Sunday, December 31, 2023

Themes for 2024

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Here’s wishing everyone a great 2024.

2023 turned out to be a path breaking year for the Indian stock market. Both the indices made new life-time highs in the last few days and don’t seem to be in any hurry to come down. There is a feel-good factor about Indian equity globally and this has rubbed off on the FIIs who have started coming back in the last few days and weeks. While the Indian market has long ended the FII money dependency, it enables more liquidity resulting in a buoyant market. So more the money coming in, the merrier the markets will be.

Indices though tell only one side of the story. While they are considered as the barometer of the economy, the real fun is in the broader market of mid-caps and small-caps. And it is this pocket which has beaten the main indices hollow over the last few months. Admittedly, there are overheated pockets in this space, and there are potential minefields, but for an astute stock-picker looking for value, this is as good as a time as any. And there certainly are value buys in this market too, even if not in the main indices. And these are the ones to focus on as we will see in the coming sections. However, one needs to carefully define what value in the current context means. Anything above a PE of 20 was once considered expensive and only the MNC kind of stocks were available at this or higher PE. These were also considered to have strong cash flows, governance and availability to tap into parent’s global technology and practices. Come 2022 post the pandemic and the normal has shifted. Now anything around a PE of 30-35 is considered attractively priced, growth stocks are available at a minimum PE of 40 and the IPOs are being priced at 40 and list at a PE of 80. And this situation has rubbed off on the PSUs too. The bluest of blue-chip PSE was available at single digit PE with a dividend yield twice that of bank account rate. And following their private sector counterparts, they are now quoting in higher teen PE, almost twice that of earlier. Given this PE expansion and re-rating of stocks across the board, one really needs to pick stocks carefully not to get one’s fingers burnt.

The one theme which has defined the markets over the last year or so has been the PSU story. It all started with Railways, moved on to PSB and then Defence. And the story is not over yet. PSU theme itself is so diversified that there are always some sectors which are in the limelight at any given time and there may well be a sector rotation here. Already many AMC have launched thematic funds focused on some of the above sectors such as Housing, Defence etc. There may well be more. And when this money starts chasing the same set of stocks, the rally in them is unlikely to stop anytime soon. Add to it the FII flows which are now re-starting and will only increase post Jan ’24. The entire manufacturing, industrials and infrastructure is not just a one-year theme, but a multi-year one. However, while the prospects are undeniably good for the hot sectors of Defence and Railways, they have run up too much too fast and their upward journey is highly likely to slow down significantly and there will certainly be a time correction over 2024 at least.

After multibagger years of 2021, 2022 amidst the post pandemic China+1 strategy adopted by global companies, 2023 was a much more sobering year where there was a de-rating amidst some signs of revival from China and the overall global slowdown in the Chemical industry leading to oversupply situation and crashing of prices. However, most of the good companies in the sector have used this sobering time to set their house in order and ramped up capacities of the right products. The results are likely to be visible from 2024 onwards. Add to that the emergence of new sectors like the EV batteries which require speciality chemicals which are not commonly available.

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. And while there will be specific companies in this area, what better way to play this than through financial and travel & tourism stocks which form the underlying bedrock over which this will grow and are supported by on-going events? Also, India story continues to play out not only locally but also internationally with FIIs waiting on the sidelines to pour in their funds. This should start in 2024 amid hopes of US Fed rate cuts.

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

 PSB ETF (Nippon India ETF PSU Bank BeES or any from ICICI, DSP & Kotak)

With consistent earnings normalization, controlled credit costs, and healthy asset quality, earnings for PSBs are expected to grow at a more sustainable pace. PSBs will continue to benefit from their established distribution network, strong geographical presence, and improved digital initiatives. After Covid-19, the asset quality of PSBs has been steadily improving, supported by improved underwriting and continued recovery. GNPA/NNPA ratios of PSBs have declined to 5.2%/1.3% in FY23 from the peak of 14.6%/8.0% in FY18. A large part of FY12-22 was spent cleaning up the balance sheets of financials.

Rather than going for individual banks, which too would make good individual stock picks, a more intelligent strategy would be to go for a PSB basket. This can happen thru ETFs available on the exchanges from top fund houses such as Nippon, ICICI, DSP & Kotak. Since this tracks the PSB index, choosing one over the other doesn’t really matter. In early 2022, Nippon India ETF PSU Bank BeES had been my pick. That time it was ~@ 28 while now it is @ ₹62. So it has more than doubled in 2 years and still has a lot of steam left, even if it doesn’t double or grow at the same breathless rate. If Indian economy must gallop at a healthy speed, how can PSBs not come into play? The only thing that one needs to consider is the AUM of the scheme to ensure that it is not too small and hence carries a high impact cost.

Shriram Finance (SF)

Apart from the PSBs, some of the financial institutions from private sector are also worth a look. Post the restructuring within the Shriram group last year wherein they streamlined their corporate structure, SF has emerged as a financial powerhouse. SF is a retail NBFC offering credit solutions for commercial vehicles, two-wheeler loans, car loans, home loans, gold loans, and personal and small business loans. Through its cutting-edge technology, it is a digital financial institution that reflects the banking needs of Millennial and Gen-Z customers. It offers priority financial services to those in the unbanked and under-banked sectors. It offers fixed deposits and recurring deposits. It has recently tied up with SIDB for offering loans to MSME.

