Diwali Dhamaka 2020

Here’s wishing everyone a great Diwali and a prosperous new year ahead. After the carnage witnessed in March this year and the extraordinary situation that has prevailed since then, the market appears to be stabilising. Dalal Street saw the indices rise till January 2020, before they saw a sharp drop due to panic selling on COVID breakout. Even as the world came to a standstill and markets plummeted worldwide with crude even entering a negative zone in one contract closing, a semblance of stability, and the feeling that things are not so bad, started to emerge. The stimulus measures announced by various central banks across the globe and the Indian government kept the market from completely losing ground. In fact, since the unlock process started, the benchmark indices started recovering. Robust liquidity and better-than-expected Q2 earnings eventually helped the indices come back to their all-time high levels and even break the earlier pre-COVID highs. The news about progress on the vaccine front for COVID-19 has provided the right tailwinds for the market to touch new record highs in the coming period.

The year ahead however looks more promising for the broader market. While the indices have run up most of their course and appear fully priced in, even somewhat expensive at this juncture, the broader market has a long way to go before it can reach or surpass its previous years. The last few 3 years have been extremely challenging for the mid-cap and small-cap stocks and since the large caps appear to be fully priced, the action should now shift down the hierarchy.

The govt. has been in the thick of action over the last 8 months and with the latest stimulus focusing on the housing and real estate sector, the core drivers of employment and economy, things should certainly start looking up. Also, some of the major uncertainties are behind us. The US election is over, moratorium decision has been delivered by Supreme Court and the way forward for the banking sector looks clear. The new US admin may eventually make life slightly easier for the Indian IT sector compared to what it has been in the last 4 years. Also, the pandemic has brought the Pharma sector to the fore as nothing else could. The last thing to be highlighted is the collateral effect of this pandemic i.e. global hatred of China and the ensuing shift towards alternatives especially in Chemicals. How India makes the best of this sentiment remains to be seen, but the Atmanirbhar scheme is a step in the right direction. The devil is in the details and execution of this strategy is what needs to be closely watched.

Another effect of the pandemic has been on the way of life for most people, in India and globally. Physical proximity and ways of working have been replaced completely by remote working (WFH for IT and other service sectors). This has had the effect of benefitting telecom and related companies which provide the backbone for this. Also, personal mobility has taken a sharper meaning with people wanting to avoid physical contact to prevent COVID infection. However, since remote working has already proved effective in providing uninterrupted service globally, it has come to stay for good and will be an integral part of organizations’ employment strategies.

So the focus this time is on the above 2 themes (on-line activities and mobility) which should play out well for the next couple of years till a stable vaccine is found and people start getting over their fear of the virus to resume travel and mobility. Pharma sector has already run up a long way and going forward, may not give the kind of returns others could, though there will be some long term stories here too.

BSE

The lockdown, and the ensuing WFH mode, has had a surprising effect in invoking people’s interest in trading. So much so that lakhs of accounts have been opened in the last 8 months and people of all ages are joining the online investing bandwagon. BSE is the only listed stock exchange in India and hence enjoys a scarcity premium in the listed space. Most of the other listed exchanges are in the commodity (MCX) or power sector (IEX). Not only does it provide a platform for stock trading but also for MFs through its STAR platform, which is gaining popularity.

It is currently quoting close to its book value and has a cash balance of nearly 360/share on its balance sheet. The value of its holding in CDSL itself comes to about 105/share. So, at the CMP of nearly 507, the core stock exchange business is available nearly free (42/share can easily be considered free considering the volumes and cash it generates).

The major re-rating for this will come when NSE is listed over the next few quarters. As per the latest rating of the NSE, its valuation is at Rs 40,000 crore while BSE stands at just Rs. 2200 crore @CMP of around 507. Now, comparing the valuation of BSE with the NSE, the former stands way ahead and hence, at the time of NSE listing, re-rating of the BSE would definitely happen.

And from a business perspective, irrespective of whether market goes up or down, BSE will continue to earn its brokerage, listing charges and other fees (such as from educational courses). All in all, one of the few debt-free businesses not really impacted by the pandemic and quoting at an attractive valuation with a definite possibility of re-rating in the near future.

ICICI Securities

With the listed exchange going great guns, how can the ancillaries supporting it be far behind?

Operating for the past 65 years and creating its presence across the country, ICICI Securities is part of ICICI Group and India's top financial service provider offering banking and other financial services. It trades with its retail investment scope with ICICI Direct. It presents e-trading and investment services to customers through ICICI Direct. Since its commencement, the company has earned a total of more than 4.5 million customer base through this platform electronic brokerage platform markets over 4,600 sub-brokers, authorized persons, independent financial associates, and independent associates.

During the lockdown which lasted for close to 4 months before the gradual re-opening started, brokerages were operating as usual & maybe in higher capacity than usual. As more and more people staying/working at/from home wanted to try their hands in the market, 12 lakh new accounts were opened in March and April 2020 compared to 9 lakh in Jan-Feb 2020. Along with that, trading activity has been all time high.  Other than the COVID related factors, there has been structural shift in how Indians invest which is quite visible from the inflows to the Indian equity markets (in particular mutual funds). All these will lead to the growth in the equity brokerage market.

