Diwali Dhamaka 2017

Here’s wishing everyone a great Diwali and a prosperous new year ahead. As compared to last year, though the market did see new highs, the much needed correction also happened some time back. Fortunately, the fall was not as huge as that witnessed in earlier instances. Of course, in the volatile world that we live in, with geo-political tensions (India-China, N. Korea etc.) keeping the market on its toes, this trend is likely to continue. So rather than tracking the market highs and lows, the returns would be much higher if one were to focus on stock picks which either have not participated in the market rally or have come down due to extraneous factors, not of their doing.

There were 2 major nation-shaking events since last Diwali – the much talked about Demonetization and in recent times, the GST. While the benefits of both these moves will be evident only much later, they have at least laid the foundation for some sound economics. While the govt. did go ahead with both these things without adequate preparation, as was experienced and proved in their aftermath, both these things did show the govt’s resolve to go ahead with bold actions irrespective of the short-term consequences. This is a much refreshing change after the policy paralysis experienced over the last decade before the current govt.

As I have been mentioning over the last 3 Diwali blogs, it never pays to get carried away in the stock market, in either direction, especially in India. So any serious dip in quality stocks with proven managements should be considered as an opportunity to buy into those shares at lower prices, thus increasing the chances of reaping better gains, than would otherwise have been obtained.

As they say in sports, Form is temporary but Class is permanent. Though there may be near-term blips in the impacted companies’ performance, it is unlikely to last beyond a couple of quarters and then the real benefits of things like GST will kick-in. And I can bet that the upside will be far greater than the current downside, as these things have a far-reaching impact which will surely be seen over the coming years.

In the last 1 year, though the mid and small caps have rallied hugely, and are quoting at valuations higher than what would be warranted, it is not something to really worry about. The Indian market has now formed a new normal. And the primary reason for this is the constant inflow of SIP money that most retail investors have started pouring into equity MFs form their bank savings accounts. If fund managers are regularly getting 5000 cr. of steady money into equities, and there is nothing to indicate that this is going to stop anytime soon, what else can they do? It is by design and not choice that the Indian markets will continue their steady upmove with reasonable valuations being re-defined. Companies like Page Ind., Jubilant Food etc. always enjoyed higher than average market valuations even among the same category of stocks and continue to do so. The only difference is that the other mid and small caps will also catch up with them under the new definition of what is a reasonable valuation.

So given that this is a buyer’s market now, where should u place your bets? The focus this year will be on pedigreed companies with proven managements and great businesses, ones which are far more likely to withstand the market volatility than some of the others. Also, I have attempted to identify stocks which may be beneficiaries of corporate moves and improvement in their prospects. Needless to say, management quality, business domain and growth prospects should always be primary factors while deciding on buying any stock.  Some of the stocks have indeed run up, but as I have said above, are quoting at fair valuations, under the new definition of fair.

South Indian Bank (SIB)

This is a south-based bank which has recently declared bad results with a fall of 96% in YOY net profit. However these were due to a one-off provision. In spite of this, the operational performance improved significantly with double digit growth in business and OP.  Slippages were normalised to 2.2% levels versus 4.5% in the past 8 quarters. They have continued to build more granular portfolio with focus on SME/retail along with CASA improvement (up 20% YoY to 24.6%). Their focus on cross-sell (benefits of centralised processing, tie ups with Kotak Life and SBI Life) supported core operating profit which surged >50% YoY.

This is one of the cheapest banks currently (the other being Karnataka Bank) with a P/ABV of 1.6. The other major factor in favour of this is the prospect of consolidation among the old private sector smaller banks going forward.  In the last few years, banks like Lord Krishna Bank, Bank of Madura etc have been acquired by the bigger private sector banks like HDFC and ICICI. With increasing competition, and govt’s push to consolidate PSBs, this trend should accelerate. And the prime candidates will be banks like these with strong growth parameters.

This bank is going the way of Federal Bank. In Diwali Dhamaka 2015, I had written about the dismal performance of Federal Bank over the last few quarters and how it was hammered down to 55 due to a bad quarter, in spite of a credible management looking to get its house in order. You can read it here. Today it is quoting close to a whopping 125, and looking good for more.

Currently quoting around 32 levels, SIB has every chance of going the same way. It can easily give a conservative 25% return till next Diwali.

