Your Diwali Portfolio

Diwali to Diwali, Indian growth story continues........

Some Major Blips Notwithstanding!

Almost 188 stocks more than doubled since previous Diwali. Tanay Loya and Yogesh Supekar find out how markets performed from previous Diwali to this Diwali, while DSIJ Research Team comes up with top 7 Diwali Picks.

As Diwali approaches this year, it is time to take stock of how the markets behaved over the last one year. In this story, we will be discussing and dissecting market performance from previous Diwali to this Diwali, and we'll be also looking at the market outlook going forward.

Global markets are trading at record highs and show no signs of fatigue. In fact, in the US, if the October month ends in the green for S&P 500 it will be its longest streak of gains over the last 90 years. Such has been the momentum in global equities. Indian markets have been one of the beneficiaries of the strong momentum in the global equity markets. The strong recovery in the global economy aided by abundant liquidity are pushing share prices higher globally.

GLOBAL MACRO ECONOMY OUTLOOK 

According to the IMF, the global output is projected to grow 3.5 per cent in 2017 and 3.6 per cent in 2018. The Asian business powerhouse Japan's growth projections have been revised upwards along with the Euro area by IMF. China's economic growth projection is also revised upwards on expectation of continuous fiscal support.

The global economy is recovering and there are signs of continued strengthening in global business activity. There is visible growth in global trade and industrial production rates remained above the 2015-16 rates






INDIAN ECONOMY OUTLOOK 

Indian economy may have slowed down recently with the Q1FY18 GDP growth coming in at 5.7 per cent as against 7.9 per cent in the same period previous year, but the future for the fastest growing economy in the world is bright.

The growth prospects are wonderfully placed in favour of India, despite several key challenges. The investment climate will improve once the consumption in India shows steady growth. The expected fiscal stimulus, export growth revival owing to steady global economic growth and consumption growth in India are working in favour of GDP growth in India. Once the investment cycle gets revived, the Indian economy will be on superlative growth trajectory.

The recently released PMI data suggest decent growth in the services sector. According to a business report, India 's services companies broke their contraction streak in September as the sector regained its demand and pushed services companies to raise hiring at the fastest rate in over 6-year time period.

The services companies had witnessed a contraction in their operations for the last two consecutive months.

A sub-index on new business that takes into account both domestic and foreign demand rose from 47.3 in August to 51.1 in September. The composite PMI, which measures both manufacturing and services activity, regained its level above the break-even at 51.1 in September from 49.0 in August 2017.




While the export sector has struggled recently in India and is facing issues related to GST, robust growth is seen in exports of engineering goods, gems and jewellery and readymade garments in the previous two quarters.

LOWER INTEREST RATE:-

One of the highlights of the Indian economic performance when we look at the period from the previous Diwali to this Diwali has been "benign inflation". Even though the inflation lately has shown some uptick, the headline inflation is below the five-year average of 6.7 per cent.

What inflation control has managed to do is to keep interest rates low in the economy. With such low interest rates sustained for several quarters now, we can say that we are in a low interest rate regime. Economists might argue that more needs to be done on interest rate front and many a capitalist would like to see further rate cuts, but equity markets seem to be happy with the current interest rate policy.

Indian economy and corporate India stand to benefit from the lower interest regime and it can be expected that the lower interest rate regime will stay much longer in India. Lower interest rates act as a great incentive for equity investors.


Inflation has plunged to an all-time low to 1.54% (YoY) in June and the sticky core inflation also lowered to 3.5%.

 
RURAL ECONOMY ON THE REVIVAL PATH

Due to poor monsoon in FY15 and FY16, followed by demonetisation in FY17, the rural economy was going through a lean phase. However, the normal monsoon season in FY17 has brought some relief. The current year has registered a 6 per cent deficit in monsoon, which is expected to be compensated by the southwest monsoon. Even if the southwest monsoon fails to live up to the expectations, a drought-like situation has been averted this year. The decent monsoon this year will certainly help reshape the rural economy. Moreover, the recent farm loan waivers by several state governments and the best MSP hikes in the last five years will further accelerate the growth of rural economy. A strong rural economy will further increase demand in consumption sectors such as FMCG, durables, fertilisers, automobiles, etc.