ICICI Securities Ltd came out with its IPO in March 2018, a couple of month post the stock market euphoria was over i.e. Jan 2018 @520/share @P/E of 35. Its business enjoys operating leverage i.e. in order to further grow the business the capital investment required would be quite low. Given, the high profitability of the business (on an average 30% profit margin), any further capital required to grow can come from internal accruals. Because of this, they keep giving out handsome dividend of 50-60%. And like BSE, their earnings is independent of market direction as they earn brokerage for every trade, profitable or otherwise.

In term of institutional segment, their parentage with ICICI bank helps where they are able to execute block deals among large wealthy customers and institutes. They are the second largest non-bank mutual fund distributor in India. Strong parentage of ICICI Bank and ICICI brand name helps to win over competition to some extent. Also, the focus of the parent to grow the subsidiary business is of immense value. Reaching out to existing customer of ICICI Bank (especially wealthy ones) to open an account with I-sec is likely to source quality clients and can be a potential game changer. Opening the ICICI direct platform to other bank’s customer opens up a big untapped opportunity.

The company is rightly placed with all the products and have been able to grow despite the headwinds. Everyday 1000+ accounts are getting added and of which 30% are different bank account holders other than ICICI which is an encouraging sign. Going forward they want to be viewed as a one-stop shop for anyone’s financial need and have products across all age groups and classes rather than just a brokerage houses. In short this can be India’s Charles Schwab, a leading US financial services and investment firm.

SBI Cards& Payment Services (SCPS)

A direct beneficiary of the record-breaking robust reports from on-line retailer Flipkart and Amazon over the last month’s festive sales is SBI Cards & Payment Services. And with more sales expected till year-end and new year, the current quarter should also be positive for SCPS.

From a dismal listing below the offer price in March amid the pandemic and beginning of lock-down, despite being oversubscribed 26 times, SCPS has indeed come a long way, up about 30%+ in last 8 months. The dismal listing and continued fall can be attributed to investors’ fear that the lockdown leading businesses to a standstill and resulting large scale unemployment and job losses may lead to defaults by credit card holders. However, that proved only partially right.

A unique listed play on cards and payment services, this has strong tailwinds in the current digital economy. There is headroom for long-term growth as there are only 4 credit cards for every 100 persons in India. That’s an abysmally low and the penetration level can only go up from here. SCPS is the second largest card issues behind HDFC Bank in India. The government has been in favour of non-cash transactions and promoting digital payments in a big way. This opens huge prospects for companies like SCPS. And with the current pandemic discouraging physical presence and promoting eCommerce in a big way, the road ahead seems smooth for SCPS.

The other tailwind for SCPS is its strong OPM of over 15%. This will shield it from whatever losses it may bear due to the COVID-19 defaults that may occur.  This can be a consistent compounder over the next few years similar to what MCX is today as a unique listed commodity exchange.

Hero Motocorp

The company is a key beneficiary of domestic two-wheelers (2Ws) upcycle.

Strong rural presence with a wide distribution network (over 7,200 outlets) is likely to aid market share gains in the near term for the company, from 36% in FY20 to 38% in FY21. In predominantly rural top 7 states (urbanisation rate below 30%), Hero Moto has the best presence among peers and a higher market share.

Hero MotoCorp continues with its market dominance in the motorcycles segment despite the competition and retains its number 1 spot in entry and executive motorcycles. It has been able to defend market share due to its strong brand equity, solid product portfolio and extensive distribution network.

The company has been working on strengthening presence in premium motorcycles, and the recent launch of Xtreme 160R is a positive step. Refreshes are expected from FY22 and multiple products are expected to be launched in the premium segment (150-400cc) over the next three-five years.

The icing on the cake is its recent tie-up with the iconic Harley Davidson. While it always has a strong presence in entry-level and mid-tier bikes, there was always a gap on the premium side where Bajaj Auto has a stranglehold thru its Pulsar range. Also, BA’s collaboration with Kawasaki, Triumph and KTM (where it has a nearly 50% stake) for premium range of bikes (Husqvarna and the like) gives it the option of introducing high-end bikes from KTM (Performance/Off-road) and Kawasaki (Sports) stables. And all this is done thru BA’S ProBiking showrooms, a dedicated space for niche and premium bikes.

The major plus points for Hero Moto - debt free balance sheet (a major positive in current times), consistent cash generation (another bonus in current times), and investor friendly robust dividend pay-out, make it a must-have in the portfolio. It is still about 10-15% away from its 52-wk high and 3 years back, it was at 4000+ levels.  So still some way to go to catch up with previous highs.

Shree Digvijay Cement Co. (SDCC)

This is the only brick-and-mortar selection this time. And it is driven by the surprise performance of Cement sector post the lock-down in Q2, which caught most people unawares. It has a market cap of less than 900 Cr and is debt-free. It has a manufacturing facility at Sikka, Jamnagar, of 1.20 MT/annum housing a fully automatic modern cement plant. They have a Gujarat-wide network of over 1,000 channel partners selling their cement under the brand name “KAMAL CEMENT “.

There are 2 main drivers which I see propelling this company forward. First is that since last year i.e. 2019, they were acquired by the PE firm True North and are now a part of its portfolio companies. True North took control of SDCC by buying out Brazilian company Votorantim Cementos’s interest in the listed entity. This itself will ensure that the company is run efficiently and maximises returns for its shareholders. This is already visible on the ground, as the company reported a profit in the March ’20 quarter which was more than 10 times the loss in the same period last year. And this trend has continued over the full year with the profit growing more than 25 times over the whole year.

