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Letter from Research Desk on Market Conditions.
Mid-Cap and Small-Cap stocks have continued to Under-perform the Markets for quite some time and the discount of Small/ Midcaps to Large Caps are at a 4 year High and this will reverse going forward. We believe that while some of our Portfolio Stocks may be Volatile, these are Good Business bought at very attractive Valuations. While our Stocks have corrected, we believe that relatively the damage is less considering the fact that we have stayed away from Stocks which are having High Pledged shareholding or companies where the Business model is weak. Even though they have corrected, considering their Quality they would bounce back sooner or later.
All our Multibagger Stocks have come out with their Q3-FY 13 Results. Before we go into the Results analysis of our recommendations, let us get a broad Idea on the Quarterly Results performance of the Overall market. Generally Earnings performance of companies has been much below expectations as the Economy continues to be subdued. One Striking feature of this Results season has been the Pressure which India Inc is facing in the current Economic slowdown. The divergence in the Performance of different companies also has been very wide. While the Large Cap companies have been able to maintain their Margins to an extent, the Mid-Cap and SmallCap stocks have seen pressure on both their Topline as well as Margins. These are well reflected in the Share prices, with a Carnage in the prices of Small Cap and Mid-Caps. We believe with the Economy going through a touch phase, this may continue over the next 2 Quarters.
We certainly have not recommended stocks where there are Issues like high Pledged share holding and also most of our Stocks have good Businesses underlying and hence there is no Scary fall where the recovery would be extremely difficult. Even in Mid-Cap and Small-Cap stocks, most of our companies are Market leaders in their own sub-segment or have enough Pricing power and hence, even if the wider Mid-Cap indices dont perform well, our Stocks would perform better. As we continue to say, a Portfolio which has great Quality Stocks will definitely do well over a period of time and performance shouldnt be compared on a Month on Month basis. Stocks like Greaves Cotton, Cera, Indiabulls, Astral Poly has performed brilliantly in a Tough Environment where even the larger players are struggling. Most of the stocks have structural Triggers which will improve Valuations. We would also like to point that, Equity Markets are forward looking and probably the worst for these Stocks might be over. With the Indian Economy bottoming out along with some steps taken by the Government to revive Economic growth, we believe there will be better Earnings going forward. None of our Stock picks (Except Arshiya) have any fundamental problems as such where the Management is bad or underlying Business dynamics is weak. As Investors, its very important to get through this phase to benefit going forward. While the Overall Economic sentiment has made sure that there are no Retail buyers, we see these are Classic signs of Markets getting ready for a major up move. With proper Government policies, this up move can indeed turn out to be a very Big Bull Market. In those cases, Our Stocks continues to be well positioned with high Quality businesses with decent Pricing power. We would also like to believe that once Retail public comes in or selling pressure abates, there could be a sharp run in these
Stocks. While some stocks has been purchased at Higher levels, Investors who have regular Cash flow from savings or have higher Cash Allocation can deploy additional money at these attractive prices and average down on these stocks, which will help them get strong returns going forward. With this Report, we have also added a few more sections which will help all our Clients to take the Right decision with respect to their Investments and not bogged down by Market conditions.
- Team HBJ Capital While this Report consists of all Analysis, I would like to give a small brief on two stocks which have Higher Allocation amongst our Clients and their performance has not been good.
HSIL
HSIL in spite of being a Market leader in both its Business segments, has been affected with a sharp drop in profitability. While its Building Products division seems to be doing fine, the Container Glass division has been affected badly. In spite of being a two-company competition in the Southern Glass market, the Glass producers have not been able to pass on their additional costs. This has been primarily due to the higher supply in the Market as a result of Capacity addition of both the companies within a short period of time. While the demand for Glass is growing, we think that the additional Supply will be absorbed over the next 3 Quarters and Margins will definitely stabilize.
The Building Products division is highly profitable with very strong Pricing power indicated by the number of hikes this year. We believe that the company is going through a temporary problems with strong underlying Fundamentals and if not for these Issues, the stock would be quoting at several times over the current Prices. This allows mature Investors to build positions in this Stock at attractive prices. Bajaj Electricals is also one such stock where one of its division with temporary issues is taking down the Valuation of the entire stock making its available at Mouth watering levels for.
Sanghvi Movers
Sanghvi Movers results were bad. Much of the damage has been because of the Environment and is not companys self created problems. While we have been expecting the Investment cycle to pick up, there has been a significant delay in the same and reports on the ground is still not encouraging. The sector continues to face severe pressures and the entire CAPEX will continue to face problems still better Government action is taken. But with Governments entire focus on this, we believe its just a matter of time before the company starts performing well.
We believe the biggest attraction for us in this bet was the Valuation and we think while the debt reduction theme might be a little elongated, but still the stock continues be a Good Buy. While the headline profitability might have crashed, the company still continues to generate enough Cash and with no additional Capital Expenditure will be able to retire its Debt. We are not fearful of the debt on the balance sheet considering the Asset backed nature and also the significant expenses are Depreciation costs which are cashless expense. Even at our Buying price of 100 Rs, the share is highly undervalued with respect to its assets and mean reversion will happen with Debt reduction.
SN
1. 2. 3.
Stock
Bajaj Electricals HSIL Dewan Housing
CMP
177.60 98.00 162.45
Industry
Consumer Durable Consumption Housing Finance
4.
5.
Sanghvi Movers
Karur Vysya Bank
67.15
462.95
Infrastructure
Banking
On Sanghvi Movers : Its a High Risk bet, while we are buying a good company at very Cheap Prices the Balance sheet Risks has increased from last Quarter and hence a Staggered buying is Good. On Karur Vysya Bank : While this Stock, may not be a 5-Bagger, its certainly one of the safest Mutlibagger Stocks present. Sanghvi Movers and KVB together would balance the Risks and Returns. .