With a complete repertoire of products from lending (property as well as vehicles), financial products distribution (MF, insurance etc.), this can be considered as a complete financial marketplace.

SF has been up 95%, over the last 3 years, soundly beating the market return of 75% (not including dividends). This was also helped by the restructuring that took place. And the story is set to continue. In fact its attractiveness is further enhanced by its relatively lower valuations compared to its peer set. It is quoting at a P/B of ~2 compared to ~10 for Cholamanadalam, another southern biggie, and the segment leader Bajaj Finance which is at a similar P/B of 10. And it is in strong hands. Over 70% of its shareholding is with FII & DII and 25% with the promoters. So, public holds just 5% of the overall equity here. This can therefore be considered as a safe bet with steady compounding over the next few years.

L&T

With an election year starting, Infrastructure is often considered a favoured sector as govt. kicks off multiple public projects involving huge infrastructure. And here, need one look anywhere other than L&T, the infra behemoth in India? It has everything that an end-end infrastructure project requires and has successfully executed several of them. From Oil & Gas, Engineering, EPC, Railways, Defence, Space they have everything that you can name in the Infra space catering to private as well as govt. sectors. Already, Defence & Railways have been very popular themes led by govt. spending and reforms and these are well set to continue in 2024 and beyond with the likelihood of govt. continuity. The latest sector which has started to take off in India is the Metro trains (which though considered a part of Railways has a large part of other infrastructure such as roads also). One can see metro network being set up in tier-2 and tier-3 cities as well as the outlying suburbs of the major metros (Navi Mumbai being a case in point), And L&T has a strong presence here having already done the H’bad metro, part of Mumbai monorail (which unfortunately didn’t take off due to other reasons and not due to anything from L&T) and recently winning the contract for B’luru suburban metro rail network.

Though it has run up somewhat along with the market, there is still ample scope for it to give healthy returns over the next few years if one has faith in the India growth story.

Camlin Fine Sciences (CFS)

CFSL is a specialty chemicals manufacturer and is one of the world's leading producers of antioxidants and vanillin. It offers solutions across different verticals such as shelf-life solutions (which include antioxidants, blends, and additives), performance chemicals, aroma chemicals, and health and wellness solutions. Apart from offering high-quality traditional antioxidants for the food, pet food, and animal nutrition industry, the company has a product basket that can cater to a wide range of industries from food to fragrance to animal nutrition to pharmaceuticals and petrochemicals.

Camlin has manufacturing facilities in India, Italy, Mexico, China and Brazil with R&D centres at India and Italy and application labs in India, Mexico, Brazil, USA and Italy. The company serves customers in more than 80 countries across the globe with more than 100 products.

Dandekar family, the promoters of CFS, hold about 18% of the equity while Convergent Finance LLP, the private equity firm launched by former Fairfax India executive Harsha Raghavan, holds ~23% in CFS. In April ’23, Belgium-based Ackermans & van Haaren (AvH) entered into a cooperation agreement with the current promoters to become co-promoters and acquired a 6.6% stake in CFS thru an open offer @ 160/share. Post the open offer, the 2 foreign firms will hold ~30% stake in CFS and together with the Dandekar family, the total promoter holding is ~48%. Both the foreign entities should add significant value in terms of prudent capital allocation and better corporate governance along with a strong & wide global network to strengthen CFIN’s position as a diversified global supplier of specialty chemicals. A strong network might also open the doors for attractive M&A opportunities for CFS.

Now that the open offer euphoria is over, the stock has come to its pre-offer price of ~₹136 and is a good entry point here. Also remember that the new investors have paid ₹160 for this to the promoters as well as in the open offer in the first half of 2023. This year (FY ’24) may not produce any great fireworks but once their vanillin supply starts from Jan ’24 and Europe demand improves, with help from AvH, things should start looking up from FY ’25. This is one for the patient investor as chemical demand is currently muted due but will gradually improve in the coming 2 quarters as stated above.

Dreamfolks Services (DS)

Consumption need not be restricted to FMCG sector only but can also be considered for Services sector. We have seen how the boom in travel sector (revenge tourism) resulted in boom time for travel services companies like Thomas Cook, EasyTrip Planners etc. Extending this logic further, there is a unique listed company in India called Dreamfolks Services. Not many have heard of this company, but it is a dominant player and India's largest airport service aggregator platform facilitating an enhanced airport experience to passengers leveraging a technology driven platform.

DS facilitates customers’ access to services like Lounges, Food & Beverage, Spa, Meet & Assist, Airport Transfer, Transit Hotels /Nap Room Access and other services. Over the years, they have transformed from being an airport lounge access aggregator to an end-to-end technology solutions provider for designing and delivering services that enhance the airport experience. They have crafted their service proposition to provide their clients the option of offering a wide-ranging bouquet of services to their consumers.

