Themes for 2023

Here’s wishing everyone a great 2023.

2022 turned out to be one of the most volatile in recent years with the markets literally going up vertically one day and plunging down equally the next day. And the main culprit appears to be the FIIs and the US economy. With Fed making its intentions clear about the direction it was taking, tightening its belt and increasing interest rates to bring down inflation in the US, there was only 1 way the FIIs would have gone – away from Emerging markets including India. And the results are there for all to see. And from the look of it, this seems set to continue for some time to come.

However, India has been one of the best performing among the Emerging markets and with good reason too. Indian economy has shown its resilience in no uncertain terms. Agreed that the Rupee has declined considerably against the Dollar and oil prices continue to threaten to break the $100 barrier now and again. But the Indian markets seem to have taken this in their stride and have not shown a great plunge as some of the other EM have done.

With the fear of COVID now all but gone and normalcy having returned for all practical purposes, life has returned to pre-COVID times. Barring an occasional road bump (like we have seen in the last few days), with the occasional threat of a new COVID variant merging, we should be able to navigate this without too much pain. The overhang of the Russia-Ukraine war and US Fed’s stance will continue for some time but that is already factored in.

The focus therefore shifts to what is happening in our own country. As I had mentioned during Diwali time about 2 months back, Consumption will continue to be a great theme to play in the coming times. However that is not all. Some moves by the govt. have also given a fillip to the economy. This whole concept of Atmanirbhar Bharat has opened up multiple doors to industries which hitherto were unaware of what they could do. Though it is a bit too early for celebration, this certainly is a move in the right direction to boost local manufacturing. Add to that the continuing woes in China and the search for alternatives and India has all the right ingredients to prosper. There is this so-called China+1 strategy which has done wonders for the Chemical sector in the last 2 years and is all set to improve the prospects of some of the other industries where China is a dominant player.

Though the govt’s plan to monetise PSUs came a cropper, the silver lining to it was the emergence of Defence sector in the last 2 years which has given a whole new dimension to the Indian economy. With such initiatives, not only can India move towards becoming self-reliant but also serve as an export hub to the western economy which hitherto depended on China & Russia for their defence equipment supply chain. This obviously won’t happen overnight but the next few years should provide a glimpse of what benefits this can give to the Indian economy. In anticipation of these good times, Defence stocks have already run up with some such as Bharat Dynamics and HAL already turning multi-baggers over the last year. So they may take a pause for a while before continuing their upward trajectory over the next few years.

The other thing to bear in mind is the fact that we are in a pre-election year with the next parliamentary elections in 2024. And is generally the case, the govt. focus would be on spending and giving a boost to economy to ensure reasonable numbers on inflation and employment. This can only happen if the govt loosens its purse strings on infrastructure and capex, which have a cascade effect on the economy. After Defence, Railways, which is one of the biggest direct as well as indirect employers in India, may well be the next big theme to play out in the Indian markets. So these are the few things which will reward investors this year as well as the next.

So this year’s stocks are based on the above themes. Let’s take a look:

IRB Infrastructure (IRBI)

This is one stock which was much maligned some time back due to its debt and governance issues. All that is history now. The company is improving and making its balance sheet strong as the company lately has got two big investors – Cintra and the GIC (the investment arm of Government of Singapore). Based in Austin, Texas, Cintra is a leading private-sector transportation infrastructure company in the world with experience spanning over 50 years of innovative highway development on four continents. Last year, Cintra acquires a 24.9% stake in IRB Infra. Cintra will be a significant minority shareholder, with a presence on IRBI’s Board of Directors, and will transfer its extensive international experience in highway management and analysis of possible new investments. And the funding will be taken care of by GIC.

The shifting focus of government towards infrastructure has led to allocation to NHAI to move up two-fold at ₹1.34 lakh crore in current budget versus previous year’s. The target set by the government to construct 25,000 kilometres of highways by FY23 has led to a positive atmosphere for road and infrastructure developers. Within this space, IRBI is a prominent player and is mainly focused on BOT (Build operate and Transfer) and TOT (Toll Operate and Transfer) projects where government gives an already operational project to private entity on long term contracts. The company is also involved in HAM (Hybrid Annuity model). This is a model where government puts 40% of equity whereas 60% equity is put up by the private developer. IRB Group’s portfolio (including Private and Public InvIT) comprises 24 projects which includes 23 highway projects that further include 18 BOT projects, 1 TOT project, 4 HAM projects and 1 Airport project in Sindhudurg district of Maharashtra.

In October 2021, the company raised funds from Cintra and GIC. Cintra was given 24.9% equity in lieu of ₹3,148 crore and GIC was given 16.9% equity in lieu of ₹2,167 crore. The shares were issued at ₹211.79 per share. Out of these issue proceeds, ₹3,250 crore worth of company debt has been paid off and now ₹3,000 crore debt remains which is self-liquidating as specific cash flows are attached to it. The deal gave a good boost to the company on the leverage front. In FY22 the Net debt to EBITDA came down to 3.32 from 5.07 in FY21 and the Debt/Equity improved to 1.09 from 2.43.

IRBI’s order book gives around 3 years of revenue visibility and with the infra push, more projects are expected to come up and growth prospects look decent. The company’s holding company net debt is zero. The company mainly has been transferring its assets in InvITs. Promoters hold a 34% stake. Government’s initiatives like Gati Shakti and projects in the infra segment will ensure firm visibility for IRBI over the next 2 years. Currently trading around 290 levels, with all the good things above, the stock should easily give at least 20% returns compounded over the next 2 years, from here on.

