SPECIAL EDITION

April 10, 2020 #50

8 904150 800041 08

STOCKS FOR
2020
By Ambareesh Baliga, Amit Khurana, Arunagiri N, Gautam Trivedi, Harendra Kumar,
Mehul Bhatt, Safir Anand, Vijay Kedia, Vikas Khemani and Viraj Mehta

PERSPECTIVE BY DEVINA MEHRA, SHANKAR SHARMA AND CHAITANYA DALMIA

Making INDIA
safe. connected. Smart.
Environment Sensors
Smart City Lighting
Measuring the Air Pollutants
IP-67 certified hydraulically operated
Kaizen box for equipment to provide
uninterrupted services
Indus adds a layer of
Smart Connectivity
To New Delhi & Gujarat
www.industowers.com
Keeping in mind the Citizen’s requirement in the areas of
Safety, Environment & Connectivity with next generation
mobile services along with a robust Fiber infrastructure, a
first of its kind in India - Public Private Partnership (PPP)
initiative has been rolled out by New Delhi Municipal
Council (NDMC) and Vadodara Municipal Corporation
(VMC) and Indus Towers.
Projects comprise of Smart Poles with LED lights,
CCTV cameras, Environment Sensors integrated with
the Command Control Center and will enable telecom
service providers to offer public WiFi system at each
pole. The Environment Sensors capture and display
features on real time basis.
The above projects are important initiatives under
the Govt. of India’s Smart City Mission and truly
demonstrates our credo of ‘Putting India First.

Time to cherry pick
The COVID -19 pandemic is an event none from
our generation has experienced. To that extent,
investors and speculators are in the dark about
the final outcome and hence the current market
panic. But as Warren Buffett has always em-
phasised, the secret of investing success is to be
fearful when others are greedy and greedy when
others are fearful.
Sounds great but being ‘greedy’ when there is
gloom, is really difficult. And that’s not only be-
cause it requires nerve to bet against the crowd.
Mostly, when catastrophe strikes, you are low
on liquidity, or there is great uncertainty over
future cash flows. The future looks hazy — will
things get worse, how much more, and when will
they get better and so on.
But then, as history has depicted, gloomy times
provide the best opportunity to buy into the
‘right businesses’ with an adequate margin of
safety. Are we at that point where investing can
be hugely rewarding? Yes and no. It will depend
greatly on which stocks you pick.
Even today, after a 30% correction, many stocks
still do not represent deep value and therefore un-
likely to yield handsome return even with a lon-
ger holding period. Over the past few years, the
market has been polarised in favour of consumer
stocks because of heightened stress in core sec-
tor and financials. Several consumer stocks have
taken a beating but they continue to be highly
EDITOR’S NOTE
valued. For all we know, this may be an inflection
point, but there is also a possibility that this will
continue to be the case because earnings visibility
of other sectors will worsen with further demand
destruction, higher delinquencies and delay in the
private investment cycle.
While it may take some more time to figure out
who will be the front runners when sentiment
revives, the multiple you are paying for down-
graded earnings should be the criteria to pick
stocks. In short, it’s not how much a stock has
fallen from the peak that should determine your
purchase decision, but how justified is the valua-
tion from a future earnings perspective. Invest-
ment return, after all, is driven by earnings and
earnings alone.
Our annual feature, “My Best Pick”, comes this
year at an interesting time. Keeping with tradi-
tion, we bring you 10 experts who present their
best ideas. As usual, the disclaimer stands: these
are not recommendations to buy, but ideas you
could consider based on your personal portfolio.
N Mahalakshmi
www.outlookbusiness.com | email: mahalakshmi@outlookindia.com
/ 10 April 2020 3
 Contents
VOLUME 15, ISSUE 8, APRIL 10, 2020 PUBLISHED ON STANDS ON MARCH 27, 2020

Perspective

8 Renaissance Group’s Chaitanya Dalmia believes the 58 First Global’s Devina Mehra and Shankar Sharma
current market carnage has brought market valuation point out why getting asset allocation right is much
closer to ground reality more than specific stock selection

12 16

12 Ambareesh Baliga believes GMR

is set to soar high with its laser focus
on the airports business

16 Dolat Capital’s Amit Khurana

22 26 feels Page Industries will continue to
comfort investors

22 Rubber chemicals player Nocil’s

expertise gives the stock its bounce,
says Arunagiri N of TrustLine Holdings

26 TCPL, might look pricey but it’s

worth every rupee, thinks Nepean
Capital’s Gautam Trivedi

4 10 April 2020 /
32 38

42 46

32 Elara Capital’s Harendra Kumar

picks I-Sec for being an all-in-one
stock with diversified business and
strong fundamentals

38 In an uncertain time when the

chips are down, Mehul Bhatt of
OysterRock Capital is putting his faith
in an old favourite — Nesco
34
42 The understated and low-key
Transpek Industry is Safir Anand’s
choice for its flair for innovation in the
50 54 chemicals industry

46 Vijay Kedia of Kedia Securities

advises us to watch out for Repro,
which is set to disrupt the book
publishing industry

50 To deal with market turbulence,

Carnelian Capital Advisors’ Vikas
Khemani relies on efficient general
insurer ICICI Lombard

54 Bucking the trend with its clean

gold loan book, Manappuram Finance
is Equirus Securities’ Viraj Mehta’s
best bet for 2020

/ 10 April 2020 5
 Contents

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6 10 April 2020 /
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PERSPECTIVE

CHAITANYA DALMIA
CIO, Renaissance Group

Corona ko blame karo na

MONETARY GASOLINE FUELLED EQUITY MARKETS OVER THE PAST DECADE, AND NOW COULD JUST
BE THE TIME TO GET RATIONAL ABOUT VALUATIONS

X X… No, it does denote either kisses

or a conjugal visit rejection, from the
smiley-infested world we live in today.
Nor does it refer to types of chromo-
somes. That’s an abbreviation I coined for ‘Xaggera-
tion Xtrapolated’. We are in unprecedented times. I
have witnessed markets hitting circuit breakers on the
miniscule part of what has been driving markets. The
biggest factor can be charitably described as ‘chimps
with a bazooka’. The bazooka is armed with all the Puts
that central banks across the world have underwritten.
And chimps are ETFs. Add algorithm traders, cheap le-
verage and you have a heady mix.
The fundamentals of the global economy have been
downside. I have also seen individual stocks hitting suc- on a weak footing for the past decade. The trouble
cessive upper circuit. Needless to say, I have seen bull with this instant-coffee world obsessed with data,
markets and bear markets. Bull markets have correc- even if it’s useless, is that majority of the markets
tions as they ought to, and bear markets have pullback miss the big picture or choose to do so. That’s myopia
rallies. But, the events of the past two months in the on the verge of blindness. Public money-laden private
financial markets made me term the goings-on as XX . funds and governments are equally in cahoots. Mar-
  kets have threatened to slip into a coma on any bad
BACK STORY news and governments have been accommodating
Like mutual fund pioneer, John Templeton, I am aware with morphine shots to revive the patient. This has
of the perils of his axiom, ‘This time it’s different’. But been going on for a decade.
I am compelled to use his maxim, though in the op- And if one were to examine the phenomenon from
posite connotation. During the past few years, we have point to point, it’s clear that whatever anaemic eco-
seen significant changes in our country, each one of nomic expansion eked out was only due to far higher
them unprecedented — demonetisation, GST, NCLT, leverage across the system. That also implies lower
Article 370, NRC/CAA , AGR , IL&FS/DHFL/Yes Bank etc. productivity. Clearly, monetary policy was broken,
Globally, we have seen change in geopo- and further fiscal incentives only trans-
litical equations, covert and overt trade ferred the burden from corporates to the
wars, compression of tax arbitrages across
Events of the taxpayer. The consumer inflation num-
jurisdictions, near-zero interest rates for past two months bers seem fudged anyway (with clumsy
a decade across OECD countries, oil prices
sub-$30, emergence of AI, social media
in the markets gimmickry of core inflation and so on, or
the inflation basket itself is outdated —
destroying traditional media, shift in con- made me term ask anyone if their cost of living has gone
sumer behaviour with marketplaces gain-
ing prominence, and so on.
the goings-on as up by less than 5% in the past decade).
The combined effects of all the above is XX — ‘Xaggera- SOME (RELEVANT) DATA
something either Jim Simons’ algorithm The earnings growth of Nifty companies
or some big-data firm can decode. But
tion Xtrapo- has been meagre, to say the least. They
even that combined impact, might be a lated’ have grown less than 7% p.a. in the past

8 10 April 2020 /
 Money for nothing
The story of growth revival was more alluring and prevailed over the reality of poor core earnings growth
Nifty CAGR: -3% Nifty CAGR: 37%
12,000
23.7
Nifty (LHS) (RHS) Nifty P/E (x)
9,000
21.0
Average: 15.7x
6,000
3,000
0 5
Mar Mar Mar
98 03 04
five years (See: Money for nothing). However, Nifty
doubled from 6,200 to 12,400. Implicitly, the Buffett-
quoting brigade led the multiple expansion in ‘quality’
stocks. It’s not as if the base multiple was ridiculously
cheap; we were at 18x in 2014 and over the past two
years, the market became very narrow and skewed.
It eased the promotion of a host of analysts/relation-
ship managers to money managers. You got paid 2/20
for investing in those specific dozen stocks which ev-
ery man and his dog knew about, and were invested
in. Just as an empty mind quickly becomes a devil’s
workshop, the aforementioned excess liquidity had
to find its way somewhere. Acknowledging the ‘risks
in the markets’ and bad economic data, the liquid-
ity stuck to those dozen stocks, leading to a bubble in
their valuations.
It’s obviously not the fi rst time this has happened,
nor will it be the last. During the tech boom towards
the end of the last century, Wipro traded at 300x
and Infosys at 200x, never mind the scorching 100%
growth in earnings. I am not even talking about
shams such as DSQ Software and Pentasoft. Technol-
ogy, media and telecom (TMT) stocks were destined to
go all the way to heaven, and rest of the markets were
touted as ‘old economy’ and considered ‘untouch-
ables’. Similarly in the run-up to the 2008 global cred-
it squeeze, infrastructure, real estate and steel stocks
wore that halo. This time the darlings were mostly
consumer stocks and non-corporate fi nancials.
LESSONS FROM THE PAST
The technology bubble burst in 2000 due to the funda-
mental cocktail of high interest rates and high valu-
ations, which eventually seemed unjustified with flat
EPS growth. The benchmark fell 40 % in less than two
years. It would need more than double that time to
Nifty CAGR: 4% Nifty CAGR: 7% 25
20
15.1 15
10
Mar Mar Mar Mar Mar
08 09 13 14 20
Source: Motilal Oswal Securities
cover lost ground. The second phase (2003 -2006) was
based on low interest rates, cheap valuations and 60%
growth in EPS, albeit on a depressed base, owing to
positive operating and financial leverage. Liquidity
started chasing the stocks, and the foundation was be-
ing laid for the next bubble.
2006 -2008 was the phase in the run up to the Lehm-
an Brothers-induced global credit crisis, index earn-
ings were up 85%! This is the time when EPS and P/E
started chasing each other and catapulted the Sensex
to 21,000. In hindsight, Lehman became the poster
boy for that super-normal growth and super-rich val-
uations to mean revert. The benchmark lost 60% in
little more than a year (quicker and deeper than the
last time in 2000). The fourth phase between Decem-
ber 2008 and June 2010 saw some recovery in stock
prices owing only to undervaluation, despite weak
earnings growth. By November 2010, the Sensex had
regained all its lost ground (little short of two years –
again quicker than the last time).
Since then and until now, I would keep it under the
fi fth phase (2011 till 2019). The reason is simple. Re-
call all that tectonic change mentioned in the begin-
ning and juxtapose it with Index earnings. It merely
doubled in the past 11 years, since 2008. Even a bank
FD doubled in lesser time. However, the Sensex al-
most tripled to 42,000 since June 2008.
WHY WE ARE WHERE WE ARE
Now, why would anyone pay an equity risk premium
for FD commensurate return? Is it not quirky? What is
on display here is the undying belief of institutional in-
vestors in central banks, post the Lehman bailout (See:
Never-ending party). Hence, zero interest rates, which
in turn help governments overburdened with debt, is
welcomed. These bottom-scraper rates are not seen as
/ 10 April 2020 9
PERSPECTIVE

a deeper underlying problem but become We have seen reasonable prices in many
de rigueur. The flattish yield curve sig-
In equity mar- stocks and sectors over the past decade,
nifying a prolonged recession is ignored. kets, the expec- but have not really seen ridiculously cheap
Poor core earnings growth is dismissed as
one-off in light of fiscal stimulus or hope
tation of better prices, which is what a deep bear market
throws up.
of growth revival in the near future. And growth keeps the Even though I thought markets
with all these assumptions, FIIs chasing should correct significantly, I attached a
relative return have net pumped in al-
market going low probability to it,  given all the power
most #5 trillion in equities since 2011 until until real un- central banks yield these days, and the
January 2020, and mutual funds with
their SIPs got another #3.75 trillion. Pre-
derlying growth fact that zero/very low discount rates ac-
tually change everything in the world of
sumably, LIC’s inflows would be a positive catches up finance. This is what forced me to throw
number as well. in the towel and not wait for those ridicu-
For sure, equity markets are a forward-looking asset lous prices and buy a chunk (though thank God no-
class, and so the expectation of better growth keeps where near fully) at reasonable prices. So even when my
the market going until real underlying growth catch- framework told me to steer clear and wait for ‘as long as
es up. But if the digression gets prolonged, you know it takes’ as Buffett says, I was not fully convinced. Nor
you are treading on thin ice, which thins quicker un- could I bet on the ‘expected fall’ since the only way to
der a rising dawn. do that was to keep buying Puts and paying premiums,
World Wars have been triggered by seemingly in- until the eventual collapse.
consequential events. But, warlike conditions had  
always been brewing under the surface. Its only in VIRUS, SERIOUSLY?
hindsight can we say that a particular event triggered The virus and the news (who knows how much fake),
the war. Financial markets are similar where reasons on which there has been an overdose from all imagin-
get attributed post collapse. Various small events able directions and sources, seems to be the event that
keep occurring until that one event which turns into has triggered the long overdue correction in the mar-
a snowball and takes the elephant down. And nobody kets. The five-year Index return stands at - 6%, as on 19
can predict in what form and when such an event will March, 2020. Even the broader Nifty 500 has returned
take shape. - 6% over that period. It has taken only two months to
I have seen ridiculous prices way back in 2000, wipe out the gains of almost four years (the Sensex was
and I have been forced to wonder over the past two last at this level in May 2016). We have fallen 35% from
decades if such prices shall be seen again. Bear the top, and this is on account of only #120 billion of
markets are a part of investing, and to imagine a net outflow (FII and MF combined till 19th of March)
perennially upward sloping index made no sense con- against the 70x combined net inflows over the past de-
sidering all that I have read and seen over the years. cade. Surely the economic impact of the virus shall be

