INDIAN STOCK MARKETS -10 Big Investment Ideas For 2018

10 Big Investment Ideas For 2018

2017 has been a blockbuster. The next year may not be in that league, but keep your cool and invest with clear thought if you want to make money

On a roll, virtually - Arun Kejriwal (Founder, Kejriwal Research & Investment Services)
The current year has been a great year for stock markets in India and the world. Dow Jones gained over 4,700 points (24.41 per cent) to be at 24,585. In India the BSE Sensex gained over 6,400 points (24.14 per cent) to close at 33,000, while the Nifty gained 2,000 points (24.52 per cent) to close at 10,200. Interestingly, our benchmark indices have matched Dow and registered similar gains of just fewer than 25 per cent. These are excellent returns by all standards and beat the often-mentioned 13-15 per cent as long-term returns in the stock market.

The broader markets saw BSE100, BSE200 and BSE500 gain 27.03 per cent, 28.28 per cent and 30.47 per cent, respectively. While the BSE midcap gained 39.56 per cent, BSE smallcap 49.27 per cent. The best performing sectoral index was BSE consumer durable, which almost doubled gaining 93.90 per cent.

After demonetisation the real estate has undergone lot of pain and transformation and has emerged significantly stronger. This led the BSE realty index gaining 84.64 per cent. The only index in the red was BSE healthcare, down 5.69 per cent. The other sector, which was in the news for poor performance, was BSE IT, which gained only 6.72 per cent.

The year saw the ruling party (BJP) make a big dent and score a landslide victory in the largest state, Uttar Pradesh, and upstage the ruling Samajwadi Party. The SP had tied up with the Congress for the polls this year. The UP election results, declared in March, saw the markets make a decisive move and gain sharply. The markets have been on a roll virtually since then.

There were some headwinds as well. The first was demonetisation, which happened in November 2016. Effect of this was felt in the quarterly results ending December 2016 and the 2017 April-June quarter as well. GST introduction was an issue and there was considerable debate about the launch date. It was finally rolled out on July 1. This led to most industries seeing a virtual stoppage of deliveries in the last week or fortnight of June. This impacted quarterly results for the April-June quarter.

In the rollout month of July one saw some strikes, protests and then normalcy after a couple of months. Rates of many products were also changed, which saw muted sales in the July-September quarter.

While GST is now there to stay, the impact of its introduction did affect the corporate India and cause obstruction to the expected growth. Despite these headwinds, this does not give reason for the poor showing of companies as expected growth is elusive for three years now.

Fund raising has been at its best in 2017. The last time that one saw the highest collection was in 2010 when 64 companies raised Rs 37,535 crore. This time in the eleven months of 2017, 33 companies have raised Rs 65,923 crore. Significantly, of this Rs 65,923 crore, around Rs 54,793 crore (83.11 per cent) was by way of offer for sale by private equity (PE) investors and promoters. Only 16.89 per cent (Rs 11,130 crore) is by way of fresh issue by companies going public. This amount does not include the sum of Rs 55,000 crore (approx), which has been raised by way of QIPs (qualified institutional placements) in the period under discussion.

Some of the key factors that have helped this huge fund raising began with demonetisation in November 2016. That single incident brought many investors from tier 2 and 3 towns to the capital market by way of investments in mutual funds. SIP (systematic investment plan) is seeing inflows of over Rs 6,000 crore a month for the past 12 months and is inching upwards.

The strength of this number is borne out when one looks at institutional business in the secondary markets. Even when foreign portfolio investors (FPIs) sold, domestic institutions have been net buyers. This augurs well for the capital markets and indirectly helps in forming an unofficial sovereign fund. There could be pressure on this inflow once markets correct say around 10 per cent in the coming year. It would be interesting to watch how many of SIPs then get stopped, discontinued or put on hold.

On the divestment front, the investment committee called ‘Dipam’ has done a great job so far. Against a target of Rs 72,500 crore for FY18, they have done Rs 52,389 crore with a clear 3 months to go. Two of the railway companies, namely IRCTC and IRFC, are on the list and could happen sooner than later. IRCTC, the railway portal, is the cash cow in the group and has a business that is probably one of its kind globally. This company is bound to demand a steep valuation due to its unique business model. It sells tickets for railways and pays on journey happening as theoretically the ticket could also be cancelled.

