Sensex To Climb Higher By Next Diwali!
Global factors coupled with upcoming elections back home are pushing up volatality for the Indian markets. Yogesh Supekar and Shohini Nath explore how the markets have performed from previous Diwali to this Diwali, while the DSIJ research team shares the top picks for this Diwali.
From Diwali last year to Diwali this year, a lot has changed for equity investors. While the first half year was great for most large-cap investors, the whole year has been a disappointment for those investors who have focused on small-caps and midcaps. The pain point for almost every investor has been small-caps and mid-caps in the last one year.
It is observed that mostly when markets are bullish, investors ignore the basics of portfolio management and get carried away. Quality is compromised as everything is going up. Just when the trend reverses and the stock prices start falling down, the casual approach towards portfolio building lies exposed.
Suddenly, the weaker stocks start showing their true colours and the investors are left sulking. Portfolio management requires peculiar skills of juggling with different stocks across market capitalisation. The investors skills were definitely tested in past one year.
The broader markets have suffered previous year, and indeed, when compared with performance in 2016- 2017, one can understand how difficult it has been to beat the markets in the last one year.
If we refer to the below table, we come to know the realistic environment that the investors operated in the last one year. In 2016-2017 Diwali to Diwali, there were 188 stocks that more than doubled compared to only 104 stocks that more than doubled in the previous year, i.e. from previous Diwali to this Diwali. The total number of stocks that generated more than 15 per cent returns in 2016-2017 was 1032, while the number has reduced to a paltry 476 stocks in the last one year.
Investors had their opportunities in the last one year. It is just that their opportunities were reduced by 50 per cent when compared to the year before. Investors really had to struggle to generate alpha, especially due to correction in markets in the last one month.
The reasons are widely known for the market rout, viz., US fed interest rate hikes, trade war initiated by the US targeting primarily China, which is expected to bring down China’s GDP growth by couple of percentage points, stretched equity valuations, IL&FS liquidation saga that pulled the stocks of majority of NBFCs down sharply, rising crude oil prices, depreciating Indian rupee and last, but not the least, political uncertainty in Europe. These concerns have kept investors cautious on the market outlook even as FIIs have been net sellers in the market of late.
Indian Equity Market Outlook
In spite of the global headwinds, the markets are expected to take support from the earnings growth and the quality of earnings. If it were not for the earnings growth, our markets could have easily corrected even more. The NBFC sector may see some downgrading owing to the slowness in growth expected due to liquidity concerns. NBFC is one sector that is capital hungry. The margins are expected to take a hit owing to rising cost of capital in the coming couple of quarters at least. NBFC has been a high growth sector for investors and indeed the sector's financials attracted huge investments. Going forward, the concern over growth outlook for the NBFC sector may see drop in investments in the beleaguered sector.
Auto sector has delivered mixed results in the September quarter. Two-wheelers have shown good momentum in earnings, primarily due to the growth in volumes despite disruption in the industry. The capital goods sector can be expected to do well in the coming year owing to sustained order flows from the government. The FMCG sector, after the recent correction, does look attractive. The gradual recovery in the rural demand can support the performance of FMCG companies in the coming year.
"The concern for NBFCs is on two fronts - rising bad loans on asset side and difficulty in refinancing debt on the liability side."
Reality Check
Out of the 1180 stocks with market cap greater thanRs.100 crore as on October 11, 2018, we find that there are at least 612 stocks that are down by more than 50 per cent from their respective all-time highs. That means nearly 51 per cent of those stocks with market cap greater thanRs.100 crore have corrected by more than 50 per cent from their respective all-time highs. Similarly, there are at least 681 stocks that are trading within 10 per cent of their 52-week lows, thus suggesting that almost 58 per cent of the stocks across market capitalisation that areRs.100 crore plus are trading closer to their 52-week lows. There are merely 44 stocks that are trading near their respective 52-week highs.
Tejas Khoday
CEO and Co-Founder FYRES (Member of MCX)
From this Diwali to the next, the Sensex 30's performance is largely dependent on macro factors such as inflation, interest rate and INR rate. Most of the Sensex constituents have been subdued this year and a bounce-back is imminent in the coming year if the macro factors are in check.
With rising interest rate scenario, the cost of capital is expected to increase for most of the corporates in India.
Election outcome in India, dollar movement against the Indian rupee, inflation data, earnings growth, global equity market conditions, FII inflows and DII investments will steer the direction of the markets till next Diwali.
Global equity market outlook
Globally, the equity markets may take cues from the bond yields and how the geo-political tensions pan out. While it almost impossible to predict what happens politically in the US, the turbulence for global markets may emerge from Italy, Turkey, Brexit and the Middle East. What happens with the US interest rates and the incremental tariffs by the US on Chinese goods may dominate market moods in coming year. Thus, the biggest risk the world economy may face in coming year is the “policy of protectionism” adopted by the developed countries, especially the US. There is risk such as “rising inflation and slowing growth”, “protectionism” and “crude @ $100”. We may be headed to a stagflationary situation in the global economy with rising inflation and slowing growth owing to the protectionism adopted by the US and other countries and the rising crude oil prices.
