“The environment for investment is good,” says Nilesh Shah, MD, Kotak Mahindra Mutual Fund. “India is standing out like an oasis in the global desert where uncertainty prevails.” Shah points out that investments from both public and private sector are happening. Inflation may soon come in line with RBI projections in a few months.

Consumption was impacted during October 2021 to September 2022. Listed FMCG volume-wise sales were low. This year, we could well see a volume rise as also a price rise. The rising trade deficit is indeed a worry. However, Shah feels that on balance, India is in much better shape to ride these uncertainties than many other countries. It is well on its way to becoming the third largest economy by 2028-2030.

Shah agrees that all this positivity has been captured in the market. “While one year forecast of earnings may reflect in the market looking expensive over a one- year period, in 5 years we may look the cheapest.”  Growth (in EPS), Governance and Green will drive sentiments. Domestic investors are currently supporting the markets and they will continue to do so. India, for the FIIs, has proved to be an easy-to-exit but difficult-to-enter market.

Weightage of India in the MSCI Emerging markets has gone up from 6.4 per cent earlier to 14.7 per cent and could rise to 18 per cent soon, if South Korea is transferred from being an emerging market to a developed one. “The chief concerns will be the rising trade deficit and depreciating rupee vis-à-vis the strengthening US dollar. Geopolitical problems may impact markets in the short run. However, markets do look good for the next few years. Buy on dips would be my advice.” 

Stock picker’s market

“It is a delightful market to be in. For an investor, global uncertainty and volatility should be looked on as an opportune time to invest,” says Manish Chokhani, director, Enam Holdings Pvt Ltd. He adds: “While earlier index funds, passive funds did well, they may not perform well during uncertain times. This year will undoubtedly be a stock picker's market.  Investors should select potential winners and buy if they have the stomach to hold them for a longer horizon.” 

Chokhani points out that every decade throws up winners. Earlier it was Infosys and IT companies.  Last decade it was Bajaj Finance. Currently it is Adani Group. The coming decade will throw up other winners. Companies which expanded during the crisis period have been able to reap good profits now. A few years ago in the steel industry, groups like Tatas, Jindal went on an acquisition spree.

Today they are reaping the benefit of higher steel prices. Investors should likewise buy when everyone (FII) is selling. India is too big a market for FIIs to ignore for long. Some of the best investments are often made during a crisis. Investors will have to be agile to spot unfolding opportunities. 

With globalisation, markets tend to move unidirectionally. However, India is currently standing out as an island of stability. An island of hope. Indian companies will outperform. One should not bet on sectors but aim to spot tomorrow’s winners. 

“Sentiments are quite good. The market is very confident despite the turbulence,” says Deven Choksey, promoter and MD KR Choksey Financial Shares and Securities. “There is increase in inflows from the direct investment route.” This is indeed a healthy sign as more than 10 crore demat accounts across two leading depositories, NSDL and CDSL, have been opened.

There are more direct investors in equity in India than the combined population of several leading countries in Europe and elsewhere. The total investment population is, of course, much higher as several mutual fund investors do not have demat accounts, with several funds dissuading investors from dematting mutual funds units.

Choksey feels that while PMS investment flows are low, investors are buying during dips. “Every fall and dip is being utilised by both investors and PMS funds for enhancing their portfolios with good stocks. 

The fact is that investors have to be agile and be able to seize opportunities when they come in volatile markets. When HDFC gets merged with HDFC Bank and goes off the major global indices, one should be able to buy when FIIs are selling. Sooner or later HDFC Bank as also some other banks, may fill the spot vacated by HDFC in these global indices.

While consumption in domestic markets will continue to grow, the real cherry on the cake will be when investment demand also moves in sync with consumption demand. Infrastructure industries like cement, steel and capital industry as well as aluminium will be the major beneficiaries. As will be the contracting companies and those investing in building platforms rather than merely looking at pushing products.

Telecom is a good example. Investors do not generally buy indices and it is best to look at selective stocks rather than take a broad view of the economy. Index stocks may not be big multi-baggers. 

Business India has identified some stocks which it feels are expected to do well in the coming years.

Busines India recommends

Like every year we have drawn up a list of six companies which we expect to do well over the next 2-3 years. While investors do have exposure to companies like Reliance Industries, Tata Steel or ACC and Ambuja Cement besides leading banks like SBI, HDFC Bank and ICICI Bank, these companies can be watched for increasing one’s exposure. We have avoided giving figures, as in many cases the September results will be out shortly.

The atmanirbhar initiative of the government has seen many PSUs coming to the fore. 

We have identified a few more this time. 

