Invest In Summer Sizzlers For Hot Returns
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There is a popular phrase that goes something like this: "Sell in May and go away from share market". But we at Dalal Street Investment Journal are coming with an interesting summer special story. The seasonal demand for the companies too will increase in the current summer season, which will further fuel the surge in share price of these companies.
Summer for 2017 would be hotter than normal. At the same time, the Indian Meteorological Department (IMD) has predicted average temperature hovering above normal by more than one degree. Between April and June, the day temperature hovers in the range of 40-50 degree celsius in most of the north and northwest India, especially in states such as Delhi, Haryana, Rajasthan and Uttar Pradesh, Madhya Pradesh and Andhra Pradesh.
The rising graph of the mercury is boosting hopes of makers of summer products such as air-conditioners, fans and cool beverages. This is because people rush to electronics shops to buy air conditioners, coolers and fans to beat the heat.
In the summer season, investors think that investments made by them should turn out to be hot, just like the temperature that rises by the day! They feel that the share price of the companies should also rise proportional to the rise in mercury levels. As season changes, we usually tend to change daily habits to suit the environment. Similarly, in the stock market, the smart investor will pick up summer special stocks to beat the heat of the season.
Generally, in the summer season, we should look at companies that are engaged in the manufacture of air conditioners, fans, air coolers, refrigerators and generators as also UPS manufacturers, ice creams makers and some of the FMCG companies. Putting it industry-specific, we should be focusing on consumer durableselectronics, electrical equipments, consumer foods, travel and support services, etc.
The companies that operate on a seasonal basis drive most of the demand for the products during the peak season. These companies launch array of schemes to grab larger share of the pie and try to push their toplines. In this scenario, looking at the better financial prospects of these companies, one should act wisely and invest in opportunity-based stocks for shining returns.
In year 2017, private weather forecaster Skymet has forecast ‘below normal' monsoon due to the possibility of the occurrence of the El Nino phenomenon. Pre-monsoon rains would be less during April, which would eventually lead to intense heating of the land mass. Though there is a possibility of rising intensity of heat, below normal monsoon would boost demand for products of summer special companies in the upcoming quarter.
AC manufacturing companies are dependent on prices of commodities such as aluminium and copper, which have increased more than 20 per cent each. But these companies have made prior arrangements for procuring commodities for the summer. The market for ACs in the country is underpenetrated and is set to grow in future. Moreover, growing power demand in the country signals bumper demand for ACs in the current year.
The onset of summer and rising mercury levels indicate huge demand for icecreams and frozen desserts across India. This implies huge sales opportunities for companies engaged in manufacture of these products in India. The ice-cream and frozen dessert industry has been growing in India at an average of 15 to 17 per cent per year.
After evaluating various sectors that are witnessing growing demand in the current year, we at DSIJ are bullish on seasonal stocks which will give fantabulous returns in the future.
Owing to the positive environment for these seasonal companies, we have homed in on four companies this summer. These are fundamental recommendations for our readerinvestors that will have seasonal upside in the future.
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Lloyd Electric & Engineering
BSE Code: 517518 FV: 10 CMP: 252
Lloyd Electric & Engineering manufactures evaporators and condenser coils for air conditioners and heat exchangers. The company manufactures consumer durables, heat exchangers and components, original equipment manufacturer (OEM) and packaged air conditioning. On the financial front, Lloyd Electric & Engineering's revenue increased 25.22 per cent to Rs.1938 crore in 9MFY17 on a yearly basis. The company's EBITDA too rose 21.34 per cent to Rs.187 crore in 9MFY17 as compared to the same period in the previous fiscal. Its net profit also boosted 35.72 per cent to Rs.62.58 crore in Q3FY17 on a yearly basis. On the segmental revenue front, Lloyd Electric & Engineering has earned 43.85 per cent from consumer durables, 26.95 per cent from OEMs and packaged air-conditioning, 18.65 per cent from heat exchangers, 10.22 per cent from wholly-owned subsidiaries in FY16.
Lloyd Electric and Engineering has sold its consumer durable operations to Havells India for Rs.1600 crore. The acquisition does not include company's manufacturing facility. Havells will procure air-conditioners from Lloyd Electric and Engineering.
On the valuation front, Lloyd Electric & Engineering's share price is trading at TTM PE of 24.58x as compared to Blue Star (62.64x) and Voltas (27.73x). The company's share price is trading attractively, as compared to industry PE of 33.49x. On attractive valuation among peers of air conditioning business, we recommend reader-investors to BUY the stock.
Thomas Cook (India)
BSE Code: 500413 FV: 1 CMP: 220
Thomas Cook (India) is India's largest travel and financial services company. Its business divisions include travel, corporate travel management, foreign exchange and travel insurance. It is the only travel company that has licence to sell insurance. The company has also entered into a tie-up with cruise line operator Indian Ocean Cruises of Londonbased Foresight Smart Ventures in order to market heritage cruise Ms Ocean Odyssey in India and Mauritius.
