Guide To Stock Investment Decisions This Festive Season
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Come festive season and our spending power suddenly shoots up. Be it buying electronics, electrical, consumer durables products or even furniture, home improvement items or for some, it is even the right time to put up a new coat of paints to let the rooms dazzle keeping in tune with the festivities. All the while when we keep spending money for all these, stocks of the companies producing these items also witness a rise. So why not invest some money during these festive months and get handsome returns when festivities get over. In this report, we make a sincere attempt to identify six stocks including one from the SME sector where you can park some of your hard-earned money and stay invested.
Experts say several factors are expected to drive consumer demand during the months of September till January including soft inflation, stable to soft interest rates, optimism on GST laws being implemented, lower fuel prices and various EMI schemes launched by several finance companies. With good monsoon this year, rural demand is also expected to pick up.
Investors can focus on those stocks which tend to do well during festive seasons. Says Dhruv Desai, Director & COO of Mumbai-based Tradebulls, “Sectors which will get boost during this festive season are travel, eating out, home decor and furnishings, consumer durables and autos.”
Should then an investor add high beta stocks to the portfolio and position himself or herself to benefit from the festive season? It is not that easy and straight forward as one may think. According to Jimeet Modi, CEO of Samco securities, “ As such there is no correlation with the festivals and rise of stock prices of a particular sector or industry. The markets in general behave independently of such events. At best there may be coincidence that may have been observed in the past, but otherwise on merits markets have its own bull bear trajectory. Example, for more than half of the time in previous 10 years Asian Paints had remained in sideways movement during Diwali festivals and at some other times falling, completely independent of festivities.”
Markets can be driven by sentiments in shorter run and the sentiment is expected to be positive in coming festive season. Sector like automobile has been doing well with the S&P BSE Auto index gaining by over 31 per cent in previous year.
S Ranganathan, Head of Research at LKP Securities believe, “With India receiving a normal monsoon after two consecutive years of drought we believe that large cap companies with major revenue share from rural markets like M&M would be key beneficiaries given its market leadership in tractors and farm equipment.
With the 7th Pay Commission and expectations of a rate cut round the corner we believe that large cap names like Hero Motocorp have the ability to report a net profit of Rs35 bn this fiscal and despite trading at 20x forward earnings would attract investor interest on every correction.”
Apart from automobiles sector, the other sectors that gain traction is the furnishing and paints industry during the festive season. On paints industry happening, Modi says, “In 2014, we’ve witnessed unprecedented fall in oil prices and all kind of crude derivatives were also impacted. Paint industry is one of the biggest beneficiary of this fall which is evident from the expanded bottom line resulting out of reduction in raw material prices. The per capita paint consumption in India which is a little over 4 kg is still very low as compared to the developed western nations. Therefore, as the country develops and modernises, the per capita paint consumption is bound to increase”.
Taking stock of market movements, investing in the auto and paints industry seem like a good bet. Taking a long term view while being cautiously optimistic investors can use the euphoria of this festive season to build a robust growth oriented portfolio. Just turn over to check out top picks for this festive season.
Nilesh Shetty
Associate Fund Manager- Equity, Quantum AMC
What is your market outlook for near to medium term? In the longterm, where do you see markets headed?
During the last three years, consumer demand has been fairly suppressed in India. Primarily, the main reason is the fact that you had two successive years of drought. The rural demand has been fairly weak.
An assumption is that this year, with a good monsoon, plus lower interest rate, and pay commission hikes, you should see a consumer demand which you have not seen over the last three years. This is the reason; you had a run up in valuations in a lot of stocks, especially those linked to consumer discretionary spending. If you do not see increase or improvement in demand because the valuations are now already factoring in the improvement, you could have a risk of a downside surprise in company share prices. So, investors have to be careful because valuations are already factoring an improvement in demand and if the demand does not come through, you could at the most be here or you could even slip lower.
In the long run, we are positive about India. Investors have to be careful as to what price they are paying for the growth.
Which are the sectors that typically tend to do well during festive seasons?
Auto sector, consumer electronics, and consumer durables sector are expected to do well. Discretionary spending triggers sales figures. Diwali may not be the best season for buying ACs, but still, AC manufacturers are expected to do better during the upcoming festive season. It's all about sentiments.
One has to check if there is growth year-on-year, as, during the last twothree years, the growth has been fairly muted actually. I think the expectation of growth is already being factored in the share prices.
Furnishing and paint industry also benefits, but again, the quality paint companies in India are priced even more expensive than consumer staples companies, so it never understands those kinds of valuations. I mean, demand will be higher not due to festive reasons, but because at some point the real estate activity should pick up which again has been highly muted for the last few years.
