Pre Election Investment Opportunities

Investors almost always take a pause when a big event is about to unfold. Shohini Nath along with Yogesh Supekar explore the investing opportunities in the current market environment ahead of the national elections, while the DSIJ research team recommends a ‘Model Portfolio’ to invest in.

Markets are showing signs of recovery and have actually taken many investors by surprise. The recent turnaround in investor sentiment has surely enthused investors, making them wonder if 2019 is indeed going to be a year of wealth creation.



The recent recovery has pushed the stock prices higher from their lows. But what is interesting to note here is that the FIIs have pumped in lot more money than the mutual funds. This is in stark contrast to 2018, where the domestic inflows dominated the markets. In all likelihood, the FIIs inflows into the Indian markets will continue to remain strong.

Quite a few experts believe that the money inflows from the FIIs will not be a problem (at least for 2019), but it is the domestic inflows that could present risk for the markets going forward. The recent two months have seen no growth in the SIP investments, even though the SIP inflows are healthy at about Rs 8000 crore. The MF industry has seen some redemption pressure and a drop in lump sum investments.

The markets have tested investors' patience in the past 18 months. The returns, even for SIP investments, have been negative for several equity MF investors. Says Amol Dandawate, who is a mutual fund investor, “My SIP investments have now turned positive, after being in the negative territory for almost eight months. It is a feel-good factor to see the investment returns turn positive.



The recent rally in the broader markets can be attributed to the gush of liquidity supporting the markets. The risk-on mood in the global markets is supporting the current rally in the emerging markets. Financial sector, yet again, has been the favourite of the institutional investors. One of the reasons for the current market rally is that it is factoring in a Modi-led NDA victory in the upcoming elections. Also, the markets are factoring in a steady double-digit earnings growth in 2019.

Some of the forward-looking investors, though, are not sure if the rally will continue for the rest of the year. The obvious risks for the markets are a slowing global economy, global geopolitical tensions, uncertainty over election results and the tapering prospects of a high double-digit growth in earnings. What may have gone unnoticed for investors is the rise in crude oil prices, which are up by almost 25 per cent in CY19. This significant jump in crude oil prices can prove to be detrimental for higher equity returns in CY2019.

Not ignoring the risks faced by the markets, investors can take respite from the fact that globally the monetary tightening stance across economies is seen easing and yields have started to fall. This could be the reason for the reversal of flows into the emerging markets, including India.

Another aspect of the market performance that can cheer investors is the fact that Sensex has, in spite of recent upsurge, been underperforming relative to its global peers. Sensex might catch up with the other leading global indices.

The world has seen a synchronised slowdown since October 2018 even as the slowdown, going forward, is expected to be severe in China and Eurozone.



Smart recovery in beaten down stocks of 2018:-
The year 2018 was a difficult year and it is common knowledge that more than 50 per cent of the listed stocks were down by more than 50 per cent. Come 2019, and the situation looks different. Several of these beaten down stocks are showing positive traction and are easily beating the key benchmark indices. Below is the list of such beaten down stocks in 2018 that are showing positive traction in 2019.





What we find is that the mid-caps and small-caps have shown steady recovery in the recent rally. What is worth noting is that several of the highly leveraged and poor-quality stocks with weak balance sheets or issues with corporate governance have gained in double digits in the recent rally.

Banks have rallied and so have IT stocks. So far in CY19, IT and banking stocks have outperformed Sensex.

The government’s decision to infuse capital in PSU banks have ensured that banking stocks are in the limelight yet again. It is possible that the IT and banking stocks will continue to outperform in the remaining part of the year. Pre-election exposure to quality stocks in IT and banking sectors is advisable.

While the broader markets have rallied impressively, the tyre stocks have not recovered yet. The tyre stocks are yet to recoup their losses and most of them are down anywhere between 30 per cent to 50 per cent from their respective 52-week highs. The tyre stocks corrected along with the other mid-caps and small-caps in 2018. However, these stocks have not recovered strongly and, hence, there is a case for investment in tyre stocks from a long term investment perspective.