On the financial front, Thomas Cook (India) posted revenue of Rs.6516 crore in 9MFY17, a growth of 54.11 per cent on yearly basis. The company's EBIDTA too rose 87.37 per cent to Rs.261 crore in 9MFY17 as compared to the same period in the previous financial year. Its net profit also soared more than two-and-half times to Rs.83.5 crore in 9MFY17 on yearly basis.
On the segmental revenue front, Thomas Cook (India) has earned 80.77 per cent from human resources, 9.91 per cent from travel, 4.95 per cent from vacation ownership and 4.37 per cent from financial services in FY16. In conjunction with the summer holidays, Thomas Cook (India) has conducted series of vacation sales such as The Grand Indian Holiday Sale and Special Weekend Mega Holiday Sale. The company has targeted venues which are popular with local travellers, offering optimal space for both the high traffic and high levels of interactions anticipated. The company is experiencing huge rise in customers from small local pockets within larger cities, and its intent was to reach out to the customers by going local - right to their very doorstep. On summer vacation sales push, we recommend a BUY on the stock.
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Crompton Greaves Con. Ele.
BSE Code: 539876 FV: 2 CMP: 211
Crompton Greaves Consumer Electricals (CGCE) has decided to boost brand recall amongst the younger generation. The company will invest around 2 per cent to 3 per cent of the turnover towards brand building to reach out to the younger generation.
The company operates primarily in four verticals, namely, fans, lighting, pumps and small appliances. It has market leadership in the fan category, with 25 per cent market share. It has another 25 per cent market share in residential pumps category and a 7-8 per cent market share in agricultural pumps.
On the financial front, CGCE's total income increased 9.7 per cent to Rs.888.9 crore in Q3FY17 on year-on-year (y-o-y) basis. The company's EBIT too grew by 21.1 per cent to Rs.96.7 crore in Q3FY17 as compared to the same period in the previous financial year. Its PAT also soared 39.3 per cent to Rs.57.4 crore in Q3FY17 on a yearly basis. On the segmental revenue front, CGCE has earned 32 per cent from lighting products and the remaining 68 per cent from electric consumer durables in Q3FY17.
The company was able to limit the impact of demonetisation by undertaking a series of actions such as special incentives for channel partners, selective extension of credit to dealers, focused pricing action, and new product launches. Both the Electrical Consumer Durables and the Lighting segments (excluding EESL) maintained growth momentum, despite the challenging operating environment. Its margin expansion projects and continued focus on the premium category have helped the company to expand margin.
On the valuation front, CGCE's share price is trading at TTM PE of 49.81x as compared to IFB Industries (48x) and TTK Prestige (65.61x). The company's share price is trading attractively as compared to industry PE of 51.42x. On strong financials and attractive valuation, we recommend a BUY on the stock.
Kwality
BSE Code: 531882 FV: 1 CMP: 162
Kwality has established extensive distribution network with 1,900 distributors covering 45,000 touch points across northern markets. The company has diversified product portfolio that includes fresh milk, UHT milk, flavored milk, milk powders, curd, chaach, and ghee/fat categories catering to institutional and retail customers.
Kwality has begun commercial production at its new unit at Softa plant, Haryana on February 2, which is dedicated primarily for value-added products. When fully operational, the unit will have milk handling capacity of 9 lakh litres/day primarily for value-added products such as flavoured milk, Paneer, cheese, UHT milk, cream in tetra packs, table-butter, yoghurts, amongst others. Its total capital outlay was Rs.400 crore approximately.
Post commissioning of the new plant, cumulative milk processing capacity of Kwality would reach 4.3 million litres/ day across its six plants. Kohlberg Kravis & Roberts (KKR) will provide up to Rs.520 crore for expansion, brand building, advertisements, sales promotions, other marketing activities. The company is aiming to develop robust IT Infrastructure.
On the financial front, Kwality's revenue increased 8.5 per cent to Rs.4597 crore in 9MFY17 as compared to the same period in the previous fiscal year. The company's EBITDA rose 13.9 per cent to Rs.307 crore in 9MFY17 on a yearly basis. Its net profit also increased 17.6 per cent to Rs.129 crore in 9MFY17 as compared to the same period in the previous financial year. It is focusing on B2C business and had 61 per cent B2B business, as against 39 per cent ffrom B2C segment in 9MFY17.
On the valuation front, Kwality's share price is trading at TTM PE of 22.25x as compared to Britania (46.52x), Nestle India (68.76x) and Hatsun Agro Products (110.8x). The company's share price is trading attractively as compared to industry PE of 37.27x. On strong organic growth plans, we recommend a BUY on the stock.(Closing price as of Apr 10, 2017)