Pankaj Pandey Head of Retail Research ICICI Securities
Q1. In your view normally which sectors tend to do well during festive seasons? How are valuations placed currently in these suggested sectors
Festive season is deemed to be demand booster for sector such as retail, auto, paints and consumer durables. Furthermore, segments such as retail centric banks, NBFC and media also benefit from the festivities which drive their credit growth and advertisement income respectively.
Auto sector continues to be one of the biggest beneficiaries of the festive season, as higher discretionary spend results into higher volume growth especially in the 2W & 4W space. Historically the month of October is one of the strongest months for both 4W & 2W segment as it accounts for ~9.2% & ~9.6% of their annual volumes respectively. Similarly, major electrical goods manufacturers are expected to witness 20%-30% sales growth in the 2016 festive season. Historically, festive months of October & November together, on an average contribute ~25% to annual sales for consumer durables segment. Retail companies also tend to see higher same store sales growth (SSSG) during the festive quarter with the margins being better owing to low proportion of discounted goods during the festive quarter.
Lenders, including NBFCs and retail centric banks, are also poised to witness incremental credit demand. Discount from sellers of retail products and freebies offered by banks also acts as a catalyst inducing higher retail credit demand. In the past, it is seen that approximately the credit growth is higher by 100-400 bps in third quarter compared to average growth for the year.
The festive season bodes well for the media companies (print, broadcast radio etc.) with Q3 alone contributing to ~28-32% of the year's advertisement revenues which are driven by FMCG, Retail and Consumer segments. In addition, the time period is marked by several holidays which serve as an ideal time to release movies benefiting the multiplexes footfalls.
How are valuations placed currently in these suggested sectors?
The above mentioned consumption driven sectors continue to command premium valuation. However, given the strong earnings growth (driven by higher operating leverage) and virtually debt free status coupled with near term catalysts such as good monsoon and implementation of 7th Pay Commission, the current premium valuation are largely justified.
Nitasha Shankar VP & Head of Research YES Securities
Which are the sectors expected to do well during this festive season in your view?
In our opinion the major theme during the festive season this year would be consumption. Favourable demographics and rising per capita income have been the themes that have collectively given rise to and kept alive the consumption driven growth story for India. However, two consecutive years of poor rainfall had led to an absence of rural participation in the story due to rural India's heavy dependence on agriculture. As a result, most of the consumption was skewed towards the urban side. Going forward, consumption is expected to receive a further boost both on the rural side as well as on the urban side. Revival in the rural sector on the back of good monsoons, fillip from the pay-outs related to the 7th Pay Commission and growing per capita incomes, favourable demographics, growing brand consciousness, etc on the urban side would drive growth in consumption. These factors should lead to an increase in the discretionary spending space including automobiles, textiles, appliances, home improvement, etc.
What is your view on automobile sector keeping in view the festive seasons?
Revival in consumption on the rural side should help drive volumes in the entry segment for 2 wheeler companies which forms the largest chunk of business for them. Volumes in this segment have been under pressure as rural demand has remained elusive till now. However, the healthy rainfall should help in a revival on the rural side and therefore to better volumes for the 2 wheeler manufacturers. Within the 2 wheeler space we believe companies that have recently launched and/or are launching new models before/during the festive season would benefit most. In addition to this player with a strong scooter portfolio would also see the benefit of the growing scooterization trend in the country.
The 4-wheeler manufacturers have already seen a pickup in numbers and this trend is expected to pick up further during the festive season as good monsoon and the 7th Pay Commission payouts are expected to contribute towards positive consumer sentiment.
Ramnath Ventakeswaran ,Fund manager - Equity, LIC Mutual Fund
Q2. What are your views on home improvement, furnishing and paints industry in India?
Home improvement segment in India is an under-penetrated segment and can be one of the structural stories from a long term perspective. Some of the organised players have been able to use their industry positions to build competitive barriers-like branding their products, developing efficient supply chains that are difficult to replicate, service centres etc., which will stand them in good stead over the longer term. However, most of these structural drivers are well understood and appear to be factored in the stock prices, this may cap the upside for these stocks in the next few years.
Q3. Which direction do you think markets will take in near to medium term especially during the ensuing festive season?
Markets might consolidate in the near term given the sharp run-up of the past six months and slightly stretched near term valuations. Over the longer term (say around 3 years), cyclical upturn in the economy and firmly rooted investment demand revival will be the critical drivers for the market.