EQUITY MARKET OUTLOOK :-

After touching record highs, the Indian equity markets may consolidate in the near term, before taking its direction further northwards. Going forward, the most important determinant for the markets to move up will be the earnings growth of corporate India. The earnings growth has been disappointing over the last several quarters and it is expected to recover swiftly in couple of quarters from now. The domestic fund flows into equities is expected to grow consistently. The channelising of savings into various investments avenues is leading to surge in fund flows into equity markets. The MFs' AUM rose 7.6 per cent in September quarter to a record high of Rs21 lakh crore, as per the data published by Association of Mutual Funds of India (AMFI). This growth in AUM suggests that the AUM has doubled in a short span of three years. In May 2014, the AUM had crossed the magic figure of Rs10 lakh crore for the first time.

The secondary market performance coupled with the vibrant IPO market have enticed investors into taking incremental exposure in equities in 2017. Superlative performance of the IPO market has even initiated first time investors into the markets. This trend is expected to continue going forward with several quality issues slated to hit the markets in the coming months.

From previous Diwali to this Diwali the outperformance has come from the sectors that were least expected to outperform. Realty index along with metal index outperformed the markets over the last one year.

Sensex gained 13.94 per cent since previous Diwali. Mid-cap index outperformed the major benchmark indices and delivered return of 16.17 per cent. Small-cap index was the best performing market-cap based index. Small-cap index was up by 20.38 per cent since previous Diwali. Clearly, the last one year belonged to small-cap stocks. The outperformance of small-cap stocks continues to surprise investors as the small-caps have been outperforming major benchmark indices for more than five years now. Says Viraj Mehta, Head PMS & Fund Manager, Equirus Capital, "Since Mar 31, 2012, Nifty Small-cap 100 has increased at a CAGR of 17% vs. Nifty's growth at 12.3%. This is a substantial outperformance of a period of five-and-half years. This outperformance was mainly driven by P/E re-rating. Nifty Small-cap's P/E has increased from 11.6x at the end of FY12 to 46.5x TTM earnings at present as compared to Nifty's P/E expansion from 15.3x to 23.2x over the same period." Mehta further adds, "With increase in economic activity as the effects of GST and demonetisation wear off, the capacity utilisation of small-caps will increase leading to margin expansion and rapid earnings growth. Hence, it makes sense to invest in small-cap companies which are poised to post substantial growth in earnings over the coming years at reasonable prices.

In the US markets, studies have proved that small-caps, even though more volatile, outperform large cap peers substantially in the long run."

Indian equity markets had a rough ride immediately after Diwali previous year as two major events took market participants by surprise. The unexpected US presidential election outcome where Donald Trump emerged victorious and the historical decision of banning notes of Rs500 and Rs1000 denomination in India created shock waves in the equity markets.

The markets showed amazing resilience, even while recovering from the lows in November 2016. Indian benchmark indices on a YTD (2017) basis stood as the world beating indices, thus reflecting the inherent strength of the markets.

Overall, equity investors in India have had a gala time since previous Diwali. Almost 55 per cent of the stocks listed on the BSE managed to post positive returns, while 45.89 per cent of the listed stocks delivered negative returns in the last one year since Diwali.

As many as 188 companies listed on the BSE delivered returns in excess of 100 per cent, the highest going up to almost 936 per cent in one year. There were at least 298 companies that gained between 50 to 100 per cent in the last one year. The number is higher for those stocks that delivered returns in the range of 25- 50 per cent. Exactly 323 companies increased investors wealth in the range of 25-50 per cent. What this indicates is that investors had a large set of stocks to put their bets on to improve their portfolio performance.

Going ahead, markets may continue its strong momentum. Says Ritesh Ashar, Chief Strategy Officer, KIFS Trade Capital, "Sensex is headed towards 38,000-mark by next Diwali. Strong demand by domestic institutional investors (DIIs) have been considered key factors in determining potential returns on Indian equities. The net demand for Indian equities is rising rapidly, which implies potential for a valuation overshoot."