The second heartening this is that true North appointed Anil Singhvi as the Exec. Chairman of this company. And this is the same person who ran Ambuja Cement for 23 years and made it the most profitable cement company in India.

So this potent combination of efficiency is likely to bear fruit in the coming period, helped by govt’s focus on infrastructure where cement is a key component. And the recent thrust of housing, real estate and infrastructure provides just the right tailwinds for SDCC to take off.

Quoting at around 62 currently, this should certainly bounce handsomely in the coming quarters driven by profitability focus of its management, and the market will discount it accordingly.

 

Before concluding, let’s look at how last year stocks have performed: 

	2019	2020	Difference	Gain/Loss (%)
Nippon Life AMC	330.40	286.00	-44.40	-13.44%
Aditya Birla Fashion & Retail	208.55	158.30	-50.25	-24.09%
Zee Learn	22.60	11.24	-11.36	-50.27%
Finolex Cables	380.90	273.10	-107.80	-28.30%
Spencer Retail	76.20	72.70	-3.50	-4.59%
Total	1018.65	801.34	-217.31	-21.33%

So from last Diwali to the current one, this portfolio has lost about 21%. To give a perspective, Sensex has gained 11.22%, BSE Mid-cap 8.5% and Small-cap index 14.82%. But both the indices are still 17% and 32%, respectively, away from their record high levels seen in January 2018, while the large cap index has crossed its previous high formed at the same time. This shows the disparity in the distribution of gains across market caps.

While things were just beginning to settle down in Jan ’20, COVID stuck and the world turned 180^0.  However, 8 months down the line, the large cap indices have not only  re-couped all of their losses but have made new highs. However, this rally has largely been driven by a few stocks, Reliance being in the forefront. And with the weightage of 14% it enjoys in the index, it is no surprise that it has single-handedly pulled it up from the March lows. This also means that the broader market has not yet regained its losses while the large caps are distinctly fully valued. Of course, while it is quite logical that in uncertain times as we are now going thru, it is the larger players with solid balance sheets which will be able to still stay in business, the green shoots visible now do give hope of the euphoria spreading deeper into the market. And it is this that needs to be tapped at the right time, well before the train has left the platform.

The current set of stocks is also from mid-cap and small-cap categories and considering that they have retraced quite a bit of their losses and are waiting for take-off, the only way for them could be up.

 

HAPPY MUHIRAT INVESTING.

 

Hidden gem

I came across this hidden gem recently while scouting for a good investment bet. Here’s what I discovered about CESC Ventures which was de-merged from CESC last year and holds multiple businesses within itself.

Current market-cap of Firstsource Solutions Ltd. (FSL) = 4425 Cr

CESC Ventures (CV) holds 54% of FSL => 37.4 Cr shares (0.54 * 69.3 Cr shares of FSL)

Value of FSL in CV = 0.54 * 4425 = 2389 Cr.

At an extreme holding company discounting of 80% for CV (conservatively taken)  = 0.2 * 2389 = 478 Cr.

FSL gave a dividend of 45% (4.5/share) => 37.4cr shares X 4.5 = Rs.168 Cr.

So FSL contribution to CV = 168 + 478 = 646 Cr.

Current equity of CV = 26 Cr = 2.6 Cr shares of 10/-

So FSL alone contributes 646/2.6 = Rs. 248/share to CV. CMP (as on 25-Aug-20) of CV is Rs. 283. So rest of the business is valued at only Rs. 35. And what does this consist of?

1.     FMCG – Under Guiltfree Industries, they have ‘Too Yum’ brand of chips which clocked sales of 300 cr/year in 2019. Latest figures are not known but it is targeting double the amount this year. Following the reception it got in the country, it also spread to international markets including Singapore, Australia, Dubai. They also have acquired 70% stake in Apricot Foods (which has a lesser known brand e-Vita) which makes chips and the like (Nimboo Sev, Halka Fulka etc.) mostly prevalent in south.

2.     Bowlopedia – which runs 11 restaurants in Kolkata, New Delhi and the NCR under the brand names “Waffle Wallah” and “The Chef’s Bowl”

3.     Quest properties which operates “Quest Mall” in Kolkata (supposedly among the top ones in the city)

For a brand growing at Rs. 300 cr./year, to be valued at less than Rs. 35 is a gross mismatch. The other businesses have not even been considered in this figure of 35. Also, the holding company discount for FSL is extremely conservative @80%. It should be way less. That itself should bring it on par with the CMP and thus provides a high margin of safety. And the rest of the businesses are free. There will be high chances of value unlocking along the way.

The big business will come post IPL2020 and other such marketing events. Already the company has started posting advertisements of Too Yumm Karare featuring Virat Kohli. Dividend contribution of FSL of 150+ Cr will more than cover the brand expenses and the rest is cash on the books.

Truly a hidden gem waiting to be discovered by the market.

Reinventing itself from beverages to consumer products

Tata Global Beverages (TGB) has moved from levels of 250 to current 400 in the last 6 months or so, and yet holds promise of more in the coming period. And there are multiple triggers for this.

TGB is likely to be a big beneficiary of the acquisition (or merger) of the consumer products business of Tata Chemicals which is its sister concern, belonging to the same group. The company also plans to enter new areas of consumer staples, beverages (fruit juices etc), macro snacks (for e.g. Dhokla, a favourite snack in large parts of west India) etc. Currently the company’s key products are primarily tea and coffee which have a market of about 27000 crores. The addressable market of consumer staples is about 77000 crores. This effectively means that the company has a potential market opportunity of 50000 crore, which would make it nearly 3 times its current market size.