Balmer Lawrie Investments (BLI)

Holding companies have given bumper returns this year (2017) because of the steep discounts to the investments in their execution companies they were quoting at. Some of them are from good corporate houses and in many cases the companies which they are holding are on a high growth path and doing well. These discounts have either shrunk or the investee companies have done exceedingly well. For e.g. Bombay Burmah Trading Corp (BBTC) , holding company of Bombay Dyeing and Brittania, has gone up nearly 3 times in the last 1 year while Vindhya Tele the Birla group holding company with stakes in cement giant Birla Corp and Universal Cables, has nearly doubled.

BLI is a govt. company and is a holding company of Balmer Lawrie Co. (BLC), with nearly 62% holding in it. Balmer Lawrie Co.  is a transnational diversified conglomerate with presence in both manufacturing and service sectors.  It is a market leader in Steel Barrels, Industrial Greases & Specialty Lubricants, Corporate Travel and Logistics Services. It also has significant presence in most other businesses, it operates, viz, Leather Chemicals, Logistics Infrastructure etc. In its 150 years of existence.

With the govt. on a divestment spree, it won’t be long before BLI makes it to its list. It is quoting at nearly 48% discount to its value in BLC.  BLI has given a commitment to RBI that it will divest its holding in BLC and dissolve the holding company. This may happen sooner rather than later. Interestingly, BLI is one of the few companies which has not joined this rally of holding companies since the beginning of this year and its time is yet to come.

Currently quoting at about 400, this can surely go up by 20-25% once the divestment is announced.

Aditya Birla Capital (ABC)

This is the child of the much-awaited restructuring of the Adiitya Birla group companies, listed and unlisted. It involved the merger of Aditya Birla Nuvo (ABN), which over the years transformed from a  rayon manufacturer (it was the erstwhile Indian Rayon) to a holding company with stakes in Telecom, and Financial Services (including Insurance) of the AB group. 

Under the restructuring, ABN was merged into Grasim Industries, the manufacturing arm of the group (Viscose fibre and Cement), and then the financial services arm was carved out as AB Capital.

This high pedigreed company is into all types of financial services and in the top few of most of the leading types. For e.g. its AMC division (AB Sun Life AMC, a JV with Sun Life of Canada), is one of top 5 AMC in the country and boasts of some of the top performing schemes currently running. Also, the AMC has been in existence for over 2 decades now (its flagship balanced fund is still called Aditya Birla Sun Life ’95 fund, since it was started in 1995) and thus has proven its credentials in no uncertain manner. Besides it CIO, Mahesh Patil, is one of the most respected fund managers currently in the industry.

AB Sun Life Insurance, again a JV with Sun Life of Canada, is in the top 5 insurance companies in India currently.

ABC has also recently forayed into health insurance and also runs an NBFC (Aditya Birla Money), though its operations currently are limited. Housing Finance is another area which is currently not explored.  Besides all the above retail focussed financial services, it is also into corporate finance in areas like PE, ARC etc. With all these businesses doing well and opportunities to get into unexplored areas, there is enough evidence to believe that ABC will have a long term sustainable above industry growth rate.

Another potential that ABC possesses to reward its shareholders is thru value unlocking in its many unlisted businesses. Insurance is on top of this list with its peer groups ICICI and HDFC already off the block in getting their insurance operations listed. AMC (MF) is another business which can potentially be listed (Reliance is already off the mark in this respect).

A truly buy-and-forget stock, all things considered.

Automotive Axles (AA)

This is a Kalyani group company which is a JV with Meritor inc. of USA. AS the name suggests, this is a market leader in Axles for commercial, off-road as well as defence vehicles. It supplies axles and brakes to most of the auto manufacturers in India. The company is a zero debt company and is performing exceedingly well. Auto-ancillary companies have had a fantastic run in the last few years and are valued at about 30 times earnings while this is still trading at sub-30 levels in spite of higher growth. With the CV cycle expected to pick up in the second half of the year, this will be one of the biggest beneficiaries. The other trigger for this is the defence orders. Its parent Meritor has an all-terrain suspension solution technology for the defence vehicles. They may consider bringing it here in the near future, triggered by the Make In India defence program.