Financials
Housing Finance Entertainment/Consu mption
Capital Goods
IT Consumer Durable Real Estate Logistics
Bajaj Electricals
Initial Investment Thesis :Current Stock Price : 177.6 Rs. Business Quality : 4/5
Bajaj Electricals has a great Business Model in its Consumer facing business which contributes majorly to its EBIDTA. This business sucks up very little Capital and throws a lot of Cash. The company has a very dominant positioning several segments of Consumer Durables and has a strong Growth Trajectory ahead.
Current Problems :-
Companys E&P business has a lot of loss making projects which is pulling down the overall Financials of the company. Also increasing competition and low pricing power makes it a bad business which continues to guzzle the Free Cash generated from the Core Consumer business.
Future View :-
With the Management taking tough decisions in terms of Order Closures and bidding for Higher Margin work, we believe that there will be a rebound in Margins and also the % contribution from this Business will slowly drift downwards, thereby showing much better Financial Ratios.
At the Current prices, the Market is giving a big Negative Equity value to its E&P business and with improving Business mix, there is a large scope for better Valuations. Also, Bajaj Electricals is one of the Rare Quality consumer businesses which is currently available at cheap Valuations. Hence, we believe that its good to buy this Well Managed company which is available at attractive Valuations and can provide strong Compounded returns to its Investors in a Longer Time-frame.
Current Problems :-
The company currently doesnt face any Issues as such, but has higher Cost to Income ratio compared with its Peers. Also there are some Perception Issues with respect to the Stock. (Real Estate exposure etc). After separation with HDIL, there is no Real Problem currently.
Future View :-
With the company having gained Scale, it would reap some benefits in the form of Lower Liability Costs and with good Provisioning coverage, the company is well set for consistent Performance. The huge scale which it has in Tier-2 & 3 towns will be leveraged and more products would be added. Also lower Non-Core investments will boost ROEs.
At the Current prices, the stock is trading at very attractive Valuations compared to its Peers. We believe with changes, the Quality is improving and hence the Discounts should narrow going forward. Generally the Stock has a very wide Trading Band. Hence, buying the stock at the Lower end of its Trading band can reap rich rewards and we believe that the Band itself would shift upwards considering the Positive Changes in the Business over the past few Years.
Current Problems :-
Company has been hit by temporary issues like Power problems in Andhra and more importantly, glut in the Container glass market (Oversupply from Capacity addition of HNG & HSIL at the same time).
Future View :-
With the end user demand growing and no new Capacities coming up for the next 3 Years, the Pricing power will be back and with some improvement in the Power situation, Margins will rebound. We also think that the Faucet plant which will commence in Q2-FY 14 will give a good boost to its Earnings and also improve Return Ratios.
At the Current prices, the stock is much cheaper to its Intrinsic Value and also relatively cheaper than its Peers like Cera and HNG. Also its Consolidated returns ratios looks bad while if you negate the EVOK, Inorganic Growth and Business reconstruction reserve, the Core ROEs are strong enough and Incremental ROICs is high for this Business. Hence, we at HBJ believe that HSIL will grow to become one of the Premium Building products company and create Value for Investors who are buying this Good Business at current cheap prices.
Sanghvi Movers
Initial Investment Thesis :Current Stock Price : Business Quality : 3/5 67.15 Rs
Companys Business model makes it a natural beneficiary of Indias Infrastructure development. Also companys long standing experience along with a Wide range of Cranes has helped it to build a Strong Moat around its Core Business.
No Big Change. Its not a very High Current Problems :Quality business, but the Opportunity Company is facing a lot of problems from Balance Sheet Issues (High Debt size in humongous and the company is + Increasing Receivables) to deteriorating Project pipeline. The other well placed to Profit from them.
major issue is the problems of its No:1 Customer Suzlon. Indias CAPEX cycle continues to be very subdued with very little new Projects.
Valuations Grade :
5/5
Future View :-
With a very bad environment, we believe that the company may even slip into losses for a few Quarters but the competition is decimated and the Company is well prepared to take advantage of any Pick up in new CAPEX. Also no new Crane buying, will enable higher Operating Cash flows and Debt reduction leading to a better Balance Sheet. .
The biggest reason for recommending this stock in spite of the Risks is the Mouth watering Valuations and we believe at the Price, the Odds are heavily in favour of the Investor. While an undervalued stock can remain undervalued, we believe there is a strong Trigger in the form of Debt deleveraging for this stock. Hence, patient Investors with a little extra Risk can hope for strong Multibagger Returns in this Stock. If there is a sharp recovery, then even a 5X in 5 Years looks too conservative.
Current Problems :-
A slowing economy with negative Interest rates is limiting Credit growth. Also there is pressure on several segments of the Economy leading to higher Risks on Book. Companys Margins also have taken a hit on both NIMs and also at the PAT level.
Future View :-
With the Economy expected to revive over the next few Quarters and with imminent Interest rate cuts, we believe that the stock is well placed to generate Strong Profits. The companys Anniversary when there would be Bonus Offer would also give a boost to the Stock price.
At the Current prices, the stock is certainly one of the cheapest Private sector banks and definitely amongst the better managed ones. We dont expect the Bank to throw up any nasty surprises and would give steady returns with good Dividends too. Considering its history over the last several years, we believe that the Bank would continue to be a Consistent compounder helping Investors to grow their Wealth.
THANK YOU