Mazgaon Dock Shipbuilders

This is one of the beneficiaries of the Defence them that I had mentioned earlier. The best part that I like here is that this is insulated from the usual worries of Inflation, oil prices, interest rates etc. And not only is there an assured market for its products in the form of Indian govt., but it can also start exporting its products (ships, submarines and the like) globally to other markets whether developed or emerging. And with the global peace always threatened with some country or the other raising fears of war, the demand front is well taken care of.

The company has so far built 799 vessels, 26 warships, and 6 submarines. The company has zero debts and a dividend payout of 37.9%. Shares of Mazagon Dock have given a multibagger returns in the last one year as it surged almost 144% and has jumped nearly 125% YTD. However, there is plenty of steam left in it yet. Just look at the financials. They made a PAT of 586 Cr last year, and for Q1 this year they have already made 217 Cr. If they maintain a similar run rate, and no reason they can’t, they could very well make 50% more PAT this year. You can imagine what this would do to their EPS, hence to the overall PE and hence the price by then. And we aren’t even talking about exports yet. Supported by the govt, if they can make a mark in the global markets where there is enough demand, then this is a potential multi-bagger in the making. This is currently trading around 790 levels and the 4-digit mark is not too far off the way it is going.

Texmaco Rail & Engineering (TRE)

Texmaco Rail & Engineering is a flagship company of the Adventz Group and is mainly in the business of heavy engineering, steel foundry and Railway EPC. The company has a total order book of Rs 10,000 crore and it recently got an order of supplying 20,000 wagons worth Rs 6,450 crore. Texmaco has to provide these 20,000 wagons over a period of thirty-nine months. The other important thing about the Texmaco is that it is completely debt free at a net level,

TRE has a market cap of 1,500 crore and sales of 1,800 crore. So the company has strong growth prospects. Even after completing its expansion plan, the company has 186 crore in cash. Another important thing is that that company has a very attractive valuation.

In line with the govt’s emphasis on infrastructure development, there is a lot of emphasis on the Railway sector and this is evident from the fact the government has planned modernisation plan worth Rs 1 lakh crore. And there aren’t too many companies like TRE who can execute such orders for the govt. In the 2022 Union Budget, FM Nirmala Sitharaman announced that the government would manufacture 400 more Vande Bharat trains over the next 3 years. The Railways had ordered 36,000 wheels for Vande Bharat train sets from Ukraine at a cost of US$16 million. Supplies were disrupted due to the 2022 Russian invasion of Ukraine. The Railways placed orders with companies based in the Czech Republic, Poland, Malaysia, China, and the United States for these trains.. The latest update here is that the govt. has already announced the launch of many such Vande Bharat trains across India (there are currently 5 of them running in India, 3 from New Delhi and 1 each from Chennai and Nagpur). These are semi-high-speed, electric multiple unit trains designed and manufactured entirely in India by ICF, Chennai.  The project is estimated to cost around Rs 26,000 crore and this spells great news for the likes of TRE.

Quoting around 57 now, this should give solid returns over the next 2 years and more if things go as planned.

RBL Bank

This is another one which had to bear the brunt of a knee-jerk market reaction. So much so that it fell about 25% in just 1 week in June, hitting a yearly low. It brought back memories of how Yes Bank had collapsed 2 years back. Investors were worried that RBL Bank might turn out the next Yes Bank.  Its most recognizable face Vishwaveer Ahuja, the former CEO of Bank of America who had led and grown the bank for the last 11 years, had gone. The bank grew multifold under the management of Mr Ahuja. Deposits grew 46x, Advances grew more than 50x, Net worth 35x, from ₹350 Cr. to over ₹12,500 Cr., Net Profit from ₹12 crores to ₹508 crores in FY21. Stellar growth numbers indeed. The incumbent, Mr Subramaniakumar, is an ex-PSU banker with 40 years of experience with the likes of PNB & IOB and considered as a 'Bad loan expert'. Historically such appointments at financial institutions have been associated with weak asset quality and governance structure. And to top it all, Mr Subramaniakumar himself was the administrator of the Dewan Housing Finance Corporation which was caught in an epic money laundering case by its management and had turned insolvent.

This sudden turn of events spooked not only the domestic investors but also the institutional biggies who dumped the stock at the first opportunity. Add to this the effect of asset quality issues from the fallout of concentrated bets on select corporate portfolios and losses on the credit cards business during the last 2 pandemic years, and the gloomy picture is complete. From levels of 200+, it fell to below 100 last year and only now has recovered splendidly from there..

But now it appears that most of the bad news is behind it. The bank has clarified that it does not foresee any asset quality challenges going ahead and has built adequate provisions to tide against bad loans. This should soothe investors’ nerves somewhat. On the positive side, it has reported impressive growth in profits and NII in the September quarter even as its credit and deposit grew at a slower pace than most of its peers. The new MD’s strategy on prioritising management stability, accelerating profitable growth, and NPA recoveries is also comforting. The bank’s regulatory compliance should also improve and, thus, reduce the risk of regulatory friction. And most importantly, it is the cheapest among the new age private banks which have come in the last few years, with P/B at just 0.5 at a 30-40% discount to even the mid-sized PSB like Union Bank and BoI who would in all likelihood have a similar risk profile and way less agility than RBL Bank.