What would be fund-raising like in 2018? I asked Pranav Haldea, managing director of Prime Database Group, for his views. He said: “The fund raising in 2017 is a record by itself. The fact that almost 83 per cent is by way of offer for sale by private equity and promoters is not necessarily a bad thing that PE’s have sold. The funds realised would bring about redeployment of resources into new companies needing capital. There is a healthy pipeline of primary issues and fund raising would continue”.

On over-subscription by leveraged HNIs where issues were getting unrealistically subscribed, Pranav said, “That till listing gains happen this would continue even though it is not a healthy phenomenon.”

I hope merchant bankers do read my article and views from the group that has the largest database on capital markets and fund raising.

During the year gone by it was a common thing to see on television and read in print that every correction was an opportunity to buy and by and large almost everybody was proved correct. 2018 is another year, and it would be difficult to replicate the year gone by.

On the political front, while Karnataka will go to polls in April-May, Madhya Pradesh, Rajasthan and Chhattisgarh would see elections in November. Elections in some of the northeast states like Tripura, Meghalaya and Nagaland are also to be held around that time. While these states election results would cause some movement to the markets, they would not change the trajectory completely.

On the global front, Dow Jones and the US economy would have a great impact on our markets. Currently, they are at a lifetime high like our markets. While the US Fed raised rates by 25 basis points on Wednesday, it also suggested/hinted of three such hikes in 2018. This would have an effect of squeezing liquidity and making money available for markets that much more expensive. With valuations being a concern and expected returns because of higher cost of money being the norm, asset allocation would become that much choosier.

Besides this, geo-political concern would have a big impact on global markets and could derail any positive trend in the short to medium term. Further the rise in crude oil prices could hit India in an adverse manner. The rupee has been steady and has helped in keeping our imports particularly that of crude oil under control. With the increased use of natural gas and higher standard of living, demand for petroleum products would be continuously rising making our imports that much more. In such a scenario crude rising above $60-65 would have a double whammy effect as rising crude would also weaken the currency.

In such a scenario how do equity markets or other asset classes look in the New Year? The issue with last year has been that for the third year in a row company results failed to deliver the expected growth that markets expected from them. It means valuations moved up significantly, even as earnings lagged. The price earnings ratio for the BSE Sensex is currently at 24.60 times while that for the Nifty 26.25 times. The Nifty PE has moved from 21.41 at the beginning of the year to the current level of 26.25 times.

On 2018, said Nilesh Shah, managing director of Kotak Asset Management, “This year people would have to moderate their returns expectation from the markets. While there would be a recovery in earnings, there would be no expansion of valuations”.

On probing further whether the returns of 25 per cent made in 2017 could be matched or not, he was categorical and said: “110 per cent returns of 2017 would not be matched. You should expect high single digit returns.”

Raamdeo Agarwal, co-founder and joint managing director of Motilal Oswal, had similar views. “Earnings must come in FY19. Structural flow of liquidity should continue,” Agarwal said. On possible returns even though he is bullish on India and stock markets, he believes “next year one should look at returns of between 10-15 per cent.”

On the road ahead, Navneet Munot, CIO of SBI Mutual Fund, said: “The most important driver for FY19 would be the growth trajectory. Pushing valuations higher will be tough. It has to be backed by earnings growth. Bond yields have bottomed out. Rates are likely to move up.” He also cautioned, “Returns will have to be moderate and any expectation with last year’s performance would be incorrect”.

Moving on to sectors to look to make money in 2018, one logical call would be to invest in the most beaten down sectors like healthcare and IT. Said Nilesh Shah of Kotak: “look at the disruptor versus the disrupted. Artificial intelligence, data analytics are sectors where money would be made. Look at companies in these sectors not the ones in products and the run-of-the-mill services. In case of pharma or healthcare, look for companies with fundamental research capabilities”. He also cautioned investors. “Do not buy simply because the share price had fallen and the sector had done badly. Second, even if there was value in the sector it would be in individual companies and not the sector as a whole,” he said.