So all in all, a sound management, high-tech products and ample opportunities make this a great pick to have. Kalyani Steels and Bharat Forge, from the same stable, have done wonders in the last 2 years and look set for more. This can go the same way, if one is patient.

Piramal Enterprises (PE)

After AB Capital, this is another company with a high pedigree in the form of its head Ajay  Piramal, an acknowledged astute businessman in the Indian industry with an uncanny knack to get into the right businesses and even more importantly, to exit from them at the right price.

 In 2010, PE completed the sale of its domestic formulations business an unprecedented value of ~9x sales and ~30x EBITDA. In May 2013, it acquired 10% equity stake in Shriram Transport Finance. Later in April 2014, they acquired 20% equity stake in Shriram Capital Limited, a financial services company and in June 2014, 9.9% stake in Shriram City Union Finance Limited, the retail focused Non-banking Financial Company (NBFC) of the Shriram Group. And in recent times, a deal between IDFC group is in the works

PE is the flagship company of Piramal Group and has a leading position in the business verticals it is present in i.e. Healthcare, Financial Services and Information Management.

Recently they have entered into another lucrative business of Housing Finance. They have recently announced a QIP and Rights issue for garnering about 7K crore. With these funds, they should grow their book to about 1 lakh crore. The other major advantage of this move would be to bring complementary businesses together. They are already into Construction and Realty in the form of Piramal Realty.  The funding of this business thru HF is certainly a great fit.

They are also in a niche business of Information Management. Decision Resources Group, a subsidiary of Piramal Enterprises Ltd., is a cohesive portfolio of companies that offers best-in-class, high-value information and insights on important sectors of the healthcare industry. Clients rely on this analysis and data to make informed, knowledgeable decisions.

With all these things in place, this is again a stock which has only created value for its shareholders consistently over the years. They have a track record of approx. 23% revenue CAGR since the late 80s, which very few Indian companies can match.

The impending rights issue is something which one should look forward to. Not only can one buy more shares, probably at a cheaper rate, but also a certain portion is assured for shareholders.  Mind you, the ratio of the rights shares offered to existing shareholders is not likely to be generous, but one can certainly apply for more than the allotted quota and expect to gain some more than the eligible number.

The other major trigger that is on the horizon over the year is the impending re-structuring that Ajay Piramal has advocated. This is quite likely to be value-accretive, the way most demergers and restructurings in recent times have been (Aditya Birla Nuvo, Reliance Capital etc.)

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

Stock	Last Diwali	Current	Difference	%
Jain Irrigation DVR	61.45	62.10	0.65	1.06%
L&T Finance	106.80	205.65	98.85	92.56%
Kokuyo Camlin	96.30	97.60	1.30	1.35%
Aksh Optifibre	27.25	25.25	-2.00	-7.34%
Aditya Birla Fashion & Retail	160.30	148.95	-11.35	-7.08%
Overall	452.10	539.55	87.45	19.34%

  All prices in Rs.

So since last Diwali, this portfolio has given a return of 19.34% nearly 16% more than the Sensex return of 16.7% since then. It is not a stupendous performance by any yardstick, but certainly a decent one, given the circumstances. But it must also be borne in mind that L&T Finance itself has carried the returns on its shoulders single-handedly, while the others hardly performed. This is not a good sign. However, I believe that this set of stocks, including L&T Finance, certainly has the potential to perform well going forward and should certainly be retained and even averaged by adding more at the current levels as their growth prospects remain strong.

Rome was not built in a day, so also wealth is not created in a year. A multi-bagger stock is called one, only after it has returned many-fold over a few years (Honeywell, Manappuram Finance etc. are some examples). Else, it might just remain a 1-year wonder. And there are enough stocks in this 1-year wonder category.  Just to prove how long term investing pays, just look at the picks I had written about in Diwali Dhamaka 2015, in the table below:

	Diwali  '15	This Diwali	Diff.	Gains/Loss
Federal Bank	55.00	125.85	70.85	128.82%
ICICI Bank	265.00	301.29	36.29	13.69%
Eros	275.00	221.65	-53.35	-19.40%
Motherson Sumi	189.00	533.10	344.10	182.06%
L&T	906.00	1722.98	816.98	90.17%
Ashok Leyland	88.90	128.20	39.30	44.21%
Overall	1778.90	3033.07	1254.17	70.50%

  All prices in Rs.  & adjusted for Bonus as declared during the period

  (L&T, Motherson S & ICICI Bank have declared bonus during this period)

This portfolio has returned a whopping 70.5% in the 2 year period or a CAGR of about 30% in this period. I am sure that if you sit down with a calculator, you will get similar figures for the picks in the year prior as well, as all of them are excellent stocks worthy of holding for the long term.