Given all the above, though RBL Bank can’t be considered to be out of the woods yet, things are certainly moving in the right direction and over the coming quarters, it should certainly bounce back to its earlier glory. Remember how ICICI Bank had become untouchable few years back with the Chanda Kochhar mess and had touched new lows only to bounce back smartly over the last few years and becoming a multi-bagger from those levels. A similar story seems to be playing out here. Currently quoting at around 180, it should certainly cross 200 levels in the next few quarters on the back of improving Indian economy and stability at the top.

ITC

I had picked this 2 years back  (for 2021) and the reasons I had mentioned then still remain valid today - multiple consumer businesses ranging from cigarettes to food products, hotels and stationery. All of them are a great play on India’s consumption story and ITC gives a complete consumption package, all under 1 roof.

With a 50% rise (excluding dividends), shares of ITC are on verge of logging their best yearly gains in 17 years. Though this was the subject of multiple memes in 2021, astute investors who got in when it was down in the dumps before 2022 and remained patient over the last 2 years or so, have had the last laugh with the stock going up by more than 50% over the last 2 years, something which not many stocks can boast of today. The scrip is also ending calendar 2022 being the second-biggest Nifty gainer.

A stable tax environment for cigarettes in recent years has allowed ITC to calibrate price increases and this trend should continue, driving earnings visibility over the medium term. ITC’s growth will be fuelled by a better-than-expected demand recovery and a healthy margin outlook in cigarettes, healthy sales momentum in the FMCG business, and a smart recovery in the hotels business.

The cherry on the cake is likely to be any news of demerger of its hotel and/or other businesses such as FMCG, paper etc. With strong tailwinds, crossing 400 and more from the current 330 levels should not be too much of a problem next year and later.

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

 

Stock	Price (31-Dec-21)	Price (31-Dec-22)	Difference	%
Nippon India ETF PSU Bank BeES	27.61	47.81	20.20	73.16%
ICICI Prudential Private Banks ETF	178.36	217.35	38.99	21.86%
ICICI Prudential FMCG ETF	377.52	452.22	74.70	19.79%
Kotak NASDAQ 100 ETF	12.30	9.14	-3.16	-25.73%
Indiabulls Housing Finance (IHF)	218.00	154.70	-63.30	-29.04%
ZEE Entertainment Enterprises (ZEE)	320.80	240.05	-80.75	-25.17%
Total	1134.59	1121.27	-13.32	-1.17%

This time the performance has been dismal compared to last year, primarily dragged down by the turnaround stories which did not come through as expected. Of course the portfolio composition was very different last time than this one. But the stocks in each of these portfolios (ITC, TCP, IRE in 2021 and the set of ETFs in 2022) are strong growth stories which will pan out over the next few years. In fact some like Snowman Logistics are ahead of their time in terms of what they offer, leading to huge underperformance in the near term.

The significant lesson to learn from last year (2022) portfolio is that ETFs consisting of a basket of niche/theme-specific stocks not only provide excellent diversification, but also greatly reduce stock-specific risks as can be seen. They should therefore form a core part of any portfolio depending on one’s outlook and preferences towards sectors and stocks.

The other noteworthy thing is the performance of PSU banks last year. This is a much-maligned set of stocks which has been in the doldrums the last few years. Significant recoveries aided by govt. policies and Indian economy’s resilience have been primarily responsible for their stupendous performance. PSU banks of all hues and sizes have performed exceedingly well in 2022 and even the elephants like SBI, PNB & BoB have danced this time and beaten down their private sector peers hands-down. And they were amply supported by India’s private banking stocks which too have returned a handsome ~22% this year. FMCG brought up the solid middle order with the consumption story too playing out well in this opening up year. No wonder then that India stands head and shoulders above any other global market (including Big Brother US) this year. It is therefore only a matter of time before the FIIs see sense in putting their money in the best performing market in the world, signs of which are already visible.

It is also true that the turnaround stories of IHF & ZEE that I had expected this year have not come true. But I still strongly believe that it is only a matter of time when these will start giving returns, much like what ITC did in 2021 and 2022.  And the returns they will generate will more than compensate for the lacklustre performance this year. The biggest media conglomerate post ZEE-SONY merger and the housing demand in India will ensure that. It could take some time, but happen it will.

The only sore thumb in this list is the IT pack which returned -25% in 2022. And NASDAQ was even worse. But again, this is the best time to accumulate the beaten down NASDAQ for 2 reasons – technology will surely lead global (and US) growth in the times to come, not necessarily in 2023, and the Exchange rate tailwinds that Indian investors have. So even if the NASDAQ performs modestly over the next few years, the returns are likely to be far better for Indian investors in the NASDQ ETFs.

And lastly, while the long term focus is rightly on equities, debt at the current juncture is very attractively placed, and there may not be a better time than now to invest in it. And there is a wide variety to choose from – NCDs of companies like Indiabulls Housing Finance, Muthoot group, Target Maturity Funds maturing in 2027-2030 are some of the best option with yields (equivalent of Returns in Stocks) close to 7% which for a debt instrument is very good. I have intentionally not included Bank FDs in this lot though they are giving returns as high as 7.5-8%, as they are highly tax inefficient for people in the 30% tax bracket due to the interest income being considered as taxable income and charged at the same slab rate. This period may last for about 3-6 more months while the inflation cools down before the downward journey of the interest rates starts.