Investors will also be keenly watching what happens with the interest rates in the coming year. The US Federal Reserve (Fed) is expected to raise rates one more time in 2018 and twice in 2019. The policy rate will eventually be more than 3 per cent in 2019. Bank of England (BoE) and European Central Bank (ECB) is expected to end the quantitative easing in Q4 this financial year and raise rates in 2019. Japan is also expected to see some liquidity tightening, while only China is expected to reduce its interest rates. On the back of slowing world economy growth, rising energy prices, protectionism adopted by developed countries and tightening liquidity conditions across developed markets, the outlook for global equities remains benign. Most of these negatives, however, are already factored in by the markets. The escalation in these risks known may impact the markets in the coming year.
Vineeta Sharma
Head of Research, Narnolia Financial Advisors.
"When the index was trading at its peak, the ratio of valuations of Mid-cap index to Sensex went up to 1.60 times and now the valuation ratio has now reached 1.44. Normally, there is usually a 30% valuation premium that mid-caps command over the broader index, considering higher earnings growth potential of smaller companies over the larger companies. For an investor who holds any of these stocks in his portfolio, he should recheck the hypothesis based on which he has bought the stock earlier and see if all the business drivers that were considered remain valid or otherwise. If no fundamental change has happened, then staying on is advisable. On the other hand, if the stock was bought just on the basis of rising price, then every interim rally should be used to divest those companies. In general, As a thumb rule, companies with ROE<10%, growth<10% and PE>20 should be avoided in the portfolio, unless one has in mind some strong earning re-rating hypothesis for the stock."
Bond yields and equity returns
The current rout in market was triggered by the inability of IL&FS to service interest payment. The liquidity crisis in the debt market is one of the reasons that triggered the sell-off in NBFCs. The rising bond yields in the US is also seen as one of the reasons why equity markets could correct in coming year.
What is bond yield and how does it impact the equity prices?
The price of the bond and the yield of the bond have an inverse relationship. The higher the price of the bond, the yield decreases correspondingly. The bond prices have an inverse relationship with interest rates as well.
Rising interest rates increase the cost of debt. This further increases the cost of capital which is used to discount future cash flows to value companies.
A higher cost of capital depresses valuation of equities. That is why, when the RBI cuts interest rates, it bodes well for stocks. The stocks may get re-rated as they will now be valued based on a lower cost of capital discounting factor.
When the level of economic activity increases, bonds and stocks perform inversely as both are competing for the investor’s capital. During periods of economic boom, money flows into the stock market as investors want to beat inflation. Inflation further deteriorates the value of bonds as it reduces the purchasing power of each interest payment that the bond makes.
When the economy slows down, consumption reduces, corporate profits dwindle and the stock prices plummet. During such periods, investors favour the regular interest payments guaranteed by bonds. Bond yields fall when economic conditions such as high unemployment rates and recession push investors towards safer investments.
However, at times, the bonds and stocks exhibit a relationship of direct proportionality. This has been observed during the early periods of economic recovery when inflationary pressures are minimal and the central banks maintain low interest rates to stimulate the economy. Excessive liquidity chasing too few investments can cause this too. Panicked investors selling everything can cause both bonds and stocks to fall. Increasing bond yields means corporates have to pay greater interest on debt. Increase in debt servicing costs poses risk of bankruptcy and default as it makes mid-cap and highly-leveraged companies vulnerable. Bond yields go up due to several factors such as rising inflation, increasing repo rates and higher fiscal deficit. The hike in the bond yields in India can be attributed to investors’ concerns pertaining to the fiscal deficit in FY18 and the higherthan- expected deficit target for FY19. A higher fiscal deficit results in increased government borrowings, particularly when the government’s revenue generation is lethargic. Other concerns include rising crude oil prices and the budget proposal to raise the minimum support prices (MSPs) on crops. Thus, weakening macroeconomic conditions push bond yields higher, thereby resulting in a drop in its prices.
Prodipta Ghosh,
Vice President, QuantInsti
"In the financial press, terms like “algo”, “quant” and “high frequency” trading are often used interchangeably. But each of these captures a specific aspect of the investing process. ‘Systematic’ (rule-based) or “quantitative” (use of quantitative analysis) trading is all about how we make trading decisions. “Algo” (algorithmic) trading, on the other hand, is where trade execution uses automated algorithms. Finally, ‘high frequency trading’ is algorithmic trading characterised by high speed and high order-to-trade ratio. In practice, we see all meaningful combination of this decision-versus-execution aspects. But we expect the sweet spot of both automated decision-making and execution to be the dominant trend going forward. While the edge in discretionary trading is deep proprietary insights, algo trading offers a superior information processing capability. The primary advantage of algo trading is the ability to monitor and trade opportunistically a very large set of stocks or other instruments. This enables a superior consistency of returns. Our in-house research shows a concentrated discretionary manager often requires 50% higher prediction accuracy (information coefficient) to achieve similar performance metrics compared to a systematic manager. This is a challenge for the stock pickers when access to information and tools are being democratised steadily."