Their asset-light business model integrates global card networks operating in India, credit card and debit card issuers and other corporate clients in India, including airline companies with various airport lounge operators and other airport related service providers on a unified technology platform.

Through their partnerships with other service providers, they have a global footprint extending to 1,500+ Touch-points in over 100 countries across the world out of which 268 touch-points are present in India and 1,232 Touch-points overseas. One of the key aspects of their business model is a strong focus on technology.

In early November, DS announced its entry into Malaysia, as a service to partners at three airports: Kuala Lumpur International Airport, Kota Kinabalu International Airport, and Kuching International Airport. And some time back, it announced its collaboration with Grey Wall, one of the largest airport and lounge service aggregators in Russia. DS’ clients and their end consumers can now gain access to Grey Wall's comprehensive ecosystem of lounges and services in Russia’.

Closer home, DS has set its sights on the railway industry as a key area for future growth. They now operate 12 railway lounges across India. These lounges offer a range of services to railway passengers, including comfortable seating, refreshments, Wi-Fi, and more.

Earlier this year, they acquired Vidsur Golf, one of the leading golf privileges providers in the country. Through this acquisition, DS has developed the capability to offer exceptional luxury services and experiences to travellers globally, thereby expanding its ancillary provisions as well as diversifying its portfolio of value-added services

With a unique service offering and the only listed company in this space, DS offers a great way to ride the travel boom not only in India but globally as well. If they play to the script of doing the right things at the right time (they have already made the right moves in terms of adding to their offerings as detailed above), they may well be the Titan of travel industry offering lifestyle travel solutions. At this point, since it is a growth story, valuations may not be that relevant, as long as they ensure good topline and positive bottom-line in the near future.

Praveg

I am sure hardly anyone has heard of this company. Established in 2005, this pioneer and leader in experiential tourism in India offers exhibition, event management, non-permanent luxury accommodation and hospitality services in India. It has recently forayed into wedding management, a particularly niche area with ample scope but no organized players, or at least listed ones. This is a niche play in the travel, tourism, and hospitality sector and hence I consider it as a hidden gem in this space amid the boom in hotel stocks which have become the consensus stories.

Praveg’s events business grew with the ‘Vibrant Gujarat’ campaign, which was first held in 2003. Given its expertise in advertisements and campaigns, it was awarded multiple event management and turnkey exhibition contracts by the government as well as private players over the years. The company secured its first contract from Gujarat Tourism in 2013 to develop a tent city in the Rann of Kutch for the Rann Utsav festival. In 2018, it bagged a tender to develop a similar tent city near the Statue of Unity. Driven by the success of this model, the government floated tenders across states, with Praveg successfully securing contracts in Varanasi, Daman, and Diu in 2023.

In terms of its inventory, the company operates in 10 properties spread across Gujarat, Daman & Diu, and Uttar Pradesh, boasting an inventory of 685 keys. This comprises 446 luxury tents, 163 cottages, and 76 luxury hotel rooms across four, five, and one property, respectively. Looking forward, the company plans to add 52 keys at three properties by the end of FY24. In FY25, another 250 rooms will be added across eight properties, bringing the total inventory to 1,000.

The big event to watch in Jan. ’24 will be the opening of Ram temple in Ayodhya. Ayodhya is expected to see a huge tourism boom. In 2022, Varanasi, a popular pilgrim spot, attracted 7.2 crore visitors which dwarfed the 85 lakh visitors snared by Goa.  Praveg has already built a resort at Ayodhya which will start from 15th Jan. onwards. This very near to the Ram mandir and almost 75% occupancy has been pre-sold.

Its Balance Sheet is healthy given its minimal capex and asset light model. Against an investment of ~ 1 cr./room, Praveg’s luxury tents require just 15–20 lakhs to set up. Its semi-temporary cottages need an investment of ~30 lakhs. Time to market is also extremely short as it has the capability to set up a tent city in just two months. Owing to limited capex, its luxury tents/cottages can break even in the first year itself, at an occupancy level as low as 20%/40%.

All in all, this is one company which is in the right place at the right time. With Modiji exhorting the world to come to India for every major event they want to host and also requesting the Indian moneybags to spend it on destination weddings in India rather than abroad, “acche din” are surely around the corner for Praveg. The only risk is that it has run up quite a bit over the last year or so. Nevertheless, considering what lies ahead, it will surely reach far greater heights over the coming years.

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

 

Stock

Price (31-Dec-22)

Price (31-Dec-23)

Difference

%

IRB Infrastructure

29.09

41.52

12.44

42.75%

Mazgaon Dock Shipbuilders

793.15

2280.30

1487.15

187.50%

Texmaco Rail & Engineering

56.70

171.25

114.55

202.03%

RBL Bank

179.40

279.20

99.80

55.63%

ITC

331.55

462.35

130.80

39.45%

Total

1389.89

3234.62

1844.74

132.73%

 

This time the performance has been rocking compared to last year, primarily because of the focus on promising sectors like Infra (Road construction and related projects), Defence, Railways, beaten down Banks and Consumption, all of which boomed beyond expectations. The performance is especially heartening when compared to the Nifty SmallCap Index (since 4 of the 5 stocks are from small cap space, comparing with this index is only fair) which gave a return of 54.82% over the last year. So this basket has given more than double the returns of the Small cap index.