Here’s wishing all investors a very profitable 2023.

Diwali Dhamaka 2022

Here’s wishing everyone a great Diwali and a prosperous new year ahead. After the recovery seen since last Diwali, the market appears to continue being volatile, mainly driven by what’s happening globally rather any India-specific problem. COVID, for all practical purposes, is now done and dusted, and people have gone back to their old pre-COVID lives. There are occasional noises being made by medical professionals here and there, but they are largely taken in stride globally, with nobody getting unduly worried.

The major global event which happened this year and shook the world is the unexpected Russian invasion of Ukraine, and there seems to be no sign of it ending anytime soon. And it has had a domino effect on the global economy. The key commodity which the Russians have is Oil and it is this that they have held Europe hostage to. The gas disruption caused by the Russian stoppage has shaken European economy and it will be some years after the war ends, that it is likely to become normal. And this also has impacted US, a major European trade partner. When all this will end, only time will tell.

The other thing which stands out this time is the resilience the Indian market is showing in the volatile global environment. While the US and European markets have crashed big time, not so the Indian markets. They have taken an occasional knock, but have bounced back soon enough.

The year ahead therefore holds a lot of promise for the Indian economy and consequently the markets. The Indian consumption story led by attractive demographics continues to be strong, and it is these sectors that are likely to stand out compared to the new age businesses of the last 2 years which were the seasonal flavour then. And these new age businesses, and their investors, have woken up to the ground realities with most of them losing 75% of the valuations at which they listed on the Indian stock exchanges.

While Pharma was the flavour during Diwali 2020 and PSUs last year due to the divestment fervour, which eventually didn’t materialize, this year it should be the Consumption story playing out. The other sector which has largely been ignored over the last few years and is poised for a comeback is the Autos and ancillaries which have turned attractive now. Though IT is a secular play with the currency tailwinds behind it, the valuations of most of the top large cap stocks have run up and only the niche ones (mostly in the mid and small cap space) are likely to survive this period and come out stronger. The major themes that I will therefore focus on this time are Consumption and related sectors.

Lemon Tree Hotels (LTH)

India, for long didn’t have any hotel chain culture existing, apart from the Taj and Oberoi groups. And these were mostly restricted to the 5-star category. But with the booming travel and tourism market, Revenge Tourism as it has been coined by the media, some industry veterans have put their heads together and come out with a chain of hotels pan India, and not the 5-star ones but catering to India’s booming middle class. Last 2 years were a double whammy for these chains as the pandemic and ensuing lockdowns ensured that people didn’t travel or go out anywhere either for business, leisure or vacations. And the only ones who have survived this period are the ones to bet on as the lessons learned during these 2 years will be life lessons for them and they should capitalize on the opportunities ahead. Most of the unorganized single hotel types have closed down in this period and the organized ones are having a field day.

Despite global economy reeling under the heat of slowdown and inflation concern, hotel stocks in India have delivered stellar return to their investors in recent times. In year-to-date (YTD) time, Indian Hotels Company shares have risen 80%, EIH shot up around 50% while LTH too ascended to the tune of 80%. As festive season has begun and it is expected to last till end of this year, there is still steam left in these.

One such chain which has caught my attention is Lemon Tree. I have personally been to some of these and the experience has been great. Tata also tried to get into the budget and mid-market segment with their Ginger and Vivanta brands, but they are yet to make their mark. Same is the case with Royal Orchid.

The favourable location of LTH's properties in prominent business and tourist districts supports revenue growth prospects and reduces concentration risk. With the opening of international borders to foreign tourists, the hotel business in key cities like Mumbai and Delhi is set to improve significantly and Lemon Tree is likely to be the key beneficiary.

Promoted by Patanjali Keswani, LTH is the largest hotel chain in the mid-priced segment in India. It operates 8,497 rooms in 86 hotels across 54 destinations in India and abroad under brands like Aurika (premium), Lemon Tree premier, Lemon Tree (Midscale), RedFox (Economy) and Keys (Prima, Select and Lite). Of its 86 hotels in its portfolio, 40 are owned or leased and the rest 46 are managed or franchised.

The company is well positioned to capture the unorganised market share due to slowdown in the upcoming room supply in the wake of ongoing distress in smaller and unorganized hotels segment. The company’s large asset base, strategic partnerships and financial flexibility would continue to support the liquidity profile, if further need arises.

Currently quoting around 84, the company can easily give returns upwards of 30% conservatively over the next year or 2 and then can go the Indian Hotels way, if things go as they have planned. The risk here is that due to the hit in the previous 2 financial years, it is still in the Red but improving fast. So conventional financial parameters like PE ratio are not relevant here. So the initial buoyancy may go towards coming in black and then growing from there on, assuming no major shocks like the COVID pandemic.

The company is well-positioned to capture the unorganised market share due to a slowdown in upcoming room supply in the wake of ongoing distress. This is a potential compounding play on India’s consumption story in the travel & tourism sector, starved as it is of quality hotel chains, a gap which LTH is seeking to fill.

Devyani International (DI)

This is another classic beneficiary of India’s ballooning demographic-led consumption story. DI went public last Aug (2021) at an issue price of 90 and has already more than doubled over the last year, another sign that consumption has not really been as much impacted as some of the other sectors of Indian economy and continues to hold promise.