The current valuation of TGB is around 40 P/E due to its primary business of tea and coffee. However, going forward, this will not be the case. Due to its changed business profile, it is likely to earn the valuations of a pure FMCG company than just a tea-coffee company. FMCG majors such as HUL and Dabur trade at PE of above 50 times their FY 21 earnings. In spite of the current rally of more than 50% in just 6 months (110% in 1 year), this trades at a P/E 20% less than that of its would-be FMCG peers.

Since it has already run up quite a bit in a short period, there may be a time correction in this stock which may lead it to consolidate at the current levels till the re-structuring in completed in the next 6 months or so and it becomes a full-fledged FMCG company. In fact, it is likely to be re-named as Tata Consumer Products in its new avatar, signalling its changed business profile. As more products in new business areas are launched, the valuations are likely to move in line with peers along with a catch-up rally, giving an upside of more than 20% even from current levels within the next year.

Themes for 2020

Here’s wishing everyone a great 2020.

Calendar 2019 proved to be a mixed bag with the indices touching new highs in the last month of December and a disaster for the mid-and-small cap stocks as they were hammered out of shape during the course of the year. And the good ones among them also suffered collateral damage. This also means that there was an opportunity to accumulate such gems gradually over the last year and wait it out for them to start bouncing back to their pre-crash levels. On the sectoral front, autos were the worst hit accompanied by real-estate. And among the auto sector, CVs have been the worst hit. Now the industry is pinning its hopes on the scrappage policy for old vehicles, which will lead to a demand for fresh vehicles, and the BS-VI emission norms from April 2020. For the PV segment, though there were a few bright sparks in the festive season, it is still too early to rejoice. The common theme impacting these sectors was of course the choking of fund supply from NBFCs which continued their dismal run from late 2018. And going by the current scenario, it doesn’t look that they are going to go anywhere in the next 6 months at least. The other noticeable thing among NBFCs was that the bigger ones were still stable with the likes of Bajaj twins – Finance and Finserv, as well as HDFC group stocks doing exceedingly well even in this gloom and doom situation. So the trend appears to be that the stronger ones will go from strength to strength while the weaker ones will either be gobbled up by the bigger ones or will just shut shop. We have seen the state of DHFL, SREI Infra which fall in the former category.

The note of caution however is that this index rally has been driven only by a handful of stocks and mostly from the BFSI space– RIL, HDFC, Bajaj twins, Kotak Mahindra Bank and the like, while the broader market is yet to revive, as seen by the state of mid-and-small cap stocks.

While the govt. has been doing its job with a series of moves such as regular rate cuts and reduction in corporate tax rates, not to mention a slew of other measures for NBFC and real-estate sectors, the effect of these is yet to be seen. It is seen that such macro-economic moves usually take time to play out over a couple of quarters at the minimum. So we will just have to wait for at least a quarter more to see the fruits of these moves, assuming no global disruption in the interim. The bright side for equities is a stale outlook on oil and commodities in general, low core inflation and a good monsoon. Things are also looking up for bad asset resolutions after the Essar settlement in NCLT recently.

While the supply side has been adequately catered to, it is the demand side which is a worry. And the govt. has hardly done anything in this area. Tinkering with personal IT rates in the coming budget in a month’s time could be a step in this direction, though how much this will really aid demand is a moot question.

The key theme in 2020 would certainly be Infrastructure, govt’s move towards increasing consumption and agri sector, which again covers everything from fertilizers, seeds, and tractors to small-ticket financial companies/NBFC which have a prudent model. These sectors would certainly benefit from the govt’s thrust in this direction. Also, there are some structural stories which have emerged in the last year such as Small Finance banks, Chemicals, Infrastructure etc. which should certainly merit attention.So this year’s stocks are based on the above themes. Let’s take a look:

Ujjivan Small Finance Bank (USFB)

A subsidiary of Ujjivan Financial Services, an MFI, this gave a blockbuster listing in excess of 50%, one of the key reasons being reasonable valuations. Even at the current price of sub-60 it has some steam left in a relative sense. A strong listing was expected after the saw hefty subscription of 166 times, becoming the highest subscribed IPO since January 2018. The category meant for QIBs was subscribed 111 times, NIIs 473 times, while the same for retail investors stood at over 49 times.

USFB's fundamentals look decent given its sustained growth in advances, improving asset quality, sound capital position and strong diversified geographic footprint. The company is customer-centric organization with multiple delivery channels. Also bank's pan-India presence along with gross NPAs being the lowest and having the second highest provision coverage ratio among the small finance banks in India, as of March 31, 2019 depicts strength in fundamentals of bank.

Going forward, overall outlook remains optimistic on USFB’s scope of business growth with well managed asset quality and higher provisioning resulting to higher return ratios comforting investors. The recent appointment of Nitin Chugh (ex-HDFC Bank Digital Banking Head) should aid the bank's liability and non-MFI asset profile. Analysts expect a price in the range of 80-100 over the next 1 year, which implies a growth of at least 33% over CMP.

Sudarshan Chemical Industries (SCI)

Speciality chemicals is that one space which was hardly affected by the global cues or liquidity crisis in last one year. The sector is thriving well and has given some tremendous returns during this year. The key triggers behind the sector rally were earnings growth and healthy domestic demand.Pune-based Sudarshan Chemical Industries is one such stock from this space.