Nilesh made a very valid point when he said, “IT and pharma need catalyst for returns. The rupee depreciation needs to happen for IT and also pharma. Second catalyst could be the US FDA approval for new products and for IT sector it could be bigger spends.”

Echoing the view, Navneet Munot said, “Individual stocks could merit attention not necessarily the whole sector.” He warns about the “huge run-up that has happened in the NBFC sector and would like investors to be cautious about the same.” He is optimistic about primary market fund raising and trusts that would continue. More importantly, he believes “the capex cycle has bottomed out and there would be private investment and fundraising for the same. Maintenance capex has begun everywhere and that itself would be a sizeable amount”.

“Returns will moderate to single digit to low teens,” he said.

I believe that the returns moderating was across the board with everyone I spoke to and the underlying thought was that 2017 was too good. A repeat of that in 2018 is impossible and should not even be thought of.

Agarwal likes private insurance companies, diagnostic labs and part of the BFSI space. He believes 2018 could be the year of AMCs (asset management companies), where one finds many such companies being listed. While Reliance Nippon has listed, HDFC, ICICI and UTI are in the process of doing so. Once we have 3-4 companies in this space, it will throw up an opportunity to evaluate and invest in this sector. The way SIPs are increasing, it seems these companies would attract lot of attention and investment.

Insurance saw just one company listing in 2016 and suddenly in 2017, in less than six weeks we saw a re-insurer, a government general insurance company, two life insurance firms and one private general insurance entity listing. Couple of more companies is on the way. Thus suddenly you would have the listed insurance companies having raised close to Rs 45,000 crore from the market. We have many more to follow and the sector was the sunrise sector in 2016 with people wanting more and more exposure.

A PMS fund manager who didn’t want to be identified due to compliance issues, said, “Easy money making is over. Expect and target only single digit returns. While the IT and pharma space look exciting as contra bets, place them carefully”. He likes the diagnostic labs part of the healthcare business. Yet another theme based investment for him is the “rural” theme, which includes affordable housing and FMCG.

Under affordable housing one gets a wider spectrum of companies and sectors like infrastructure with steel and cement, road developers, entities doing work for NHAI and, of course, housing finance companies catering to bottom of the pyramid and associated with the government housing scheme where there is a subsidy on interest payment. He made an interesting quote, “later the correction, more the pain”.

Markets would be driven by local and global factors as well. Geopolitical tensions, crude oil, the US economy besides local factors like economic data points and political developments would all influence and affect our markets.

Having interacted with some thought leaders and learning from their valuable insights, a couple of points emerge.

First, returns in the New Year will be lower than the ones earned last year. The going will be tough and one would have to be selective in what they invest in.

Second, the real estate looks like an interesting proposition considering the measures introduced and the thrust on ‘housing for all’ and affordable housing.

Third, pharma and healthcare can be looked at but only company wise not the entire sector.

Fourth, fundraising will continue and could surpass last year’s number with government and private companies raising capital.

Finally, one has to keep his cool, patience and invest with clear thought, before one can beat the fixed deposit returns and make money.

Put your nest egg in equity diversified, short-term debt & gold - Vijayanand Prabhu (Investment analyst, Geojit Financial Services)
With oil price dividend fading fast, inflation shows signs of hardening and rate cycle poised to go up as central bankers across globe are poised to shrink their balance sheets sizes, investors should take a call on parking their money with an eye on macroeconomic prudential in 2018.

It’s this time of the year that normally investors resolve to make a new resolution on how to park their funds in the year ahead. In the past, such decisions were easier since investors, especially small investors, could rely on the trend on their return on investment or yield on assets, based on cues thrown up by the year gone by. More prudent investors took cues from forecast made by experts on the basis of historical numbers. There is yet another class of investors with higher risks appetite that used to rely on market momentums, based on random numbers.

But in 2018, taking a call on investment is going to be a bit tricky and tough, especially for the first-time investors with small ticket size. Let me take you through the reasons one by one before making my suggestions for your asset allocation in 2018.