Some of last year’s stories have played out for the time being, moving up too much too soon, Mazgaon Dock, ITC being the cases in point. All the neglect they suffered in the earlier period has been more than made up last year with multi-bagger returns. It is highly likely that they may pause in 2024 to get their breathe back after such an astounding run at a blistering pace, but the long-term story is still intact. So, one can take a call considering their own situation, risk appetite and this perspective.

There always is sector rotation in the market and no one sector keeps going forever. Same will be the case in 2024 too. Apart from the ones mentioned above, watch out for the much-maligned IT pack, especially the niche ones (for e.g. Cyient, Tata Tech) and the product companies (for e.g. Newgen Software, Intellect Design) etc. Similarly, PSBs will continue to thrive to make up for the lost time over the years. Another sector to watch out for will be Auto ancillaries (I have already highlighted FMG in my Diwali Dhamka) esp. the ones catering to the EV sector. And lastly the beaten down Chemical sector which after a sparking run in 2021-22, cooled down significantly in 2023. A lot of the EV sector requirements are catered to by Chemicals and some of the biggies like Tata Chemicals have invested in setting up capacities here, besides some of the smaller ones.

 Also watch out for corporate developments in ZEE, Delta Corp, FMG and few others, especially the Tata pack where a lot of rationalization is being done.

 Here’s wishing all investors a very profitable 2024.

Sunday, November 12, 2023

Diwali Dhamaka 2023

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Here’s wishing everyone a great Diwali and a prosperous new year ahead.

With the benchmark indices breaching the historic milestones the first time ever (esp. Nifty crossing the 20K mark) a couple of months ago, there is a gung-ho atmosphere all round, even though there has been some volatility in the last few days (a dip followed by a subdued recovery). However, the consensus is that this is a minor correction in the bull run and not a bear run. While there are some naysayers citing overheated valuations in midcaps and smallcaps, and probably rightly so, most people seem keen to ride the rally. And why not? With Rs. 16K coming in every month through the SIP route, where else will this money go? Add to that the NPS money, however miniscule it may be at the current juncture, and the DII flows (insurance, PE etc), and there is a problem of plenty. After all the gloom and doom in the western economies and China, India seems to be the only one left standing for the moneybags to put their money in.

However, things are not as hunky dory as they seem. It is true that the midcaps and small caps have indeed gone up anywhere from 50% to 2X-5X in the last 6-8 months. Such a rapid rise is not healthy and is certainly unwarranted, all the liquidity notwithstanding. One should certainly be careful in such stories esp. in sectors like Defence and Railways which have gone up too much too fast. Agreed that these are multi-year stories, but they need not discount FY ‘28 earning in FY ‘24. While there may not be a price correction in them so soon, there certainly will be a time correction now with the prices not going up in a hurry now over the next few quarters and/or months. After some cooling off, the journey may resume. And the major risk as always will be a bad quarter which will bring the house crashing down in no time.

The major global events which were on the radar and have now more or less played out were the stance of key global central banks, with US FED leading the way. Since they have now pronounced their verdict of not increasing the rates in a hurry (and also keeping the option of future rate hikes open), and our own RBI also following suit, things on that front are more or less clear. However, while there may not be any increase in rates as yet across the globe, nobody including RBI is yet talking about lowering them. Higher for longer seems to be the consensus mantra now. That also means, the debt investors can look for reasonably decent returns across instruments for some time to come. Inflation is still above the desired mark globally, even though it may have come down somewhat lately. What might however queer the pitch for India is the oil prices which are yo-yoing these days due to the Gulf war. That may likely to have a much bigger impact on our economy than the rest of the world as we import most of the oil. Add to it the elections and the freebies that the regional parties are likely to unleash in the coming weeks and months before the elections, and the risks are manifold. Nobody questions a winning team but the same team’s performance comes under the scanner when a tournament or series is lost. So too with the markets. It is usually seen that theories are created to suit the result either on the way up or down. Both sets of explanations are ready with the market pundits. So as always, there is no point in getting carried away and having FOMO. Market always gives opportunities to everybody and this time will be no different.

The usual suspects like the Consumption theme and Infra (including Power) are very much likely to be in the fray in the coming year as well. Add to that the PSU story which started this year and is likely to continue for a while longer to play catch-up with all these years’ lag. Interesting to note that the PSUs themselves are a kaleidoscope of myriad sectors and there are enough overlaps with Consumption (IRCTC being a classic Consumption/Infra intersection) with Infra at the core.

With the BJP expected to scrape through the elections next year, with whatever margin, that should be enough to keep the markets ringing. One thing which the market likes is stability irrespective of the political party and that makes the choice obvious.

One sector which should do well over the next year or two is Paper. The driver for this is the New Education Policy which has been rolled out as a pilot this year but will certainly take wings next year after the learnings of the pilot this year.