Never-ending party
The massive injection of liquidity by global central banks kept equities on a tear
3,400 16
3,200 S&P 500 & ASSETS OF MAJOR CENTRAL BANKS 15
3,000 14
2,800 13
2,600
12
2,400
2,200 11
2,000 10
1,800 9
1,600 S&P 500 Index 8
1,400 7
1,200 Total Assets of Fed, ECB, BOJ (in $ trillion)
6
1,000
Quantitative 5
800
600 QE1 QE2 QE3 tightening 4
3
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Source: Yardeni Research

10 10 April 2020 /
 Value illusion
Forward Nifty P/E is now lower than its long-term average but ‘quality’ stocks still trade at a premium
25 12-month forward Nifty P/E (x) 23.3

22

19

16 Long-term average: 17.2x

15.1
13

10
Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar
05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20
Source: Motilal Oswal Securities

devastating, but the “Nanga nahayega kya aur nichode- pullback and that too without outrageous net liquid-
ga kya” economic environment is already abysmal. As ity outflows, only indicates the omnipresence of ETF
it is, the market was out of sync with the economy for money compounded by algorithmic traders. The IPO
many years. of the country’s premier exchange is stuck in a case
As the market overshoots in either direction, here allowing early and preferential access to some such
are some more data-driven reasons to expect further players. So, serious money can be made by these ma-
downside: First, a lot more money is queued up head- chines. But technology can be destructively brutal,
ing for the door as can be observed from the above and these hot money machines have XX impact on
mentioned liquidity inflows and outflows. Two, the the markets, which only leads to more volatility than
earlier bear markets saw more than 50% drawdowns. desired, and can cause serious market dislocations.
We are far away from there even if we don’t go all the What adds fuel to the fire is the availability of stock
way this time. Three, we shall be at a median-ish P/E futures to raise the traded volume. Imagine, if the
band of 15 -16x closer to 25,000 for the Sensex. This market falls 10% daily, it can shave off 65% value in
number could be even lower given that FY21 may see two weeks. That sounds more like the Argentinean or
sharp earning downgrades. Severe bear markets can Zimbabwean inflation nightmares of the past. Ideally,
go to as low as 12x (See: Value illusion). Four, we may regulators need to figure out a way to keep the role of
be looking at supply shocks (and/or past monetary the machines to a manageable level. They also need
stimulus rearing its ugly head) leading to high infla- to ban or at least limit the use of leveraged products,
tion. Finally, and most importantly, the ‘pied piper’ which don’t serve much purpose except to increase
stocks have still not corrected enough to what one trading volume, so that the exchange gets a premium
may call intrinsically reasonable prices. IPO valuation.
However, it is not all gloom. All the above only im- As for investors, they would do well to remain mind-
plies that the stocks that went to outrageous valuations ful of the risks and evaluate them appropriately before
are unlikely to do much for the next decade. But besides fishing for return. Despite having heard ‘markets can
those stocks (which also comprise the Index remain irrational longer than you can re-
to a large extent), there is a whole world
of stocks which have almost halved, have
There is a whole main solvent’, it’s quite hard to steer clear
for half a decade if the valuations remain
a stable business, don’t have any balance world of stocks elevated. Jhoot bhi agar sau baar bola
sheet issue and are not run by crooks. In-
trinsically, they are at ridiculous valuations
that have almost jaaye to sach lagne lagta hai. So come what
may, valuation comfort is perhaps the
no matter what assumptions one may make. halved, have a only basis to invest on and sleep well. On
It won’t even need an eagle eye to find those
gems; they are scattered on the road.
stable business second thoughts, sleeping well may be a
thing of the past; the machine-age mixed
  and don’t have with social media infodemic and cata-
MORAL OF THE STORY any balance lysed with virtually free and unlimited
Given the ferocity of the fall, and the an- leverage is likely to make XX bouts occur
gle at which it has fallen with hardly any sheet issues more often than ever before. So, brace! b

/ 10 April 2020 11
 MY BEST PICK

AMBAREESH BALIGA
INDEPENDENT MARKET EXPERT

GMR Infrastructure is
cleaning up its act and
has a golden goose in
GMR Airports
FAISAL MAGRAY

*Ambareesh Baliga has an interest in the stock and has also recommended it to his clients

12 10 April 2020 /
GMR INFRASTRUCTURE

/ 10 April 2020 13
MY BEST PICK
STOCK PRICE
M-CAP
FY20* RETURN
TTM P/E
ROE
ROCE
Net Sales
LOSS
Market data as on March 20, 2020. Financials for 9MFY20; Return ratios as of FY19
I n movies, an aircraft landing
bumpily on a poorly built runway
that ends in single-cabin office
suggests a hick town. The pro-
tagonist has arrived in the back of the be-
yond. Over the years, airports have come
to convey the poverty or prosperity of a
city or a state. They are no longer mere
transport hubs, with empty hours of wait-
ing. They are vibrant spaces, where travel-
ers are invited to engage with local history,
art and food. One such is Indira Gandhi
International Airport in New Delhi, with
its famous hand sculptures.
The airport has earned accolades as one
of the world’s best, year after year, with
its Terminal 3 built in a record time of 37
months, just before the biggest sporting
event that Delhi hosted — Commonwealth
Games in 2010. It is operated by Delhi In-
ternational Airports, which is a subsidiary
of GMR Airports, the fourth largest private
airport developer in the world.
It is in the thick of things, as the Indian
government has recently unveiled plans to
develop 100 greenfield airports by 2024. Air
passenger traffic has more than doubled
in the past decade and has seen a healthy
double-digit growth over five years. As per
a FICCI report, total air passenger traf-
fic in India should grow 6x by 2040 to 1.1
billion at a CAGR of around 9%. The total
number of operational airports may rise to
200. In the same period, global passenger
traffic is expected to double by 2040 and
reach 19.7 billion.
14 10 April 2020 /
17
103 billion
0.8
NA
NA
NA
62.06 billion
9.19 billion
Data: Ace Equity
The airport business offers long-term vis-
ibility with a stable regulatory environment
(after extensive regulatory experimenta-
tion). The revenue model is well diversified
with non-aero revenue ranging from retail,
food and beverages, cargo, rentals, adver-
tisements and ground handling in addition
to the regular aero revenue. GMR Airports
has consistently performed well with FY20E
Ebitda margin higher than 40% (See: Fly-
ing high). Globally, airport stocks are val-
ued at around 18x EV/Ebitda. Despite the
advantage of India’s higher growth rate,
using the same yardstick would value GMR
Airports at EV of #500 billion.
However, GMR Airports is not listed, thus
one needs to play this theme through the
listed holding company GMR Infrastruc-
ture. The listed entity has had a tumultu-
ous journey during the past decade, after
initially being a much sought after infra-
structure stock when it was listed in 2006.
In addition to investment in airports, like
many others who were riding the infra-
According structure wave, GMR stretched its balance
to a FICCI sheet by committing big to energy and
highway projects. The downturn in the
report, total economy post the Lehman Brothers crisis,
air passenger the regulatory overkill and unkept prom-
traffic is ises such as PPAs as well as gas supply for
power projects turned out to be its nemesis.
expected to The silver lining, however, were the airport
grow 6x to projects that continued to be cash-positive.
The past 10 years were spent fire-fighting,
1.1 billion after which the management seems to have
by 2040 clarity on the way forward. They have de-

The core airport business has long-term revenue visibility... but also the highest debt
Gross Revenue PAT
(# billion)
39.2
4.9
14.7
9MFY19
cided to focus on the fledging airport busi-
ness and divest the rest of the businesses at
an opportune time. However, to immedi-
ately reduce the debt burden and clean the
balance sheet, they have divested 49% of
the airports business to Aeroports de Paris
(Groupe ADP) at a post-money valuation
of #220 billion, which is about #40 billion
higher than their earlier agreement with
the Tatas. Earn-out achievements may add
another #45 billion in due course.
GMR Infra would utilise part of the #100
billion it receives from Groupe ADP, to
reduce debt from #95 billion currently to
about #25 billion at the listed entity level.
It has also been able to divest the 1,050
MW Kamalanga Thermal Power Plant to
JSW Energy with an equity payout of #12
billion and made a similar divestment
of Chhattisgarh Power project in 2019 to
Adani Power at zero equity value. The road
project vertical is self-sustaining. The oth-
er thermal projects, too, are self-sustaining
with some of them providing a positive
cash flow. The Rajahmundry Power Plant,
which was an albatross around its neck,
where it has 45% equity, has been able to
go through a resolution plan and the debt
has been brought down to sustainable lev-
els. GMR is in a position to clean the bal-
ance sheet across verticals.
A closer look reveals some hidden wealth
in the backyard. GMR has 10,400 acres of
port-based land at Kakinada in Andhra
Pradesh with eight kilometres of coastline,
which will be developed into a port by a
GMR INFRASTRUCTURE
Flying high
EBITDA Total debt in %
45.5 Others Energy
2 10
5.3
18.6 Highways
Airport 10
43
35
Corporate
(Inc. debt for
PE Exit)
9MFY20
Note: Certain loans part of Energy and Others segment till Mar’19
Source: Company are reclassified as Corporate Debt
third party utilising 2,000 acres. Another
2,500 acres may be developed as a mega
petrochemical park by HPCL , GAIL and
Haldia Petrochemicals. They also have
2,500 acres of land at Krishnagiri in Tamil
Nadu. A special investment region is be-
ing set up on 600 acres in collaboration
with TIDCO. The land should be in demand
when global majors look for alternate re-
gions for their manufacturing facilities
post the Covid-19 scare and the US -China
trade spat. Even assuming a paltry #5 mil-
lion per acre, the land value works out to
#65 billion. Additionally, there are claims
of #39 billion pertaining to the road as-
sets against government authorities which,
when realised, will be added to the bot-
tomline. There is also a 30% interest in PT
Gems Coal Mines, which was acquired for
around $500 million in 2011.
Over the next two years, we should see
the clean-up being completed. The airports
business will drive the group valuation
with a possibility of GMR Airports being
listed independently and GMR Infrastruc-
ture shareholders directly holding the 51%
currently (could go up to 59% with earn-
GMR Infra outs) held by the holding company. This
has decided could unlock huge value. Though Covid-19
to focus on is a risk factor for the airports business due
to travel curtailment and lower footfalls, I
the fledgling would prefer to be an optimist looking at
airport life beyond the next three to four months.
The stock has corrected sharply by 33%
business and due to the Covid-19 scare, making it an op-
divest the rest portunity to buy for long-term growth. b
/ 10 April 2020 15
 MY BEST PICK

AMIT KHURANA
HEAD-INSTITUTIONAL EQUITIES, DOLAT CAPITAL

Page Industries will

continue to comfort its inves-
tors through brand loyalty
and strong distribution
FAISAL MAGRAY

*Amit Khurana does not own Page Industries, but Dolat Capital has recommended the stock to its clients