SENSEX STOCKS PERFORMANCE 

Within the Sensex, Tata Steel turned out to be the biggest gainer in the index, registering a gain of 57.7 per cent in one year. RIL, HLL, HDFC Bank and Maruti Suzuki were among the top five index gainers during the period. Lupin, Sun Pharma and Dr Reddy's Laboratories were among the top Sensex losers, followed by Tata Motors and Coal India. This underperformance shows that pharma stocks were a major drag on the Sensex performance.







GLOBAL 3MARKET PERFORMANCE In the last one year, Brazil was the top performing equity market, giving a 29.4 per cent return. In spite of the political uncertainty in Europe in the last one year, the European region was among the best performers globally, with Germany and France delivering 22.8 per cent and 19.2 per cent returns, respectively. However, as a consequence of Brexit, the UK market fared poorly, giving moderate return of 5.6 per cent to its investors. The global growth engines, i.e China and India, did not impress investors much, as these growth-oriented markets could not match the US market performance. The US markets generated 17.9 per cent returns over the last one year.

Indian markets continue to trade at a premium as compared to their emerging market peers. Sensex is trading at 22.11x to its earnings while China trades at 16.82x, Brazil trades at 18.27 x and Russia at 7.33x. Nifty is trading at a 10 per cent premium to its 5 years average valuation.

CONCLUSION 

Indian markets have underperformed the US markets if we consider one-year period. This happened as global investors chose safety over growth in the previous year owing to political uncertainties. Going forward, it does look like the global investors may chose to look beyond safety and chase growth.

More funds are expected to flow into emerging markets in the coming years as the emerging markets are undoubtedly going to be the growth engines for the world economy. Indian equity markets, though slightly relatively overvalued when compared to the emerging market peers, are expected to enjoy considerable amount of premium.

The government's expansionary policies coupled with rise in consumption in India augurs well for the Indian markets. The exports can be expected to pick up due to China and India, did not impress investors much, as these growth-oriented markets could not match the US market performance. The US markets generated 17.9 per cent returns over the last one yearsteady global economic growth. Owing to improvement in the overall health in the economy, the earning of corporates can be expected to see some revival which will act as a trigger for the markets to enter into the bull orbit once again.

Once the earnings growth starts to kick-in, the Indian markets would be irresistible for the FIIs. The investment cycle can also turn positive once the economy starts delivering.

It is usually observed that big uptrends in equity markets coincide with stable inflationary environment. There is a good probability that the inflation will remain within an acceptable range for the RBI.

The global economic cycle is entering its strongest phase and there is a synchronous growth witnessed in developed markets and emerging markets after almost a decade. Indian exports stand to gain immensely due to this synchronous global growth, which is expected to boost global trade.

Benign interest rate environment in India, fiscal stimulus expected to be provided by the current government, expected improvement in exports for Indian companies, growth in consumption and consistent domestic fund flows into equities are some of the silver linings for the long term equity investors. Another good year of investing is on the cards for those who are willing to invest regularly and can stay invested for the long term.

You can refer to our ❝Top Seven Diwali Picks❞ which are meticulously researched stocks by DSIJ research team. These seven stocks represent different industries and in our view will outperform the key benchmark index — Sensex. In bull market scenario that we are in currently, a concentrated portfolio approach works best and hence investors can construct a solid portfolio with well researched 7 stocks as mentioned in coming pages.

Review Of Our Previous Diwali Portfolios

Our Diwali portfolio has been outperforming Sensex year on year for several years now. Over the past five years, the S&P BSE Sensex has witnessed a growth of over 13.46% while the bunch of stocks that we recommended witnessed a jump of 27.22 per cent in the corresponding period, surpassing the gains from the major Indian benchmark index.

Among the set of 2016 Diwali recommendations, four stocks, including Prime Focus Limited, RBL Bank, Indiabulls Housing Finance and TVS Motor Company recorded excellent returns. Prime Focus Limited with a return of 62.22 per cent became the top most gaining stock among the recommended set. While RBL Bank, Indiabulls Housing Finance and TVS Motor Company recorded a return of 35.86 per cent, 33.62 per cent and 31.75 per cent, respectively.