SCI, India’s largest pigment producer, appears to be back on the growth path due to its high revenue visibility from ongoing capacity expansion for specialty products.Its products are used in industries that make coatings, inks, plastics and cosmetics. In daily life, the pigments are used in the making of nail paints, skin creams, eye shadows, and pencils.

Pune-based SCI is investing around Rs 300-320 crore in the current year and about Rs 200 crore next year to expand its capacities, which will rise 40-50 per cent in the next three to four years. Existing capacity utilisation is north of 70%. Global chemical companies such as Clariant and BASF are planning to exit the pigment business, which is worth around $10 billion. Of this, organic pigment where SCI has greater presence accounts for half the total. SCI has 2% global market revenue share of the global organics pigment market, according to the company’s annual report. The exit of global biggies will help the company improve market share.

SCI is increasing focus on the high margin specialty pigment, the share of which has consistently risen the past five years. With the addition of new capacities, the proportion of the specialty business is likely to further improve. Growth of the specialty chemical business of SCI has outperformed the non-specialty business. Consequently, the company posted 12% revenue growth annually in the last decade. This trend is likely to sustain, with the company adding 25-35 new products every year. The total product portfolio has reached more than 400. Despite the industry appearing to be commoditized, given that every product is customized for every customer, it becomes an entry barrier for new players. In addition, costs are lower for the India-based manufacturer. The export share rose to 46% in FY19 compared with 39 % in FY13 as its global reach spread to 85 countries.

In 2018, many chemical companies in China were shut down due to growing environmental concerns. This led to an increase in the manufacturing of specialty chemicals in India to ensure an uninterrupted supply in the market.We have seen how chemical companies have given robust returns over the last few years, with the likes of Vinati Organics(~117% in the last year), SRF, the largest manufacturer of refrigerant gases in India (~78% in the last year) and Deepak Nitrite(another promising prospect from this space) turning multi-baggers. Whether SCI will follow this only time will tell, but it certainly is in their league as far as pedigree is concerned.

Ashoka Buildcon (AB)

An infrastructure development company, Ashoka Buildcon is engaged in building highways, bridges, power transmission and distribution infrastructure on EPC (engineering, procurement and construction) basis. The government’s thrust on infrastructure and road development projects are key triggers for the industry going forward and will help companies like AB.It has a strong track record, robust order book and well-funded BOT (build-operate-transfer) project portfolio.

With the rains now past, and as work gets going at the two recently appointed hybrid annuity and the recent additions, growth ahead is expected to be healthy. The balance sheet, too, is in shape to ensure growth doesn’t falter for want of funds. Delayed appointed dates, RoW issues for TOT and the monsoon-impacted Q2, made management lower revenue guidance from 25-30% to 20-25%. Margin guidance held at 11-12.5%, but FY20 is expected to be better on strong Q2.

With the lowering of corporate tax, the money saved would flow to the bottom-line, resulting in a huge bump in profits and hence the EPS. Thus the current market price doesn’t factor in the gains from above developments. Analysts are predicting a jump of 50% or more from current price levels if all the above growth factors play out as expected.

Reliance Industries (RI)

This is one giant which has woken up from slumber over the last 2 years, ever since Jio was launched. And this is one elephant which can certainly dance. After going nowhere for the last 5-6 years, all the pieces are falling in place for RI. It has already given a near-40% return in the last 1 year and certainly looks good for the trend to continue.

All the businesses which it had so meticulously nurtured are now flourishing and the result is there for all to see. Of course, deep pockets are always a bonus, but the way Jio disrupted the telecom market is a case study for B-schools. So much so that the Indian telecom market has now become an oligopoly of sorts with only RI and Bharti Airtel still standing and putting up a reasonable fight with Jio. Even a global telecom giant like Vodaphone has fallen by the wayside, in spite of tying up with another Indian stalwart in K.M. Birla.

And Reliance has a few more aces up its sleeve which it will unravel in the years to come and keep its investors in good spirits.

Firstly, it will spin off Jio into a separate digital company a la Alphabet of India. And most of its digital assets including the media and content will probably come under Jio’s banner. It won’t take too much trying to get a strategic investor into this to take care of futurefunding needs and growth.

Second ace up RI’s sleeve is its Retail business. Here too, it could very well turn out to be an Indian Amazon. Right now they are into brick-and-mortar shops in Retail, but Reliance Digital has an online presence and it won’t take too much for Retail to join it online, thus giving the Flipkarts and Amazons and such other e-commerce ventures a run for their money in India.

And lastly, monetising some of its refinery business which has now matured is certainly a great move. With another giant like Saudi Aramco by its side, this could be another masterstroke by Reliance.

With such an array of developments in the offing, valuations are not something one needs to look at currently. With a 1-lakh crore market cap and an EBITDA of about Rs 90,000 crore for the current year, there is an excellent margin of safety.

Induction of strategic investor in Reliance Jio and probably the IPO plans getting crystallised either for Jio or for Retail, will spell great news for investors. In fact, the 1-lakh crore market capitalisation can rise to about Rs 12,50,000 crore in the next one year and that translates into a share price of about Rs 1,900+ in the next year.