Solar Industries

Exploding growth

Names can be misleading. Solar Industries, despite having solar in its name, is not into green energy. Started in 1995, this Nagpur based company promoted by Satyanarayan N Nuwal, has now become a leading company producing explosives, bulk and packaged products used in the mining and defence sector. It has diversified into the business of propulsion systems for space appliances.

It has also invested in a start-up, Skyroot Aerospace, which manufactures space launch vehicles. There are 34 total production units across the globe, servicing 64 countries.

The customers of Solar Industries include Coal India, non-CIL and institutions, housing and infra. Defence also contributes to the top line, albeit in a small way. The company manufactures hand grenades. Exports and overseas orders contribute to 34 per cent while CIL and non-CIL contribute 33 per cent. Housing and infrastructure forms a fourth of its revenue while defence is around 4 per cent. 

At Rs1,615 crore in the first quarter of FY23 the turnover has nearly doubled compared to the first quarter of FY2022. This is largely due to the increase in prices of explosives which have gone up by 74 per cent. Volumes in the first quarter have shown a 14 per cent rise. Its EBIDTA has gone up by 66 per cent while the PAT, at Rs183 crore, shows a near 81 per cent increase. Interest as a percent of net sales amounts to less than 1 per cent.

The company’s return on net worth was around 23 per cent (FY2022) while the return on capital was nearly 27 per cent. As against the EPS of nearly 49 for FY2022 the company posted an EPS of Rs18.81 on shares of the face value of Rs2.

A healthy order book of Rs3,834 crore at the end of the first quarter and government’s initiative on indigenisation bode well for the company.

Aditya Birla Fashion & Retail

Profit across price point

Income rise has given rise to aspirations across the cross strata of the population. Donning branded clothes with subtle brands flashing has become synonymous with making a style statement. Aditya Birla Fashion and Retail has an array of aspirational brands. Along with the older brands of Louis Phillipe, Van Heusen, Allen Solly and Peter England, the company has grown through collaboration and takeovers.

It has taken over Pantaloons, Reebok, Forever 21, American Eagle, Ted Baker, London, Polo, Fred Perry, Jaypore, The Collection and inked tie-ups with Sabyasachi Mukherjee and other leading fashion designers Shantanu & Nikhil. The company uses shares as a currency effectively and pays consideration in shares through preferential offers to its partners. The share capital of the company stood at Rs938 crore as on 31 March, 2022 with net worth of Rs2,773 crore (as on 30 March, 2022). 

From a single acquisition of Madura Coats and Madura Garments, the first by Kumar Mangalam’s foray into this consumer facing business the company has morphed into a billion dollar one producing 20 million garments a year. The company has a staff strength of nearly 25,000 people with a presence across nearly 3,500 stores and nearly 28,600 multibrand outlets.

One of the differentiating factors of the company is that it offers new products 12 times a year compared to the industry’s twice a year. Digitisation and building of omnichannel infrastructure have also helped to curtail costs. 

The company, which was in a building phase, has started reporting net profit since the last two quarters ended June. On a consolidated basis it reports a PAT of Rs95 crore on a top line of Rs2,505 crore. In the quarter ended March 2022 the company had reported a PAT of Rs32 crore.

The shares, which gave returns of 22 per cent in 2022 and 130 per cent over a two-year period, are a good proxy for the consumption sector.

Coal India

Mining profits – generous dividends

Despite all the talk about coal being one of the biggest polluters, thermal power stations are not going out of fashion in the near future. The war between Ukraine and Russia has shown how countries are vulnerable to disruptions in gas supplies. Along with the rising price of crude oil, coal in India will continue to see good demand from thermal plants, for at least a decade, if not more. 

Mining companies may not be able to reduce pollution but in a bid to become carbon neutral they are entering into new businesses including solar and wind energy. Coal India, a Navratna PSU, has recently inked a JV with NLC (earlier Neyveli Lignite Ltd) which is now using its minerals to produce both thermal and green power.

Earlier this month (October), it inked an MoU with the Rajasthan Government, the first of its JVs with a state to set up a 1,160 MW solar plant at Bikaner at an envisaged cost of Rs8,000 crore. It has also inked MoUs with other PSUs, BHEL, Indian Oil and GAIL for studying the feasibility of setting up gasification plants to exploit surface mines and get into producing more value-added products. 

Coal India, one of the largest global coal mining companies, is on a roll. YTD returns are 61 per cent. In the first quarter of FY2023 the company posted an EPS of Rs14.33 which is more than 50 per cent of the total EPS of FY2022. While figures for the year ended September are awaited, the company has stated that the total production for the period April-September has gone up by 20 per cent.