Rise of Algo trading and HFT in India
Algo trading is legal in India since April, 2008, when SEBI permitted algo trading in Indian exchanges. According to regulations, any investor who wants to use algo trading strategies has to get each and every strategy approved before using it live in the markets.
Algo trading is prevalent in the US markets and other developed markets. High frequency trading (HFT) and returns. It is important that investors switch to different stocks with higher potential returns. The restructuring of portfolio will be crucial for the portfolio performance in the coming year. One of the aspects that investors need not ignore is reducing the portfolio risk. Rightsizing the portfolio is key and rebalancing the portfolio keeping in mind proper asset allocation across sectors and market cap segments is essential in the coming year.
The global market risks remain detrimental to the market sentiments. The crude oil prices may remain higher owing to geo-political situation. Such higher economy. Excessive liquidity chasing too few investments can cause this too. Panicked investors selling everything can cause both bonds and stocks to fall. Increasing bond yields means corporates have to pay greater interest on debt. Increase in debt servicing costs poses risk of bankruptcy and default as it makes mid-cap and highly-leveraged companies vulnerable. Bond yields go up due to several factors such as rising inflation, increasing repo rates and higher fiscal deficit. The hike in the bond yields in India can be attributed to investors’ concerns pertaining to the fiscal deficit in FY18 and the higherthan- expected deficit target for FY19. A higher fiscal deficit results in increased government borrowings, particularly when the government’s revenue generation is lethargic. Other concerns include rising crude oil prices and the budget proposal to raise the minimum algorithmic trading accounts for an estimated 70 per cent of the trading in the equity market. In India, Algo trading across cash and derivatives market as a percentage of total turnover has increased to 49.8 per cent in 8 years. In 2010, the percentage share of algo trading was merely 9.26 per cent. Going ahead, the opportunities for HFT traders may improve owing to sophisticated technology, and a smart order routing system at NSE and BSE. As an investor, one may not need to be an algo trader, however investors cannot ignore the impact of algo trading on markets. There is always a chance of prevailing trend being magnified owing to algo trading and HFT.
Dinesh Thakkar,
CMD, Tradebulls
What is your Sensex target for next Diwali?
The recent correction has provided the much-needed opportunity as valuations are normalising. The ongoing corrective wave which commenced from the high of 38,989 seems to have terminated. The occurrence of a ‘Bullish Harami’ formation on the weekly scale post the decline near the confluence support zone augurs well for the near term support established around 33,800. The ongoing corrective wave has ‘Flat Wave’ characteristics which seems nearly terminated. The next leg or the fresh upmove should commence soon, which could stretch towards 40,300 by the next Samvat.
How do you see markets behaving till next Diwali?
Market seems to be finding its way back from the macroeconomic whirlpool it had been facing. The cool-off in momentum is also witnessed in crude oil prices along with the VIX, which is nearing its upper bound of the oscillation range and could be a good catalyst for a near term bottom. However, the rising bond yields, rising interest rates and rising commodity prices across the globe would remain detrimental in the long run. On the other hand, Indian government’s consistent efforts of imposing second round of import tariffs to rein in imports and boost and immunize Indian rupee could provide some cushion in the future. The journey from the current Samvat till the next could be filled with challenges as most of the markets across the globe would be passing through their respective election mode in the next few months. Hence, expect global volatility to keep the markets on the edge, yet a 12-15% upside from the current juncture cannot be ruled out.
Where should investors focus right now--large-caps, mid-caps or small-caps?
Earnings season could uplift the dampened sentiments as we expect consumption to remain the key theme, while metals, healthcare and auto would remain interesting avenues due to their global influence and exposures. We always believe in having the right mix and blend of large-caps and mid-caps in one's folio as it provides the necessary optimisation of risk.
Rajesh Sharma
MD, Capri Global Capital Limited
Is your company facing any ALM issue?
No. We are not having any ALM issues whatsoever. In fact, the company has adequate liquidity to comfortably meet its growth targets in the next few quarters, as planned.
What are the growth challenges faced by NBFCs such as yourself?
Capri Global is in a high-growth phase and we have aggressive growth plans in the next few quarters. The Company is focused on lending to the underserved segments of MSMEs and Affordable Housing Finance which have huge demand gaps, providing multiple growth opportunities.
Though the recent developments have squeezed liquidity for large players, we do not see any such limitation for Capri.Key challenge in growth would be felt in case the general economic slows down and negative sentiment prolong.
What is the growth outlook for your company in the coming quarters?
We hope to maintain high double-digit AUM growth on an annual basis for the next few quarters.
We are also closely watching the general economic scenario, liquidity impact and the overall business sentiment and its impact on the NBFCs which may require recalibration of our growth targets.
Abhishek Gupta,
Chief Economist, Bloomberg India
What is your view on interest rates?
The Reserve Bank of India’s October policy shows an undue focus on upside risks to inflation. Its change in stance from neutral to calibrated tightening suggests that it is likely to hike rates if the upside risks to consumer prices were to materialise. In our view, the central bank's conservative bias was unwarranted, especially as it sharply revised down its inflation forecasts. We continue to hold our contrarian view that further rate hikes are unlikely. We expect inflation to continue to undershoot the central bank’s projections -- dampening its hawkishness bias and leading it to keep rates on hold at the December review and until mid-2019 at least.