While Pharma as a sector fizzled out post COVID, there are green shoots now as things have become overheated elsewhere. It may be a fait accompli considering the valuations of other sectors currently. The other sector which has largely been the victim of the much-hyped US recession is the IT sector which should recover now. Midcap IT players and especially the niche ones, look interesting now. Auto ancillaries are also another area where there is still scope for upward movement with new car launches again picking up speed after the semiconductor scare of last year and the EV theme gathering momentum across both 2-wheelers and 4-wheelers.

On the corporate side, some of the groups have regained their mojo, 2 of them being the Adani and Shriram. I am particularly bullish on Shriram group which has clearly reinvented itself over the last few years, with a lot of restructuring and having a clear structure and focus on the sectors they are betting on. 2 of the companies this time are associated with Shriram group

So here are the stocks I am betting on this year. Let’s start with the Infra sector.

SEPC

This was formerly Shriram EPC and is a service provider of integrated design, EPC and project management services for renewable energy projects, process and metallurgical plantsl and municipal services sector projects. It is also one of India's leading 250KW wind turbine generator ('WTG') manufacturers.

It came out with an IPO in Jan ‘08 before the global financial Lehman Brothers crash (GFC) later that year when the Infra frenzy was at its peak, at a whopping price of 300/share. And by the time of its listing the market sentiment had already turned weak and it listed below the issue price. And what a wealth destroyer it has been. Since GFC, it could never recover and come anywhere close to its IPO price. Even Shriram group couldn’t bail it out over the years and in the next few years after the GFC and its IPO, it plunged below Rs. 50 and debt became a major overhang. It eventually became a penny stock as the downward trend continued, even slipping below Rs. 10/- earlier this year. During the course of this journey, as was the case with most Infra companies, it ran up heavy debt from a clutch of private and public sector banks, which they later converted into equity. The result is that these banks including the PSB biggies like SBI, BoI, Indian Bank and the like and private bank biggies like Axis Bank & Federal Bank have significant stake in it totalling about 40%. Shriram group still holds about 15% stake in this company.

The company has been making losses over the last few years and the worst part was that they were increasing every year. COVID only made matters worse. From 30 Cr. in 2019, the losses ballooned to 263 Cr. in 2022. The promoters viz. Shriram group had infused Rs.736 Cr. into the Company from FY15-FY20. The infusion of funds by the promoters went more into servicing of debt obligations rather than being used for growth of the Company. Given this state of affairs, it was no wonder th at Shriram group was looking for a white knight to bail out their EPC company who could infuse funds and simultaneously reduce the debt level and to sustain and grow. And they found it last year in Mark AB Capital, a leading investment firms in the Gulf region. Mark AB is an investment company established in Kuwait in 1998 and reorganised in Dubai, UAE in 2020. Mark AB manages $ 1.09 Billion and has experience in 9 EPC companies in Kuwait, UAE, North Africa and Russia. Shriram EPC’s footprint in the Sultanate of Oman in the Middle East and in Tanzania, Africa can also be used for mutual benefits by the companies. Mark AB Capital LLC invested 350 Cr. and has 26.48% of fresh equity in SEPC. This was part of a restructuring of SEPC under the Stressed Asset Provisions of the RBI. As a result of this, Mark AB capital became the promoter and the largest shareholder of SEPC. The existing promoter (Shriram group) ceased to be a promoter. As part of the rejig, the consortium of bankers converted part of their debt into CCDs and NCDs.

This move will also enable a constant flow of funds from Mark AB to SEPC and also provide the necessary financial support with the lenders. The results are already visible. The company’s debt has reduced from 981 Cr. in FY 22 to 409 Cr. in FY 23, a huge 58% reduction. Consequently, the interest cost reduction has followed with it coming down from 125 Cr. in FY 22 to just 60 Cr. in FY 23. The company has order book of ~100 Cr. with a bid pipeline of ~3000 Cr. The largesse provided by this year’s budget of 70,000 Cr of Jal Jeevan mission would ensure a steady bid pipeline and order wins.

This is a microcap stock with a MCap of ~1500 Cr. and is a re-rating story. With fund infusion from a Gulf-based investor, huge stake of banks as well as Shriram group (though not a promoter, they still hold a 15% stake), and infra boom already in progress and set to accelerate in the coming election year, things couldn’t be better for SEPC. Though it has more than doubled in the last few months from 10 to 24 now, this is a potential multibagger. Of course, it is not realistic to expect it to double at the same pace as the current, but with the baggage behind, it certainly has all the classic signs of becoming a multi-bagger in the next few years.

Orient Green Power (OGP)

Orient Green Power is an India-based company, which was founded by SEPC (detailed above) in 2006 and is engaged in the business of generation of power from renewable energy sources, which is wind energy. The Company has a portfolio of 402.3 megawatt (MW) of wind assets spread across the states of Tamil Nadu, Andra Pradesh, Gujarat and Karnataka. Its portfolio also includes a 10.5 MW wind farm in Croatia, Europe. The management is also exploring opportunities in solar power segment through a hybrid model of wind and solar with the objective of attaining 1 GW of installed capacity in the next 2-3 years. The company counts US-based Bessemer Venture Partners and Olympus Capital Holdings Asia amongst its major partners.