Camlin Fine Sciences (CFS)

Camlin is a micro-cap with a market capitalisation of only Rs. 925 crore.It is the world’s second largest manufacturer and marketer of food grade antioxidants TBHQ and BHA with plants in Italy, Guatemala (Central America) and China besides India, and subsidiaries in Europe, US, Brazil, China and Mexico which cover most of the global markets.Its product range includes food ingredients like Antox TBHQ, Antox BHA, Sweetener and API like Miconazole Nitrate B.P. / USP, Clotrimazole B.P. / USP, Amlodipine Besilate E.P etc.The other major players in this category which are CFS’ key competitors are Vidhi Specialty Food Ingredients and Dynemic Industries.

CFS has an SEZ facility in Dahej, Gujarat, which is a prime hub for chemical companies. The production of this plant is expected to start from Dec ’19 onwards, trial runs having already commenced, after much delays. The commercialisation of this plant will male CFS the 2^nd largest producer of HQ and Catechol in the world. This plant will come with multiple benefits (compared to its Italy plant) like

1)     10% higher yield

2)     improved product mix (i.e. 60% HQ vs. 45% there)

3)     much lower utilities cost, and

4)     process waste will be sold as by-product (unlike in Italy).

Additionally, the dependency on material from Italy plant will reduce the logistic cost and currency risk meaningfully. Besides this trigger, another factor is that the utilisation in its plants in China and Italy can be improved significantly.

What adds to the attraction is the attention CFS has recently caught. The latest sensational news is that Radhakishan Damani (owner of Avenue Supermart which runs the D-Mart grocery supermarket chain) has taken a fancy.The wily Billionaire has used his trusted investment arm, Bright Star Investments, to make the acquisition. He now holds about 1.5% in the company.This microcap company from the Chemicals sector has already more than doubled in the last few months  on informed buying and now we know who the buyer is. Analysts expect this to go around 50% more even from this level, if all the growth triggers mentioned above play out as expected.

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

This time the performance has been much better than the disastrous Diwali one. And had it not been for the 2 scrips – Everest Industries and Parag Milk Foods, which cracked close to 50%, this portfolio would have done a lot better. Yet, thanks to Amber, this has managed to weather the battering the midcaps and small caps got during the year and did reasonably well in comparison. BSE Midcap and Smallcap indices are down 3% and 6.85%, respectively, for the year.

This is also a reality check on a mid-and-small-cap tilted portfolio. While this category is the fastest gainer, the fall is equally swift. Both the laggards above still have good potential in the years to come. Everest with its focus on building materials and Parag, the only Indian dairy company with branded products after Britannia which has some dairy products but is into multiple other things as well, and hence though a strong competitor in PMF’s products, may not be a fair comparison.

As I have said many times before, equity is a long term game with a holding period of at least 5 years (and much more in the case of mid and small cap stocks), if not more, to get any meaningful compounded returns. So it may not be really fair to compare YoY returns, especially for mid and small cap stocks, but serves as a periodic check as to how the selected companies are performing. This is especially true in current times when a lot of companies of which it was unthinkable to think that something could go wrong, are today in dire straits (DHFL being a prime example, and even Tata Motors, in spite of  the massive backing from Tata group).

 Here’s wishing all investors a very profitable 2020.

Diwali Dhamaka 2019

Here’s wishing everyone a great Diwali and a prosperous new year ahead. After the carnage witnessed in mid-cap and small cap stocks over the last year (which worsened over the last 6 months), the market appears to be stabilising. Though the rise in indices has largely been due to their large cap nature, where this category has done reasonably well, there are some mid-caps which have either been news driven or were beaten down way too much along with the market churn, much more than was warranted, which have regained some of the lost ground in the last few weeks.While it is true that this category of stocks has always traded at a premium to the market at most times, everybody was taken aback by the severity and impact of the fall ranging anywhere from 10% to 90% in some cases.

There were some major market-shaking events since last Diwali – the cascade effect of IL&FS default on the entire NBFC space, the govt’s quirky budget announcements of taxing the super rich (of which foreign investors form a significant part) and the US-China trade wars which had a global impact which cascaded to Indian markets. The IL&FS fiasco cascaded into an overall liquidity crunch so much so that the source of funding for NBFC practically dried up and some like DHFL have gone belly-up and others like Piramal Enterprises have halved from their year-ago levels. The sell-off in mid-caps and small-caps also happened in no small measure due to SEBI which launched the re-categorisation exercise based on market capitalisation. This led to a number of mutual funds selling off their disproportionate holdings of mid-cap and small-cap stocks across schemes to bring them in line with the SEBI mandate and their schemes’ categorisation as per the new classification. This couldn’t happen overnight and their effect was felt over the next few months.

While the govt. has rolled back the tax on super rich and has tried to reverse the tide by announcing corporate tax cuts, which will boost the bottom lines of quite a few companies significantly in these trying times, the key question of when the demand will again come to its pre-churn levels or even increase from those levels is a moot question.

And this has provided a window of opportunity, and a quite wide one at that, to grab some of the quality mid-caps at attractive prices, which will lay the foundation for compounded growth in times to come. After all, equity is considered, and has proven in no uncertain terms, to be a long-term game meant only for the patient ones. The current times are certainly testing this theory to the full.

The mid and small caps which have crashed over the last year are the very stocks which will bounce back with a vengeance once the environment becomes benign, or at least there are no negative signs. This will not be a broad-based rally like the bull run of the 2003-08 and will only reward the ones which are in sectors with positive outlook and/or have cleaned up their acts either on the management side or the business side.