However, UltraTech Cement, IPCA Laboratories and Manpasand Beverages could not perform up to the expectations and estimates of the analysts due to various unprecedented reasons.












TOP SEVEN DIWALI PICKS

ASHOKA BUILDCON
BSE CODE :533271
Face Value : Rs.5 CMP Rs189
Market Cap 1,522.97 F F (Cr.)

 
Ashoka Buildcon Limited is an infrastructure development company based in India. The company operates through three segments, including construction and contract related activities; BOT projects and sales of goods. Its construction and contract-related activities segment comprises of execution of engineering and construction projects to provide solutions in civil and electrical engineering to core or infrastructure sectors. The company's BOT activity relates to execution of projects on a long term basis, consisting of development, operation and maintenance of infrastructure facility. The sales of goods segment involves activities concerning the sales of ready mix concrete (RMC), plain cement concrete (PCC) poles, software and bitumen. The company has projects under construction in the states of Tamil Nadu, Karnataka, Odisha and West Bengal.

On the financial front, Ashoka Buidcon witnessed rise in its net sales by 54.33 per cent to Rs722.82 crore in the first quarter of FY18 as against Rs468.35 crore in Q1FY17. The PBIDT of the company grew 53.31 per cent to Rs97.50 crore in Q1FY18 as against Rs63.60 crore in Q1FY17. The profit after tax of the company also increased by over 101 per cent to Ra 61.94 crore in the first quarter of FY18 as against Rs30.77 crore in the first quarter of the previous fiscal.

On an annual basis, the net sales grew 5.80 per cent to Rs2,029.52 crore in FY17 from Rs1,918.34 crore in the previous fiscal. The company's PBIDT grew 4.77 per cent to Rs259.66 crore in FY17 from Rs247.84 crore in the previous fiscal. The profit after tax of the company grew 32.95 per cent to Rs184.22 crore in FY17 from Rs138.56 crore in FY16.

BALKRISHNA INDUSTRIES
BSE CODE :502355
Face Value : Rs.2
CMP Rs1688.50
Market Cap 6,862.45 F F (Cr.)

Balkrishna Industries Limited is engaged in the business of pneumatic tires. The company provides tyres, tubes and tyre flaps. It focuses on the production of a range of off-highway tyres (OHT). The tyres are majorly manufactured for agricultural, industrial and construction, earthmover and port, mining, forestry, lawn and garden and all-terrain vehicles.

The company also offers tyres for backhoe loader, compact dumper, compactor, container handler, excavator, mobile home and skid steer. It provides tyres for dozer, haul train, load haul dump (LHD) and underground mining vehicles.

On the financial front, Balkrishna Industries witnessed a 15.76 per cent increase in its net sales to Rs3,788.30 crore in the first quarter of FY18, as against Rs3,272.52 crore in Q1FY17. The PBIDT of the company grew 35.04 per cent to Rs1,131.86 crore in Q1FY18 as against Rs838.14 crore in Q1FY17. The profit after tax of the company increased 63.06 per cent to Rs715.14 crore in the first quarter of FY18 against Rs438.57 crore in the first quarter of the previous fiscal.

On an annual basis, the net sales grew 15.76 per cent to Rs3,788.30 crore in FY17 from Rs3,272.52 crore in the previous fiscal. The company's PBIDT grew 35.04 per cent to Rs1,131.86 crore in FY17 from Rs838.14 crore in the previous fiscal. The profit after tax of the company grew 63.06 per cent to Rs715.14 crore in FY17 from Rs438.57 crore in FY16.

DR LAL PATHLABS
BSE CODE :539524
Face Value : Rs.10 CMP Rs768.65
Market Cap 768.64 F F (Cr.)

Dr Lal PathLabs is one of the renowned diagnostic healthcare services companies in India. The company has an increasing presence with an already established wide network of diagnostic healthcare centres. The company offers over 3,368 diagnostic and related healthcare tests and services prescribed by physicians in India. The company has a qualified team of 147 pathologists, 8 radiologists, 13 microbiologists, 5 biochemists as well as 11 specialists.