Will trade deficit widen for India in coming years?
We expect India's trade deficit to increase sharply by 27% year-on-year to $203 billion in fiscal 2019, largely driven by higher oil prices. As India's growth gathers momentum over the next few years, its non-oil imports are also likely to increase in tandem. In our view, a sharp pick-up in export based manufacturing is still a few years away for India, and until that happens, the trade deficit is likely to widen further.
Do you think Indian rupee is oversold and has potential to strengthen in the coming year?
Our rupee forecasting model projects that the currency weakness could continue until December, before seasonal patterns in India’s trade balance start to temper the losses. Rising oil prices are boosting the import bill, driving the current account deficit wider and capital inflows have been insufficient to fill the gap. The tapering of FX sales by the RBI in August and September contributed to the bearish mood on the rupee, prompting speculative bets against the currency and further driving out capital flows. For the sentiment on the rupee to change, the RBI will either need to sell FX assets more aggressively or issue NRI bonds to raise dollar reserves in rupee's defence.
What are the key risks that can slow down the GDP growth for India?
The key risks that have already started materialising are the rising cost of borrowing, elevated oil prices and currency weakness. These factors are already having a downward pressure on companies profit margins, squeezing the disposable income of consumers and reducing the room for government expenditures. Additionally, tight liquidity in the banking system and bank deleveraging are also contributing to the slowdown by making financial markets more risk averse. Looking ahead, political uncertainty remains a key risk in the upcoming state elections and national elections next year.
Kiran Jadhav
CMD, Kiran Jadhav & Associates
"Midcap 100 has fallen near about 38% from its peak, whereas Smallcap 100 has fallen about 41%, creating maximum damage since 2009. Even after such a ruckus, technically both the indices are seating just above the up-trending line, which is drawn by joining lows of Aug-2013 and Feb-2016. Even on the day when the leading index Nifty, after taking sell-off cues from Dow Jones index, became extremely volatile on Oct. 12, 2018, both mid-cap and small-cap indices stayed at least above 3% from the recent low made on that day. One should follow the quest to find companies whose stock price is still holding above the trendline or forming price patterns.
One should not be surprised to learn that the most leading Index of our markets, Nifty is still forming uptrend. The long term uptrend is a way too far from any danger, but even the uptrend that has emerged since Feb-2016 is holding its significance currently. Up-slanting line by joining and extending lows of Feb-2016 and Dec-2016 gives us the current level of 10100 and it is about the same level from which Nifty has taken supports lately.
I firmly believe that the time of sob stories is over and sanity has started knocking the door. In either case of indices, I am leaning on the side of new highs in one year. And for that to happen, all I want is Nifty to hold its recent support line for few weeks only.
Remember that the bullish market evolves in pessimism. By buying into opportunities, bulls earn in bear market and realize their profits in bull market. It is sagacious to stay put with stocks that may have corrected but are still holding on to their uptrend. Find more stocks with promising price patterns and this market will be a different place for you."
Conclusion
The current market correction presents an opportunity to all the investors to re-evaluate the portfolio and get rid of the weak stocks that could hurt portfolio crude oil prices will pose threat to the growth of developing economies such as India. However, the oil producing nations will soon have to take a call on supply as the higher prices might lead to demand destruction and that may lead to capping of crude oil prices in the coming months. Investors will have to keep an eye on crude oil prices, earnings quality and growth, currency movement and relative performance of developed markets and other emerging markets. The election results will definitely dominate the markets next year, however, the earnings growth should give direction to the markets in the coming year. The fear of falling prices may cause investors to act unwisely. A wise investor would capitalise on the buying opportunity when the prices are falling.
Here are seven stocks selected by DSIJ research team.
BCL Industries
CMP : Rs.112.95
BSE CODE: 524332
Face Value: Rs. 10
Market Cap F F (Cr.) 75.51
Here is why
Well-diversified conglomerate
Competitive edge
Excellent financial performance
BCL Industries is a conglomerate operating in the verticals of solvent extraction and edible oil (65 per cent), distillation (33 per cent) and real estate (2 per cent). It is the only company in India with a forward and backward integrated distillery-ethanol industry plant.
The standalone quarterly financials reported a drop in total income from operations toRs.202.90 crore in Q1FY19 from Rs.230.67 crore in Q4FY18, registering a fall of 12.03 per cent. Its EBITDA stood atRs.14.17 crore in Q1FY19 versusRs.11.16 crore in Q4FY18, posting an increase of 26.97 per cent. The net profit increased to Rs.5.84 crore in Q1FY19 from Rs.4.69 crore in Q4FY18, registering an increase of 24.52 per cent.
On the consolidated annual front, revenue from operations stood atRs.850.7865 crore in FY18 versusRs.671.2811 crore in FY17, posting an increase of 26.74 per cent. The EBITDA stood at Rs.46.7921 crore in FY18 versusRs.36.609 in FY17, registering a growth of 27.81 per cent. The net profit increased toRs.17.8348 crore in FY18 fromRs.9.7606 crore in FY17, a rise of 82.72 per cent. The National Policy on Biofuels – 2018 CMPRs.112.95 Face 524332 ValueRs.10 BSE CODE 75.51 Market Cap F F (Cr.) has allowed BCL to generate higher realisations by modernising its plant in Bathinda. The policy permits the use of damaged food grains unfit for human consumption to produce ethanol.