This company too came up with its IPO when the world was just settling down post the Global Financial Crisis (GFC) in 2010. And as was the case with SEPC, it too made a weak listing debut. The company has done a major debt refinancing of 721 Cr. from IREDA which will reduce interest cost by 3% by FY24. The company has been constantly reducing its debt over the years from ~1500 Cr. in FY19 to ~1100 Cr. in FY23. This will reduce further by FY24. Add to it its receivables from discoms and the picture further brightens. And to top it all, it recently made a Rights Issue which was fully subscribed by its existing shareholders. So this fund infusion will further reinforce its finances.

All this is makes it a very strong re-rating candidate.

The other thing which appeals to me regarding OGP is its strong management. Mr. T. Shivaraman is the founder & Vice Chairman of the company since 2010. He has a Master’s degree in Chemical Engg. from IIT-Madras. Another director Mr. R. Ganapathi is also from IIT-Madras.

With the govt. as well as global focus on renewable energy, OGP has tailwinds going for it. Once it settles its finances with multiple fund infusions as mentioned above, it should be on a growth path. The backing of Shriram group and the PE funds is the icing on the cake, This has also doubled from sub-10 levels to around 18 now, in tandem with SEPC, it still has a lot of stem left and its upward journey should continue once the re-rating happens, after a few string quarters.

These twins (SEPC & OGP) should continue to progress in tandem, given the close association between them, and being in the right sector at the right time.

Raymond

If ever there is a stock which can be compared to ITC over the last few years, it is this one. After lying in deep slumber for quite a few years (a la ITC), it has suddenly woken up and started its restructuring in right earnest. For the last couple of years, it appears Raymond has relentlessly been trying to simplify its structure & create value for shareholders. The group announced a couple of internal restructurings by calling a step towards creating value for its shareholders, which however didn’t materialize. In yet another similar move in Sep ‘23, Raymond announced internal restructuring to list its apparel business separately. But this time they also announced selling of their identified Fast-Moving Consumer Goods (FMCG) business to Godrej Consumer Products (GCP) to deleverage its balance sheet.

Raymond is a leading Indian textile, lifestyle, and branded apparel company with a wide network of operations in local as well foreign markets. It is also engaged in the development of residential commercial real estate projects.

Raymond’s turnaround can be a classic turnaround case study for B-schools.

Pummelled by the pandemic and, especially, the lockdowns, Raymond’s businesses had seen some of the toughest times in its 98 years post the pandemic in FY ‘21. Sales of its traditional businesses—branded textiles, branded apparel, garmenting, high-value cotton shirting and, to a lesser extent, engineering & auto components—plunged between 7% and 59% that fiscal, and the company’s bottom line slumped to a loss of RS 297 crore. But Raymond boss Singhania was not the one to give up. He hired a bunch of grizzled professionals in leadership positions including the heads of the real estate and lifestyle businesses, a new CFO, and a Vice Chairman with multinational exposure, between July 2020 and July 2022.

The steps started with a reduction in inventory resulting in lower working capital (WC) requirements and debt levels. Next was the cutting down on non-performing branded apparel stores, and focus on efficiency. The money released by cutting costs, enhancing productivity, managing inventory better, and from reducing the WC was used to repay debt. All these initiatives helped Raymond’s net debt fall from Rs. 2,378 crore in September 2019 to Rs. 689 crore in March 2023, with a subsequent fall in the debt-equity ratio from 1.1x to 0.23x in the same period. In FY22, Raymond’s bottom line returned to black, and in FY23, net profits doubled and revenues notched up its highest-ever value of Rs. 8,337 crore, making it a freshly minted billion-dollar organisation. The sale this April of its FMCG business to Godrej Consumer Products for Rs. 2,825 crore has given Raymond significant cash in hand to invest in its lifestyle businesses and pare debt further if necessary.

The real turnaround happened due to Raymond’s focus on its realty business. Harmohan Sahni, a qualified CA and a real estate veteran was brought in to head the Realty business. He had led various initiatives in real estate, starting with GE Shipping’s realty venture, then Mahindra Lifespaces, then his own venture, and then running Edelweiss’s realty lending business. So he knew the game inside out. Post the pandemic, real estate, which had been in a decadal slump, suddenly sprang to life when people realized the importance of home. And now it is in a virtuous upcycle which is likely to last for a few years. And it also helped that Raymond had prime land bank in Thane a part of which housed the Sulochanadevi Singhania School. A small part of the bank was sold to a mall developer, so a mall is also being built and there is a hospital nearby. So all the good things that a real estate project needs are well in place besides being in a prime area of Thane, which has had nearly 50% share of all residential unit sales in Maharashtra in recent years.

Besides the realty part, Raymond’s traditional business of everything to do with clothing is also chugging along just fine. So are the denim and engineering & auto components businesses. All the businesses related to clothing clocked high growth in FY23—sales of branded textile, branded apparel, garmenting (which is an export-oriented B2B business where Raymond supplies ready-made garments to international brands) and high-value cotton shirting grew upwards of 20%. This growth has come on the back of an explosion of pent-up demand after the pandemic.