16 10 April 2020 /
PAGE INDUSTRIES

/ 10 April 2020 17
MY BEST PICK
STOCK PRICE
M-CAP
FY20* RETURN
TTM P/E
ROE
ROCE
Net Sales
PAT
*Market data as on March 20, 2020. Financials for 9MFY20; Return ratios as of FY19
I t fits like a song. The internation-
al brand that is known for com-
fort wear came to India in the
mid ’90s and has since remained
the first choice of innerwear for the aspira-
tional youth. Sure, many came and went.
The likes of VIP and Hanes have been a
few competitors, but Jockey’s brand loyalty
has only increased over time. With strong
faith in its brand value, we believe Page
Industries makes for a good bet, since it
has had the exclusive rights to the brand
in India since its entry in the market. In
fact, the company has been reporting al-
most 35% CAGR growth over the past two
decades. While its net sales grew at 19.4%
CAGR from FY14 -19, PAT grew at 20.7%
CAGR (See: Breathing freely).
THE PROMISE OF COMFORT
One cannot really miss the Jockey logo
on a storefront in all its black and white
glory. Distributed in more than 63,000 out-
lets across 2,800 cities in the country, the
brand enjoys a monopoly in the premium
innerwear segment. To stay with the times,
this century-old brand also sells via most
e-commerce platforms. Despite rising com-
petition from brands such as Dollar, Lux,
Van Heusen and Rupa, the management is
confident of sustaining volume growth.
Strong recognition and high distribution
are only a few factors that give Page In-
dustries a pricing advantage over peers. To
boost market share over the years, the com-
pany maintained advertising and promo-
18 10 April 2020 /
18,060
201 BillioN
-23
52x
48
70
24 BillioN
3.12 BillioN
Data: Ace Equity
tion (A&P) spends at 4 -5% and undertook
calibrated price hikes. Even though minor
price changes lead to major volume devia-
tion in mass-category products, Jockey has
proved an exception to this rule. The com-
pany has taken annual price hikes of 4 -7%
over a long period without having any im-
pact on its volume. This goes to show that
the brand has ‘stickiness’. One would hard-
ly ever find discounts on Jockey products
online as well. According to us, the brand
strength is the ‘glue’. This has helped the
company maintain its operating margin at
19 -22% over FY08 -FY19, which resulted in a
similar growth in profitability.
We also expect the ongoing store addi-
tions and innovations to help the company
sustain its growth rate over the next few
years. It already boasts of more than 720
exclusive business outlets (EBOs) in over
250 cities, which contribute to nearly 10%
From 720 of the company’s revenue. Out of these,
EBOs, Page 530 are located on high streets and 170 in
malls. They are confident of increasing
Industries is that number to 1,000 by FY22, which will
confident of further improve Jockey’s brand visibility.
With the recent foray into kids wear and
increasing new launches in athleisure, cross selling in
the number EBOs is expected to gain momentum.
to 1,000 by LADIES, FIRST
FY22, which As with most trends these days, Page
will further Industries’ Jockey is shifting its focus
towards women. It has introduced new
improve its women’s wear products including the Miss
brand visibility Jockey Collection, which is aimed at teen-
 PAGE INDUSTRIES

Breathing freely
Page Industries has remained a consistent performer over the years
Net sales Net profit
CAGR 2014-19 CAGR 2014-19 28.5
19.4% 20.7% 25.5

21.3
18
15.1
11.7
8.6

3.5 3.9
2 2.3 2.7
1.1 1.5

FY13 FY14 FY15 FY16 FY17 FY18 FY19

Figures in # billion Source: Dolat Capital

age girls. During the past three years,
contribution of Page’s dominant men’s seg-
ment has been gradually decreasing from
51% value in FY15 to 46% value in FY19.
Volume has decreased from 61% to 54%
over the same period.
While men’s segment grew at value and
volume CAGR of 19% and 9%, respectively,
that of the women’s wear grew at 27% and
17%. Seeing that athleisure is catching on
in a big way with women, we expect that
segment to continue to drive earnings.
As of now, the brand dominates with 20%
market share in premium men’s innerwear
and 5% in women’s.
In a bid to diversify its portfolio and
transform its men-centric brand image,
Jockey also extended its foray in the kids’
category. Page Industries has emphasised
that kidswear is another focus area, and
losing no time, it has set up an indepen-
dent team and realigned sales and mar-
keting strategy for ‘Jockey Juniors’. With
a view to strengthen its ground in the out-
erwear category, Jockey launched a new
MOVE range for men and women.
This need to diversify and cover all its
bases has come from growing competition
in the premium space. From mass play-
ers such as Rupa, Lux and Dollar to sports
and leisurewear names such as Puma,
Benetton, Levi’s and others, many brands
are vying for a share of the premium in-
nerwear category. Van Heusen’s recent
success in this space is surely on Page’s
radar. But anecdotal evidence suggests
that Jockey has always bounced back from
similar phases in history. In the domestic
market, the brand witnessed many turbu-
lent phases where it had to compete with
local and foreign brands.
The other challenge Page Industries has
to face is an economic slowdown and slug-
gish consumer sentiment. For 9MFY20, the
company’s revenue grew 7% YoY to #24
billion, with volume growth of just 1% YoY.
But the slowdown has hit companies across
the board. Furthermore, after a year of av-
erage performance, we expect growth on a
favourable base. Once the economy recov-
ers, Page Industries’ volume will pick up
and reach past levels.
ARSENAL-READY
That has been reaffirmed through our in-
teraction with multiple distributors. Page
is ready with multiple new products, which
After a year can be launched any time. On ground, the
of average sales team is focused on increasing the
distribution and retail reach of kids wear,
performance, which can be a big lever in the coming de-
we expect cade. At an estimated FY21 P/E of 55.9x, its
immediate valuation appears to be on the
growth on a richer side, but it has long term potential to
favourable generate strong free cash flow along with a
base. Once well-oiled inventory management and low
requirement for incremental capex. More-
the economy over, improvement in domestic demand will
recovers, trigger significant growth in all the catego-
ries. With fundamentals in place and pros-
volume will pect of healthy volume growth, the compa-
pick up ny’s future prospects look snug. b

/ 10 April 2020 19
RA CHANDROO MY BEST PICK

20 10 April 2020 /
 NOCIL

AR UNAG I RI N
FOUNDER, TRUSTLINE HOLDINGS

Coronavirus has wreaked havoc

on global markets, but it could
prove to be a boon for specialty
rubber chemicals player Nocil

*Arunagiri N and his clients own the stock

/ 10 April 2020 21
MY BEST PICK
STOCK PRICE
M-CAP
FY20* RETURN
TTM P/E
ROE
ROCE
Net Sales
PAT
*Market data as on March 20, 2020. Financials for 9MFY20; Return ratios as of FY19
I t isn’t that hard to choose, and
it’s a no-brainer. Yes, it’s a prim
adaptation of the Justin Beiber
song You stick out of the crowd,
baby. But he’s singing about his love inter-
est and this is about Nocil, a no-brainer
stock, or a deep-value stock.
Is this the best time to be talking about
value stocks? Value as a strategy has been
under-performing for an extended period
of time since early 2018 because of flight
to safety and polarised market dynam-
ics. As a result, a value investor is a beast
that is vanishing. Even the last man
standing is being tested for his tenacity.
One needs to be brave to back a value
stock. But, do not be mistaken, it is not a
‘value for value’s sake’ kind of stock, rath-
er a ‘growth at a discount’ stock. Noth-
ing beats value that comes from trying to
buy ‘quality-cum-growth’ at a discount,
be it large-cap or small-cap. Of course,
in small-caps, such spicy opportunities
come more often, because the space is
under-researched and under-covered —
Nocil is one such opportunity.
Openings in both — successful screen-
plays and stock research — are crucial.
Good opening moves in stock selection
usually start with the most critical ques-
tion, that is, whether there is a competi-
tive edge in the business and, more im-
portantly, where does it come from? The
answer to this question will determine
whether one takes a deep dive into more
due-diligence.
22 10 April 2020 /
64
10 Billion
-55
7.3x
16
25
6.33 billion
1.08 billion
Data: Ace Equity
When one has the following factors sup-
porting a product in any business, it in-
variably has a towering entry barrier or in
other words, a durable competitive edge
(leaving out the most obvious moats such
as consumer brands):
 Highly critical ingredient that con-
tributes to the quality of end product, but
at the same time, constitutes a very low
percent of the end product in terms of unit
value.
 Long lead time for customer approval
and stringent approval process.
 Exceptional need for technical know-
how and long gestation period for setting
up capacity.
 Favourable replacement cycle in the
end user markets.
 Few limited specialised players (niche
oligopolistic market).
In the industry in which Nocil operates,
the economics of business is extremely at-
tractive with dynamics that reflect the
above industry traits. Nocil has established
Nocil has itself as a niche specialty player in the rub-
established ber chemicals business with a high entry
itself as barrier. Rubber chemicals constitute only
3.5 - 4% as raw material to manufacture a
a niche tyre. However, that component is critical
speciality to the production of rubber to enhance
its key characteristics such as elasticity,
player in strength, durability, hardness, flexibil-
the rubber ity and resistance to wear. This blend of
low unit value with high importance for
chemicals the end product quality, acts as a critical
business source of competitive edge for the rubber

chemicals industry. Besides this industry-
level economics, Nocil also has another
significant source of moat. That is, its
business enjoys a high level of operational
and process efficiency that comes from a
long period of specialisation. Now that the
opening move has been made, it is time for
the main plot.
ATTRACTIVE DYNAMICS
Globally, there are just a handful of rub-
ber chemical players. First, there is a need
for advanced technical manufacturing
knowhow, high R&D investments and long
customer approval process. Besides these,
there is another critical factor that makes
the industry dynamics attractive. This
comes from the nature of the replacement
cycle in the end-product (tyres) where rub-
ber chemicals are used. The tyre industry’s
replacement intensity makes the rubber
chemical industry less cyclical in terms of
demand volume.
Nocil is the largest manufacturer of
rubber chemicals in India with a domes-
tic market share of 40% and a diversified
22 -product portfolio in the entire range
of rubber chemicals (See: Many in one). It
is also the fourth largest in the world, in
terms of capacity, with a market share of
5%. Tyre manufacturers prefer to work
with such companies with a diverse range,
which can assure steady supply.
Nocil’s expertise in the rubber chemical
business spans over four decades, during
which it has built business relationships
with clients in over 40 countries. Just like
its product pipeline, it has a diversified
clientele that includes the likes of MRF,
Apollo Tyres, Pirelli, CEAT, Michelin and
JK Tyres to name a few. The company’s
65 -70% offtake is consumed by tyre manu-
facturers and the rest by non-tyre sectors
such as latex, cycle tyres, surgical gloves
and footwear among others.
GOOD BOOKS
High quality business, check. Leadership
in the market, check. With robust funda-
mentals in place, Nocil’s financial ratios
paint a pretty picture. From 60% on oper-
ating profit to operating cash flow to over
48% on net profit to free cash flow, the
company boasts a healthy balance sheet.
NOCIL
Many in one
Nocil is a one-stop shop for tyre companies across the world
due to its diversified portfolio
Revenue breakup (FY19)
Pre/Post
10% Vulcanization
inhibitor
45%
Accelerator
45%
Anti oxidant
Source: TrustLine Holdings
Nocil enjoys a strong net cash position of
#1.47 billion (#8.9/share) as on FY19 and its
expansion capex of #4.25 billion is com-
pletely funded through internal accruals.
Its revenue, operating profit and net profit
grew at a CAGR of 10%, 27% and 34% over
FY15 -19, respectively. Its operating profit
and profit margins have grown from 15.8%
and 7.9% to 28.1% and 15.2%, respectively
(See: Growth formula). On the back of its
robust earnings growth and cash flows,
Nocil was able to clear its entire debt in
FY18 (from #1.31 billion in FY14) and is cur-
rently debt free (See: Cash is king).
In the current fiscal (9MFY20), revenue
fell by 21% to #6.34 billion due to weak re-
alisation, steep slowdown in domestic auto
volumes and no benefit of anti-dumping
duty in the second and third quarters. Its
operating margin also contracted by over
670 basis points to 22.4% from 29.1% in
9MFY19. As a result, net profit fell by 27%
to #1.09 billion. However, the management
has guided a recovery in volume from
Q4FY20 following the commercialisation of
Nocil is the Dahej plant and renewed focus on volume
largest Indian growth, which will lead to positive oper-
ating leverage. FY21 could be a welcome
manufacturer change given a significant increase in en-
of rubber quiries from domestic and global OEMs on
supply disruptions in China.
chemicals and
has a domestic BANKING ON STRUCTURAL GROWTH
The prevailing coronavirus crisis could
market share turn out to be the biggest opportunity for
of 40% Nocil. Reducing China dependency is no
/ 10 April 2020 23
MY BEST PICK NOCIL