It also allowed the company to save 40,000 million in foreign exchange during FY17-18. In a strategic move to bridge the demand-supply gap in North-East India, BCL has planned to set up a distillery plant at Kharagpur, which will magnify production capacity and render it the largest foodgrain ENA manufacturer in India.
BCL enjoys a competitive advantage as its plant is equipped to use any type of grain for distillation, be it wheat, rice, maize, millets, either individually or mixed together. This shields the company from fluctuating commodity prices, vagaries of climatic conditions and from infestation issues.
It also awards considerable flexibility on the supply side and cost front. With a view to leverage on the demand for affordable housing and infrastructure, as well as to diversify its operations, BCL has forayed into real estate.
The increased import prices drove the demand for domestic consumption of edible oil upwards. The FMCG sector is expected to thrive owing to the anticipated increase in disposable incomes due to the focus on education, healthcare, agriculture, infrastructure, education and MSMEs under the Union Budget 2018-19. The alcohol market in India is growing at a CAGR of 8.8 per cent and is expected to reach 16.8 billion litres of consumption by 2022.
During FY17-18, the company reported the highest recorded consolidated turnover, EBITDA and net profit figures. Its EPS almost doubled to Rs.12.78 in comparison to Rs. 6.90 per share in FY16-17. The return on capital employed (ROCE) surged to 17.95 per cent in FY18 versus 14.61 per cent in FY17. By virtue of these factors, we urge our reader investors to BUY this stock.
Gujarat Alkalies and Chemicals
CMP : Rs.577
BSE CODE: 530001
Face Value: Rs. 10
Market Cap F F (Cr.) 1057.79
Here is why
Good financial performance
Operation efficiency
Competitive edge
Gujarat Alkalies and Chemicals (GACL) is one of the largest producers of caustic soda in India. It has diversified its business by venturing into the chloralkali and integrated products market. Its plants in Vadodara and Dahej are in close proximity to raw material suppliers and end-users. It exports to the US, Europe, Australia, Africa, Middle East, China and South Asia.
On the quarterly front, its income from operations increased to Rs.752.85 crore in Q1FY19 from Rs.697.32 crore in Q4FY18, reporting a rise of 7.96 per cent. Its EBITDA stood at Rs.287.37 crore in Q1FY19 versus Rs.292.83 crore in Q4FY18, marking a drop of 1.86 per cent. The net profit plummeted to Rs.183.17 crore in Q1FY19 as against Rs.221.06 crore in Q4FY18, registering a fall of 17.14 per cent.
On the consolidated annual front, income from operations rose to Rs.2,513.8950 crore in FY18 from Rs.2,302.5123 crore in FY17, reporting a surge of 9.18 per cent. The EBITDA increased to Rs.786.6925 crore in FY18 from Rs.449.6156 crore in FY17, posting an increase of 74.97 per cent. The net profit increased 73.93 per cent to Rs.534.50 crore in FY18 from Rs.307.30 crore in FY17.
The EPS increased to Rs.72.78 in FY18 from Rs. 41.85 in FY17. In FY18, the dividend per share increased to Rs. 6.50 from Rs.5.00 in FY17 and book value per share increased to Rs.516.36 from Rs. 450.70 in FY17.
The company’s portfolio offers 36 products, with caustic soda being the major revenue generator. Since production of caustic soda is a highly power-intensive activity, GACL has set up its own captive power plants and wind farms in order to be self-reliant. However, increasing cost of power and utilities and unstable market conditions remain areas of concern for the company
The repercussions of dollar appreciation are felt on the cost of imported materials such as rock phosphate and potassium chloride.
Additionally, the industry faces stiff competition from cheaper imports with reduction in custom duty. Despite these challenges, the company generated the highest ever sales in FY18. GACL managed 95 per cent capacity utilisation in caustic soda during FY17-18, outperforming the industry performance of 70 per cent utilisation. Most of its plants are strategically integrated such that a part of finished product of one plant is consumed as a raw material in another. This integration philosophy awards a competitive edge.
The company’s strengths include leveraging on economies of scale, low cost power generation from captive plants, vast marketing and distribution network, excellent industrial relations, and proximity to raw material supply and end-users. It also has an extensive R&D centre to keep pace with the mercurial nature of the chemical industry and focus on adding value to its products.
By virtue of these factors, we urge our reader-investors to BUY this stock.
Mahindra &Mahindra Limited
CMP : Rs.731.70
BSE CODE: 500520
Face Value: Rs. 5
Market Cap F F (Cr.) 70,787.38
Here is why
Positive financials
Expanding product portfolio
Excellent growth potential
Mahindra & Mahindra Limited manufactures farm equipments and automobiles. It operates in 20 chief industries and has a vast footprint spanning across 100 countries. It ranks as the world’s largest tractor brand by volume as well as the largest utility manufacturer.