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

HAPPY INVESTING

Demerger bets - 1

Post the demerger of Sintex Plastics Technology from Sintex Industries and the resulting gains that accrued to shareholders of the pre-demerger parent Sintex Industries, there is certainly merit in evaluating other companies which are going the same way. In the case of Sintex, the Sum-Of-The-Parts (SOTP) was always going to be greater than the whole as the market usually discounts the bundled company fairly highly over the individual businesses. The same story is likely to play out in the case of Reliance Capital (RC), ADAG group’s financial services flagship.

RC houses a lot of lucrative businesses under its fold. These businesses individually would be valued way more than what the whole of RC is currently valued at. This is where the SOTP principle comes into play. And at long last, ADAG seems to have realized this. To be fair, it is not easy to demerge an entire unit, much less list it on the exchanges, unless it achieves a certain scale and has the ability to sustain itself through its own earnings rather than relying on the parent. We have seen this happening in the case of L&T Finance. Another recent case is that of Max Financial Services. Both are promising businesses and have highly pedigreed promoters and management. They are sure to stand credibly on their own in the years to come after coming out of their parent’s shadow. A similar case is likely to play out in the case of RC as well. 2 of the most promising businesses that it houses are the MF (Asset Management) and Insurance (Life as well as General/non-Life), both of which are now doing extremely well. This can be gauged by the fact that Nippon of Japan holds half of the MF business and also has a significant stake in both the Insurance businesses. And the names of all 3 companies reflect this. MF constitutes nearly 27%, General Insurance (GI) nearly 11% and Life Insurance nearly 18% of the current RC. If they were to be separately listed, the SOTP is likely to be way higher than the proportion suggests. Of course it is too early to get into the numbers game right now before the Investment bankers crunch the figures and bring out their valuation reports.

The other silver lining is that ADAG group has made its intention of listing both of these businesses (only the General Insurance, GI, for now) in the near future, both having filed DRHP with SEBI. That would be case of huge value unlocking here. That there is appetite for both these areas in the market can be gauged from the fact that 2 other big groups also have shown interest in going in a similar direction (ICICI with listing of ICICI Lombard, its GI subsidiary, and UTI with its MF business).

Apart from the above key businesses, RC still has other related business like Retail Broking, another hot area which is picking up (look at Motilal Oswal and Geojit’s stock trajectory over the 2-3 years), Consumer and Commercial Finance (look at where Bajaj Finance is and still going strong), Commodity (trading in precious metals like Gold,, Silver etc.) to name the key ones. Retail broking is a small part currently constituting only about 3% while the Financing business is a large chunk of about 28%.

This is only half the story. While the above value unlocking of the MF and Insurance businesses will happen over the next few months, the more immediate gains are likely due to the demerge of the Housing Finance business in the next few days. This is nearly 13% of the current RC. HF is one business area which has caught the fancy of the markets with most stocks in this space having doubled or tripled in the last 2 years (just look at DHFL, LICHFL etc.). Most NBFCs in the HF business have handsomely rewarded their investors. And so too will Reliance HF post its demerger and listing on the bourses.

With HF out of the way, rest of RC as explained above still has a lot of value which will be unravelled over the next few weeks and months. So it would be best to start SIPing this over the next few weeks/months to gain the most from the market volatility and participating in the value unlocking.

While short term gains are certainly there for the asking, over a longer term also, these businesses are likely to compound at healthy growth rates, thus giving everyone a choice as to their holding period.

Themes for 2017

Here’s wishing everyone a very happy 2017 ahead. 

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

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

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

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

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

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

Sterlite Technologies (ST)

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

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

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

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

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

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

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

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

Bharat Electronics (BE)

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

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

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

NBCC (India)

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

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

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

Engineers India

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

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

This is again a bonus candidate.

ICICI Bank

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

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

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

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

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

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

.

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

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

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

Happy investing in 2017!