Incorporated in 1991, DI is the largest franchisee of Yum Brands and among the largest quick-service restaurants (QSR) chain operators in India with 655 stores across 155 cities all over the country. Yum Brands Inc. operates many fast food brands i.e. Pizza Hut, KFC, and Taco Bell brands. It operates 3 business verticals;

1. Core Brands (KFC, Pizza Hut, and Costa Coffee stores in India)

2. International Business (stores in foreign countries i.e. Nepal and Nigeria), and

3. Other Businesses (own branded stores i.e. Vaango, Food Street, Masala Twist, Ile Bar, Amreli, and Ckrussh Juice Bar).

Initially, the business started with a Pizza Hut store in Jaipur but subsequently expanded operations in both KFC and Pizza hut, and operates 264 KFC stores, 297 Pizza Hut stores, and 44 Costa Coffee stores in India. The biggest advantage of DI is its band strength which cuts across all age groups. The promoter, Ravi Jaipuria is a seasoned hospitality industry and chairman of RJ Corp which apart from DI also runs Varun Beverages, the second-largest bottling partner for PepsiCo's soft drink brands outside the US. Thus there are obvious synergies in both businesses of RJ Corp thus benefitting both. DI runs several brands which are a big hit among the younger generation as well as millennials, which makes it quite diversified. This also reduces risks and increases growth potential.

The company has been able to do expansion even amid the Covid-19 times. To counter the effects of COVID-19, the company adopted the approach of re-developing its menus to focus on delivery and takeaway options. DI also introduced measures to reduce fixed and variable costs and sought rental waivers from store landlords and lessors. It also rationalized certain loss-making stores to maintain profitability and strong operating financial performance, though it is yet to come out of red.

Its closest listed competitors are Jubilant Foodworks (Dominos), Westlife Development (McDonalds) and Burger King. However, Westlife Development and Burger King are single product (burger) companies while Jubilant is primarily a Pizza company, though it is making some attempts at diversification. And this is where DI scores with its multiple brands spanning different product types (KFC-Burgers, Pizza Hut – Pizzas, Costa Coffee – beverages & bakery).

As can be seen in recent months, the re-opening theme is here to stay for some time and Westlife (McDonalds) which has been around for some time now, has been a big beneficiary in the stock market with its stock price nearly doubling in the last 2 years. The same may very well play out with DI. RJ’s golden touch (as with Varun Beverages) is likely to help make this faster. Currently quoting around 190, this could be another steady compounding story over the next few years.

Associated Alcohols & Breweries (AAB)

This is not a branded play on the liquor market but a contract manufacturer. It is also into grain-based ethanol manufacturing which could well be the next big trigger for it along with the current consumption boom.

This contract manufactures for the liquor MNC United Spirits (US) with best selling brands like Black Dog, Smirnoff Vodka and VAT69 among others. United Spirits has had a stellar run in the last 2 years from 550-600 levels to more than 800 now. Naturally, AAB will be a big beneficiary of US’ stellar run and more so with the festive season and arrival of foreign tourists who are the biggest consumers of these global brands. And that’s not all. In addition to contract manufacturing, AAB also has around 7 of its own spirit brands which are marketed in 5 states locally and are quite popular there.

Recently AAB has recently completed its capacity expansion the results of which will start coming from the current quarter. This is likely to have a positive impact on its sales, margins as well as the bottom-line. And the best part is that even without this rub-off, it is quoting at attractive valuations. With a Mcap of just about 850 Cr, it is a true Microcap. And that’s where money is made.

In spite of the expansion it undertook, AAB is a debt-free company. And this in itself is no mean achievement. Not only that, it is currently quoting at a PE of 13 while most popular liquor stocks (Radico Khaitan, US etc.) quote at PEs from 18-30. And this ratio will further come down with the increase in its numbers in the next few quarters once its expansion effect comes into play. So the price will have to rise to catch up with the sector PE. And conservatively, this can be at least 50% from the current level. With debt-free status, which in itself is commendable in current times, the increase in its bottom-line will straight go into its EPS

Another interesting aspect is AAB’s focus on increasing its own brands. Recently US divested some of its popular brands to focus on its premium offerings and AAB bought some of these 32 on royalty basis from them. This IMFL foray, where they themselves will manufacture these brands as well as sell them (earlier US used to sell them under its own banner) will further enhance AAB’S margins. This is a kind of forward integration that they have undertaken.

Liquor sector is set for a re-rating in the next few years with even retail stores being allowed to vend them eventually a la 7-11 in USA. So it is imperative to have a few of these stocks in one’s core portfolio from this sector and there is a wide variety to choose from – US, UB, Radico Khaitan and few others.

With all this in place, AAB should go on to give strong compounding over the next few years.Currently it quotes at around 470 and has the potential to double over the next 2-3 years with strong tailwinds.

L&T Technology Services (LTTS)

LTTS provides services and solutions in the areas of product software, mechanical and manufacturing engineering, embedded systems, engineering analytics and plant engineering. The Company operates through five segments: Transportation, Telecom & Hi Tech, Industrial Products, Plant Engineering and Medical Devices.