And the road ahead appears to have a long runway. China-plus-one strategy by global brands will benefit India. Compared to competitors like Vietnam and Bangladesh, Raymond can offer end-to-end vertically integrated, very strong world class facilities, people to the global players which look for exactly that.

Indian consumer trends like casualization and hybrid formals, where people go to work wearing attire that is not strictly formal, yet not totally casual either, is also  a great market for Raymond. Add to that the start-ups, the tech crowd and millennials, and their approach to dressing, and Raymond couldn’t have had it better. And Raymond has covered its flanks well by bringing in its ethnic apparel brand Ethnix. The “smart ethnic”, bundi, kurta and other ethnic wear, are becoming fairly common in the workplace, and remain popular in weddings and festivals. While there is competition from the likes of Vedant Fashions (of Manyavar fame) in this segment, there are also a lot of unorganised players in this segment, which would help the overall ethnic portfolio in terms of consumers wanting to buy branded ethnics. Raymond, starting from a lower ase, can scale up profitably here.

Raymond also has a Rs. 1,000-crore-plus business of denim, which it runs through a 50:50 joint venture with UCO of Belgium. Apart from supplying to other premium Indian brands, Raymond UCO Denim now also supplies denim fabric and readymade jeans to Raymond brands such as Parx

The final piece is engineering and auto components, a not so commonly known business area of Raymond. The engineering company JK Files, has strong products such as engineering files, drills used in manufacturing, and power tools used by electricians and plumbers. And two, auto component maker Ring Plus Aqua, manufactures a host of products such as engine and transmission components to global OEMs such as Cummins, Caterpillar, BMW, among others, and in India to practically all OEMs in both passenger and commercial vehicles. Ring Plus Aqua is now getting into new products such as dual clutch transmission and dual mass flywheels. About 60% of its revenues comes from exports.

Last week, Raymond acquired a 59.25% stake in Maini Precision Products (MPL). MPP is engaged in manufacturing precision engineering products for aerospace, EV, and defence sectors, with 11 manufacturing facilities in India. With this acquisition, Raymond's engineering business will emerge as a largescale provider of engineering, automotive, electric vehicle (EV), aerospace and defence components, distinctly positioned to target highgrowth precision engineering products with a significant presence across international as well as domestic markets. This acquisition will also provide an impetus to the ‘Make in India’ initiative & China Plus One strategy.

Going ahead, Raymond is restructuring and streamlining its businesses to drive further growth. This April, Raymond Group exited its FMCG business by selling its condom brand Kama Sutra and deodorant brands Park Avenue and DS, to GCP for Rs. 2,825 crore in an all-cash deal. However, Raymond will retain its condom manufacturing plants and contract-manufacture them for others.

In parallel, the businesses of Raymond have now been shuffled into a new structure. The lifestyle businesses are being demerged from Raymond into Raymond Consumer Care (RCC), and Raymond’s main business will be real estate, with investments in engineering-auto and denim.

All in all, with all growth drivers well in place, Raymond as a conglomerate can now start rubbing shoulders with other corporate flagships like ITC and Tata Consumer Products and have a long runway ahead. This is likely to be a multi-year story similar to ITC, where further value unlocking of  engineering and auto components is a distinct possibility over the next few years, once the effect of current re-structuring stabilizes.

This too has nearly doubled from levels of 1000 to the current 1800 but with all that described above bearing fruit, I don’t see any hiccups in its upward trajectory after some consolidation at the current level, given the rise in a short period. After all, the street also needs to digest the value it is unlocking over the quarters. It should give a return of at least 25% over the next year or so. The bonus will be further value unlocking thru the listing of its multiple businesses such as engineering & auto components.

 TNPL

This is a combination of Paper and Cement both of which are in demand now. It is engaged in the manufacture of newsprint and printing and writing paper by using bagasse as a raw material. The company caters to the needs of multifunctional printing processes like sheet-fed, web offset, and digital printers. The company also manufactures writing paper and markets them under the name Eezee Write. TNPL manufactures a range of eco-friendly notebooks. The company also in the business segment of Paper, Cement, Energy.

Not only is this a leading paper maker, but also is a small cement player with a 3.3 lakh TPA capacity which though miniscule compared to the sector biggies, is a lucrative by product of their waste and fly ash. Besides it also has 140 MW captive power plant. Few months back, they commissioned a pulp mill which has improved their margins. FII& DII own about 20% here while TN govt holds about 35% stake which also could be up for grabs at some point with the consolidation on in the sector.

On the valuation front too, this ticks all the boxes. With a PE of around 5 (less than 3, 5 and 10 Year PE) and close to its BV, it is certainly going for a song. As paper and cement demand picks up TNPL should continue to do well in the coming period. Though it too has run up along with the small-cap segment of the market in the last 3-4 months, it hasn’t run away over the full year and is still available around the same price as a year ago. There are enough tailwinds for TNPL to give good and stable returns going forward.