The company has a growing presence across India and also operates labs and diagnostic centres in Saudi Arabia, UAE, Nigeria, Bangladesh and Sri Lanka, among others. Since April 2016, the company has set up 17 new labs, 200 PSCs and about 5021 active pick-up points in the country. The company's labs under hospital lab management contracts have increased to 22 in the current fiscal.

On the financial front, Dr Lal Path Labs witnessed a 12.10 per cent increase in its net sales to Rs241.80 crore in the first quarter of FY18 on a year-on-year basis. The PBIDT of the company grew 8.73 per cent to Rs63.50 crore in Q1FY18 as against Rs58.40 crore in Q1FY17. The profit after tax of the company increased 11.37 per cent to Rs43.10 crore in the first quarter of FY18 as against Rs38.70 crore in the first quarter of the previous fiscal.

On an annual basis, Dr Lal Path Labs witnessed a rise of 15.22 per cent in its net sales to Rs881.87 crore in FY17 as against Rs765.40 crore in FY16. The PBIDT of the company grew 12.38 per cent to Rs229.09 crore in FY17 as against Rs203.85 crore in FY16. The profit after tax of the company increased 17.06 per cent to Rs147.21 crore in FY17 as against Rs125.76 crore in the previous fiscal.

HINDALCO INDUSTRIES
BSE CODE :500440
Face Value : Rs.1
CMP Rs251.60
Market Cap 34,998.52 F F (Cr.)

Hindalco Industries Limited is engaged in the manufacture of aluminium and aluminium products, as well as copper and copper products. The company operates in several segments, including aluminium, and copper, gold and silver products. The company's geographic segments include India and the rest of the world. The company's product portfolio includes aluminium ingots/ rolled products, copper cathodes and concast copper rods. The company's renowned brands include Hindalco extrusions, Maxloader, Eternia, Everlast, Freshwrapp, Superwrap and Birla Balwan.

On the financial front, Hindalco Industries recorded an increase in its net sales by 27.55 per cent to Rs10,407.04 crore in the first quarter of FY18 as against Rs8,159.31 crore in Q1FY17. The PBIDT of the company rose 2.05 per cent to Rs1,147.72 crore in Q1FY18 as against Rs1,124.68 crore in Q1FY17. However, the profit after tax of the company decreased 1.59 per cent to Rs289.60 crore in the first quarter of FY18, as against the first quarter of the previous fiscal.

On an annual basis, the net sales grew 7.27 per cent to Rs 39,383.12 crore in FY17 from Rs 36,713.05 crore in the previous fiscal. The company's PBIDT grew 43.86 per cent to Rs 4,813.52 crore in FY17 from Rs 3,346.07 crore in the previous fiscal. The profit after tax of the company grew 180.98 per cent to Rs 1,556.39 crore in FY17 from Rs 553.91 crore in FY16.

KARNATAKA BANK
BSE CODE :532652
Face Value : Rs.10
CMP Rs147.35
Market Cap 4,164.22 F F (Cr.)

Karnataka Bank Limited is an Indian banking company which provides a range of banking and financial services, including retail, corporate banking and para-banking activities in addition to treasury and foreign exchange business. The bank operates in four segments including treasury, corporate/wholesale banking, retail banking and other banking operations. Its products and services comprise of borrowing facilities, deposits, providing returns on funds and helping with overseas transactions.

The bank offers business banking services, such as working capital finance, term loans and business finance products. It provides personal banking services; loans, including Apna Ghar home loans and Varthak loans; deposit products, such as Soulabhya deposit and cumulative deposit; mobile banking, and internet banking. The bank nearly has 2,003 service outlets, over 725 branches and over three extension counters in over 20 states and two Union territories.

On the financial front, Karnataka Bank witnessed a 5.55 per cent hike in its interest earned to Rs1,330.54 crore in the first quarter of FY18 on a year-on-year basis. The operating profit of the bank grew 18.24 per cent to Rs309.70 crore in Q1FY18 as against Rs261.92 crore in Q1FY17. The profit after tax of the company increased 10.13 per cent to Rs133.85 crore in the first quarter of FY18 as against Rs121.54 crore in the first quarter of the previous fiscal.