LTTS has a strong presence in the different verticals and a higher geographical presence. This reduces the dependency on one particular sector, making the business more robust and having better sustainability. The strong client relationship indicates the robustness of the business. It has strong patents and strong digital capabilities to capitalize on the demand as compared to peers across geographies.

LTTS undertakes complex design and engineering projects that require deep domain expertise. They operate higher up the value chain thereby making higher margins on the services offered.

While attrition has been a headache for most IT companies over the last few months, niche firms such as LTTS are less likely to be impacted as the employees here have niche skills and there are limited opportunities for these, compared to plain vanilla IT services skill set. Key engineering problems are best solved by companies such as LTTS and not plain vanilla IT services firms though each of the majors has a small segment working in these areas. However, the contribution of this segment to the overall company is negligible for the bug 5 IT services firms. Companies across the globe spent US$1.5 tn on ER&D in 2020. Global ER&D spend is expected to shoot up to US$ 2.6 tn by 2026.

Given a strong parentage in the largest Indian engg. company L&T and its global reach, LTTS is well poised to grow steadily in the coming years. Compared to its nearest competitor Tata Elxsi (TE), LTTS has better diversified revenue mix and is way cheaper than TE.

Given the rupee depreciation. focus on niche IT areas of engineering R&D and product development, LTTS has great prospects going ahead. Due to the turmoil in the US, it has taken a beating from where it was last year (~6000) and thus provides a good entry point at 3500 now.

Nifty Auto ETF

If the vehicle sales figures published in the last 2 days are anything to go by, happy days are here again for the Auto sector. This was one sector which was battered over the last few years and its woes compounded in the last 2 years due to the supply chain disruption following the COVID pandemic. While things are not fully normal yet, there are green shoots emerging and hence this is the right time to stock up on this sector.

COVID pandemic also brought to the fore the primary need for self and safe mobility and there was a rush for cars of all sizes from last year once there were signs of the pandemic stabilizing, which unfortunately couldn’t be fulfilled. The same was the case with 2-wheelers. Add to that the headwinds of chip shortage, and other auto ancillaries primarily from China, and there is a huge pent-up demand waiting to be met. And the industry appears to be gearing up for it with a slew of launches planned in the next few months/years. And with the advent of EVs, both 4-wheelers and 2-wheelers are gearing up for good time ahead.

The Auto sector is at the cusp of a turnaround with a return to normalcy post-COVID already underway. Valuations are at a discount to long term averages unlike other sectors (4.4 times P/B vs 10 year average of 5 times). Margins and return ratios are expected to improve significantly in an expected cyclical recovery, after taking a beating in the down-cycle in the past few years. Opening up of workplaces and educational institutes will also aid revival of transportation segments (e.g. 3Ws/buses/scooters).

While the major listed players – Maruti Suzuki, M&M, Tata Motors, Eicher Motors and Escorts (post its takeover by the Japanese player Kubota), are all good plays, an Auto ETF will be a much more promising bet which can give all the good things in 1 neat packet. Currently there are 2 such ETFs being run - by ICICI Prudential AMC & Nippon India AMC. Being an ETF, there is very little to choose form between the 2, so you can take your pick based on individual preferences. Though small (93 Cr.), ICICI Pru has more than double the AUM of Nippon AMC's ETF.

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

	2021	2022	Difference	Gain/Loss
Rane Holdings	633.15	912.80	279.65	44.17%
HDFC	2899.95	2355.35	-544.60	-18.78%
Tata Power	231.35	218.60	-12.75	-5.51%
Max Healthcare Institute	345.65	411.00	65.35	18.91%
Sterling & Wilson Renewable Energy	448.80	295.20	-153.60	-34.22%
	4558.90	4192.95	-365.95	-8.03%

 

The overall return of -8.03% can’t be considered good by any yardstick. Apart from the lone Auto sector representative Rane Holdings, and to some extent Max Healthcare Institute, none of the others have really done justice to their potential amid the volatile market in the last 1 year. However, they had already run up quite a bit by last Diwali and have paused in their upward journey. All these are fundamentally sound stocks and can continue to grow and provide good returns over the next few years.

The current picks are a bet on India’s Consumption story and have the potential to generate compounding returns over the next few years, and not just next Diwali. You may not get market-beating returns every year, but can surely expect steady compounding (probably market-beating) over a longer timeframe.

HAPPY MUHURAT TRADING!!

Themes for 2022

 Here’s wishing everyone a great 2022.

What a year 2021 proved to be. It can truly be called a year of recovery.

From the depths it touched in 2020, 2021 staged a remarkable turnaround and we are on the cusp of taking that growth forward this year. There may be some hiccups along the way with the emergence of new variants of COVID, but that should not be a reason now to lose sleep over. It will be like any other cyclical disease which occur in waves and then recedes. The big difference now and 2 years back is that there is a lot more knowledge and awareness and the dread has significantly gone down. Add to this the medical advances over the last 2 years with vaccinations picking up speed globally and with large parts of the world vaccinated, at least to some extent, this is not something which is likely to block the economic recovery now under way. Barring an occasional road bump (like we have seen in the last few weeks), we should be able to navigate this without too much pain.

One thing which everyone needs to remember now is that there has been a phenomenal run-up in stock prices, most of which is on hope of economic recovery. While that will happen is not in question, it is the when which is bothering the markets which have discounted earnings well into 2023, more than 1 year ahead. And that is a long time for things to go wrong.