Conclusion
Every market condition throws up several investment opportunities. As we extend the investment horizon, smoother the equity returns get. What investors need to do now or under any market condition is to ascertain their risk profile. Once the risk profiling is done, a well-diversified portfolio can be constructed by tapping the investment opportunities that arise in the prevailing market conditions. The current market turmoil should be taken as an investment opportunity. Investors will gain immensely by selectively investing in equities. While selecting stocks and building portfolio, one must remember that elimination is as important as selection.

While several investors are waiting for the major event – national elections – to unfold before investing, we believe the current market environment is ripe to tap the pre-election investment opportunities. Historical data suggests that, on an average, the markets have delivered higher returns during the election years. Pre-election market environment brings additional element of volatility in the markets. This additional volatility can be used as an investment opportunity by long term investors and this could be an excellent opportunity to build a long-term portfolio. We are happy to present you with a ‘Model Portfolio’. The ‘Model Portfolio’ is prepared keeping in mind the ‘Moderate Risk Profile’ of a client. The methodology we have used to recommend these stocks is statistically robust and free from any bias towards any company or sector. This ensures that you get to invest in the best companies purely on their risk-return matrices. This report contains a portfolio on the following parameters: 1. Investor’s Risk Profile 2. Sector Allocation 3. Stock Portfolio and reasons to invest.





DSIJ Model Portfolio Holdings 

Pitti Engineering 

Investment Rationale : Reason PEL has exposure to small-sized laminations in consumer durables' segment and is the only company having exposure to the industrial segment too and manufactures customised products. It has given a competitive edge to the company over the other players. The company’s products have applications across various sectors such as power generation, transportation, mining, oil & gas, industrial motors, locomotives, aerospace, automobiles etc. Thus, its customer base is wide and the pick-up in capital goods and manufacturing sectors would drive the demand for its products.

It has longstanding customer relationship with domestic and global companies like ABB, Suzlon, Alstom, Nidec Corporation, Voith, Siemens, Crompton Greaves, WEG Industries, L&T, Cummins, GE, Marathon Electric and many more. In mid-FY18, it bagged a contract from GE Group worth Rs. 600 crore to be executed over a period of ten years. It has set up a plant at Hyderabad having capacity of producing 10,000 MT laminations and the commercial production started in August 2017.

Its new facility at Aurangabad has capacity of producing 26,000 MT laminations and became operational from January 2018. Both these facilities will contribute significantly to the top line in the upcoming quarters. Also, the company is trading at an attractive P/E of 13.7x on a TTM basis.

Associated Alcohol & Breweries

Investment Rationale : Associated Alcohols & Breweries is Indore based distillery engaged in capturing the entire value chain of potable alcohol, starting from rectified spirit and country liquor to supplying high grade ENA to major international brands and to bottling and blending single malt Scotch whisky. It is the single-source supplier of raw material for Smirnoff Vodka.

The company has made an agreement with United Spirits under which Associated Alcohols can manufacture and sell specified brands in selected states. Further, the company is aiming to expand its geographical presence to Pondicherry, Kerala, Goa, Maharashtra and Chhattisgarh, which could drive the revenue. Also, it is planning to double its ENA capacity to 7 crore per litre in coming years, which would be almost double from its current capacity.

The company is planning to expand its modern alcohol plant capacity from 31 million litres to 90 million litres by FY21E to cater the growing domestic and global demand. On the valuation front, the stock is trading attractively at P/E of 16.62x as against its peer Radico Khaitan (29.05x).

Bank of Baroda

Investment Rationale : We see recapitalisation of PSU banks to play major role in reviving growth in advances. The Govt has also proposed merger of BoB, Vijaya Bank, Dena Bank. Markets have not taken this with much enthusiasm. But amongst all the clutter, the bank has strong fundamentals. Its NIM is healthy for its size of bank at 2.65 per cent.

Domestic Deposits stood at Rs. 4.6 lakh crore. Growth traction is good overall. Domestic and retail credit registered yoy growth of 19.84 per cent and 33.85 per cent respectively. Within retail loans home loan growth was the puller at 43.47 per cent yoy. Further, we see the increasing retail asset portfolio will aid to lower delinquency and improve the asset quality. After the fall in value the stock seems fairly valued.

