Dear Customers, Wish you all a Happy Diwali and a Prosperous New Year!
Last year, when we started Samvat 2077, we were battling a Black Swan event. Though we moved from “jaan hai toh
jahaan hai” to “jaan bhi, jahaan bhi”, there was neither any fool-proof treatment nor any approved vaccination. The second
lockdown dampened business activities and consumer sentiment. Today, when we are about to begin Samvat 2078,
India’s vaccination drive has dispensed 100 crore doses. Our team takes this opportunity to thank all frontline workers,
vaccine makers, and the government for their excellent work. The gradual easing of pandemic restrictions, the global
liquidity push by central bankers, and several growth-oriented government policies have resulted in fireworks on D-street.
The macroeconomic outlook is strong. The World Bank, the International Monetary Fund (IMF), the RBI, and other
economic institutions forecast India’s GDP growth at 8.5–10.0%. Ratings agency Moody’s upgraded India’s outlook from
‘negative’ to ‘stable’. Meanwhile, earnings of companies have been improving. The upcoming festive season is contributing to the release of pent-up demand and a good monsoon is expected to bring on positive rural sentiment. The stock
market had a spectacular year not only due to institutional buying of shares but also due to big investments from retail
investors. There was record addition of new Demat accounts in Samvat 2077. Also, in 2021, over 40 companies floated
IPOs to raise more than Rs 70,000 crore, with many more in the pipeline.
Since last Diwali, benchmark indices have advanced more than
40%, while midcap and smallcap indices are up 70–80%. MSI’s
model portfolio has given returns of more than 80% in Samvat
2077. Depending on how you played it, it may have been a great
year, a good year, or a mediocre year. As O’Neil often says, “it is all
about how you handle your winners.” There are lot of positive
factors favoring the market as we start Samvat 2078. However,
rising inflation, increasing bond yields, and an extended rally are
making investors cautious. But, we will keep an open mind and
continue to follow the situation, and see what opportunities present. We will continue to follow the O’Neil rules and have an eye
out for names that meet our profile, appear poised to move higher.
It is crucial to be attentive to market behavior at this time and follow the O’Neil Methodology for safe, fruitful investment.
With a plate full of learnings and dramatic experiences from last year, let’s begin Samvat 2078 with an eye toward sectors
that are turning around to lead the market, stocks that are showing traits of a leader, and be disciplined to invest in perfect
sync with the market. There will be several growth ideas if the market remains in a Confirmed Uptrend. We, at
MarketSmith India, have shortlisted a few stocks as our top picks. These stocks may not be trading in their ideal buy range,
and hence investors should consider buying them as and when they break out of a proper base pattern, or as indicated in
the stock-specific chart.
CMP: Rs 7,775 (November 01, EOD)
UltraTech Cement (UltraTech) is the Aditya Birla Group’s flagship company. It is India’s largest manufacturer of grey
cement, ready-mix concrete (RMC), and white cement. It is the world’s third largest cement producer, excluding China.
Globally, it is the only cement company (outside China) possessing more than 100 MTPA of cement-manufacturing
capacity in a single country. It has a consolidated capacity of 116.8MTPA of grey cement. It has more than one lakh channel partners countrywide covering over 80% of India.
In Q2 FY22, several cost factors rose, which impacted the company’s margins. Logistics cost, which is linked to fuel prices
(diesel prices rose 21% y/y), climbed 7% y/y to Rs 1,219/ton. Energy cost increased 17% y/y to Rs 1,099/ton due to the
steep hike in coal and petcoke prices. Raw material prices rose 3% to Rs 518/ton.
UltraTech has been increasing its manufacturing capacity through brownfield and greenfield expansions. This will enable
it to expand market share and reinforce its market leadership. It has a capital outlay of Rs 6,527 crore, of which Rs 1,050
crore is marked for ongoing expansion projects and Rs 5,477 crore for proposed expansions (a mix of brownfield and
greenfield projects). Grey cement production capacity will increase to 136.25 MTPA in the next two years. The expansion
is planned in the fast-growing markets of the east, central, and north regions of the country.
To curb costs, the company has started locking in long-term sourcing contracts for packing bags for a seamless supply of
quality packaging materials. These contracts are expected to lower costs compared to the current market prices. There
was also a disruption in the supply of petcoke, which the company was able to mitigate by switching to alternative competitive fuels sourced from other suppliers. O’Neil Viewpoint:
- The stock is currently forming a stage-2b flat base pattern. It is trading 5% below its pivot of Rs 8,073.
CMP: Rs 145.7 (November 01, EOD)
- EPS Rank of 92 indicates a strong fundamental profile. Its technical setup is not so good with an RS Rating of 42 and
an A/D Rating of C+.
JK Tyre & Industries (JK Tyre) is one of India’s foremost tire manufacturers and among the top 25 manufacturers worldwide
with a presence in more than 105 countries and 180+ global distributors. It offers tires across the entire range of
two-wheeler, passenger, and commercial vehicles, as well as off-road and specialty tires. It is a preferred brand in India’s
truck bus radial (TBR) segment and was the first in India to market more than 20M TBR tires.