It has already achieved 43 per cent of the target of 700 MT in FY2023. This, despite the fact that monsoon production normally tends to get impacted and the second half of the year shows a higher growth than the first. This is one of the reasons for the company’s shares giving a return of 61 per cent (YTD) on top of 30 per cent returns in 1 year and 107 per cent for 2 years.

The company also pays good dividends. For FY22, shareholders received Rs17.50 per share as dividend.

SCHAEFFLER India 

(Earlier Fag Bearings India)

Bearings for the auto industry

The growth in the auto industry has seen a lot of attention focussed on auto ancillaries. Besides catering to OEM demand, these companies also cater to replacement markets. 

After completing the takeover of Fag Bearings India in 2017, German major, Schaeffler AG, merged two companies – INA Bearings India Private Ltd and Link India Private Ltd – in 2018 to become a major roller bearing company. One unified corporate brand with three product brands – as it had said at the time of merger. Thereafter it set up a new factory in Pune for manufacturing engine and transmission components. 

Currently through its four plants, it provides solutions to automobiles, commercial vehicles and tractors. Its solutions to the industrial sector includes railways, wind energy, textile machinery, wind energy and power and transmission segments. Replacement parts are also supplied to the automobiles sector as also the industrial sector.

Over the last 5 years the EPS per share has gone up from Rs124 to Rs201 in FY21 (it follows the January-December accounting year). The results for the current 9 months reflect a near 26 per cent jump in the top line to Rs5,073 crore. PAT stood at Rs648 crore with PAT margins improving to 12.8 per cent as against 10.9 per cent. 

Schaeffler India provides a good proxy in the automobile ancillary segment for those who want to be exposed to the growing automobile market.

RITES INDIA

Riding the infra wave

A Miniratna, PSU RITES is a multidisciplinary engineering and consultancy company incorporated in 1975. Besides providing consultancy services to railways, bridges, roads, highways, tunnels, ropeways, solar projects and a host of other services, the company also undertakes turnkey contracts. These includes enhancement of railway lines and the modernising of railway workshops. It also leases out railway wagon stocks and trades for power for the railways.

Based on its order book position of Rs5,206 crore as at the end of 30 June, 2022, the company’s main revenue comes from consultancy. The margins are high. Consultancy work, at 48 per cent, accounts for the bulk of its top line. Turnkey projects on a standalone basis account for nearly 40 per cent of the top line with leasing of wagons (3 per cent) and exports and income from its subsidiary accounting for the balance.

Exports include African countries and South East Asia. Its subsidiary Renewable Energy Management (REML) undertakes power purchase for the railways. It recently inked a JV with SAIL with the aim of making around 1,000 wagons.

With government expenditure likely to rise in the coming years, RITES has good prospects to ride the infra wave. For the first quarter, consolidated revenue has gone up by nearly 70 per cent to Rs637 crore, the highest amongst all quarters. PAT has likewise gone up to a record quarterly high of Rs145 crore. It has a PAT margin of over 22 per cent, making it an attractive buy. It is also a good dividend payer. For FY22 it had paid Rs17.50 per share of Rs10.

Mishra Dhatu Nigam India Ltd (Midhani)

Alloying profits

With the government’s focus on Atmanirbhar, with an increased emphasis on domestic defence, this PSU is increasingly coming into the limelight. The Hyderabad based company (in its pre-golden Jubilee year) manufactures special steel, titanium alloys, nickel-based, cobalt-based and other metal based alloys. The specialised metallurgical company’s products are used in defence, space, atomic energy, and railways.

The company has manufacturing units in Hyderabad and has recently set up another armour unit at Rohtak in Haryana. Amongst other things this plant will be manufacturing armour for vehicles, bulletproof jackets and bullet-resistant jackets. A platform has been developed at Hyderabad to provide springs used in coaches by the Indian Railways. Composite armouring for vehicles and helicopters is also being done.

The company collaborates with leading companies and institutions for enhancing its knowledge base. It has a tie-up with Hindustan Aeronautics, another great defence company, for production of composite raw materials. A tie-up has been inked with Carborundum Universal for developing ceramic based products. Likewise, it has tied up with an Italian company for developing aluminium alloy powder for additive manufacturing. 

The company was in the news recently with the launch of the indigenously developed INS Vikrant by the Cochin Shipyard. Midhani, as the company is called, delivered the welding rods which were used for welding the special alloy steel. 

The full potential of the company has yet to be realised by investors. As a result, returns from shares have been modest. YTD returns were 36 per cent and on a 3-year basis were 86 per cent. Here are returns from other well researched defence PSU companies – HAL (YTD returns are 107 per cent); Bharat Electronics (YTD, 56 per cent); Bharat Dynamics (YTD, 136 per cent). Unlike the others, which are largely product based companies, Midhani is a supplier to some of these companies and returns could see an improvement in years to come.