However, this year 2022 should be considered as a year of consolidation. We are highly unlikely to see the unbridled exuberance led by ample liquidity globally, once again this year. The gains will be much more measured this time round as the central banks the world over have publicly announced liquidity tightening measures (US Fed for one) and some have even started implementing them (UK leading the way). So one certainly needs to tone down the expectation of a repeat of 2021 this year.

Focus therefore this time is on baskets of stocks which can reduce the risk to a large extent and yet give excellent risk-adjusted returns. And the Indian Capital markets/Financial services industry has helped this by bringing in products in all flavours catering to almost all segments of the population. And the product I like most in this basket is the ETF. There are a variety of ETFs launched by various fund houses catering to the varied tastes, not only on the equity side, but also on the debt side. And it is the Equity basket that is my focus this time. I would strongly recommend everyone to visit the website of ICICI Prudential AMC and explore their basket of ETFs which practically caters to every taste not only from debt to equity but also to the more exotic thematic and sectoral bouquets including global funds. There surely must be others too who have done similar things and are worth a look.

Apart from the above, there are some stocks which have the potential to be compounders with credible management changes coming in and the older promoters making way. This is likely to lead to a re-rating of such companies giving huge returns. We have already seen what a good management can do to companies like CG Power which has gone from 20 to 195 in about a year and a half.

So this year’s stocks are based on the above themes. Let’s take a look:

Nippon India ETF PSU Bank BeES

This is a basket of PSU Banks with all the major PSBs represented here. Everyone is gung-ho about SBI  only but there are others too like Canara Bank and Bank of Baroda which have the potential to give good returns over the next few years. This is one group which has massively underperformed over the last few years and is now ripe for a turnaround. India’s economy just can’t grow without the support of this much maligned group of banks, and not only SBI. Having such a basket will also reduce the concentration risk in SBI which in most years has only flattered to deceive and is now more of a trading stock than an investment one, though recommendations of most pundits are to the contrary.

With the economy on the cusp of recovery, there is no way that this group will not perform. However, one can’t expect fireworks from this basket. Rather, this should be looked at as an alternative to a 3 to 5 year FD with way better returns, at least 100% more than what an FD would give if booked currently.

There is another PSU Bank ETF from Kotak AMC but its AUM is very low and hence Nippon is my preferred option.

ICICI Prudential Private Banks ETF

I was on the lookout for such a product in the MF space when I came across this. If you look at the portfolio of this ETF, you will find all the top private banks under one roof here. It is really an excellent idea to sell of all your individual private bank holdings and move them to this ETF thus giving the same returns with much less risk. It really would be cumbersome to manage a portfolio of so many good private banks (all of which certainly are investment worthy) when you get the whole bouquet in this neat package. And you don’t have to keep a track of the ups and downs in the stock prices of individual banks; this will automatically take care of it.

Besides ICICI Pru AMC, SBI AMC also has a similar ETF. But there too, the AUM is very low and this is a much better alternative.

Between the above 2 ETFs, you get all the banking sector exposure that you can possibly need and without any fund manager bias which you would find in an actively managed B&FS sector fund available with most AMCs. The above 2 can also be considered in SIP mode, in whatever proportion you feel apt, to get excellent returns over a 5 year period.

ICICI Prudential FMCG ETF

This is another one from the ICICI Pru AMC stable which gives you all the top FMCG names right from Asian paints to Bata under one roof. And given the cost of owning individual FMCG stocks, most of which are MNCs, this is a much more prudent option with limited capital.

Considering the run-up that has already happened, FMCG is one sector which is likely to provide reasonable risk-adjusted returns compared to any other sector. After all, a growing Indian economy would have consumption as its underlying theme, without which it will simply not happen.

Look at this as a stabilising or defensive component in your portfolio rather than any return-boosting one.

Kotak NASDAQ 100 ETF

Continuing the current ETF theme, my next preferred pick is this ETF based on NASDAQ 100, which is the gold standard in technology companies globally. USA is at the forefront of all changes globally in terms of technology, research and innovation and this index perfectly mirrors it. With Indian markets trading at euphoric valuations, this ETF can help you diversify and create sector-agnostic portfolios to garner stable returns.

This ETF offers investors in India an opportunity to invest in US tech stocks which otherwise would be very expensive unlike trading/investing in Indian markets/stock exchanges. Retail investors can’t invest in ETFs because of the high ticket size. The NASDAQ 100 majorly constitutes the big tech players from the USA like, Facebook, Google, Netflix etc. This makes it a very technology sector specific index. However, the quality of stocks and companies in this index is unmatched by any other ETF in India.

Till some time ago, in India, you didn’t have easy direct access to such ETFs. However, there are few of the top AMCs which have launched local MF schemes which invest in NASDAQ 100 ETF from India. Motilal Oswal (MO) was the first AMC to recognize this gap 10 years back and launched the first NASDAQ 100 ETF. And it has given 25% CAGR since then. No Indian MF across sectors or categories has been able to match this performance.

The benefits of investing globally could be manifold. Robust performance of the US markets and impact of currency depreciation are some of them. The Indian Rupee has been depreciating against the US dollar for the last 20 years, which additionally adds to an investor’s return.

Taking a leaf out of MO’s book, some of the top Indian AMCs have also launched MF schemes based on NASDAQ 100. These include Aditya Birla Sun Life and ICICI Prudential besides Kotak. Since all of them track the same index, the performance will be the same irrespective of the fund house, so you can choose as per your preference for a fund house among the above.