On an annual basis, Karnataka Bank witnessed a rise of 3.87 per cent in the interest earned to Rs5,185.40 crore in FY17 as compared to Rs4,992.21 crore in FY16. The operating profit of the company grew 16.53 per cent to Rs995.80 crore in FY17 against Rs854.53 crore in FY16. The profit after tax of the company increased 8.90 per cent to Rs452.26 crore in FY17 as against Rs415.29 crore in the previous fiscal.

PRISM CEMENT
BSE CODE :500338
Face Value : Rs.10
CMP Rs108.60
Market Cap 1,366.61 F F (Cr.)

Prism Cement Limited is a building materials company with interest in portland cement, tiles, bathroom and kitchen (TBK) and ready mixed concrete (RMC). The company operates in segments concerning cement, TBK, RMC and insurance. The company has three divisions, namely Prism Cement, H&R Johnson (India) (HRJ) and RMC Readymix (India). The company manufactures Portland Pozzolana Cement (PPC) under the brand name Champion, Champion Plus, Hi-Tech and DuraTech. HRJ operates in TBK segment, providing end-to-end solutions of tiles, sanitary ware, bath fittings, kitchens and engineered marble and quartz. RMC Readymix (India) is ready mix concrete manufacturer. It also offers various concretes, including Enviroprotectcrete, FRCcrete, Thermocrete, Dyecrete and Perviouscrete.

On the financial front, Prism Cements witnessed 1.94 per cent increase in its net sales to Rs1,433.57 crore in the first quarter of FY18 on a year-on-year basis. The PBIDT of the company declined 20.35 per cent to Rs78.45 crore in Q1FY18, as against Rs98.49 crore in Q1FY17. The profit after tax of the company increased 6.65 per cent to Rs16.69 crore in the first quarter of FY18, compared to Rs15.65 crore in the first quarter of the previous fiscal.

On an annual basis, Prism Cements witnessed a slight decline of 3.96 per cent in its net sales to Rs5,444.92 crore in FY17 as against Rs5,669.47 crore in FY16. The PBIDT of the company grew 15.46 per cent to 281.06 crore in FY17 as against Rs243.43 crore in FY16. The profit after tax of the company increased 115.91 per cent to Rs17.51 crore in FY17 as against Rs8.11 crore in the previous fiscal.

RALLIS INDIA
BSE CODE :500355
Face Value : Rs.1
CMP Rs237.05
Market Cap 2,304.94 F F (Cr.)

Rallis India Limited is engaged in the business of manufacturing and marketing agriculture inputs. The company's manufacturing facilities are located in India while it sells its products in India as well as abroad. The company operates in several segments, the most important out of all of them being agri-inputs and polymer . The agri-inputs segment comprises of pesticides, plant growth nutrients (PGN) and seeds. The company's non-pesticide portfolio consists of agri services.

The company also offers products for crop protection, such as fungicides, including Contaf, Contaf Plus, Master and Fujione; weedicides, including Fateh, Tata Metri, Tata Panida, and insecticides, including Tata Mida, Reeva, Asataf and Manik. The company offers a variety of categories of products, including hybrid maize, hybrid paddy, hybrid pearl millet, mustard and wheat.

On the financial front, Rallis India witnessed a slight decline in its net sales by 4.75 per cent to Rs264.76 crore in the first quarter of FY18 as against Rs278 crore in Q1FY17. The PBIDT of the company slumped 66.85 per cent to Rs8.44 crore in Q1FY18, as against Rs25.46 crore in Q1FY17. The profit after tax of the company also got reduced by over 99 per cent to Rs1.13 crore in the first quarter of FY18 as against Rs126.68 crore in the first quarter of the previous fiscal.

However, on an annual basis, the net sales grew 8.54 per cent to Rs1,505.17 crore in FY17 from Rs1,386 crore in the previous fiscal. The company's PBIDT grew 13.95 per cent to Rs235.03 crore in FY17 from Rs206.25 crore in the previous fiscal. The profit after tax of the company grew 110.90 per cent to Rs266.03 crore in FY17 from Rs126.14 crore in FY16.