Growth formula Cash is king

Quality business and market leadership have helped Prudent cash management has allowed the company to
Nocil maintain healthy margins shed all its debt
Ebitda margin (%) Profit margin (%) Debt-to-equity (%)
0.45
27.5 28.1 0.40
0.35
22.4
21.5 0.30
19.5
17.8 17.6 17.2 0.25
15.8
13.1 0.20
11
0.15
8.1
0.10
0.05
0
FY15 FY16 FY17 FY18 FY19 9MFY20 FY14 FY15 FY16 FY17 FY18 FY19 FY20
Source: TrustLine Holdings

longer a cocktail discussion, it is a clear IT'S A STEAL

danger facing the boards of all global
companies. Buyers everywhere are speed-
ing up their ‘China hedging’ process,
which kicked off post the US -China trade
war. India is likely to be one of the po-
tential beneficiaries, in industries such as
specialty chemicals where the country is
globally competitive.
Right now, Chinese players dominate the
global market with over 68% share, but
that is likely to change and Nocil is well
placed to capitalise on this transition. In
fact, it has already done that once. In Jan-
uary 2019, the US imposed additional 15%
duty on rubber chemicals from China. We
believe this has acted as a trigger for Nocil
to capture the incremental wallet share
from Chinese rubber chemical players.
In addition, the export market remains
highly untapped for Nocil. With increased
capacity, it can leverage and increase its
global market share.
Nocil’s current capacity utilisation stands
at 45%, which means it has huge head-
room for growth. With asset turn of 2x,
and given the capex of #4.25 billion, the
company has the potential to double rev-
enue over the next three to four years. The
other triggers that could boost growth are
increasing share of radialisation, espe-
cially in the MHCV tyres (requires 1.3x-1.4x
rubber chemicals compared with regular
tyres), expected recovery in Indian auto-
mobile sector in FY21 and increasing pollu-
tion curbs in China.
Besides an experienced and competent
management, a long and complex pe-
riod of specialisation, attractive industry
dynamics with high entry barriers and
robust financials make this stock a high
quality one from the smallcap space.
With a market obsessed with quality and
growth, one would have expected the
stock to trade at a premium. But due to
the overall global uncertainty, that has
not happened yet.
Its short-term earnings visibility is in
question coupled with removal of an-
ti-dumping duty. Hence, the stock has
de-rated to a level where it offers a sig-
nificant discount to what it is worth.
In our estimate, the per-share intrinsic
value for the stock, even with a conser-
vative growth and margin assumption,
works out to be around #220 -#230. At
#64 per share (as on March 20), it trades
With asset at a sharp discount and offers substan-
tial margin-of-safety of over 70%. Over
turn of 2x, a four-year period, it can provide signifi-
and capex of cant upside to long-term investors as we
#4.25 billion, expect the intrinsic value to grow at a
reasonably high rate.
the company Of course, no investment opportunity
has the comes without any downside risks. In this
one, a protracted delay in the recovery
potential to of demand in the domestic auto industry
double revenue could pose a serious risk to earnings in
the short-term. Since much of this risk is
over three to already in the price, further downside, if
four years any, is likely to be limited. b

24 10 April 2020 /
 NATIONAL COOPERATIVE DEVELOPMENT CORPORATION (NCDC)
IN SERVICE OF AGRICULTURE & RURAL DEVELOPMENT
National Cooperative Development Corporation is promoting various development programmes through
Cooperatives for agricultural activities like production, processing, marketing & inputs, storage, export & import of
agricultural produce, foodstuff and allied activities. NCDC plays a key role in doubling farmers’ income through many
modes including its Mission called SAHAKAR-22 targeting 222 districts in the country which include 117 Aspirational
Districts identified by NITI Aayog. Activities broadly include:-

· Ginning, Pressing & Spinning, Weaving & Garmenting

· Sugar and other agro-processing units
· Credit for procurement and marketing of agriculture product
· Storage and cold chain activities
· Support to Cooperatives for undertaking Consumer Business
· All types of Industrial Cooperatives, Cottage & Village Industries, Handicrafts/rural crafts etc.
· Credit & Service Cooperatives Labour Cooperatives & Service Cooperatives: Water Conservation works
& Irrigation in Rural Areas, Animal Care/Health,Agricultureal Insurance & Agriculture Credit, Rural Sanitation,
Tourism, Hospitality & Transport/ Generation & Distribution of Power by New, Non-Conventional &
Renewable Sources of Energy/ Rural Housing/ Hospital / Health Care & Education through Cooperatives etc.
· Integrated Cooperative Development Projects in selected districts
· Weaker Sections Fisheries, Dairy & Livestock, Poultry, Schedule Caste/ Tribe, Handloom, Coir, Jute,
Sericulture, Hill area, & Labour & Women Cooperative
· Assistance for Computerization

Net NPA of NCDC are at zero and loan recovery position is approximately 99%. Cumulatively assistance
of almost n1.25 Lac Crore has so far been provided for various cooperative development programmes
by NCDC.

NATIONAL COOPERATIVE
DEVELOPMENT CORPORATION
(An ISO 9001:2015 Certified Organisation)
4, Siri Institutional Area, Hauz Khas, New Delhi-110016
Phone: 26567475, 26567026, 26567202, 26567140
Fax: 0091-011-26962370, 26516032
Website: www.ncdc.in
FAISAL MAGRAY MY BEST PICK

26 10 April 2020 /
 TATA CONSUMER PRODUCTS

G A U TA M T R I V E D I
CO-FOUNDER, NEPEAN CAPITAL

TCPL, with its vast

distribution network and
promising new manage-
ment, looks expensive but
holds great promise
*Gautam Trivedi holds the stock in his fund’s portfolio

/ 10 April 2020 27
MY BEST PICK
STOCK PRICE
M-CAP
FY20* RETURN
TTM P/E
ROE
ROCE
Net Sales
PAT
*Market data as on March 20, 2020. Financials for 9MFY20; Return ratios as of FY19
A lmost exactly a year ago,
the chairman of Tata
Sons, N Chandrasek-
aran, decided to restruc-
ture the $113 billion conglomerate (FY19
revenue). The plan was to have the group
focus on 10 verticals, merge businesses
that have synergies with each other and be
among the top three in each vertical.
As a result, Tata Global Beverages
(TGBL) and Tata Chemicals (TCL) decided
to unite their consumer products busi-
nesses to form Tata Consumer Products
(TCPL), a premier diversified consumer
products company (See: The sum of parts).
TCL shareholders would receive 1.14
shares of TGBL for every 1 share of TCL .
TCL shareholders now own 31.4% of the
combined entity. The scheme of amalga-
mation became effective from February
7 this year and the company has been re-
named Tata Consumer Products. The new
name is more befitting the future plans
that the Tata group appears to have with
TCPL . This is the fi rst of the many triggers
that will play out.
TCPL has become the Tata group’s vehicle
for its FMCG ambitions with 91% of the rev-
enue coming from branded products. The
combined company is now home to various
brands and businesses and the revenue mix
is also set to change going forward.
The company has the second largest
branded tea company in the world and one
of the largest in India, with iconic brands
such as Tata Tea (first by volume and sec-
28 10 April 2020 /
264
243 billion
33
68x
6.6
9.5
56.9 BillioN
4.73 billion
Data: Ace Equity
ond by value in branded tea in India) and
Tetley (among the top three brands in the
UK and Canada). Post-merger, branded tea
accounts for 57% of revenue, down from
71% pre-merger.
Coffee accounts for 13% of revenue, down
from 17%. While Eight O’ Clock is the
fourth largest player in coffee bags in the
US, Tata Coffee Grand is an instant coffee
brand in India launched in late 2015. An as-
tounding 330 million servings of its bever-
age brands are consumed everyday globally.
Starbucks India is a 50:50 joint venture
with Starbucks that has 174 stores across
11 cities (as of December 2019). This busi-
ness, which is already cash-positive, has a
long runway for growing this iconic global
brand in India. The company is taking a
measured approach to expansion, much
like group company Trent, which has built
an outstanding retail fashion brand.
TCPL has The company is present in the water
become the business with Himalayan Natural Mineral
Water, one of the biggest brands in India.
Tata group’s It also has Tata Gluco Plus that makes a
vehicle for glucose-based energy drink for the masses.
It’s attractively priced at #10 and sold in
its FMCG seven different flavours. Currently avail-
ambitions able only in three states, it will be gradu-
with 91% of ally launched in the rest of the country.
The consumer products business, that
the revenue comes from TCL , includes Tata Salt (the
coming from top branded salt in India with a two-thirds
share of the branded market), and Tata
branded Sampann that has branded pulses, spices
products and ready-to-cook packaged food. The
 TATA CONSUMER PRODUCTS

The sum of parts

With a focus on branded products including tea and coffee, TCPL is an FMCG player to be reckoned with
Tata Global Beverages
TCL TGBL TCPL Tata Chemicals’ Consumer Products
#112 billion* #72.5 billion* #90.99 billion*
REVENUE (# BN)
CPB Others Others 72.52
16% 12% 12% 18.47
Coffee
EBITDA (# BN)
17% 18% Salt
57% 8.38
3.16
13% India Reach
84% 71% (#Households)
Coffee 110 mn
Other Business Tea Tea 140 mn
TCL to de-merge its Consumer Product Business (CPB) into TGBL through a NCLT approved Scheme of Arrangement; TCL shareholders will be entitled to receive 1.14 shares of
TGBL for every 1 share of TCL; Post the Transaction, TGBL to be renamed as Tata Consumer Products Limited *FY19 Revenue

penetration of branded pulses, and spices
and condiments businesses in India are
merely 1% and 30%, respectively.
TCPL expects strong growth in both these
segments given the rise in modern trade,
online trade and the secular trend of buy-
ing more branded goods. Their products
are available with major online retailers
such as Amazon, BigBasket and Flipkart.
In fact, Tata Sampann is already the lead-
ing online pulses brand in India.
The next trigger will be the unfolding of
the synergies between TGBL and TCL . We
believe that TCPL will be able to leverage
Tata Salt’s 2.5 million distribution points
and widen its reach to over 200 million
households across India. Moreover, TCPL
will be able to leverage the Tata group’s
other consumer-facing businesses, namely
Trent, Indian Hotels and Vistara.
The other major trigger in the stock is
the appointment of Sunil D’Souza, who
takes over as managing director and CEO
with effect from April 4, 2020. A gradu-
ate of IIM Calcutta, D’Souza joins from
white goods major, Whirlpool of India.
During his five-year tenure, Whirlpool’s
sales grew 14% CAGR and profit grew 27%
CAGR . Prior to that, he spent 14 years at
PepsiCo’s Asian operations.
Besides Sunil D’Souza, TCPL has made
several senior management changes, hir-
ing fresh talent such as Ajit Krishnakumar
(COO), Adil Ahmed (head of international),
Rakesh Sony (head of strategy and M&A)
and Rishi Dang (head of US business).
For a period of 10 years, that is, between
2006 and 2016 end, the stock price of the
erstwhile TGBL went up a mere 32% from
#94.50 to #124.45. As a result, investors
had lost interest in the stock and missed
the growth that came soon after Chandra
assumed office as Chairman of the Tata
Group on February 10th, 2017. The stock
has since tripled to hit a lifetime high of
#392 , before falling to #265 (on March 20,
2020). This was led more by the corona-
virus correction in global equity markets
than any change in fundamentals. What’s
more, with 66.8% free float, the stock
trades $28 million a day (last 3 months av-
erage), making it among the top 50 most
liquid stocks in India.
TCPL has a healthy balance sheet which
generates free cash flow of #10 billion.
Trailing twelve months (TTM) financials of
TCPL have combined revenue of over #95
TCPL will billion and Ebitda of over #12 billion. India
be able to will contribute more than 60% revenues,
against 49% at TGBL .
leverage While the stock is not cheap at 24.5x FY21
Tata Salt’s price to earnings, we estimate that the P/E
will expand as the story plays out and the
2.5 million stock catches up to the high valuations of
distribution its listed peers, such as Hindustan Unile-
points and ver, Nestle and Dabur.
Over the next five to 10 years, the com-
widen its pany will introduce more FMCG products
reach to over and pump them through its extensive
nationwide distribution. We believe Tata
200 million Consumer Products is the next food and
households beverages giant in the making. b

/ 10 April 2020 29
 MY BEST PICK

HARENDRA KUMAR
MD, ELARA CAPITAL

ICICI Securities has a

strong moat, thanks to its
distribution reach and a
strong product offering
FAISAL MAGRAY

*Harendra Kumar does not own ICICI Securities, but Elara Capital has recommended
the stock to its clients

30 10 April 2020 /
ICICI SECURITIES

/ 10 April 2020 31
MY BEST PICK
STOCK PRICE
M-CAP
FY20* RETURN
TTM P/E
ROE
ROCE
Net Sales
PAT
*Market data as on March 20, 2020. Financials for 9MFY20; Return ratios as of FY19
I CICI Securities (I-Sec) is one
of the largest and oldest eq-
uity brokers in India and ranks
number one with an overall re-
tail client base of 4.7 million, and number
two by active client base with 10% market
share and number two in market volume
with a 9% blended market share — its re-
tail volume share is higher than its blended
share. While the advent of discount bro-
kers has dented margin, I-Sec is still the
number two by revenue market share, with
a CAGR of 14% over FY14 -19.
I-Sec is a full-scale broker and provides
research, margin funding and a full bou-
quet of other financial products including
mutual funds, life and general insurance,
and third-party loan products. The leader-
ship position extends even to the distribu-
tion piece, where I-Sec is the second-larg-
est non-bank distributor with a market
share of 4% as on FY19, as per AMFI. The
capital markets business remains its crown
jewel, with I-Sec being number one domes-
tic financial advisor by revenue for FY19, as
per Prime Database.
THE MOAT
As a subsidiary of one of the largest pri-
vate banks in India, the ICICI brand pro-
vides customers the trust, especially given
the recent incidents surrounding client
asset misappropriation, with client’s cus-
tody sitting with the bank. I-Sec has been
an innovator from the start, with being
the first to provide eATM facility to all cli-
32 10 April 2020 /
282
91 BillioN
12
18x
53
52
12.2 BillioN
3.86 BillioN
Data: Ace Equity
ents, where up to #500,000 is transferred
to all clients within half an hour against
industry practice of T+2 (transfer day plus
two) working days. I-Sec still has a size-
able customer base above the 40 -year age
bracket, which is considered sticky and a
segment that has been difficult to crack by
discount brokers.
The biggest moat in financial services in
India has always been distribution, which
serves the dual purpose of client acqui-
sition and servicing. While the broking
industry has moved online with 30% of
the NSE cash and derivatives trade being
done via the internet, broking still remains
a light touch model, and being the sub-
sidiary of a bank with 4,874 branches, of
which 50% are in semi-urban and rural ar-
eas, has its advantages.
We see enough room for the industry to
expand client base from a mere 28 mil-
lion retail participants (See: Geared for
growth), of which I-Sec has 0.96 million on
board as active users on December 2019
(See: More the merrier). Beyond the natural
ICICI shift to financialisation of savings, which
benefits the industry at large, the firm has
Securities other advantages including the 8,600 -plus
is one of the sub-brokers.
largest equity BENEFICIARY OF CONSOLIDATION
brokers in A growing client base (2x over FY14 -20) and
India with a revenue pie (16% CAGR over FY14 -19) are
testaments of I-Sec weathering the storm of
client base of discount broking, which heightened since
4.7 million FY17. Revenue did take a beating at 64%