Here again, you can either buy these ETFs directly from the stock exchange (like any other stock) or through the AMC directly as in any of its other local schemes.

Besides the above 3, there are 2 restructuring stories that caught my attention.

Indiabulls Housing Finance (IHF)

I have already published a detailed post on this a few days back here.

In its new avatar, led by pedigreed investors managing it, I believe this has all the ingredients to become a great compounding story over the next few years. As usual, the trading-focused Indian markets have apparently not recognized the potential this has, and therein lies the opportunity. Considering the sell-off that has happened since this news broke out, it is indeed surprising, more like shocking, to see that the Indian market is unable to see what Blackstone and other top financial investors can see in IHF, and have put their money where their mouth is.

ZEE Entertainment Enterprises (ZEE)

On similar lines as IHF, ZEE also is trying to come out of the shadow of its erstwhile promoters the Subhash Chandra’s Goenka family. While its merger with Sony Picture Network India (SPNI), a subsidiary of the $82 billion Japanese conglomerate, has been recently approved by the companies, the objections of its largest shareholder Invesco (which owns 17.88% stake in ZEE), need also to be addressed. And in all fairness to the minority shareholders, Invesco does have very valid points in not letting the promoters get a backdoor entry post the merger with SPNI. That it has taken Sony 3 months to do a due diligence and agree to this merger speaks a lot about the potential it sees in ZEE. Sony will hold majority stake in the merged company, ZEE promoter family will own 3.99% with an option to increase it up to 20% from market.

As and when this merger finally happens over the next few months, it will create India’s second-largest entertainment network by revenue and spawn an entity with 75 TV channels, two video streaming services (ZEE5 and Sony LIV), two film studios (Zee Studios and Sony Pictures Films India), a digital content studio (Studio NXT), and programming libraries. And shareholders of the current ZEE will get shares in this media and entertainment MNC.

Sony as a broadcaster in India has always been a distant third behind Star and Zee, even though it kicked off in the late 1990s. Sony has tried everything. It bought out KBC rights, and went aggressively after cricketing properties. However, it failed to achieve the audience following Star and Zee have. The takeover of Zee and the emergence of a unified programming of over 100 channels, with combined revenues of over $2 billion will be a game changer, not only for Sony but also the M&E industry in India.

There is hardly any completion to this M&E behemoth currently with only Star as the real competitor. I expect the M&E industry in India to go the telecom way with only 2-3 large players remaining and others either shutting shop or getting gobbled up by the 2-3 larger players who will remain standing.

Given that the shares of ZEE have been surprisingly subdued despite the positives in the deal, maybe due to the legal overhang brought by Invesco, it is an opportune time to board the ZEE train and reap the benefits over the next few years.

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

     

Stock	Price (31-Dec-20)	Price (31-Dec-21)	Difference	%
SCI	88.35	134.80	46.45	52.57%
ITC	209.00	218.00	9.00	4.31%
Tata Consumer Products (TCP)	589.90	743.60	153.70	26.06%
Indiabulls Real Estate (IRE)	82.20	157.30	75.10	91.36%
Snowman Logistics (SL)	66.40	40.50	-25.90	-39.01%
Total	1035.85	1294.20	258.35	24.94%

 

This time the performance has been slightly lesser than that of last year (26.63% last year vs 24.94 % this year). Of course the portfolio composition was different last time than this one. And the 2019 portfolio has given a return of 16.79% this year i.e. if one were to hold the same stocks of 2019 this year, against which last years’ return of 26.63% was calculated, this is the return one would have got this year. And because of the higher performance of last year, the CAGR of 2019 portfolio till this year is 21.61%, primarily driven by the great performances of Reliance and Camlin Fine Sciences the year before. This also goes on to prove that the same stocks will not give the same high returns year after year and will have their share of spurts and downs. As long as the spurts are much higher than the downs, one should not really complain. The heartening thing for me is that in both the years, the performance is > 20% which is my internal benchmark for satisfactory performance, irrespective of how the benchmark indices fare.

And this time, had it not been for Snowman Logistics and ITC, this portfolio would have done a lot better. 3 out of 5 have really justified the faith I had in them last year. And they are not done yet. SCI has the divestment tailwinds to take it forward, not to mention attractive valuations (it quoting at P/B of less than 1). TCP is a consumption growth story with an ever-growing portfolio and its entry into newer segments is all set to take it to the 4-digit mark in the next few months. IRE is all set to be re-rated with a pedigreed management now in place and tailwinds of real-estate growth supporting it. Coming to the laggards, Snowman Logistics is a long term story and is in a very nascent sector. So one needs to give it time to really start giving returns, as happens with most sunrise sectors. When loss-making new-age digital companies are commanding eye-popping valuations, it is unfortunate that SL in a futuristic industry is not able to do the same. But its time will also come and will make up for this long gestation period. This is established by the fact that retail in India is growing by leaps and bounds. And a large part of this requires cold storage transportation facility which hardly any other player offers. So it is only a matter of time when SL will catch the attention of an MNC who is into related areas and make the leap. And ITC has for the first time publicly announced some sort of intent at restructuring and value unlocking. It remains to be seen when this actually materializes. Like SL, this too is one for the patient ones.

 

Here’s wishing all investors a very profitable 2022.