Jiya Eco Products

Investment Rationale : Jiya Eco-Products is engaged in the manufacturing of bio fuel, such as bio briquettes and bio-pellets, which is an alternative source of energy. It is the only listed company that manufactures biomass briquettes and pellets from agriculture waste and forest waste.

The company has recently improved its plant in Navagam and added two new lines of pellets resulting in 4 lines of Briquettes and 6 lines of pellets with rated capacities of 1,19,680 TPA and 1,79,000 TPA respectively, which can be utilised at 95 per cent of peak level. Also, it has planned a plant for pellets in Gandhidham with rated capacity of 95,000 ton per year, which is likely to be commenced in February 2019. Moreover, it is planning a pellet plant in Ankaleshwar which is likely to commence by Q1FY20E.

The company after acquiring 100 per cent stake in JEIL, the company successfully enhanced its presence among small and medium manufacturers in Gujarat. Till August 2018, it has installed 75 burners and stoves in Surat and Bhavnagar. Also, JEIL is planning to enhance its distribution reach to 1000 retail clients by FY20E from current client base of 65. The company has recently automated its existing plant with new chipper machine.

This led the company to further trim its labour force which would result in improved efficiency and overall margins. During the second quarter of FY19 company announced in an update that it’s subsidiary Jiya Eco Gandhidham has started setting up a new pellet plant in 3 acres field at village — chudva, Taluka —Gandhidham. After this development the total capacity will be 260000 tonnes per year. Company expects that due to this increased capacity it’s bottom line should be up very highly & our net profit may be up by 8% - 12%.

SRG Housing Finance

Investment Rationale : SRG Housing Finance is at the cusp of growth due to revival in the rural income post the normal monsoon. SRG Housing Finance is an NBFC providing housing loan, loan against property and project finance. The company is looking to aggressively grow its loan book from ~Rs. . 200 crore in FY18 to Rs. 500 crore by 2020. The company is looking to provide housing loans to people with consistent income in tier-I and tier-II cities and have the inclination to own a house. Further, in FY17, Rajasthan contributed ~95 per cent to the revenue, while its share in FY18 was 69.9 per cent. This was due to 24.4 per cent contribution by Madhya Pradesh. The branches increased from 15 in FY16 to 29 in FY18. The company’s net interest income increased substantially in FY18 on the back of higher loan disbursements and also lower average cost of borrowing. The cost of borrowing got reduced due to the better rating enjoyed by the company, leading to interest rate of 11 per cent on borrowings as term loans from banks, while the company lends at the rate of 18-20 per cent. With higher proportion of LAP, we expect NIM percentage to shrink and hence lower yields. However, the quality of loans will improve.

Uflex

Investment Rationale : Recently, company has Set up a factory in Sanand with cost of around Rs. 580 crore for foraying Aseptic liquid packaging from where management expects to generate around Rs. 1200 crore of revenue in next 3-4 years. Currently the Indian Aseptic Liquid Packaging Market is growing at 17-18 per cent per annum and the market is expected to double up in the next five years to approximately 20 billion packs per annum. Presently, aseptic packaging plant is EBITDA negative and running at around 20 to 25 per cent capacity utilization. The company expects aseptic division to breakeven on EBITDA level by Q4FY19 with sales of 100- 120 million packs a month. We believe innovative packaging concepts provides higher growth opportunities for company like Uflex. One of the main factors driving the growth of flexible packaging market is the rise in its demand and wide acceptance of this type of packaging across segments such as food and beverages, industrial goods and FMCG. Presently, the packaging industry is dominated by rigid packaging which accounts for 79 per cent of total industry size where as flexible packaging accounts for 21 per cent, this provides enormous opportunity for company like Uflex to grow further. We believe stability in crude oil prices is likely to act as a cushion for company’s margin in near term. Notably, Indian flexible packaging industry is growing at 15-17 per cent annually. Uflex’s overseas facilities are moving towards achieving 100 per cent capacity utilization. Thus, it is looking to set up a new facility in films with a BOPP base, having a capacity of 40000MT in Hungary with an investment of ~60 mn euros, which is expected to come up in the next 2 years.

