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Published on: Sept. 26, 2022, 10:21 a.m.
Gems across Business Cycles
  • Gems aplenty, spot and pick them

By Daksesh Parikh and Sunil Damania

There are certain companies which one can safely hold in one’s portfolio as they can withstand adverse pressures in the economy. They may not rise as fast, but they will not only protect one’s capital but also ensure a steady growth over a long period of time. While during a downturn one is tempted to buy stocks which have fallen sharply from their 52-week highs in a bull run, such temptations are to be avoided. 

Large caps should form a large portion of your portfolio allocation strategy with midcap and small caps should not be more than 25 per cent. A crisis should be treated as an opportunity as it gives one a chance to get quality stocks of good management at reasonable rates. 

While the US economy going into recession has instilled fear of recession across other economies, India may not go into a recession. A slowdown yes, but certainly not a recession as is normally talked about in the West. India is a consumption-led economy with internal consumption accounting for the bulk of goods produced. 

Exports and imports account for 33 per cent of the GDP. While no country can remain unscathed by recession in our major partner countries, India will be a little less touched by this. 

Business India has picked up a few companies which can perform across cycles

  • HDFC

    HDFC

HDFC

Merger will make it the largest bank

Banking and financial companies will be at the forefront during an upcycle. HDFC, post its merger with HDFC Bank, will become a sizeable bank and the combined market cap which is around Rs13 lakh crore will easily go up as it pursues scale to become a bank of global size. Secondly, in good times or bad people will buy houses, albeit in varying quantity.

The merged entity will be in a better position to increase the share of mortgage finance. There are several other companies in the group which will be listed in due course, unlocking value for its shareholders. For every 25 shares held in HDFC a shareholder will receive 42 shares of HDFC Bank. There is still a small arbitrage window in favour of HDFC shares.

  • Cipla

    Cipla

Cipla Industries (CMP Rs1,035 )

India accounts for 45 per cent of its total revenues of Rs21,763 crore (annual consolidated figures for FY22). Fifty-five per cent comes from exports. The USA accounts for a fifth of Cipla’s revenues and it is amongst the top 10 players by prescription. It is the third largest player by prescription in South Africa. It is also India’s second largest exporter of medicines in emerging markets.

The strengthening of the rupee as also higher expected sales due to downtrading of medicines in a slowdown augur well for Cipla over the next few years. With rising inflation people will look at good generics which sell for reasonable prices as compared with patented drugs. Cipla also has a strong pipeline of products in peptides.

In early September the company got US FDA approval for its cancer generic drug Lenalidomide to be produced in different formulations. The company’s policy of focussing on producing complex drugs will stand it in good stead.

  • Tata Steel

    Tata Steel

Tata Steel (CMP Rs104)

If one is betting on the Indian economy standing out during a global recession and attracting investors, one should look at traditional companies in the steel, copper, aluminium and cement sectors. All are infrastructure companies and sooner rather than later, these companies will be playing a major part in allowing India to become a $5 trillion economy. 

Globally also, governments will have to continue to pump in money into infrastructure to generate employment. In India Tata Steel looks attractive. At a consolidated levels it will be amongst the largest profit generators at Rs63,830 crore. It caters to almost all types of sectors ranging from construction, railways and automobiles to industrial and general engineering. 

The company is also looking at new materials. It has set up a 100 mtpa graphene plant and is looking at new materials used in medical field (dentistry and others). An acknowledged leader in the country Tata’s 2030 blueprint plan envisages becoming a cost-effective global leader and attaining leadership in adjacent businesses (new materials, services and solutions and commercial mining).

  • ITC

    ITC

ITC (CMP: Rs345)

ITC posted robust returns of around 60 per cent in 2022 despite the intense volatility and we expect it to continue the uptrend. Promising growth prospects from the cigarette business, which accounts for a major share of revenue, is a green flag for the company. Cigarette volume in the second half of FY22 surpassed pre-pandemic levels and will continue to grow, reflecting the retrieval of share from the illicit trade. The Indian Government not increasing taxes on cigarettes will also aid the shift towards sales for the legal cigarette industry.

Out of the total tobacco consumption in India, the legal cigarette industry accounts for around 8 per cent. Another supporting factor for ITC is the demerger of businesses into separate listed entities to unlock value for its shareholders. The demerger of the hotel business was recently confirmed by a top official.

While the company already has six brands under the Rs1,000 crore-plus club they plan to add a few more to that group. Aashirvaad is at Rs7,500 crore and Sunfeast at Rs4,500 crore, as recently mentioned by Chairman Sanjiv Puri.