Geared for growth
I-Sec has enough room for expansion
In million
Market participants
28
Demat holders
39
Individual tax filers
59
Retail MF folio
77
EPFO subscribers
170
Source: Elara Securities Research
CAGR in average daily turnover versus reve-
nue growth of 16% over FY14 -19, though not
all was because of pricing but also a shift to
derivatives and intraday trading.
Recognising the needs of new-age cus-
tomers and aggressive competition, the
management led by Vijay Chandok has
taken steps to bridge gaps in pricing
and products. I-Sec launched a separate
membership plan called Prime, where
it has reduced the rack rates, although
they are still higher than those of dis-
count brokers. The steps have been well
received with 5% of the customer base
shifting to Prime, which has resulted in
increased activation rates.
Of the 230,000 Prime customers, 90% are
in the first category, as per the manage-
ment. While volume has held up for 60%
for 9MFY20, broking revenue was down
2% YoY, which we ascribe to the launch of
Prime at the start of the current fiscal. We
currently do not build in any material shift
of customers to Prime, and expect FY20
brokerage revenue to see 2% YoY growth.
Margin trade financing, too, has picked
up with a quarter on quarter jump in book
to #11 billion in Q 3FY20 from #6.8 billion
in Q 2FY20. Management sees this is as a
stable source of revenue. Given its current
networth of #10 billion, I-Sec has the abil-
ity to grow this 4x.
TIGHTENING RULES A POSITIVE
Despite the growing size of the broking
industry, the regulator has not increased
ICICI SECURITIES
More the merrier
I-Sec has close to 10% share of the overall active client user base
In million
9.8
8.8
8.3
6
5.1 5.2
4.3
FY14 FY15 FY16 FY17 FY18 FY19 FY20*
Source: Elara Securities Research. *Till January 2020
the minimum networth requirement for
trading and clearing membership (TM &
CM) in the capital market and futures and
options segment, which currently stands at
#30 million. The networth for large brokers
remains high and comfortable and gives
them an edge. The changing regulations,
while do not directly increase the require-
ment, are pro-large brokers given their
stronger balance sheets.
We see tightening regulations working
towards the benefit of large brokers and
increasing networth requirement putting
a floor to the price war. On one hand, a
stricter implementation on margin fund-
ing will be detrimental for the industry at
large. On the other, regulations to reduce
settlement frequency and inability to use
client assets post the Karvy episode work
in favour of I-Sec. We expect a 27% CAGR
in market volume over FY19 -24, with I-
I-Sec began Sec growing higher at 28% as we build in
a separate market share gains. These gains could be
sharp due to the reducing competition,
membership but we keep them conservative, given
plan ‘Prime’ the uncertainty around margin funding.
We expect 12% CAGR in broking revenue
with reduced over FY20 -22 on the back of 20% CAGR in
rack rates, market volume and a slight dip in yield
although they to account for the impact of Prime and
Option20.
are still higher
than those AMAZON PRIME OF BROKING INDUSTRY
I-Sec historically has had a diversified rev-
of discount enue mix, with distribution being an inte-
brokers gral part at 23 -26% of revenue. This makes
/ 10 April 2020 33
MY BEST PICK
the company partly offset the cyclical-
ity of the broking business. The manage-
ment’s long-term objective remains to have
a 50:50 broking and non-broking share,
which stands at 57:43 currently.
The largest pie in the distribution piece
is mutual funds. With an MF AUM CAGR
at 24% over FY14 -19, I-Sec has seen its cli-
ent MF post an AUM CAGR of 35% over the
same period, with market share in com-
missions going up from 2.3% in FY14 to
4.0% for FY19. The recent total expense
ratio (TER) cuts have dragged MF rev-
enue down 3.0% for FY19. We estimate MF
revenue to fall by 16% YoY for FY20, with
growth resuming over FY21-22.
Being a one-stop shop, insurance is also a
part of the bouquet of services. But unlike
MF, the tie-up is only with group compa-
nies on the life (LI) and general insurance
fronts, while for health, it has tie-ups with
two standalone health insurers. The man-
agement is looking to go the open archi-
tecture route here too, which could be an
additional growth lever. Revenue for the
LI business has been flat in 9MFY20, due to
subdued performance by ICICI Life Insur-
ance with annualised premium equivalent
(APE) up just 1.2% for 9MFY20. We see it
improving once ICICI Prudential Life picks
up steam.
I-Sec has other distribution products, in-
cluding the National Pension Scheme, Al-
ternative Investment Fund, portfolio man-
agement services and fixed deposit, which
contribute to 28% of distribution revenue.
Gilded edge
I-Sec’s parentage could spur the wealth management business
AUM (# trillion)
IIFL Wealth
Edelweiss
1.11
ICICI Securities
1 nesses is volatile, given the cyclical nature
JM Financial
0.47
Motilal Oswal
0.19
34 10 April 2020 /
The We expect distribution income to bottom
management’s out in FY20 for the combined impact of
TER cuts and slower growth by ICICI Pru-
long-term dential Life. We estimate distribution in-
objective come at a CAGR of 13% over FY20 -22.
Long entrenched relationships are the
is to have a backbone of wealth management, with
50:50 broking I-Sec boasting of 65% of revenue contri-
bution by customers who have been in as-
and non- sociation for more than five years. I-Sec
broking share, classifies its wealthy clients as having as-
which stands set under advice of more than #10 million
and currently stands at an aggregate of
at 57:43 #1 trillion spread over 30,000 strong client
currently base (See: Gilded edge). Given limited dis-
closures, the potential from this pie could
range from 12% to 30% of revenue. We see
this piece gaining increased focus under
the new management and could be a sig-
nificant value driver.
As far as investment banking activity
goes, FY16 -18 were the best years as I-Sec
reported #1.4 billion in revenue for FY18,
at a CAGR of 31% over FY15 -18. FY19 was
hurt by the IL &FS crisis, which combined
with the fall in consumption reflecting in
macro and GDP growth rate. With GDP
growth and capex expected to bottom out,
we expect capital market activity to revive
in the medium term. Additionally, the gov-
ernment’s #2 trillion divestment target will
be a key driver to revive capital market ac-
tivities. I-Sec remains the largest domestic
financial advisor by revenue, and a high
share in public issuances will enable it to
capture the above opportunity.
We are conservative in our projections of
overall revenue CAGR of 12% over FY20 -22
on the back of 12% CAGR in broking rev-
enue and 13% for non-broking. We cur-
rently project 20% CAGR in market volume
over FY20 -22 against 68% over FY17-19,
and we expect further moderation in pric-
1.79 ing owing to the adoption of Prime and
Option20.
CALL FOR EFFICIENCY
Profitability of the capital markets busi-
of business, which coupled with lofty em-
ployee cost, makes it a highly operating
leverage play. For I-Sec, profit before tax
margin has been moving from 20% for
Source: Elara Securities Research FY14 to 44% for FY19 and has maintained

The perfect mix
Distribution business helps I-Sec offset cylicality of broking
FY15 FY16 FY17
491
500
400
300
200 165
131
100
0
Equity + MF AUM
Derivative ADTO*
Note: Rebased FY14 to 100 *Average daily turnover
during 9MFY20. This is a result of the fol-
lowing: One, tight leash on other opex,
which was up by 3% CAGR over FY14 -19,
owing to the strategic shift in closing down
branches. As per the management, direct
cost toward branches is 10% of FY19 over-
all cost, and, thus, has further scope for
rationalisation as it closes more branches.
Two, given the increasing use of digital as
a platform, I-Sec has broadly maintained
headcount, but wage inflation has meant
employee cost rising at CAGR of 11% over
FY14 -19. Management is now only looking
to fill vacancies which are crucial, else the
headcount is expected to rationalise fur-
ther. Three, the focus is also on reducing
cost-income ratio to 50% by FY22.
ONE-STOP SHOP
We see merit in financialisation of savings
as a theme and expect fi nancial savings
to post CAGR of 11% over FY19 -24. Even
with intense competition in financial ser-
vices and disruption from new entrants,
we believe I-Sec will hold its fort as it has
weathered the storm with a strong balance
sheet. I-Sec’s net worth of #100 billion is
more than combined networth of 400 small
brokers.
It ticks off all the boxes — leadership po-
sition across clients, revenue and distribu-
tion, and a strong brand that instills trust.
The organisation has a lot of firsts to its
credit and continues to innovate under
the aegis of a new management, which we
believe is of utmost importance, given the
ICICI SECURITIES
competition from fintech. Another advan-
tage to I-Sec would be the continued con-
solidation into larger brokers. A diversified
FY18 FY19 business model and expectation of further
diversification bode well to reduce cyclical-
ity (See: The perfect mix). We expect FY20
to be a bottom for revenue growth and ex-
pect it to pick up to 12% CAGR over FY20 -
289 22. This clubbed with an 6% CAGR in opex
would result in an earnings CAGR at 21%
179 over FY20 -22.
95
BIG TO BIGGER
We see changing regulations working
Insurance in favour of large brokers as the smaller
Premium ones find it difficult to sustain incremen-
Source: Elara Securities Research tally. This opens up 35% of market share
gains for large brokers. Risks from the
entry of other big firms such as Paytm
remains, but having weathered the on-
slaught from the largest discount broker
Zerodha with continued increase in mar-
ket share, I-Sec is likely to ride this one
out, too. A one-stop shop for all financial
products provides stickiness and is ex-
pected to provide delta to earnings and
reduce cyclicality of business.
Importantly, I-Sec has been an innova-
tor at its core. With Chandok taking over
charge in May 2019, the company has fur-
ther strengthened its offerings. The incum-
bent management undertook an extensive
internal assessment to bridge product gaps,
further strengthen the core and plug ex-
cesses in cost. The new launches via Prime
and Option 20 is already visible in a 133,000
increase in active client share over the past
10 -11 months to 988,000 in January 2020.
Along with that, blended volume market
I-Sec ticks off share has also moved up from 8.1% to 8.9%
all the boxes as on December 2019. Additionally, the
management looks to adopt open archi-
— leadership tecture in distribution of life and general
position insurance segments and acquire non-ICICI
bank customers as well to broaden the cus-
across clients, tomer base. We see strategies playing out
revenue and well with Chandok at the helm until FY24.
distribution, We are bullish on I-Sec with a target
price of #610, based on an earnings growth
and a strong model which implies a P/E of 26x. We see
brand that moat in the business, reflective in its wide
distribution, brand name, good balance
instills trust sheet, diversified revenue streams and
in customers strong execution. b
/ 10 April 2020 35
 MY BEST PICK

M E H U L B H AT T
FOUNDER, OYSTERROCK CAPITAL

Nesco, with its enviable real

estate assets, well-managed
cash-flow and competent
management, looks like a
good place to move into
FAISAL MAGRAY

*OysterRock Capital owns shares of Nesco in the fund’s portfolio and may buy or
sell in the future and to that extent, could be considered as interested

