business was turned down by the government amid three pending criminal investigations against the company and its owner Kalanithi Maran. This led to the stock tanking close to 30% in a day from its previous close. However, this was opposed by the govt.’s own I&B ministry, thus showing division within the govt. ranks. I&B ministry approached the law ministry to seek the opinion of the top law officer on the issue after the Ministry of Home Affairs (MHA) denied security clearance to the network. And the AG supported the grant of security clearance, saying the corruption cases being investigated against the network's promoter cannot be the ground to deny permission. This again led to a jump of 8% in the share price.

Thus this was more news-driven rather than any business or corporate governance issue. In fact its operational parameters are quite strong in spite of the news flow around it From those lows in June, it has now risen nearly 50% in 6 months.

In early Nov. the company mulled a buyback of its shares and set up a committee for arriving at a price for the same. The company clarified that buyback was to reduce extra cash from the company and in the process will drive return on equity (ROE). It has an outstanding cash of Rs 750 crore on books. Promoters hold 75%, FII 16.61% and DII 2.64% in the Kalanidhi Maran-owned company. Thus the floating shares are hardly 7% in the market. This also shows the confidence of the long-term investors in the company. To add to this, recently MSCI added Sun Tv to its MSCI global standard small cap index, another thumbs up from a global body.

In the entertainment space, this is one of the fundamentally strong listed players and should find a place in a long term portfolio.

DCB Bank

Again, in a knee-jerk reaction typical of Indian markets, investors dumped shares of this promising bank, like there was no tomorrow. It tanked 20% in a day when it announced aggressive expansion plans to double its branches to 300 within a year in an effort to tackle increased competition for customer deposits in India. These were not to the liking of the market. DCB Bank then scaled back its plans -- to 150 new branches over two years – to assuage investor. However, investors still are sceptical and the stock is still down more than 30% than from before these announcements.

Again, there is nothing fundamentally wrong with the bank, and not too long ago, it was a darling of the markets, having moved from 40 levels to 130 in a couple of years. Once it starts showing good results in a quarter or two, things should come back to where they were before this fracas. So gains are meant to be had in such situations.

In the above 2 examples, Sun has recovered the lost ground in style, even going past the price it quoted before the dumping, while DCB is still to come to terms with it. It has a good retail franchise and no asset quality concerns which have plagued the likes of ICICI Bank and Axis Bank over the last year, thus making a good investment bet.

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

Core Picks	Price as on 31-Dec-14	Price as on 31-Dec-15				Returns
Zicom Security Systems	178.6	132.6
Kalyani Steels	157.25	167
Capital First	366.55	410.65
Hindustan Zinc	170.35	146.4
L&T	1494.65	1275.45
	2367.4	2132.1			235.3	-9.94%
Berger Paints	201.2	268.25
Kansai Nerolac	198.53	269.65
HDFC Bank	951.6	1082.15
ICICI Bank	353	261.35
Tata Motors DVR	331.9	289.35
Ashok Leyland	51.35	87.9
Overall
	4454.98	4390.75			64.23	-1.44%

I have excluded the GST-related stocks (Pidilite, Allcargo Logistics and Gateway Distriparks) because the premise of their recommendation itself did not materialize. However, they still make it to my list because of their inherent strengths. It is only a matter of time before the GST Bill is passed and when it does, these are the ones which will be some of the biggest beneficiaries of this move.

As seen from the above table, most of the economy-related stocks failed to make a mark due to the lack of expected pick-up in the economy.

Also, I have not included the Power-related stocks mentioned last year as I had stated clearly that the returns in these will be visible only after 3 years from then, which will be another 2 years from now. So let’s wait and see how things pan out in 2 years time. 

All in all, nothing much to cheer about. So after a dismal 2015, here’s wishing all investors a very profitable 2016.