After a volatile 2018 and a weak beginning in earlier part of the year, Indian markets have turned around since mid February. Inflows from foreign investors have been strong (Rs 492 billion in 2019) over last few weeks, resulting in India s performance turning around and making it surface among the top-performing markets in the emerging markets space.
Markets also hit new life-time highs last week, marking up a strong beginning for the financial year 2019-2020. The last fiscal year was poor in terms of creating multibaggers. Large cap stocks performed well in early 2019 as they tend to outperform in uncertain times. For mid and small caps to do well, markets have to be in risk on mode and valuations need to be favorable. We believe that markets are in risk on and valuations are in neutral zone. With the RBI reducing the key rates, lower cost of capital shall boost the profitability of firms with a lag, and higher credit growth should boost growth. Since the market trough in February 2019, mid caps are up by 12.9%, vs 8.9% for Sensex. Going forward we expect midcap index outperformance to continue. With this there is potential for investors to find multibagger ideas in this space.
While the Bajaj Finance stock is up by 40% compared to April 2018, an investment in multinational pharma company Merck has more than doubled over the last one year. It was trading at around Rs 1500 in the month of April 2018, and is currently placed at 3800, depicting the power of compounding and wealth creation in strong companies. An investment of Rs 10,000 in Bata India in April 2018 would be worth Rs 20,000 now a return of 100%. This firm in the consumer durables space has grown its bottomline at 43% and is generating an ROCE at 26%.
Identifying multi-baggers is both an art and a science. Investors can find potential strong movers for the next 1 year by focusing on certain parameters. According to the government, India will be a $5-trillion economy in five years, and expand to $10 trillion in eight years thereafter. With most of the central banks easing policies and focusing on economy growth, themes like discretionary consumption, financials and realty are the major spaces to look into. By following a structured and disciplined process, investors can identify stocks which have the potential to deliver high returns on a consistent basis.
What to look for to identify multi-baggers
Strong growth in consumption
Consumption should continue to grow as disposable income rises. Stocks like Titan, Bata India, Jubliant Food Works and Havells have delivered multi-bagger returns during last decade. Implementation of GST and migration from an unorganized to an organized sector is a growth driver for listed companies. V-Guard, present in the electrical equipment and electronics manufacturing space, is an example which fits this theme. As more and more households buy electrical appliances, the company is expected to grow strongly. The company s management has allocated assets well to generate a strong presence in its space. This company is virtually debt-free. We believe that in the future, V-Guard can deliver strong growth in its all business segments.
Within the consumption theme, Apollo Tyres is an example of a stock which can be considered. The company has recorded strong sales numbers last year and the 9-month PAT grew by 42%. The auto sector stocks have overreacted to negative news and the space should recover in the coming months as the stock has the potential to move much higher over the next 1 year.
New age industry disruptors
Disruptors are those who disrupt the existing business model using a competitive advantage to benefit from the inefficiencies of the incumbents. Generally such disruptors are mostly startups and by the time they are listed, the high growth phase is over. However, there are few exceptions and All Cargo is one of them.
We believe All Cargo Logistics has the potential to disrupt the logistics sector; its subsidiary ECU Worldwide wants to be the Uber for the business of booking marine freight, given its end-to-end connectivity across the globe. While there are constraints, the company can potentially overcome them using technology, giving it the potential to disrupt the sector and generate multi-bagger returns.
With a recovery in credit growth and the RBI action to restore liquidity, banks and stronger NBFCs have the room to recover strongly. L&T Financial Holdings is a stock that can benefit; it has a book size of around Rs 95,000 crore and an AUM of around Rs 70,000 crore. It caters to a diversified customer base with products offerings like housing finance, asset management, wealth management, vehicle and equipment finance and real estate and infrastructure lending. Its strong parentage helps it whether any downside risks, and has a sustainable business model. Recently the company recorded a PBT growth rate of 55% for the last quarter.
Infrastructure growth will be center stage over the next few years with projects like Bharat Mala. Ashoka Buildcon is a company that can potentially benefit from new contracts awarded by NHAI over the next one year. Road building forms a sizable chunk of the company s order book and is expected to remain robust. The third quarter results were robust with net profit growing at 32%. It has won orders recently that should help it grow strongly in the coming years.
Real Estate sector should benefit from lower rates and pickup in capex spending. The real estate sector comprises of four sub sectors — housing, retail, hospitality, and commercial. The growth of this sector is well complemented by the demand for office space as well as residential. In this space, we expect Oberoi Realty among the beneficiary in the next few months which has a real estate and hospitality segment. The company reported a growth of 48.4 percent in its consolidated revenue and the real estate segment revenue grew by 53.3% Y-o-Y. We expect the company to deliver a strong growth trajectory in the real estate segment in the coming years. Its low debt to equity ratio places it in a strong position compared to competitors.
In conclusion, while identifying sectors and stocks that have potential to be multi-baggers can be hard, but it is not impossible. In this note, we have attempted to outline the framework which can help investors identify high growth stocks. Markets are inherently volatile and investors need to hold stocks for the long term to build wealth. While our list is not exhaustive, the approach above should help investors grow wealth in FY2019-20 and beyond.
(By Rajiv Singh, CEO-Stock Broking, Karvy)
(Disclaimer: These are the views of the author, and readers are advised to consult their financial advisor before investing in any stock)