36 10 April 2020 /
 NESCO

/ 10 April 2020 37
MY BEST PICK
STOCK PRICE
M-CAP
FY20* RETURN
TTM P/E
ROE
ROCE
Net Sales
PAT
*Market data as on March 20, 2020. Financials for 9MFY20; Return ratios as of FY19
W hat do you love, in
the time of corona?
The question is in-
spired from the ti-
tle of the famous Gabriel Garcia Márquez
book, set in a period of cholera epidemic.
We are in a similar situation. Much like
the book’s protagonist Florentino Ariza, in
times of market carnage like the one we
are facing due to Covid-19, it is difficult
to maintain a sense of equanimity. In the
present milieu, many investments offer
mouth-watering valuations for good busi-
nesses. But, my love for a clean, strong
balance sheet and transparent manage-
ment draws me towards Nesco, which has
a history of healthy return ratios com-
bined with an attractive valuation (that
could get cheaper).
Originally known as New Standard En-
gineering Company, Nesco figured out
the potential of real estate and a way to
commercially exploit it by creating an IT
park lease rental business. And in the ’90s,
it converted itself into a pure lease rental
play. Its 65 acre land in Goregaon, Mumbai,
has excellent connectivity — it is in close
proximity to both the airports, and is right
on the Western Express Highway. As an off-
shoot, the company also started a hospital-
ity business and continues to run a legacy
engineering business.
Additionally, Nesco has embarked on an
expansion plan that, in the short run, will
add significant IT park space, to increase
leasable area. To take advantage of the
38 10 April 2020 /
502
35 BillioN
12
20x
16
23
3.13 BillioN
1.80 BillioN
Data: Ace Equity
Mumbai Development Plan for 2034, Ne-
sco plans to create a holistic growth pro-
gramme including, potentially a hotel. The
entire exercise is expected to be financed
internally without equity dilution or debt
and, interestingly, in some instances, even
from customer advances. This makes for
a formidable investment case. Now, let us
dive into each of its diversifications.
Exhibition Centre: In FY19, Nesco gener-
ated revenue of #1.56 billion with an EBIT
of #1.26 billion from this business. It has a
leasable area of ~0.65 mn sq ft. Typically,
the space sees large, sizeable exhibitions
every alternate year. The third and fourth
quarters tend to be the best ones, while the
second quarter is often weak due to the in-
ternational calendar. It plans to construct
the New Business Exhibition Center with
built-up area of ~0.15 mn sq ft, which is ex-
pected to be completed in a few years.
IT Park: Nesco currently has three op-
Nesco figured erational IT buildings with a total of ~2
out a way to mn sq ft leasable area generating revenue
of ~#1.37 billion in FY19 (See: Jewel in the
commercially crown). The construction of IT park 4 is also
exploit its completed, which will add another ~2 mn sq
real estate ft of area. The handover of premises to les-
sors is currently underway. There are plans
by creating to construct one more building that will
an IT park add 0.13 mn sq ft, in the next four years.
lease rental Hospitality: Nesco has created food
business courts on its premises and is now look-
 NESCO

ing at this business as a profit centre. For Jewel in the crown

FY19, this division brought revenue of The IT park business has compounded at 19.54% over the past decade
~#350 million and an EBIT of #70 million Business exhibition centre IT Park Others
on capital employed of ~#250 million. The
company set up a state-of-the-art kitchen 0.99
0.81 0.82
for #150 million and is expecting this busi-
ness to grain traction. 0.65
1.37
Engineering Division: Nesco makes sur- 0.47 1.41 1.45
face preparation systems called ‘Indraba- 0.38 1.20
tor’ shot blasting machines. For FY19, the 0.44
0.45 0.37 0.48 0.90
revenue from this was ~#350 million with 0.42 0.28
0.34 0.27
an operating profit of ~#70 million. De- 0.23
spite being the company’s legacy business,
this division has become relatively insignif- 0.54 0.65 0.76 0.91 0.95 0.85 1.11 1.32 1.30 1.56
icant. But, it plans to continue this opera- FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19
tion without any further investment. Revenue in # billion Source: Jainam Share Consultant, Ace Equity

EXHIBITING PROMISE rona, commercial real estate will also see

All in all, the company plans to add over
4 mn sq ft of space over the next many
years incurring a capex of #20 billion.
The leadership team of Suman Patel and
his son Krishna Patel, both with a strong
pedigree and an excellent record on gov-
ernance issues, shun models such as JV
or REIT structures and continue to focus
on basics.
While the sheer size of Nesco’s land
parcel gives it a competitive advantage,
Reliance Industries plans to build a large
convention centre in BKC, Mumbai. This
might pose a direct threat to Nesco. How-
ever, due to the location, the size would be
smaller than Nesco, which would limit it
to only certain types of exhibitions. Also,
combining forces for both companies — if
it ever happens — could attract larger ex-
hibitions, some of which do not happen in
India or are moved to NCR for various rea-
sons. A price war could lead to potential
lower yields for both.
Nesco faces various risks. One, if the eco-
nomic slowdown persists, exhibition rev-
enues could be affected due to lower occu-
pancy. This can also reflect in the IT parks.
Two, the large convention centre being
built by Reliance Industries in BKC could
compete for revenue. Three, a pandemic
such as the coronavirus can pose consider-
able threat to the exhibition business, as
congregation of large crowds is discour-
aged. Four, as work-from-home becomes
an acceptable corporate norm post Co-
challenges in the coming year.
However, in our view, issues such as the
coronavirus will blow over. Locational ad-
vantages and top class infrastructure will
ensure that Nesco’s rental business is not
at significant risk.
The company trades at a valuation of
~20x trailing 12 -month earnings. This con-
siders a reduction in rentals due to tearing
down of one structure for a new develop-
ment and does not include the just opera-
tionalised IT park. However, earnings are
likely to be lower in the current year due
to the pandemic, and hence, valuation
will seem elevated. But, taking into ac-
count consistent return ratios, long history
of positive free cash flows and growth in
revenue and earnings, the business offers
good prospects to warrant making an in-
vestment case. In each of the businesses,
The leadership increasing leasable area and rising rentals
has a great offer growth opportunities. If one applies a
cap rate (not preferred), the numbers could
record on become even more attractive. Also, in case
governance of a benign interest rate environment, low-
ering cap rates would increase valuation.
issues and Future growth plans, sufficiency of in-
shun models ternal accruals to fund growth, a com-
such as petent management, size and locational
advantages of the asset, and an attractive
JV or REIT valuation make Nesco a solid business. So
structures, much like the protagonist of Love in the
time of Cholera, Florentino Ariza, I keep
while focusing going back to one of my old favourite
on the basics stocks — Nesco! b

/ 10 April 2020 39
 MY BEST PICK

SAFIR ANAND
SENIOR PARTNER, ANAND AND ANAND

With macro dynamics

shifting in its favour and
a sturdy business model,
Transpek Industry has the
perfect formula for growth
VISHAL KOUL

*Safir Anand owns the stock and is not a Sebi-registered advisor

40 10 April 2020 /
TRANSPEK INDUSTRY

/ 10 April 2020 41
MY BEST PICK
STOCK PRICE
M-CAP
FY20* RETURN
TTM P/E
ROE
ROCE
Net Sales
PAT
*Market data as on March 20, 2020. Financials for 9MFY20; Return ratios as of FY19
E verything does not have
to be pomp and show. Just
because something is not
in the limelight does not
mean it is not worth respect. How else
would this world find gems such as Irrfan
Khan or Pankaj Tripathi? They were un-
derrated despite being in the industry for
long, but today, both have a cult following
of hardcore film-watchers. Transpek In-
dustry is one such stock.
Established in 1965 by Shroff Group,
Transpek has been exploring all kinds of
compounds — from sulphur to chlorine —
and has earned a name for itself as a quali-
ty supplier and manufacturer of chemicals.
With more than five decades of experi-
ence, the company has evolved as a fi rst-
time manufacturer of several products in
India and also built the market for these.
They developed the process for chlorinated
chemicals including thionyl chloride and
various acid and alkyl chlorides that are
used across industries such as agrochemi-
cals, polymers, pharma, dyestuff, flavour
and fragrance, and surfactants.
If that exhaustive list of potential client
sectors wasn’t enough to convince one,
let’s turn to the overall outlook for Indian
chemical companies. Demand contin-
ues to rise domestically and internation-
ally, as companies are looking for sources
outside of China due to high pollution
levels and increasing cost. Not to mention
the Novel Coronavirus outbreak that has
jolted global markets into the realisation
42 10 April 2020 /
1,390
7.91 billion
-6
10x
24
27
4.03 billion
0.48 billion
Data: Ace Equity
that heavy dependence on China will cost
everyone dearly. According to the latest
data compiled by India’s drug regulatory
authority, 57 active pharmaceutical ingre-
dients of crucial antibiotics, vitamins, and
hormones or steroids could go out of stock
in case of a prolonged lockdown in China.
Moreover, western chemical companies
are seeking strategic alliances and invest-
ment opportunities. In this aspect, they
deem several Indian companies to be reli-
able, one of them being Transpek Industry.
Besides the fact that the company delivers
quality chemicals, it also counts some re-
puted pharma giants as its clients. Hence,
in the foreseeable future, we expect the
company to register solid growth for the
Shroff Group.
UNIQUE STANDING
In 2017, Transpek struck a long term
Transpek has agreement with global giant DuPont to
been exploring manufacture an existing product for the
company for the next 10 years. The poly-
all kinds of mer chemicals are used to make Kevlar,
compounds, a high performance heat resistant, strong
synthetic fibre. In simple words, Kevlar is
from sulphur a super-strong plastic, a plastic so strong
to chlorine, that it can stop bullets and knives and 5x
and has stronger than steel. Yes, it’s Kevlar that is
used to make bulletproof vests. It also has
earned a name other applications, ranging from bicycle
as a quality tires to racing sails. The deal is a big posi-
tive for Transpek since it ensures a stable
supplier of client and revenue source for almost a
chemicals decade. In fact, after signing this agree-
 TRANSPEK INDUSTRY

Formula for success

With a number of major clients and focus on innovation, Transpek has delivered strong growth over the years

Sales (# billion) Net Profit (# billion) OPM % ROE %

2.90 2.84 3.17 3.61 5.95 5.70

0.22 0.21 0.30 0.26 0.66 0.79
13% 17% 17% 13% 20% 22%
29% 23% 15% 11% 21% 25%

FY15 FY16 FY17 FY18 FY19 FY20*

*Estimate Source: Company, reports

ment, DuPont announced that it would be
closing down its facility in the US to source
from suppliers (read Transpek) who have
“newer process technology”. The company
also called Transpek’s technology “more
productive” than its own.
Even on the financial front, the com-
pany has performed well over the recent
past. While net profit grew at CAGR of
31% from FY15 to FY19, sales grew at 19%
CAGR (See: Formula for success). Even after
the company had an accident at its plant
in May 2019 and production was halted for
two months, the company has managed to
deliver steady growth over the past three
quarters of FY20. The company also boasts
healthy return ratio (See: Quiet underdog).
Though the products it manufactures
are chemicals that are hazardous in na-
ture and, thus, timely environmental
approvals and expansions are necessary
Quiet underdog
Transpek seems an attractive play on the rising specialty chemicals
demand around the world
Stock CMP P/E
(#) (x)
Aarti Ind 772 24.7
Navin Fluorine 1,186 35.2
Alkyl Amines 1,250 13.8
Fairchem 454 64
Transpek 1,390 10
Data as on March 20, 2020
for value creation, one cannot overlook
Transpek’s upper hand in terms of exclu-
sivity when compared to its peers. This
can be attributed to factors such as back-
ward integration and on-site production
of intermediaries, a unique recycling sys-
tem with closed loop chemistry and R&D
recognised by departments of the Indian
government. It also boasts of 100 acres of
land with a green belt of more than 30,000
trees, fully fledged effluent management
system with a licensed discharge facility
to the central effluent channel and a self-
sustained water source.
Transpek’s focus on innovation is reflect-
ed in its pipeline of organic as well as in-
organic products. Manufacturing technol-
ogy for all of its existing products has been
developed in-house.
POISED FOR GROWTH
During a recent board meeting, Transpek
sought approval to undertake a greenfield
expansion project at an estimated cost of
#1.20 billion, funded by a mix of debt and
Market cap D/E ROE equity. Even if it undertook the project,
(# billion) (x) % it will not hurt its books since its current
fixed assets stand at #2.70 billion.
134 0.91 24
As more global players see a reliable part-
58.8 0 14 ner in Transpek, it can further boost its
growth and assure steady return for inves-
25.5 0.44 24 tors. The DuPont deal is testimony to the
company’s capability and the upcoming
17.6 0.85 18 expansion can unlock the runway for this
mid-sized chemical player, taking it to the
7.9 0.46 24
next level of growth. b
Source: Companies, reports

/ 10 April 2020 43
 MY BEST PICK

V I J AY K E D I A
MD, KEDIA SECURITIES

Repro India is changing the way

people read, and is set to capture
a third of the market
FAISAL MAGRAY

*This is a personal analysis by Vijay Kedia, who has invested in Repro India
and is not to be construed as a recommendation to buy or sell the stock

44 10 April 2020 /
 REPRO INDIA

/ 10 April 2020 45
MY BEST PICK
STOCK PRICE
M-CAP
FY20* RETURN
TTM P/E
ROE
ROCE
Net Sales
PAT
*Market data as on March 20, 2020. Financials for 9MFY20; Return ratios as of FY19
R eaders are fickle crea-
tures. Ask the publishers.
They will tell you how
a book that was all the
rage yesterday has become as uninterest-
ing as dust today. Therefore, publishers
have to manage a promising business on a
rickety supply chain. They are never sure
what will be rejected, what will be read
and what will be returned. Therefore, Re-
pro comes as a godsend.
Repro India has created a print-on-de-
mand solution where it prints a book after
the customer has bought it, hence disrupt-
ing the decades-old existing supply chain.
Its solution fulfills the demand through
various channels — by aggregating, digitis-
ing, listing titles on online storefronts, pro-
ducing on demand, delivering anywhere
in the world. Repro has done this through
tie-ups with the world’s largest e-retailers
— including Amazon, Flipkart, Paytm, In-
fibeam, Rediff and Snapdeal.
Currently, India is the sixth-largest book
market in the world and, with the total
number of internet users in India expect-
ed to grow rapidly, the number of people
expected to buy books online is increasing
every day. Today, around 100,000 books are
sold per day through online marketplaces.
Books have emerged as an instrumen-
tal category for e-commerce business,
accounting for 15% of the overall e-com-
merce trade, just trailing behind electron-
ics at 34%, and apparel and accessories at
30%. The Indian e-commerce market is
46 10 April 2020 /
388
4.65 BillioN
-32
18.6x
10.5
7.7
2.93 BillioN
0.17 BillioN
Data: Ace Equity
expected to grow to $200 billion by 2026,
and the online book market in India is
expected to grow to #80 -100 billion in the
next three to five years.
But the Indian book industry has its
challenges. It receives no direct investment
from the government, which is “a serious
roadblock for publishers”. Other key chal-
lenges include fragmented nature of pub-
lishing and bookselling, a tortuous distri-
bution system, and long credit cycles.
PUBLISHING DISRUPTED
Currently, the publishers face challenges
in the traditional way of doing business.
Books are produced and then sold — lead-
ing to high levels of inventory. The solu-
tion, therefore, is keeping zero inventory.
By the time a book reaches the market or
is actually sold, it might be out of date or
no longer relevant. The solution, there-
fore, is zero obsolescence. All books are
Repro India bought on consignment in various differ-
prints a book ent geographies and so publishers may feel
they have sold higher numbers than they
after the actually have. The solution, therefore, is to
customer entertain zero returns. Books are produced
at one place and sent over to one part of
has bought the country, while the actual book may be
it, hence, required in another corner of the country.
The Repro solution is a tech platform
disrupting the that aggregates content from publishers
decades-old all over the world and reaches more books
existing supply to more readers, anytime, anywhere!
Just like aggregation platforms such as
chain Uber and Airbnb, it connects products and