It has 12 globally benchmarked ‘sustainable’ manufacturing facilities – nine in India and three in Mexico – that collectively
produce around 35M tires annually. It has 500+ dedicated brand shops called Steel Wheels and Xpress Wheels.
The company has an extensive distribution network, which ensures brand visibility and availability all over India. It has
6,000+ dealers, 500 distributors, and 20 regional offices. It has tied up with 870 fleet operators and three oil marketing
companies (OMCs) and is aggressively spending on expanding its network, adding 550+ dealers in H1 FY22. For its rural
presence, it has tied up with Amazon and ITC e-Choupal.
It frequently introduces new products. Some of these products gaining traction are: TBR – JUH XF & JDH XF, PCR –
Levitas (UHP), PCR – Taximax – 1Lac km. tire, two-wheeler tire – Blaze, and Farm Shresth. To strengthen its market
position across segments, the company is focusing on increasing sales volume, especially in the replacement and export
segments. It is launching eco-friendly products for electric vehicles (EVs).
JK Tyre acquired a smart tire technology start-up to revolutionize the Indian tire market. It is the first company in the country to launch a tire pressure monitoring system (TPMS) that uses sensors. Key benefits of the TPMS system:
- Reduces fuel bills by increasing fuel efficiency
- Reduces breakdowns
- Enhances tire life
- Enables real-time application-based alerts for tire inflation and temperature breaches
- Offers real-time asset tracking to prevent tire theft O’Neil Viewpoint:
- The stock recently broke out of its stage-2c consolidation base pattern. Going by the general market direction, the
stock cannot find momentum.
- The stock recently breached its key moving averages, its 21-, 50-, and 100-DMA, which is not a good sign.
CMP: Rs 588.6 (November 01, EOD)
- It has a fair EPS Rank 73. Its RS Rating has deteriorated slightly to 50. Base formation was on lower volume, which is
a good sign.
Cholamandalam Investment and Finance Company (Cholafin) is a premier diversified non-banking financial company
(NBFCs) in India. Cholafin offers loans for commercial vehicles, two-wheelers, tractors, construction equipment, SME, and
home purchases, apart from other purposes. The company’s main business is vehicle finance, which accounts for 73% of
advances, followed by loans against property (LAP) at 21%, and home loans at 6%.
On the liability side also, Cholafin is well diversified, which has helped it maintain its liquidity position and borrowing cost,
even when the housing finance and NBFC spaces were in duress. The major chunk of its borrowings comes from bank
loans, which contribute ~55% of its total borrowings, followed by Non convertible debentures (NCDs), commercial paper
(CP), subordinated debt, working capital, and securitization.
Cholafin has an established track record. In the last five years, it has established a credible operational and financial risk
profile supported by a superior 20% CAGR in assets under management (AUM) and 17% CAGR in earnings. While the
industry faced challenges in the last few years, Cholafin has been able to maintain stable asset quality. It has one of the
lowest NPA ratios in the industry along with ROAA of 2.2% as of FY21. The company has been giving consistent
dividends for more than 10 years.
The management expects stage-two/three pool increase in transitory. It is confident about improving trajectory and anticipates better numbers in FY22 versus FY21. Collection efficiency rose to 114% in July from 84% in April–May and 101%
in June. Total liquidity position stands at Rs 154B, including undrawn lines. Cholafin is likely to end FY22 on a better note
than it did FY21, provided there is no third wave or other disruptions. O’Neil Viewpoint:
- The stock recently broke out of its stage-one consolidation base. During the current pullback in the markets, it is
moving sideways, which is a good sign.
CMP: Rs 357.1 (November 01, EOD)
- Institutional sponsorship has been consistently increasing with the number of funds holding the stock rising to 514 in
June from 491 in March, 276 in December 2020, and 229 in September 2020.
Orient Electric (OEL) is one of the leading producers of electric consumer durables (ECD) in India and has a diverse portfolio of fans, lighting, home appliances and switch-gears. It is the third largest player in the fans segment, being in operation
for over 60 years. Despite higher investment in people and branding related spending, and the consequent potentially
lower margins at present, OEL generated ROE of more than 26% in FY21, which is superior to many of its peers.
In FY21, revenue was almost flat at Rs 20.3B, while EBITDA grew 24.4% y/y and margin expanded 220bps y/y to 10.8%.
Working capital cycle days improved in FY21 due to the elongation in vendor payment cycle. With its strong cash generation, OEL has repaid almost of all its debt, leading to net cash of Rs 2.4B.
Even though the company is an established player in the fans segment, it continues to re-invent its offerings. OEL has
been constantly innovating and has impressed consumers with its noise-reducing ‘Aeroquiet’ fans, thereby creating a
niche for itself in the premium segment. It has a range of aerodynamic fans that showcase its in-house R&D facilities.