Q4. On valuation front , are you comfortable at current valuations and should investors invest at current juncture?
Valuations appear to be optically stretched at the current level after the rally since the February 2016 lows, however, a key point to underline is that earnings are at a cyclical trough for a large section of the market. Stable economy, incipient signs of a cyclical recovery and not so demanding valuations imply that investors can expect to make decent returns over the next few years.
Asian Paints
BSE CODE: 500820 FV 1 CMP: 1194 VOL : 53911.66
Asian Paints Limited (APL) is the industry leader in the decorative paint segment with ~53% market share and a dealer network of over 40,000 across India. In spite of the competition inching up for Asian Paints with Berger Paints with ~19% and Kansai Nerolac with ~15% market share, in the past six years, APL is able to retain and expand its market share. APL derives ~81% of its top line from the decorative segment while the rest comes from the industrial segment. The international business posted strong growth of 16% led by good demand in its key markets like Middle East, Bangladesh and Ethiopia in previous one year.
The net profit for the company for FY 16 came out to be Rs 1,597.43 crore, an increase of 20 per cent over the net profits declared at Rs 1,327.40 crore for FY15. The total income for the company increased by 9 per cent for FY16 at Rs 12,871.18 crore from Rs 11,835 crore in FY 15. Asian Paints saw improvement in its net profit margins at 12.63 per cent for FY 16 from 11.40 per cent in FY15. The operating profit margins (OPM) for the company stood improved for FY16 at 20.87 per cent versus 18.75 per cent OPMs for FY15.
Economic recovery (albeit at slow pace), increasing urbanisation, higher rural income, brief repainting cycle and hence repainting demand aided with the government’s focus on increasing spending in infrastructure projects could lead to healthy volume growth assuming demand stays intact in tier II & tier III cities. The soft raw material prices may help expand the margins further.
RCI Industries & Technologies Limited
BSE CODE : 537254 FV : Rs.10 CMP: Rs.173 VOL : 49.88
RCI Industries & Technologies, a high growth company engaged in manufacturing of copper wire, lead free Solders, tin-alloy, copper, brass, stainless steel/foils/coils as well as international and domestic trading of non-ferrous metal used in various electricals and industrial applications. The company also trades in scrap, copper scraps, copper and cathodes.
Apart from the metal products, the company also deals in Indian handicrafts specially made of copper and brass. The company is one of the leading artificial jewellery sellers in India. With festivities around, sales of handicrafts and also related products is bound to pick up and thus, adding into the topline of RCI.
On consolidated basis, the company has declared revenues at Rs 983.09 crore in FY15. The revenues were declared at Rs 428.15 for FY14 on a consolidated basis. The profits however showed an impressive jump of over six fold at Rs 6.18 crore in FY15 compared to Rs 1.73 crore in FY14.
The net profit margin shrank for FY15 to 0.25 from 0.41 in FY14. The return on net worth for the company stood at 4.95 for FY15. The EV/EBITDA multiple stood at 10.39 for FY15. The stock remains a good buy at this time even as it recorded an impressive rise of over 2.90 per cent on September 26 when Nifty had fallen by 108.5 points.
Arrow Textile Limited
BSE CODE : 533068 FV Rs.10 CMP 35.90 VOL : 21.34
The company manufactures woven labels, fabric printed labels, elastic and non-elastic tapes. The company remains the preferred choice of many leading Indian brands, both for hosiery products and outer wear. Arrow Textile has an excellent track record when it comes to ‘intensity of innovation’ with around 50 per cent of its business being based on products developed in the past four years. The manufacturing and other core processes are digital.
A shift towards the market of branded ready-made garments, more number of emerging malls and retail industries, more FDI investment opportunities and withdrawal of quota restrictions are all the factors providing growth opportunities to Arrow Textile.
The net profit for the company for FY16 came out at Rs 5.31 crores, an increase of 17 per cent from the previous year's profits of Rs 4.54 crore in FY15. The total income for the company increased by two per cent for FY16 at Rs 49.13 crores from Rs 47.97 crore in FY15. The company saw improvement in net profit margins at 10.82 per cent versus 9.87 per cent for FY15. Operating profit margins for FY16 were 27.53 per cent and for FY15 the operating profit margins were 25.33 per cent. These margins are amongst the best in the industry.