The company’s e-retail business has been quite a successful one, and it continues to grow at a healthy pace
Volume (Books sold/quarter)
Domestic International Total
400,000
300,000
200,000
150,371
100,000 122,731
27,640
0 20
Q1FY19
services to users. Repro’s aggregation plat-
form offers books to readers all over the
world from publishers all over the world. It
lists the publishers’ titles online through e-
retail giants such as Amazon and Flipkart,
and readers order the online books from
Repro. The platform then produces the
book (after it has been bought) and deliv-
ers it in 24 - 48 hours. Repro then pays the
publishers their royalty immediately on
sale of the book.
Hence, the publishers can focus their en-
ergies on creating a book, making no other
investment. The industry need no longer
be bogged down by worries about inven-
tory, obsolescence, returns and wastage.
Also, the cash flow is positive.
Repro India tied up with US -based In-
gram content group, which is one of the
world’s largest content aggregators and
distributors for books. They have the in-
dustry’s largest active book inventory
with access to 14 million titles from 45,000
publishers. The company has exclusive
agreement with Ingram in which the US
company will provide international titles
to Repro India to sell on Indian platforms,
and Repro will also share domestic titles it
has aggregated over the years from Indian
publishers with Ingram to list those titles
on international platforms.
BOOKED FOR GROWTH
Repro started the print-on-demand opera-
tion in 2016 -2017 with ~90,000 titles, with
one facility in Bhiwandi with a capacity of
REPRO INDIA
Page turner
Revenue (million/quarter)
Domestic International Total
140
367,327 130
120
320,554 100
82.1
80
61.8
60
33.7 48
46,773 40 28.2
Q3FY20 Q1FY19 Q3FY20
Source: Company
4,000 books per day and average sales of
#250,000 a week. It saw 114% increase in
volume of books from Q 1FY19 to Q3FY20.
Similarly, its revenue also increased pro-
portionally by 111% over the same period
(See: Page turner).
By the end of 9MFY20, it listed over more
than five million titles, two operational
facilities, one in Bhiwandi and other in
Delhi and third facility is expected soon in
Bengaluru and cumulative capacity will be
22,000 books per day and revenues are now
touching #130 million per quarter. It has a
negative working capital cycle.
Repro seems to be entering an exciting
phase of growth with its capex almost over
and commercialisation of the new capacity
set to start in FY21. The balance sheet has
become healthy with debt/equity ratio fall-
ing to 0.35 in December 31, 2019, as against
0.52 in March 31, 2019. Operating cash flows
have been improving and the company may
start generating healthy free cash flows
from FY21. The debtor days, too, have re-
With its capex duced from 105 to 68, over the same period.
almost over One thing to note is the old printing busi-
ness could continue to be a cash cow for
and a tie-up the company, in-spite of the topline being
with US-based range bound. Thus, Repro would have a
Ingram, Repro healthy working capital cycle and would
become debt-free sooner than expected.
seems to be Being the first-mover in this space, we
entering an expect Repro India to have minimum one-
third market share in three to four years,
exciting phase and we are confident that it will disrupt
of growth the industry in a meaningful way. b
/ 10 April 2020 47
 MY BEST PICK

VIKAS KHEMANI
FOUNDER, CARNELIAN CAPITAL ADVISORS

Growth opportunity and a

competent management are
great for compounding
capital, and that’s why
ICICI Lombard makes the cut
FAISAL MAGRAY

*Vikas Khemani owns the stock

48 10 April 2020 /
ICICI LOMBARD

/ 10 April 2020 49
MY BEST PICK
STOCK PRICE
M-CAP
FY20* RETURN
TTM P/bv
ROE
ROCE
Net Sales
PAT
*Market data as on March 20, 2020. Financials for 9MFY20; Return ratios as of FY19
S tuff happens. Life is ran-
dom and unpredictable.
2019 was a perfect illustra-
tion of this, with the floods
in Kerala and Karnataka, and Cyclone
Fani in Odisha to the big pandemic that
has spooked everyone. In times of such
uncertainty, insurance shines like a bea-
con. In India, the opportunity size of the
insurance industry is huge, with the min-
iscule penetration in general insurance.
Companies operating there usually don’t
have to fight for growth. Therefore, we
like ICICI Lombard.
This industry has several things going
for it. First is its size and scale. Second is
the structural benefit inbuilt in the dy-
namics. Here, one receives cash upfront
and pays later, leaving a large sum of
money called ‘float’, which allows insur-
ance companies to generate investment
return while underwriting profit. That, in
turn, helps these players generate good re-
turn on equity.
The #1,700 -billion general insurance in-
dustry has been growing at 16% CAGR for
the past 20 years and yet the premium per
capita stands at only $19 in India. Where-
as, in countries such as China, South
Africa and Brazil, that figure is 8x to 10x
higher. Within sub-segments such as mo-
tor, only 25% of two-wheelers and 60% of
cars are insured as compared to the global
benchmark of 90%. Even with something
as crucial as health insurance, penetra-
tion is merely 27% in the country, and 89%
50 10 April 2020 /
1,004
456 BillioN
2.5
8.82x
21
329
70.5 BillioN
9.11 BillioN
Data: Ace Equity
of the private expenditure incurred on
healthcare is out of the consumer’s pocket.
These dynamics leave ample room for
players to penetrate and increase the size
of risk coverage.
The other interesting trend playing out
is the large market share movement from
public players to private players, quite
similar to what is being seen with banks.
In early 2000, private players held around
13% of the market, which has increased to
55% in FY20. The mood towards PSU play-
ers has not been too sanguine. The gov-
ernment has also allocated #70 billion for
mergers and the recapitalisation of general
insurance companies to manage manda-
tory solvency ratios, which has soured the
sentiment against them.
In the recent past, regulatory changes
such as mandatory third-party insurance
of three years for four-wheelers and five
Backed with years for two-wheelers have also helped
a strong the industry immensely. Thus, an insur-
ance player gets the money upfront for
parentage, three and five years — one could not ask
well-known for more in a float-oriented business.
brand and an STRONG LINKAGES
experienced Focusing on ICICI Lombard, this com-
leadership, pany brings with it a strong parentage,
well-known brand and an experienced
ICICI Lombard leadership. All these factors form a great
has the recipe recipe to capture growth in any good
business. The dynamic and capable lead-
to capture ership of Bhargava Dasgupta makes it
growth even more exciting. He is one of the best
 ICICI LOMBARD

Getting it right
Conservative underwriting has ensured that ICICI Lombard continues to enjoy high solvency
Underwriting profi ts/(losses) (# mn) Underwriting margin (%) Solvency (%)

34
2.26
2.24
-1,152

-363

-891

-400

-489

-686

-622

-322

-430
0.2 2.21

-2.0 2.20
-1.8 -1.4 -1.8 2.18 2.18
-2.3
-3.1 -2.8
2.10 2.12

-4.8 2.05
2.04
-6.4
Q2FY18 Q1FY19 Q4FY19 Q1FY20 Q3FY20 Q2FY18 Q3FY20
Source: Company, HDFC Securities

CEOs I have come across, who has priori-
tised product innovation, technology and
risk management.
ICICI Lombard is the largest private
general insurer with a comprehensive
and well-diversified product portfolio
covering motor, health, fi re, engineering,
marine and more coupled with strong
infrastructure of 265 branches, 910 vir-
tual offices and over 10,000 employees.
The insurer’s premium income grew
16% CAGR over the past five years and
net profit at 16% CAGR . Strong solvency
ratio, combined ratios and loss ratios in
comparison to its peers only validate the
strong underwriting skills, risk averse-
ness culture of the company combined
with focus on profitability (See: Get-
ting it right). Their ability to reject a less
profitable business is commendable. For
instance, it exited its crop insurance
business and did not chase commercial
vehicle insurance when it stopped look-
ing lucrative.
Yes, the recent regulatory plan of allow-
ing life insurance players to sell health
insurance policies can be an additional
competitive factor, but I do not believe it
will deter players such as ICICI Lombard.
The company offers a huge back-end in-
frastructure across claims processing,
tie-ups with third party administrators
and hospitals. If anything, life insurance
players should be wary of ICICI Lombard.
Furthermore, corporates generally prefer
insurance companies that provide a bou-
quet of services, so that they don’t have
to deal with several vendors.
What could have been another risk for
the company — technology — has not yet
posed a threat since the management has
always been a bit ahead of the curve in
terms of innovation and cost efficiency.
SOLID AND SOLVENT
We believe ICICI Lombard should be able
to double its profit from #11 billion to
#20 billion over the next four years and
further enhance its market leadership. If
anything could dent its path towards ac-
celerated profitability growth, it is only
regulatory risk and persistent economic
slowdown. But a great company will know
how to navigate turbulence.
Compounding at 15 -20%, with no ad-
ditional capital requirement and a huge
retail customer base, ICICI Lombard is
more of a consumer business than a finan-
ICICI Lombard cial services one. Can the company reach
$50 billion in market cap over the next
should be able decade? I believe the probability is quite
to double its high. Of course, the stock is not trading
cheap. At 5.7x its estimated FY21 P/BV, the
profit from 11 stock may look expensive to many inves-
billion to #20 tors but a business like this will remain
billion over the expensive. Sure, in equities, one should
never overlook risk. But, investing has
next four years always been a game of probability in an
and further ever-changing world. And ICICI Lombard
will compound over a long period. As the
enhance its saying goes — if you want quality stocks,
leadership you have to pay for it. b

/ 10 April 2020 51
MY BEST PICK

52 10 April 2020 /
 MANAPPURAM FINANCE

V I R A J M E H TA
HEAD–PMS, EQUIRUS SECURITIES

With steady cash flow, robust

business model and prudent risk
management, Manappuram
Finance’s future looks golden

*The stock is part of Equirus Long Horizon Fund

/ 10 April 2020 53
MY BEST PICK
STOCK PRICE
M-CAP
FY20* RETURN
TTM Pbv
ROE
ROA
Net Sales
PAT
*Market data as on March 20, 2020. Financials for 9MFY20; Return ratios as of Q3FY20
“When lending people money, be sure
their character exceeds their collateral”
– Jackson Brown Jr
T his lesson was one of the
thousands in the Ameri-
can author’s book of life
instructions, which, if our
bankers had read, would have done great
service to this country. While growth is
important, risk assessment is vital. While
asset quality is important, determining
loss in case of a default is vital. While NIM
is important, risk adjusted yield is vital.
It may be a cliché, nonetheless true, that
anyone can lend but not everyone recovers.
This is where risk management plays an im-
portant role in any lending business. For in-
stance, in the gold-loan business, a company
would have to closely assess the quality of
gold and price fluctuations, both are major
risk parameters. While the first is objec-
tive, insulating against the latter requires
a nuanced strategy. That’s why we like
Manappuram Finance, a company that has
smartly introduced an additional protection
measure by shortening the tenure of loans
to three months compared to industry prac-
tice of one year. Thus, it protects the lender
from sharp vagaries of price fluctuations.
It’s no wonder then that its gross NPA rose
above 1% only in one out of the past five
years, which was the year of demonetisation.
From FY08 to FY12, its gold loans grew
at a scorching pace with AUM increasing
~15x on the back of rising gold prices. Over
54 10 April 2020 /
97
82 BillioN
23
2.3x
30.4
6.3
38.6 BillioN
10.8 BillioN
Data: Ace Equity
the consequent five years, the industry
underwent a consolidation, primarily due
to stagnant gold prices and regulatory in-
terventions. But now that the players have
adjusted to the new norms, the industry
is expected to grow at 8 -10% rate for the
foreseeable future.
SAFE HAVEN
Billionaire investor George Soros once
wrote, “The act of lending can change the
value of the collateral.” While this may be
true in most forms of lending, it does not
hold water in case of gold loans. Gold is a
highly liquid asset and can be easily mon-
etised in case of a default without having
much effect on its value. Another common
Manappuram financial market wisdom falls on its face in
has introduced case of Manappuram’s gold loans business
— high risk, high return. The company has
an additional one of the highest spreads in the lending
protection business and, despite being one of the safest
forms of lending, it earns a very high yield.
measure with a What further strengthens our case for
loan tenure of the stock is the current economic turmoil.
three months Considered safe and valuable when things
get tough, gold holds a special appeal in
compared Indian households. Collectively, Indians
to industry own more than ~20,000 tonne of gold, ap-
proximately valued at #80 trillion at cur-
practice of rent prices. At 70% loan-to-value ratio, this
one year translates to an opportunity size of #56