Bandhan Bank

Investment Rationale : Bandhan bank reported strong improvement in recent quarterly numbers with turnaround in bottom-line and asset quality improvement. It has focused on building a strong deposit base, since the beginning of banking operations. Total Deposits grew by 29.6per cent as on September 30, 2018 is at Rs. 32,959 crore as compared to Rs. 25,442 crore on September 30, 2017. Current and savings account deposit (CASA) was at Rs. 12,176 crore, constituting 36.9per cent of deposits for the quarter. CASA provides a stable source of lowcost funding, which allows bank to provide cost-effective loans to target customers. It has also successfully added 96 new branches during the financial year, the total branch distribution network of Bandhan bank went up to 936 branches as on March 31, 2018. It has also expanded its Small and Medium Enterprises (SME) loan business by increasing its presence through opening of new SME hubs/Asset Centres across various cities in the country. At the end of March 2018, there was total SME loan outstanding of Rs. 414 crore. Bandhan Bank has successfully managed to maintain asset quality with GNPA (excluding IBPC/Assignment) at 1.29per cent (September, 2018), which is a very decent number considering turmoil being faced by micro finance industry.

Tata Chemicals

Investment Rationale : Tata Chemicals Limited is a manufacturer of soda ash and sodium bicarbonate for diverse industries. The company’s Tata Salt brand is a highly reputed salt brand in India with a market share of close to 29 per cent. The company plans to grow and acquire about 40-45 per cent market share in this segment. The company has announced capex of Rs. 2400 crore for capacity expansion at the Mithapur facility. This would result in enhanced soda-ash capacity by about 200,000 MT, salt production by 400,000 MT and upgraded turbines for higher efficiency with a reduction in carbon footprint. Notably, it has announced its foray into the Lithiumion battery sector to develop cell chemistries to meet Indian application which is likely to be catalyst for the company in long run as batteries forms almost one-third of the cost of the overall e-vehicle cost. Also, its specialty business is expected to be driven by growth in Rallis; upcoming silica business and expansion in nutraceuticals business. The nutraceuticals project is expected to be commissioned by Q1FY20E. Furthermore, the company is divesting its fertiliser business, which is generally a low margin segment, to focus towards specialty chemical business and farm business. Also, the company is focusing on expanding its consumer business and hopes to double the reach of its pulses to around 80,000 retail outlets in FY19. The company added nutrimixes like khichdi and chila mix to its portfolio and looks to launch more such products as it believes the market is still under-penetrated.

Oil India

Investment Rationale : We see that crude oil prices are not seeing a breather due to supply curtailment by OPEC. US shale gas has seen highest ever production but has not been effective in completely erasing supply short falls. We see oil settle in the range of 65-70 (USD/bbl). This is the zone where refiners and last mile retailers like Oil india can benefit a lot. There have been concerns over oil subsidies to lead to lower realization for the companies however we see government more keen on full market based pricing and then having share of dividend rather than disrupting the existing structure. We see realization in Natural gas has also improvement and fourth hike in this year has been taken.

Nocil India

Investment Rationale : Nocil is India’s largest rubber chemicals company having capacity of 53,000 tonnes and also producing antioxidants and accelerators. The company enjoys around 50 per cent market share in India, and nearly 5 per cent globally. On the capacity expansion front, the company aims to double its capacity to 1,10,000 MT for a which it has earmarked Rs. 425 crore which will be funded through internal accruals. The first phase of this expansion is completed in Q4FY19 (spend nearly Rs. 175 crore) and Phase 2 is likely to commission in first half of FY20E. This will help the company to double up its asset turnover which would bring incremental revenue of Rs. 850 crore. This expansion will cater to the growing demand in the domestic and international markets. Also, this is expected to enhance capacities of accelerators and antioxidants. The company is likely to benefit from growing tyre industry which is expected to grow at a CAGR of 12-14 percent for next five years. Further, both global and domestic tyre industry is undergoing expansion plans which indicates strong outlook from demand side. The company derived 26 per cent of its revenue from exports with 8 per cent volume growth and 17 per cent growth in revenues. This indicates that the pricing power of the company has improved. This is largely due to supply restrictions coming due to stricter law in China providing level playing field to Nocil in terms of pricing. Going ahead, we see that rubber chemicals have a basic input benzene, which is derived from crude, hence the margins might be range-bound and largely driven by volumes.