As always, the focus should continue to be on companies with quality management and good corporate governance practices. Also, some of the companies have been beaten down for reasons other than their performance and this can only change once the non-technical parameters are sorted out. Following are some of the companies either in nascent sectors which are poised for growth in the coming years, or have suffered collateral damage in the market meltdown.

Nippon Life AMC (NLAMC)

I had recommended this earlier as well, and now post management change (Nippon Life buying out Reliance stake), there is all the more reason to go for it.

In the MF industry, the penetration has certainly been significant. Even in times of a weak market when the indices fell by a few thousand points, the SIP book has remained stable. For NLAMC, the retail AUM has now reached 55% of its total. The ADAG group issues which haunted this stock earlier are now behind it with Nippon Life taking full control of it. Now the focus will be on improving business fundamentals. After being on top for some time few years back, due to management and group issues, this company had to let go of its top ranking and had slipped from its former #2-3 rank in the MF industry. It is now in a position to regain its lost stature in the next 1-2 years.

There are only 2 listed AMC in the market and HDFC AMC commands a premium over reasonable valuations, So NLAMC is in the right position to reduce this gap and provide great returns. This is a structural story and hence will continue a compounded growth over the years to come. It should be considered as a portfolio stock to be held for years to come to see the real benefits of growth for a sunrise industry. A similar thing happened in the Paint industry where only Asian Paints, a pedigreed stock, ruled the roost not too many years back. In the last 5 years, Berger Paints and Kansai Nerolac have given eye-popping compounded returns, way ahead of Asian Paints, just because people only looked at the leader and not the next few below it who were snapping at the leader’s heels. And the market expanded favourably to give the next in lines an opportunity which they grabbed with both hands. The same could well turn out to be true for NLAMC.

Aditya Birla Fashion & Retail (ABF&R)

Another pedigreed stock from the AB stable, this too has had a hammering over the last year or so from the levels it enjoyed earlier.

After integrating Pantaloons with itself, ABF&R is planning an aggressive store expansion of Pantaloons’s Lifestyle stores. It has plans to expand to 400+ such Lifestyle stores and 60+ Pantaloon stores. From its earlier avatar of a premium apparel maker (post Madura Garments merger), ABF&R is now in a position to straddle multiple price points in the apparel chain from low-cost to premium branded clothes, and these stores will reflect that. Pantaloons is expected to improve store productivity and margins with a higher focus on private labels and a higher mix (above 80%) of margin-accretive fashion products.

Another emerging segment which this company is tapping is that of innerwear. Page Industries is the only listed branded premium innerwear maker currently and enjoys premium valuations due to this. This segment gives ABF&R a good way to improve its margins due to the premium products in this segment that it can market. This segment has been growing well for it in the last few quarters and giving some competition to Page Industries, though there is still some distance between the 2. It is aiming to expand in the women’s inner wear segment (with already significant presence in men’s inner wear – growing at 50-60% annually). This, coupled with cost efficiency drives in the brands business, is expected to improve the EBITDA margin in the coming years.

This company enjoys a high RoE, strong FCF generation and should continue to show strong growth in the coming years.

Currently quoting at about 204, it can easily provide a 20-25% upside from here.

Zee Learn

The education sector has seen great interest from investors post the much-hyped acquisition of Euro Kids, Euro Schools, Kangaroo Kids and Billa Bong High chain by the marquee global PE fund KKR. Market sources believe that the deal was inked at around 2000 Cr Enterprise Value which translates to an EV / EBITDA multiple of 20 given the estimated Euro chain EBITDA of around 100 Cr p.a. Using the same methodology, Zee Learn is likely to be valued at an Enterprise Value of 4000 Cr given that its EBITDA this year is likely to be around 200 Cr as per market estimates. If the above deal goes through then the Zee Learn share price may get re-rated around 3-4 times from the current lower levels that it has been languishing for the last few months. Also, this deal may be one of the largest ones in the recent past. Blackstone had also invested in the Test Preparation major, Aakash, recently at an Enterprise Value of around 3500 cr which may get surpassed by the Zee Learn deal if it goes through. 

Zee Learn is a diversified Education Company with its network having multiple offerings from Pre K, K12, Higher Education, Test Prep, Tutorials, Vocational, Skilling, Manpower & Training and Digital Education. 

Zee Learn has grown its turnover and EBITDA at more than 50% CAGR in the last few years. It is has more than 4 Lakh students and 50K teachers/staff in its network. Its Brands include market leaders like Kidzee (Asia’ largest Pre K chain), Mount Litera (India’s top three K12 chains), Mahesh Tutorial (leading Test Prep & Tutorial chain) and Robomate. The Zee Learn Network has a massive pan India presence with more than 3000 schools / centers present over 800 plus cities which collect revenue of around 2000 Cr p.a. 

Currently quoting 50% below its 52-wk high, in spite of rising 45% above its 52-wk low, it can still give good returns considering the situation Zee promoters find themselves in.

Finolex Cables (FC)

Finolex Cables is the third largest manufacturer of electrical and telecommunication cables and also polyvinyl chloride (PVC) sheets for roofing, signage and interiors in India. It counts among its strengths a diversified product portfolio, wide distribution reach, backward integration to manufacture key cable components like copper rods and its cash and carry business model due to higher B2C mix.

The domestic wire and cable market is growing 10-12 percent p.a. and the current market size is estimated in excess of Rs 52,000 crore. Polycab is the largest player with a double-digit market share. Havells, Finolex and KEI follow with an almost equal share of 5% each.