Well-funded
A well-diversified liability mix ensures cost of capital is in check
Bank Finance Commercial Paper
in %
1 2
13.1 18.7
3.8 1 0.1
28.3
82
52.7
FY15 FY18
trillion. Of this, organised gold loans have
barely scratched the surface with 3% pene-
tration. That means a long growth runway
for players such as Manappuram Finance.
Furthermore, lending is a commodity busi-
ness and anyone including banks, NBFCs,
local money lenders can lend against gold.
However, specialised NBFCs have a distinct
advantage against other lenders. Gold loan
NBFCs enjoy speed and flexibility of local
moneylenders while benefiting from much
lower cost of funds.
The company has already proved its mettle
as it emerged out of the IL&FS fallout most-
ly unscathed. While the cost of borrowing
for troubled NBFCs increased substantially
over two years, Manappuram was not one of
them. In fact, recent commercial paper issu-
ance at 6.12% yield was at a much lower rate
compared to peers (See: Well-funded). This is
because of its high quality loan book backed
by highly liquid collateral.
Due to its healthy gold loans business,
the company has maintained substan-
tial cash flow, which has been prudently
utilised by the management. From being a
100% gold loan company in FY14, Manap-
puram’s 33% of the loan book now comes
from sectors such as micro finance, vehicle
loans and housing finance. Ashirvad Micro
Finance, which it acquired in February
2015, is now among the top five MFI lenders
in the country. The subsidiary’s AUM has
grown from #3 billion to more than #50 bil-
lion over the past five years. It enjoys RoA/
RoE of ~5.3%/~26.8% and gross NPA of
MANAPPURAM FINANCE
All that glitters is not gold
Manappuram has derisked its business
Subordinated Bond NCD Others Gold loan AUM Non-gold AUM
FY19
10.9
23.6
100
33
FY15
62.8
67
Q3FY20
Source: Company, PL Source: Company, PL
<0.5% as of Q 3FY20. While Manappuram’s
gold business continues to be a core one,
we believe non-gold business will also be
a substantial growth driver, contribut-
ing nearly 50% of the AUM in the next five
years (See: All that glitters is not gold). With
a customer base of 4.93 million customers,
it has large cross-sell opportunities, which
Manappuram should be able to capitalise.
SHINING BRIGHT
Despite high growth over the past de-
cade, Manappuram raised equity only
once, in FY11. It has reported strong earn-
ings growth with EPS rising from #1.8 in
FY10 to #15.9 in FY19 on a trailing twelve
months basis. The financier’s efforts to
lower security cost over the years has
also reaped rich dividends in the form of
healthy return ratios — RoA of 6.3% and
RoE of 30.4% on consolidated basis as of
Due to its Q 3FY20. Despite being in a capital-inten-
healthy sive business, Manappuram has not missed
dividend payouts for more than 15 years,
gold loans which demonstrates the robustness of its
business, business model as well as cash flows.
All these factors prove the company has
Manappuram significant room to grow, and it would
has steady not even require much capex. It already
cash flow, has more than 4,600 branches across the
country and as business grows, operating
which has leverage should kick in, which would mean
been prudently extremely attractive return ratios. At #82
billion market cap, Manappuram trades at
utilised by the ~5x estimated FY21 earnings. That, with-
management out a doubt, is a great steal. b
/ 10 April 2020 55
PERSPECTIVE

DEVINA MEHRA
Co-founder and head of research, First Global

SHANKAR SHARMA
Founder and vice chairman, First Global

What asset allocation is,

what it is not
FOR ASSET ALLOCATION STRATEGY TO WORK IN YOUR FAVOUR, INVESTORS MUST INCLUDE ALL ASSETS

R emember XYZ stock I told you about

three months ago? It is up by 80%
since then”, “ABC ekdum solid hai.
Just jump in”, “PQR kya lagta hai?”
Sounds like a familiar party conversation…or some-
thing that you watch fi nancial channels for.
If your endgame is to have fun discussion at par-
Just go and look at his record in the past 15 or 20
years and you will see an investor who has missed
practically every single multibagger that the US mar-
ket has given in this period: Amazon, Netflix, Dom-
ino’s, Google, Apple (he bought way too late), Face-
book, Microsoft, and so on. He is an investor who has
consistently underperformed the stock indexes.
ties, this is fi ne. But if your purpose is to protect and This is PRECISELY the problem with the ‘sexy’ bot-
multiply your wealth, or to optimise your portfolio, tom-up stock-picking approach. Everybody is relevant
you are frankly approaching the problem from the in a period. And one fine day, the market changes,
wrong end! Why? The answer takes you to Investing and you and your strategy become irrelevant.
Basics 101. And, it is to do with asset allocation. De- Therefore, when you are picking people to manage
pending on the study you read (and there have been your money, check the approach and their strategy.
many, conducted over decades), you will find that
fully 85 -92% of the returns of a portfolio come from THE GOLDEN KEY TO INVESTING
asset allocation. Most investors fall in the very familiar trap of get-
ting over exposed to the hot asset class of that era.
YOU GOT THAT RIGHT! But the key point to always keep in mind is that if
Specific stock selection, which eats up most of your you start playing every innings thinking that you
and your advisor’s waking hours contrib- are going to get a hundred runs, you
utes only 10 -15% of the return. Moral
of the story: it does not make sense to
Bottom-up stock are never going to be successful. Mar-
kets change; sometimes they become
concentrate your resources and time on picking is a easy, sometimes very tough.
security or stock selection. But, all the The key to successful investing, over
talk you will hear from portfolio manag-
very difficult the long term, is to have every major as-
ers is about how good they are at picking art, and nobody set class in your consideration set, across
stocks and great bottom-up winners.
The uncomfortable point is — bottom-
has been able to countries and currencies and across in-
vestible assets — equity, fixed income,
up stock picking is a very, very difficult do it successful- real-estate, precious metals, other com-
art, and nobody in the history of invest-
ing has been able to do it successfully for
ly for decades. modities and more.
The mantra: there is always a bull
decades. Yes, not even Warren Buffett. Not even Buffett market somewhere in the world, even
56 10 April 2020 /
as there is a bear market elsewhere at the very same markets. For instance, let us look at the past 10
time. View this: Technology in 1998, Emerging Mar- years. In two years, gold was the best performing
kets in 2004 - 07, Commodities 2003 - 08, US equities- asset class in India (partly due to currency move-
tech 2010 onwards, Japan 2013 -15, Global Fixed In- ments), and in another year, it was the second-best
come 2009 onwards. performing asset class. In other years, real estate did
Even more recently, 2018 and 2019 have been ex- extremely well. And now, through REITs and some
tremely difficult periods for Indian stock markets. Bar- other instruments, it is possible to get systematic ex-
ring a handful of stocks, most have been in negative posure to real-estate as well.
territory. Despite the difficult 2019 period, First Glob- When we, at First Global, talk of ‘asset allocation’ it
al’s global portfolio returns have been up 40%! means that your consideration set has practically all
That’s the beauty of asset allocation. the investible asset classes in the world.
To optimise your portfolio, it is important to have The other key is to have a dynamic and tactical
all asset classes in your consideration set and carry asset allocation model, that is, assets are to be real-
out dynamic and tactical asset allocation. located based on the tactical view of various asset
classes at any point in time. Just crude measures
WHAT ASSET ALLOCATION IS NOT — like at an age of X years, you should have 60%
The phrase ‘asset allocation’ is bandied around rather exposure to equity and 40% to debt — simply don’t
casually these days. Hence, it is important to under- work, if you are looking to protect and multiply
stand what asset allocation is not. your wealth.
We see this phrase being used quite lightly by many An in-depth understanding of the underlying asset
financial advisors and fund managers classes is also important. Among other
claiming to do asset allocation strate-
gies. Only when one goes somewhat
You may be get- things, this is to ensure that asset classes
are largely not correlated. That comes
deeper into it, one realises that all the ting trapped by from data and vast experience. Is your
talk is about the nature of large-cap ver-
sus small-cap Indian stocks or moving
the narrow ex- money manager well-versed across asset
classes, across countries, across curren-
from value strategies to growth strate- pertise of your cies? If not, you need to be very care-
gies in terms of stock choice within the ful because you may be getting trapped
Indian market. This, combined with
money man- into the narrow expertise of your money
some debt allocation, appears to be the ager, which can manager, which is fine for him, but can
philosophy underlying the so-called ‘as-
set allocation’ strategy.
be disastrous for beFor disastrous for your portfolio.
example, if one has a positive view
In fact, some of the investment docu- your portfolio on commodities and a positive view on
ments even cite the same studies that we Brazil and Russian equity markets, in-
mentioned — 85 -92% of a portfolio return comes from creasing exposure to both will most likely be corre-
asset allocation, with specific stock-selection con- lated as commodity prices drive many of the large
tributing only 8 -15%. The problem? The studies cited company earnings in these two markets.
take into account a portfolio consideration set that Currency alone, or a single country exposure,
is across countries and across asset classes, not just can also change your portfolio return profi le
couple of asset classes in a single country! dramatically.
So, for asset allocation strategy to really work in To conclude, investing is about batting like Sunil Ga-
your favour, your consideration set must include all vaskar: a steady, decidedly ‘unsexy’ approach of care-
assets — developed market equities, emerging market ful risk management through diversification across as-
equities, developed market fixed income, gold and set classes… just like Gavaskar played shots all around
precious metals, other commodities, real-estate (RE- the wicket, hit both pace and spin balls with equal
ITs) across countries and so on. mastery, and also batted well across the world.
Just changing allocation across different categories Bottom-up stock picking is a bit like Virendra Se-
of the Indian equity market or even Indian equity hwag: brilliant when it works, terrible when it doesn’t.
and debt markets is simply not good enough. That is But, never steady or predictable. So, runs come with
like playing football on 20% of the football field. It high volatility or standard deviation.
might be better than not playing at all... but can it re- Who would you want managing your money: Gavas-
ally be called football? kar or Sehwag? The answer is obvious, isn’t it? b
Hence, it is important to look at asset classes be- THE AUTHORS ARE FOUNDERS OF FIRST GLOBAL,
yond just debt and equity, even within the Indian A GLOBAL PMS AND SECURITIES FIRM

/ 10 April 2020 57
 MY BEST PICK

WHAT A YEAR!
Amidst a weakening economy, uncertain policies and a global pandemic,
the 16 stocks recommended in 2019 have delivered mixed return

I
t was a year when the Nifty hit an all-time
high, but as the financial year comes to a
close, it might end 30% below its peak. Out
of the 16 stocks recommended by some of the
top market experts in the country in March 2019,
five delivered positive return. While Coffee Day
Enterprises declined due to unfortunate events,
even stocks such as Bombay Dyeing, Majesco and
Tata Motors have not been spared in the market
carnage. The only true winner in the list is spe-
cialty chemicals player Alkyl Amines, which was
recommended by Viraj Mehta of Equirus Securi-
ties. With a gain of 53% since the recommendation,
it tops the chart, followed by Dr Lal PathLabs,
recommended by Saurabh Mukherjea of Marcel-
lus Investment. As the market carnage continues
amid the novel coronavirus scare, analysts believe
the time is ripe to bet on quality stocks, and that’s
SHUTTERSTOCK

what they have recommended this year. Here’s hop-

ing FY21 is kinder. b

Taking stock
A quick look at how the top picks of 2019 have performed
Reco Peak price CMP** Change
Stock Recommended by price* (#) post reco (#) (#) (%)
Alkyl Amines Viraj Mehta, Equirus Securities 815 1,810 1,250 53
Dr Lal PathLabs Saurabh Mukherjea, Marcellus Investment 1,073 1,846 1,420 32
Vaibhav Global Vijay Kedia, Kedia Securities 628 1,199 765 22
Aavas Financiers Gautam Trivedi, Nepean Capital 1,156 2,101 1,328 15
Dr Reddy’s Aditya Narain, Edelweiss 2,749 3,364 2,879 5
ICICI Bank Vikas Khemani, Carnelian Capital Advisors 392 552 344 -12
Maruti Suzuki Gautam Duggad, Motilal Oswal Financial 6,558 7,758 5,094 -22
Reliance Harendra Kumar, Elara Capital 1,342 1,617 1,028 -23
Grauer & Weil Arunagiri N, TrustLine Holdings 51 62 36 -29
Star Cement Jigar Shah, Maybank Kim Eng Securities 100 140 70 -30
Greenply Ekansh Mittal, Katalyst Wealth 154 194 101 -34
Engineers India Ajay Jaiswal, Stewart & Mackertich 113 128 57 -49
Tata Motors Ambareesh Baliga, Independent Market Expert 175 239 77 -56
Majesco Mehul Bhatt, OysterRock Capital 497 587 206 -58
Bombay Dyeing Gaurav Parikh, Jeena Scriptech 143 147 43 -69
Coffee Day Niraj Dalal, 3A Capital 287 318 26 -91
*As on March 22, 2019 **As on March 20, 2020

58 10 April 2020 /