On the quarterly financial front, the company's revenue increased to Rs.13,519.91 crore in Q1FY19 from Rs.13,307.88 crore in Q4FY18, posting an increase of 1.59 per cent. Its EBITDA increased to Rs.2,285.48 crore in Q1FY19 from Rs.2,201.38 crore in Q4FY18, reporting an increase of 3.82 per cent. The net profit increased to Rs.1,220.96 crore in Q1FY19 from Rs.1,059.09 crore in Q4FY18, registering a growth of 15.28 per cent.
On a consolidated annual basis, the revenue from operations stood at Rs.93,264.77 crore in FY18 versus Rs.88,983.03 crore in FY17, posting a growth of 4.81 per cent. Its EBITDA stood at Rs.13,226.1 crore in FY18 as against Rs.10,734.83 in FY17, registering an increase of 23.20 per cent. The net profit increased to Rs.7,957.79 crore in FY18 from Rs.4,050.53 crore in FY17, posting a growth of 96.46 per cent.
During the year, the company launched several new products such as Jeeto Minivan, Trakstar, Swaraj 963 FE tractor and E-Alfa Mini Electric Rickshaw, to name a few. The auto and farm equipment businesses performed well in FY18 because of normal monsoon, revival in rural demand, an optimised cost structure and an improvement in the trucks business. A major chunk of the capital expenditure is directed towards new product development and capacity enhancement. Improvement in capital efficiency is evident by glancing at the following performance indicators – operating profit margin increased to 14.8 per cent in FY18 from 13.1 per cent in FY17, return on capital employed improved to 19.6 per cent in FY18 from 16.8 per cent in FY17 and interest coverage ratio increased to 23.3 per cent in FY18 from 18.8 per cent in FY17.
The Mahindra Group crossed Rs.2 trillion in market capitalisation during the year and enjoys a market share of about 10.9 per cent in the domestic market. It is one of the first companies to incorporate futuristic technology in its operations. In FY2017-2018, the company crossed the one million mark in sales of vehicles and tractors for the first time ever. In a press release dated October 17, 2018, the company announced its agreement with Ford to supply Bharat Stage VI gasoline engines to strengthen Ford’s petrol portfolio. Although the company faced some challenges by way of decline in exports by 24.2 per cent on account of rigid regulatory environment in target countries, it is working on growing its presence in the foreign market by launching new automobiles. Except for the two-wheeler segment, all other segments of the automotive sector demonstrated growth momentum, causing the industry to grow 11.9 per cent in comparison to the previous year, registering double-digit growth for the first time in seven years. The electric vehicle segment presents excellent growth potential as the government is emphasizing on eco-friendly mobility. The government's initiatives to assist farmers will open several doors for the company, thereby paving the way for sustainable growth. By virtue of these factors, we recommend our reader investors to BUY this stock.
Sonata Software
BSE CODE 532221
Face Value Rs1
CMP Rs305.20
Market Cap F F (Cr.) 2,118.75
Here is why
Positive financial performance
Good growth prospects
Fair valuation
Sonata Software is a technology company that offers IT services and software solutions to enterprises by exploiting industry expertise, design thinking, platform technology excellence and strategic engagement models. Additionally, it also resells products from international technology companies in India. It operates in the verticals of travel, retail, distribution and software solutions.
The consolidated quarterly performance depicts an increase of 9.99 per cent in net income from operations to Rs688.32 crore in Q1FY19 from Rs625.80 crore in Q4FY18. Similarly, EBITDA witnessed an increase of 15.43 per cent to Rs73.35 crore in Q1FY19 from Rs63.54 crore in Q4FY18. Consequently, the net profit posted a growth of 5.74 per cent to Rs57.41 crore in Q1FY19 from Rs54.29 crore in Q4FY18.
As per the consolidated annual financials, the net income from operations increased to Rs2,453.942 crore in FY18 from Rs2,370.78 crore in FY17, posting an increase of 3.50 per cent. EBITDA increased 20.58 per cent to Rs230.981 crore in FY18 from Rs191.55 crore in FY17. Net profit posted a growth of 22.44 per cent to Rs192.135 crore in FY18 from Rs156.92 crore in FY17. Overall, the net sales, EBITDA and net profit posted a 5-year CAGR of 13 per cent, 36 per cent and 45 per cent respectively.
The dividend per share (DPS) increased to Rs10.50 in FY18 from Rs9.00 in FY17. Its earnings per share (EPS) increased to Rs18.54 in FY18 from Rs15.07 in FY17. The return on capital employed (ROCE) rose to 30 per cent in FY18 from 26 per cent in FY17. Overall, DPS, EPS and ROCE surged at a 5-year CAGR of 44 per cent, 45 per cent and 26 per cent, respectively.
Largely, international IT services contributed with 38 per cent of total revenues and 81 per cent of PAT. On the other hand, domestic products and services contributed with 62 per cent of total revenues and 19 per cent of PAT.