The financials clearly show that despite the ongoing uncertainties, the company portrayed a robust performance in the recent quarters and we believe it will reiterate the same in the quarters ahead.

  • Cera Sanitaryware

    Cera Sanitaryware

Cera Sanitaryware (CMP: Rs5,771)

Cera Sanitaryware Ltd is India’s number one sanitary ware and number two faucet-ware player and is growing faster than the industry in both market segments, which account for 89 per cent of Cera’s overall revenues. 

Typically, corporate governance is an issue with players from within the house improvement segment, but not Cera. Also, most companies in this industry have higher borrowing while Cera Sanitaryware has no debt. 

The company expanded the faucet-ware capacity from 1.8 lakhs in HIFY22 to 3 lakhs per month in July 2022 without any capex, and they plan to push it to 4 lakhs per month by June 2023, which clearly showing the management’s ability to expand and effectively sweat their assets. 

The management has projected their turnover to double in the next 40 months. The company has not released any sales target for FY23. But based on hints given in the con-call post-June numbers, the company might achieve a sale of Rs1,800 crore turnover and expand EBITDA by 50 to 75 bps over and above the FY22 figures. 

In FY22, Cera Sanitaryware reported its highest sales, operating profit, and net profit figures in its history, and we believe they will surpass these numbers in FY23.

  • Tube Investments

    Tube Investments

Tube Investments (CMP: Rs2,761)

Tube Investments is the first company from India to manufacture optical lenses for automobiles. Only four countries in the world were into manufacturing optical lenses – Taiwan, China, Korea and Japan, and it has a global business size of $4-5 billion. Now, even India has joined this list. 

The company’s constant attempts to increase its presence in the EV sector is another positive factor, considering the boom in the segment. TI Clean Mobility (TCM), a subsidiary of Tube Investments of India made its debut in the EV space with the launch of the Montra Electric 3W Auto in Chennai.

After branching out in the electric three-wheeler business, it now also plans to launch electric heavy commercial vehicles and tractors. The company also vowed to invest about Rs1,000 crore for expansion in the said sector.

Tube Investments also enjoys a healthy institutional stake of over 40 per cent which is also a supportive factor. The company also has its footmarks into the capital goods sector and we expect the demand to remain robust in the years ahead.

With improvement in chip availability, a bounce-back in the economy and easing commodity prices, the auto sector might continue with its solid performance in the quarters ahead which carves out a favourable outlook for the company.

  • Bharat Dynamics

    Bharat Dynamics

BDL (Bharat Dynamics) (CMP: Rs929)

The defence sector has been buzzing all of 2022. BDL posted solid returns of 137 per cent YTD and we expect the company to continue to perform well in the quarters ahead. 

BDL is engaged in manufacturing missiles and allied defence equipment and serves most of it to the Indian Armed Forces. The company’s order book stood at Rs13,000 crore in July 2022 and they expect an order book Rs25,000 crore in the next 2 years as mentioned in the FY22 report.

Government restrictions on imports to boost self-reliance have opened the gates for BDL products which will ensure that the order book remains healthy along with promising growth prospects.

The government of India also plans to increase defence exports by 3x in the next three years. This will help Bharat Dynamics increase its presence in the export markets. Solid domestic demand along with improving global presence makes this company a safe bet in times ahead.

Moreover, the company operates in a recession-free industry which can be a positive sign considering the ongoing scenario.

  • Blue Dart Express

    Blue Dart Express

Blue Dart Express (CMP: Rs8,785)

Despite global uncertainties, Blue Dart Express has continued to perform well in 2022 and we expect it will continue to be a good bet in times ahead. 

With the resumption in domestic activities and a high growth potential in India in the years ahead, the domestic transport industry is expected to expand substantially which carves a favourable outlook for the logistics major. 

Further supporting the companies in this sector was the recently launched Logistics Policy by PM Narendra Modi which aims to curb transport-related challenges, and reduce the cost for logistics companies. Logistic costs in India are high, at 14-15 per cent and the focus will be to bring this down to a single digit. As India is one of the top emerging markets, the New Logistics Policy will work as driving and guiding force.

The company also aims to improve its geographic presence amid higher contributions from the ground express segment, which augurs well for the company.

Even the financials of the company look promising with little fall in margins despite the steep hike in fuel prices. Net profit in the June quarter was up by 280 per cent vs the same quarter last year.

(Financial data source: Marketsmojo.com)

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