Zensar Technologies

Investment Rationale : Zensar Technologies Ltd is a software and infrastructure services company, which provides a range of information technology (IT) services and solutions. Going forward, Zensar’s growth is expected to be led by digital and manufacturing and BFSI are also expected to further aid growth. Vinci, Zensar’s autonomics offering in Infrastructure is running pilots with multiple customers, which are likely to convert into deals over coming quarters. This would boost the services business in IMS. Apart from these, E-commerce & IMS recovery to help to expand margins gradually. Further, acquired firms Keystone and Foolproof have been well integrated into the Zensar which augurs well for the company.

VRL logistics :-

Investment Rationale : VRL Logistics is engaged in goods transportation and passenger transportation. The revenue mix comprises of Goods transport (80.25%), Bus operations (18.82%), Sale of power (0.49%) and Transport of passengers by Air (0.45%) as of Q3FY19. In the recent quarter, revenue from goods transportation segment and passenger transport segment increased by 13.7% YoY and 9.9% YoY respectively with rise in EBITDA level by 18.04% YoY and 9.36% YoY respectively. During October to December, the diesel prices were down by around 17% which has resulted into improvement in operating profit. However, volatile oil prices may affect VRL’s performance in near term. On the capex front, under its goods transportation business, it has reduced the plan to purchase of vehicles to 680-700 from 1200 as it can cater the demand with this capacity.

Music Broadcast

Investment Rationale : Despite making investments in new stations, the company has been delivering double digit growth in terms of revenue, EBITDA and PBT since FY16. Its PBT is growing 3x faster than the revenue. Thus, it is clear that the company has showcased sustainable operating performance despite facing macroeconomic headwinds. Q3FY19 was the highest-ever performing quarter for the company. The recovery in growth was driven by 11 per cent rate hike in the legacy markets, festive advertising and contribution from the government as well as from the sectors of e-commerce and auto. MBL also witnessed an increase in inventory utilization of around 53 per cent in the Phase III markets. MBL implemented price hikes as the utilization hit 60 per cent. In Q3FY19, the government ads increased by 33 per cent. We can certainly expect an upsurge in the political and government spends as well as increasing utilisation of the new stations. Moving forward, there is a potential scope for margin improvement to as high as 45 per cent in matured stations.

The company is focused on geographical expansion over multi-frequency expansion. It boasts a healthy balance sheet with Rs. 2 billion in net cash, in addition to robust return ratios and steady cash flows. Recently, the company partnered with Noida Metro Rail Corporation to provide passengers with a distinctive in-transit entertainment experience. Through this initiative, the company is exploring new avenues of entertainment in emerging fields such as the next generation mobility of hyperlocal experiences. Previously, the company had successfully partnered with Lucknow Metro Rail Corporation to offer specialised content across eight Lucknow Metro stations. The management commentary states that it expects MBL’s revenues to grow at 11 per cent CAGR over FY18-23 on the back of 50:50 blend of price increase and utilisation. Also, its FCF generation is forecasted to triple from Rs. 0.4-0.5 billion p.a. in FY18 to Rs. 1.2-1.3 billion in FY23E. EBITDA margins are likely to improve on the back of enhanced utilisation and improved pricing.

Indiabulls Housing Finance

Investment Rationale : India’s housing segment is in sweet spot considering government’s push to affordable housing. The company is well-placed considering in its huge exposure to retail home loans at 58 per cent. The management has given guidance for 66 per cent in retail home loans by FY20, which gives enough growth confidence. The loan book growth is expected to grow at 27 per cent CAGR over FY18-20E strongly aided by retail home loan segment. Further better asset quality with GNPA of 0.77 per cent also bodes well for the company.