Inox Leisure
BSE CODE : 532706 FV : Rs.10 CMP : Rs.266 VOL : 1287.72
Inox Leisure is the second largest multiplex player in India and with festive season on the cards, the stock can expect to see some momentum in its favour. The industry is getting consolidated with only four main players operational currently viz., PVR, INOX, Carnival and Cinepolis. This consolidation would help players retain and gain market share individually. The consolidation is also expected to enable players to benefit from the Average Ticket price (ATP) hike which is expected to grow at 4 to 4.5 per cent CAGR in coming three to four years. The rise in ATP and spends per head (SPHs) are the key drivers for revenue growth of multiplexes.
With an impressive screen addition pipeline ahead and a strong earnings trajectory the stock looks attractive aided by its distributed presence and growth levers in the form of F&B revenues. Inox has steady other income component from virtual print fees, rental income and income from online ticketing.
Advertisement revenues are expected to grow at 14.9 per cent CAGR in coming years. The advertisement revenue historically has grown at 32.9 per cent CAGR from FY12-16 from 29.2 crore to 91 crore. Inox, a dominant player in the multiplex space has a 19 per cent market share of multiplex screens in India approximately 8 per cent share of domestic box office collections. EBITDA margins are expected to be expanding for the company in the coming years. The net profit margins for the company expanded impressively for FY15 at 5.82 from 2.59 in FY14. The total revenues for FY16 were at Rs 1,337.01 crore against Rs 1,025 crore for FY15. The net profits for FY16 were declared at Rs 77 crore Vs Rs 20.04 crore for FY15.
Hero Moto Corp
BSE CODE : 500182 FV : Rs.2 CMP : Rs.3451 VOL : 40402.44
Hero Moto Corp on back of good monsoon is an excellent pick expected to do well due to demand revival in rural markets like Rajasthan, Bihar, MP and UP. Hero’s good performance in fast growing segments i.e scooters and premium bikes and exports augur well for the scrip. About 9 to 10 per cent CAGR increase in the volumes over coming two to three years makes it a favourable buy.
The Q1FY17 EBITDA for Hero Motocorp’s at Rs 12.3 bn , up by almost 18 per cent indicates good momentum in business on ground however the gross margins decline by 109 bps QoQ remains a concern. The margin drop was due to higher commodity prices and lower mix of spare sales. Its PAT came out at Rs 8.8 bn, up 18 per cent YoY aided by higher other income.
With long term margin to stay at healthy 14-16 per cent and strong demand across segments the stock can do well with festive season just around the corner. The urban demand is expected to grow in double digit and there is a strong traction in the 125cc segment. Better demand environment is expected to soak up the price hike for Hero Motocorp.
The revenues for FY16 were declared at Rs 285993 Mn up by 3.8 per cent YoY. The Adjusted PAT for FY16 was declared at Rs 31,322 Mn up by almost 24.3 per cent YoY.
Rising rural demand aided by good monsoon and festive season around hero moto corp is expected to do well.
Bajaj Finserv
BSE CODE 532978 FV : 5 CMP : 3272 VOL 18794.82
Bajaj Finserv is a financial conglomerate engaged in life insurance, general insurance, consumer finance and other financial products. The portfolio of the company includes 74% in the two insurance companies viz. Bajaj Allianz Life Insurance Company (BALIC) and Bajaj Allianz General Insurance Company (BAGIC), 50% holding in Bajaj Allianz Financial Distributors, 57.6% in Bajaj Finance and 100% holding in Bajaj Financial Solutions. Apart from financial services, the company has an operational wind energy asset.
The company has delivered a growth of approximately 6.6 per cent CAGR in FY10-16 from Rs 13,997 crore to 20,519 crore. Insurance has contributed to almost 49 per cent towards revenues while Bajaj Finance has contributed approximately 35 per cent in FY16. Bajaj Finance is the most profitable business for finserv with PAT growing at 39 per cent CAGR in FY10-16 to Rs 1,279 crore in FY16. Net Interest Income (NII) margins CAGR have been 36 per cent in FY10-15. NII traction has been maintained by the company owing to strong traction on the advances front of 51 per cent CAGR in the past five years and 36 per cent CAGR in the past three years. Consumer finance segment has done well for the company.
The company enjoys a leadership position in under penetrated & growing segments like CD financing, lifestyle product financing, two-wheeler financing, LAP, etc. These growth oriented segments accounts for approximately 50 per cent of its bajaj finserv portfolio. General insurance premium growth also remained healthy at 18.1 per cent YOY to Rs 1,730 crore. On consolidated basis the commercial finance business continued to do well with 35.5 per cent YoY growth in topline at rs 1,956 crore.
Strong business model with a niche in general insurance, superior return ratios compared with peers and aided by return on equity in excess of 24 per cent, the stock offers good investment rationale with festive season expected to boost the demand for consumer durables portfolio.