In a strategic move, the company acquired 15 per cent stake in a Danish company Izara to toughen the dynamics capabilities and access to Nordics markets. As a part of its expansion plans, the company finalised its new 32,000 sq ft facility in Hyderabad. It also secured 32 new customers for its products and solutions, including the addition of new logos across geographies and competencies. During the year, the company performed well in both the international and domestic markets, reporting PAT growth of 28 per cent and 6 per cent, respectively.
A major distinguishing factor for Sonata is its business solutions wrapped with IPs. This strategy has yielded quicker growth and margin expansions. The company has scheduled a meeting of the board on November 2, 2018 to contemplate paying an interim dividend on November 14, 2018. With an ongoing focus on leveraging technology alliance partnerships and undertaking strategic brand enhancing initiatives, the company has delivered good operational performance. By virtue of these factors, we recommend our reader-investors to BUY this stock.
Suven Lifesciences Limited
BSE CODE 530239
Face Value Rs1
CMP Rs226.00
Market Cap F F (Cr.) 1,140.20
Here is why
Growth prospects in the pharmaceutical sector
Fair financial growth
Innovative ideas of the company
Suven Life Sciences Limited is a bio-pharmaceutical company. The company is engaged in the business of manufacture and sale of bulk drugs and intermediaries. The company's segments include manufacturing segment, which develops and produces bulk drugs and intermediates under contract manufacturing services. The services segment, which consists of collaborative research projects, clinical trials and testing and analysis services and R&D. Its products consist of active pharmaceutical ingredients, including Aripiprazole, Armodafinil etc. The company leverages its innovation capability to undertake NCE-based CRAMS (Contract Research and Manufacturing Services) projects involving discovery and development of molecules for innovator companies. The company’s expertise in process research, custom synthesis and NCE development support services has earned it the respect of global pharmaceutical companies. However, due to generic competition post the patent expiry of the product, revenues from business have declined 31 per cent YoY in FY18. Suven is working on new molecule additions in speciality chemicals with a target launch during FY19-21E.
The company has a vision to provide world-class R&D solutions for global life science companies with efficiency in cost, quality and speed and to become a leading company focused on treatments for unmet medical needs in mental health.The FY2017-18 was interesting for the company as it was a period of ups and downs. In the first half, the company's business and profits took a dip, while in the second half, fortunes turned in favour to close the year with a positive momentum.
On the financial front, the company witnessed a 34.51 per cent growth in net sales as it stood at Rs184.88 crore in the first quarter of FY2019, while in the same quarter of FY2017, it was Rs137.44 crore. The PBIDT of the company grew by 28 per cent to Rs58.23 crore in Q1FY19 versus Rs45.28 crore in Q1FY18. The profit after tax (PAT) has surged by 31.35 per cent to Rs38.38 crore in the first quarter of FY19 as against Rs29.57 crore in Q1FY18.
In annual terms, the company’s net sales have gone up by 15 per cent as in FY18 it was Rs625.26 crore, while in FY17 it was Rs543.53 crore. The PBIDT of the company has also seen a jump of 37 per cent and stood at Rs256.19 crore in FY18 and in FY17 it was Rs186.44 crore. The profit after tax (PAT) came in at Rs158.43 crore in FY18, up by 28 per cent as against Rs123.47 crore in FY17. On the valuation front, the company is available at PE of 18.44x as against an industry PE of 36.82x. The return on equity (RoE) stood at 19.83 per cent and the return on capital employed (RoCE) stood at 27.69 per cent.
The research-based pharmaceutical industry plays a unique role in developing new medicines and vaccines to prevent and treat diseases and improve the lives of patients worldwide. Its key contribution to global health is turning fundamental research into innovative treatments. The industry’s success rests on continuous innovation which Suven has been catering to. With the company’s broadbased momentum and expectations of a sizeable fiscal expansion in the United States over this year and the next, global growth is now projected to be at 3.9 per cent for 2018–19. Considering the abovementioned factors, we recommend a BUY in the stock.
Piramal Enterprises
BSE CODE 500302
Face Value Rs2
CMP Rs1876.00
Market Cap F F (Cr.) 16,951.15
Here is why
Expansion in financial services
Competitive edge
Strong quarterly results
Piramal Enterprises Limited (PEL) is engaged in the business of pharmaceuticals which include research and development, financial services as well as information management through its subsidiaries. The pharmaceutical business consists of manufacturing and sale of the company’s own and traded bulk drugs and formulations. It operates through three segments: healthcare, financial services and information management. The healthcare segment includes critical care, pharma solutions and consumer products.The financial services segment includes wholesale lending, alternative asset management and investments in Shriram Group. Its information management segment is engaged in Decision Resources Group (DRG). DRG's product and services portfolio consists of data and analytics, research products and global consulting services.