Quoting at ~285 at an astonishing PE of ~5, this must be one of the cheapest stocks with significant growth potential in the market. Of course, the govt. stake in it could play out either way – as a spoiler in tapping the potential growth areas or as a bonus if govt. were to sell this to strong hands.

Federal Mogul Goetze (FMG)

Not many people have heard of this MNC auto ancillary company. It was a subsidiary of US based activist investor Carl Icahn-owned Federal Mogul. It makes pistons, piston rings, sintered parts and cylinder liners covering a wide range of applications including two/three-wheelers, cars, SUVs, tractors, LCV, stationary engines and high output locomotive diesel engines. It is a market leader both in OEM and aftermarket. It exports to many countries.

In 2018, US-based Teneco, a Fortune 500 automotive components OEM and an aftermarket ride control and emissions products manufacturer, acquired Federal-Mogul, the parent of  FMG, in a deal worth approximately $5.4 billion. Following this, as per Indian laws, it made an open offer to acquire an additional 25% stake from Indian minority shareholders at ₹400/share. Here comes the twist. As per SEBI rules, if a counter is liquid (having the prescribed trading volumes), the open offer has to be at the 6-month average price. If however, the counter is not liquid, or if the Indian company contributes more than 15% of the enterprise value of the parent, then the open offer has to be done at a fair value price arrived through an independent valuer. Accordingly, Teneco came out with an open offer at ₹400/share. This was however rejected by the Indian minority shareholders as too low a value for FMG share. The matter went to SAT, following which SEBI appointed Haribhakti & Co, a reputed accounting (audit, tax, risk etc.) and business advisory firm in India, as an independent valuer to assess the fair value of shares of FMG. They too opined that this value of ₹400/share was lower than the fair value. They in turn arrived at a fair value of ₹608.5/share which was nearly 50% more than the open offer price. Following this, SEBI directed Teneco to make the open offer at this price of ₹608.5/share in 2019. There was also an interest component included here due to the delay in the open offer from the date of acquisition, resulting in the open offer price going to ₹667.5/share. This was finally completed in Jan ’20.

The twist doesn’t end here. The successful open offer led to the promoter Teneco’s stake going beyond the SEBI’s prescribed limit of 75%, which meant that they had to come out with an OFS to bring it down to 75%.They complied with this at a throw away price of ₹250/share. Once the dust had settled down on this, there was yet another twist. The initial acquirer and now the parent of FMG, Teneco, itself was acquired by a PE biggie Apollo Global early last year. And this acquisition happened at $20/share, a 100% premium to the then local Teneco price of ~$9/share. The price of FMG in the Indian market when this happened was ₹235/share. So the new parent Apollo Global came out with an open offer at ₹275/share as a fair value for FMG shares. When the last open offer 3 years ago was at ₹608.5/share, which was considered as a fair value then, how could the fair value now be nearly half of that? The minority shareholders have again gone to the regulator SEBI against this price. Few weeks back, SEBI has appointed MM Nissim & Co as an independent valuer to assess the fair value of FMG shares. The minority shareholders have a valid reason to be sore. FMG is a debt free company trading at a PE of 17.5 times FY 24 earnings with cash of ₹48/share on its books. And to top it all, Auto sector is booming, Auto index is at an all-time high. Given this background, it looks highly likely that this open offer price of ₹275/share will pass muster with SEBI which holds shareholder interest as paramount. Even at a conservative discounting of 30-35 for a debt free MNC stock in a booming sector (the median PE of small cap stocks itself is around this range, so this should certainly command a premium, but for the purpose of this conservative estimate, let’s take it the PE at 30-35), the price should be anywhere upwards of 650, which is nearly double (~1.8 times) of CMP of ~360. Add to that the interest part as was done last time, and it well be at last 2.5-3 times the CMP. So it is a reasonably safe bet to expect multi-bagger returns from FMG over the next few months.

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

 

2022

2023

Difference

Gain/Loss

Lemon Tree Hotels

86.25

113.25

27.00

31.30%

Devyani International (DI)

194.25

183.10

-11.15

-5.74%

Associated Alcohols & Breweries (AAB)

473.95

472.50

-1.45

-0.31%

L&T Technology Services

3524.95

4265.00

740.05

20.99%

Nifty Auto ETF

129.51

165.18

35.67

27.54%

 Total

4408.91

5199.03

790.12

17.92%

 This year was a reasonably satisfactory year with an overall return of ~18%, well above the index returns. Apart from the underperforming couple of Devyani International & AAB, rest of the stocks performed well in line with expectations with 2 of them giving returns in excess of 25%. Even the 2 underperformers hold a lot of promise which should emerge in the years to come and I would not write them off just yet. The current picks are a bet on India’s Infra & Consumption story in an election year and have the potential to generate compounding returns over the next few years, and not just next Diwali. Considering that all of them are small caps, you may certainly expect volatility in the coming quarters and year but also steady compounding (probably market-beating) over a longer timeframe with this lot.

 

HAPPY MUHURAT TRADING!!