Outlook across OEL’s segments remains strong. The government’s focus on infrastructure spending and expected resurgence in institutional demand imply the B2B business will do well in future. Meanwhile, in the fans segment, the introduction of energy-efficiency norms from January 1, 2022 is expected to improve unit realizations. The industry is likely to see
a multi-year demand expansion cycle due to replacement demand arising from institutional and government entities
along with a revival in housing demand that would not just boost demand in fans but across segments. O’Neil Viewpoint:
- The stock is breaking out of a stage-two flat base. It is trading above its key moving averages and is actionable in Rs
- The company has strong fundamentals with EPS Rank 90 and ROE of 26%.
- RS line has started to move higher recently. The stock has an A/D Rating of B+.
CMP: Rs 142.8 (November 01, EOD)
- Institutional sponsorship has increased 4.4% q/q.
Welspun Group is one of India’s fastest-growing global conglomerates with businesses in line pipes, home textile products, infrastructure, warehousing, steel, oil & gas, advanced textiles, and flooring solutions. Welspun India Limited (WIL)
is a leader in bed, bath, and flooring products with the widest product portfolio. It has a distribution network in more than
50 countries, world-class manufacturing facilities in India, and strategic alliances with top global retailers.
In Q2 FY21, revenue grew 25.5% y/y and EBITDA increased 4.7% y/y. EBITDA margin in H1 FY22 came in at 18.7%. PAT
in H1 FY22 increased 82.1% y/y. Net debt stood at Rs 25,332M against Rs 22,945M in June. The U.S. terry towel market
is valued at $1.4B. Terry towel is one of the largest categories of home textiles exported from India. WIL leads in this
segment with a dominating share of 20% in the U.S. terry towel segment and a 45% share in India’s exports of terry
towels to the U.S. In FY14–21, WIL’s terry towel capacity expanded at a CAGR of 8% to 80K MT from 43.8K MT.
The global total addressable market (TAM) for WIL’s flooring segment is $20B. The U.S. is WIL’s biggest market. Currently, 80% of the hard flooring market in the U.S. is served by China. With the ongoing trade war, China-made flooring
solutions attract an import duty of 25% in the U.S. This is likely to be advantageous for competing nations like India.
Recently, WIL entered into a long-term strategic arrangement with one of the largest U.S.-based distributors of hard
flooring, thus locking in ~50% of its current capacity for hard flooring.
WIL intends to expand towel-manufacturing capacity by 20% to 102,000 tons/year to meet demand from export
customers. The expansion is likely to be completed in Q4 FY22 and WIL expects to earn revenue from it in Q1 FY23.
Capex for FY22–23 is expected to be Rs 656.5 crore. O’Neil Viewpoint:
- The stock has broken out of a stage-two cup-with-handle base and is currently trading around its pivot. The ideal buy
range is Rs 144–152.
- The company has strong fundamentals with EPS Rank 84 and ROE of 16%.
- The stock has an RS Rating of 69 and an A/D Rating of B+.
CMP: Rs 284.6 (November 01, EOD)
- Institutional sponsorship has increased 15% q/q in Q2 FY22.
KNRCL is a multi domain infrastructure development organization with more than 2 decades of experience and executes
the construction of technically complex and high-value projects across segments such as Expressways, National Highways, Flyovers, Bridges and Viaducts, Irrigation Projects, and Commercial and Residential Projects.
The company has a strong EPC order book of Rs 7,117.9 crore, which includes Rs 4,008.8 crore worth of orders from the
roads sector and Rs 3,109.1 crore from the irrigation sector. It also has projects involving the building of 778 km of lanes
in the states of Telangana, Karnataka, and Bihar. Apart from the order book, the company recently won new projects
worth Rs 4,322.9 crore. These include the six-laning project from the start of the Valanchery Bypass to Kappirikkad
Section in Kerala, six-laning from the Ramanattukara Junction to the start of the Valanchery Bypass Section in Kerala, and
four-laning of the Bangalore-Mangalore Section, including a six-lane flyover at Kalladka Town.
The company has 20 years of project execution experience and has completed more than 6,000 lane km road projects
across 12 states in India. It has a strong track record in the timely execution of projects. In the Bijapur-Hungund project,
though completion was scheduled within 932 days, the company completed it in 582 days. Similarly, it completed the
Hyderabad-Siricilla and Karimnagar-Kamareddy projects in 1,219 and 343 days, respectively, against the scheduled time
of 1,440 and 450 days. The timely execution of projects is mainly driven by management’s active involvement in execution and fast decision-making to ensure adherence to timelines.
The government plans to invest Rs 100 lakh crore in India's infrastructure sector in the next five years. This is backed by
the government's goal of becoming a $5T economy by 2025. Players like KNR stand to benefit from this move. O’Neil Viewpoint:
- The stock broke out of a stage-two cup-with-handle base on June 30 and advanced more than 35% from its pivot.
During the current pullback in the markets, it has breached the 50-DMA but on low volume. If it reclaims the 50-DMA
on above average volume, it gives us an alternate buy point.
- The ideal buy range is Rs 300–315.
- The company has strong fundamentals with EPS Rank 95 and ROE of 13%. The stock has an RS Rating of 62 and an
A/D Rating of B+.
- Institutional sponsorship has increased 20% q/q in Q2 FY22.