JM Financials

Investment Rationale : We see company has entered into financing of affordable housing segment and also looking at having exposure in retail business. With post-money equity valuation of upto Rs. 7,175 crore for its NBFC subsidiary JMFCSL, JM Financial (Rs. 225 crore) along with external investor (Rs. 650 crore) will infuse Rs. 875 crore. This may lead to increase in the net worth of JMFCSL by 50per cent. Also, this will aid to meet its liquidity requirements in the environment where other NBFCs may have been facing a cash crunch. Also, as banks are diminishing in Capital adequacy ratio and ability to give loan at lower rate, refinancing also offer good opportunity to the company. We foresee revenue to grow at CAGR of 22per cent over next two years and PAT to grow at 20per cent CAGR over the same period.

GMDC

Investment Rationale : GMDC is engaged in the business of mining and power. The company is currently operating six lignite mines with a total lignite production of 106.01 lakh MT as on FY18. The Ministry of Coal has allotted 3 lignite blocks, out of which 2 lignite blocks have been kept reserved for the company. So, these 3 mines collectively have estimated 34 MT of lignite reserves. Further, the company is also engaged in bauxite, fluorspar, manganese, silica sand, limestone and betonies mining. The company is in the development of setting up of Fluorspar Benefication Plant (40000 TPA) and plant for Zeolite and other value-added products. GMDC will supply 120000 TPA NPG Bauxite to M/S Credo Mineral Industries Ltd. The company is also in the process of setting up a Silica Sans Benefication Plant of 150000 TPA capacity and Lignite based 500 MW Power Plant at Bhavnagar in JV with 7 other PSUs. So, going ahead, revival in manufacturing at industrial activities and government’s thrust on power will continue to drive demand for lignite.

Ashoka Buildcon

Investment Rationale : Government’s impetus to infrastructure development in the country is benefiting the infrastructure players in the country. The NHAI is targeting to award 8000 KM in FY19 as against 7400 KM in FY18. Most of these orders will be issued through HAM and EPC models, which would aid revenue growth of infrastructure players such as Ashoka Buildcon having strong execution capabilities. The company’s current order book for the September quarter ended stood at Rs. 9763.7 crore which gives strong revenue visibility for the next three years. Further, robust bidding pipeline worth almost Rs. 35000 crore in the second half of FY19 gives confidence to the company’s management to win orders worth around Rs. 4000-4500 crore in FY19E. Besides, it has guided revenue growth of around 35 to 40 per cent and eyes for ~13 per cent EBITDA margin in FY19E. Besides, the company achieved financial closure for all its HAM projects at 9.5-9.6 per cent interest rate in Q2FY19 and appointed date for three of the projects expected in Q3FY19E. Ashoka Buildcon is looking to transfer ACL stake to an InvIT. This stake sale through InvIT can help the company to utilise the proceeds to fund HAM projects.

Mishra Dhatu

Investment Rationale : Mishra Dhatu Nigam is one of the leading manufacturers of special steels, superalloys and only manufacturer of titanium alloys in India. Midhani is the only company in India to carry out vacuum-based melting and refining through a world class vacuum melting furnace. This enables the company to venture into new markets with innovative and advanced products. The advanced melting facility also aids in terms of flexibility to manufacture quality products having stringent quality requirements. The company is planning to set up new plant at Rohtak for manufacturing of armour products and likely to be commissioned by FY19E. Also, it is planning to set up new plant at Nellore for manufacturing of high end value aluminium alloy products and is likely to be commissioned by FY20E. There are no comparable listed companies in India that engage in the same line of business as the company. The order book position of the company as on 1st January, 2019 stood at Rs. 795 Cr. With this order book and the new order prospects in pipeline, the company has planned for a good growth with commensurate profitability in the year to come. On the valuation front, the stock is trading at P/E of 16.99x. All these factors coupled with favorable government initiative policies towards defence and space sector will augur well for the company.