FC has 5 manufacturing plants across India and 28 depots to service its 800 distributors catering to 4000+ dealers. It also has JV with foreign companies such as Sumitomo of Japan for EHV cables, marketing JV with Corning of US for optic fibre technology and technical collaboration with NSW of Germany for cables for submersible pumps.

In recent years, the company has diversified to change from being a cables company into an electrical products company (a new term FEMG for Fast Moving Electrical Goods such as electric switches, LED lights, fans and such). It is banking on its wide distribution network and brand recall in this initiative. The company first entered the electrical switches and lighting segment, leveraging its widespread distribution network in the country, and then introduced switchgears, fans and water heaters. New products within FMEG sector grew by more than 10% y-o-y each in FY19, albeit on a low base. Considering the intensely competitive market in this segment, it is treading cautiously in this area.

The interesting thing is that it owns 32% in Finolex Industries, the pipe-maker, which is expected to have a good run given the demand for PVC pipes on the back of govt's drive for water schemes and housing for all. This makes it still cheaper on the valuation front. And the fact that it has consistently enjoyed double digit margins in this competitive industry speaks a lot for the management.

Currently it is quoting at 380 close to its low of 335 and has seen a 52-wk high of 540. Considering govt’s focus on affordable housing, chances for growth are high and it should get back its growth trajectory pretty soon.

Spencer Retail (SR)

This is a new kid on the block in the listed retail space after KB’s Future Retail and Tata’s Trent.

Though this got listed only in Jan ’19, it has been around for 10 years now. It had stores in tier-2 metros such as Pune and in less expensive ones like Chennai.

The Indian organised retail market appears set for a stellar run, with its size likely to triple by FY25 as per a recent research report by Motilal Oswal. While the industry is undergoing constant disruption, one thing has remained steady – consumers’ affordability is on the rise and aspirations are growing more than ever. This trend particularly bodes well for food & grocery (F&G) and apparel categories.

Though the demand exists, all is not rosy yet in terms of financials for the retailers and it has taken quite a while for them to get their maths right. Consider this - Trent Hypermarket, which has been around for around 16 years, saw losses widen to Rs 90.50 crore in FY18 from Rs 52.49 crore in FY17 partly on store rationalisation costs. Again, not able to sustain prolonged losses which accumulated to 712 crore at the end of FY17, Shoppers Stop sold Hypercity to Future Retail for 655 crore in October 2017. Godrej’s Nature’s Basket, a premium supermarket chain, with outlets across 2000-6000 sq ft, has been around since 2005 but is still floundering.

Spencer’s managed to break even at the EBITDA level for the first time in FY18 after the parent company took over its debt of Rs 280 crore. The smaller debt helped the company to narrow its net loss to Rs 30 crore compared with a net loss of Rs 108 crore in FY17. And in the first half of ’19, it has shown a positive PBT of 5.2 cr. SR added 19 stores this year, most of which are doing well.

Management plans to accelerate the pace of store additions, increase the share of private labels and apparel with the recently launched value apparel brand 2Bme and ramp up omni-channel presence.

Similar to insurance and AMC business, though Retail has been around for close to a decade or slightly more, this is still a sunrise industry. It has taken 10-15 years for the established biggies such as Tent and Future to get their act right, but the advantage that SR has is that it has seen all the mistakes the others have done over the years and also some of its own. It therefore is in a position to grow judiciously within its means.

Post its demerger from CESC, SR listed in Jan ’19 at a price greater than 200, and is currently quoting at 78. Given time, this will surely provide great returns, albeit at a measured pace, at least initially. One thing which should be remembered but almost 90% of the people forget, is that your returns in the market are determined at the levels you buy the stock. If you had bought Reliance in the first week of January 2008, you still have not made any money in Reliance Industries. For 9.5 years, you have been just preserving your capital but if you had bought Reliance in the third week of October 2008 or the first week of March 2009, you would have made great returns.

Before concluding, let’s look at how last year stocks have performed:

  

	Market Cap class	Price last Diwali (Rs.)	Price this Diwali (Rs.)	Gain/Loss (%)
Yes Bank	Mid-cap	216.00	52.15	-75.86%
Maruti Suzuki	Large-cap	7135.45	7457.50	4.51%
Max Financial Services	Mid-cap	392.85	404.65	3.00%
GNA Axles	Small-cap	392.40	251.45	-35.92%
Godrej Agrovet	Mid-cap	530.05	506.45	-4.45%
Total		8666.75	8672.20	0.06%

So from last Diwali, the portfolio is practically flat. Considering the carnage in mid-caps and small-caps over the last 6 months and the performance of the indices of both these categories, mid-cap indices fell 3-7% and small-cap 10-11%, the performance of this mid-cap heavy portfolio should count as a reasonable one, though that may not be something to be proud of. Maruti Suzuki and Max FS were the only 2 stocks which kept their heads above water. Yes Bank (asset quality and promoter issues) and GNA Axles (M&HCV auto sector slow down) were the ones hammered badly. However, in the light of recent developments, I am still positive on both of these and given some time, a year or two, they should get back their mojo, barring unforeseen circumstances beyond their control.

The current set of stocks is also from mid-cap and small-cap categories and considering that they have already been hammered to rock-bottom, the only way for them could be up.

HAPPY MUHURAT INVESTING.