Piramal Enterprises Limited is one of India’s largest diversified companies that has a presence in pharmaceuticals, analytics as well as helathcare. The company’s FY2018 revenues were over 1.6 billion dollars, out of which 46 per cent were generated from outside India. The financial year of 2018 has been a robust year for the company financially. The company’s financial services arm is expected to deliver a higher ROE by 2-3% driven by benefits from its subsidiaries’ merger. Under the financial business, banks, insurance companies and mutual funds are the largest sources of funding for the company. The financial business is on a strong growth track. The company also launched retail housing finance with seven branches in Delhi–NCR, Bengaluru and Pune. PIEL plans to open branches in Nashik, Ahmedabad, Hyderabad and Chennai. It is also planning a B2B2C model and to leverage Brickex (distributor base of 10k employees) to grow its retail housing finance business. Further, PIEL has partnered with 445 connectors, 123 direct sales agents and 100 projects on the housing finance platform; focus is on both salaried as well as self-employed customers.
The pharma segment margins has witnessed strong improvements as well as moderate growth in domestic pharma business. The global pharma has been a key driver for the growth with enhanced business from products as well as services. In the last five years, the company’s EBIDTA margin has increased from 0.4 per cent to 18.5 per cent in FY18.
On the financial front on a consolidated basis, the company has posted a 28.77 per cent hike in its net sales to Rs2902.49 crore in Q1FY19 as against Rs2254.07 crore in Q1FY18. The PBIDT of the company on a YoY basis has jumped 43 per cent and stood at Rs1526,67 crore in Q1FY19 from Rs1061.81 crore. On the valuation front, the company is currently available at PE multiple of 8.89 on its TTM earnings, while the industry PE multiple is 25.54. The company’s return on equity (RoE) stood at 23.42 per cent and the return on capital employed (RoCE) stood at 8.53 per cent. The company has been focusing on expanding its financial services by creating a large and well-diversified financial service business of India, constantly generating strong riskadjusted returns, while also maintaining a high focus on asset quality. The company is looking forward to further explore the opportunity to grow into retail. Keeping these points in perspective, we recommend our investorreaders to BUY into the stock.
Venkey’s
BSE CODE 523261
Face Value Rs10
CMP Rs2435.00
Market Cap F F (Cr.) 1,489.76
Here is why
Good financial numbers
Higher capacity utilization plans
Growing consumption of Venkey’s products
Venky's (India) Limited is engaged in the production of day-old layer and broiler chicks for the poultry markets . The Company offers a wide range of products, such as day old commercial chicks, grown up commercial broiler, refined oil and de-oiled cake for poultry feed. The Animal Health Products segment produces and sells medicines and other health products for birds. The Oilseed segment produces and sells edible refined soya oil and soya de-oiled cake. Its portfolio of products includes animal health products, pellet feeds, processed and further processed chicken products and solvent oil extraction.
The poultry industry has maintained stable growth rate in the year 2017-18. With an annual productions of 70,000 million eggs, India is ranked second in world egg production. There is a gap in per capita consumption and the National Institute of Nutrition (NIN) recommended level of consumption which offers the company an excellent position for growth for the several years to come. The company’s major segment is the Poultry and Poultry products. In 2017-18 this segment’s turnover was Rs1,36,079 Lakhs as compared to Rs1,24,236 Lakhs in the last year. The profit before tax and interest of this segment was Rs28,014 Lakhs as compared to Rs18,438 Lakhs in the previous year. The animal health products segment of the company had a sales turnover of Rs20,458 Lakhs as compared to Rs17,911 Lakhs. Profit before tax and interest was Rs4,444 Lakhs as against Rs3,327 Lakhs in the last year. The oilseed segment registered a sales turnover of Rs1,20,578 Lakhs as compared to Rs1,10,310 Lakhs last year. Profit before tax and interest was Rs7,142 Lakhs as against Rs7,428 Lakhs in the previous year.
The Company has undertaken expansion projects, expansion in oilseed segment by setting up a new solvent extraction plant and vegetable oil refinery and expansion of Specific Pathogen Free eggs capacity by setting up new production unit. With higher capacity utilization and better product mix, the outlook for the year ending March, 2019 appears to be good,barring unforeseen circumstances for the company.
On the financial front, the company’s net sales YoY was up 13.97 per cent and stood at Rs756.2 crore in Q1FY19 as against Rs663.48 crore accrued in the same quarter of the previous year. The PBIDT of the company had grown by 9.62 per cent in the Q1FY19 where the company posted Rs119.08 crore versus Rs108.63 crore in Q1FY18. The profit after tax (PAT) in Q1FY19 went up 36.77 per cent to Rs71.05 crore versus Rs51.95 crore accumulated in Q1FY18. On an annual front, the company’s net sales stood at Rs2688.81 crore in FY18 while in FY17 it was Rs2475.58 crore. The PBIDT too has witnessed a growth of 33 per cent in FY18 and stood at Rs2688.81 crore in FY18 against Rs2475.58 crore in FY17. The PBIDT of the company recorded in FY18 was Rs414.97, up by 33 per cent from Rs311 crore in FY17. The profit after tax (PAT) rose by 60 per cent to Rs199 crore in FY18 as against Rs124.74 crore in FY17. On the valuations front, the company is currently available at a PE multiple of 15.90x. The return on equity (RoE) stood at 32.06 per cent and the return on capital employed stood at (RoCE) stood at 36.17 per cent. The company has reduced debt and has a good consistent profit growth of 52.57 per cent in over 5 years. We would recommend a BUY in the stock keeping in mind all the above given points.