2017 will go down in the history as a year of disruption and heightened geopolitical tensions. The only exception has been the sustained rally in the stock market, which some dubs as triggered by over ebullience while others say is fuelled by excess liquidity. But no one could, so far, reach any convincing conclusion about the equity rally that has sustained all through 2017 barring a few halts before taking the next leap.

But in 2018, investors may have to consider more macro factors than micro episodes before taking the decision to allocate resources. That’s because the oil dividend, which has been playing out, as catalyst for growth across advanced markets and emerging markets may no longer be there when we move on to 2018. The signs of hardening benchmark prices – West Texas Intermediate (WTI) or Brent crude – lend credence to this.

Second, central bankers, especially of the advanced economies, have implicitly decided to put an end to the easy money policy or quantitative easing by shrinking their balance sheets. This is based on the assumption that most advanced economies have hit the ‘full employment’ levels. The argument is indeed supported by shrinking number of new jobseekers in North America and Europe. The only disquieting factor here is the ongoing guess game about the fallout of Brexit. The end of easy money era will sure signal hardening of prices, heightened inflationary expectations of respective central bankers, which ultimately lead to an upswing in rate cycle.

While the policymakers’ focus shifts to domestic balance sheets, economies with not so strong external balance sheets will feel the pressure on their currencies and the Indian rupee is not going to be an exception. As the latest balance of payment figures released by RBI show, the current account deficit has swelled from $3.9 billion in H1FY17 to $22.2 billion in H1FY18. This is mainly due to shrinking exports and rising oil price bill.

The monetary policy committee of RBI at its latest meeting not only refused to budge the growing pressure on the central bank to pare down the key policy rates, but also instead revised up its inflationary expectations. It has also dropped enough hints that the rupee, which is currently trading range-bound, may feel downward pressure if the external deficit widens further. This has nudged the government to take a re-look at its trade policy resulting in announcement of a slew of sops for small and medium enterprises, the growth engines of the economy in general and exports in particular, to make a trend reversal on the export front.

Before I take you through what is in store for different asset classes in 2018, it will be in order to talk about the government’s revenues, which has a direct bearing on the public investment cycle with a derived implication for reviving private investment. Till April-October of FY18, the government’s total revenue receipts as a percentage of budget estimates has declined to 48.1 per cent from 50.7 per cent during the same period of FY17 and the revenue deficit has gone up to 124.9 per cent from 92.6 per cent of the budget estimates.

These sum up the macroeconomic picture of the Indian economy as per the latest available data. Now let me take you through the major investment themes for 2018.

Equity

Let me begin with the equity market, the dominating theme among the asset classes, so far. Equity like all asset classes takes cues from three major drivers of the market sentiments and fundamentals, namely crude oil prices, inflation and exchange rate.

As the trajectory of crude remains elevated since the Organization of the Petroleum Exporting Countries (Opec) might not, in near future, think of a revision of production targets already set. But the unfolding shale story can come for rescue in which case the oil prices could stay range-bound but a downtrend seems less probable.

The steep uptick in consumer price inflation in November was due to a spike in prices of a few food articles. Once the food inflation eases, the target inflation range could be met and this might not be a headache for the government or policymakers in 2018. But this will prove true only if crude prices remain in a comfortable range.

Further, the annual rate of inflation, based on monthly WPI, stood at 3.93 per cent (provisional) for November (over November 2016) against 3.59 per cent (provisional) for the previous month and 1.82 per cent during the corresponding month of the previous year. Build-up inflation rate in FY18 so far was 2.74 per cent against a build-up rate of 3.90 per cent in the same period of the previous year.

As I pointed out earlier, exchange rates are in favour of the US dollar, which could strengthen against the rupee on account of capital flows supported by 2018 rate hike series. This is expected to drain liquidity out of the country over short-term, putting pressure on the local unit.

An optimistic view on inflation in 2018 leading to a subsequent rate cut by RBI may be the most desirable factor that could happen. This may bring rates down from the current levels and should reflect on corporate earnings through H1FY19. Higher consumer spending in Q1FY19 also could favour the market.

Though deficit targets are on a shaky wicket, the probable increase in tax collection from the unorganised sector, manufacturing, real estate, and other goods-centric sectors can boost receipts in FY19. More and more cash transactions now getting routed through the banking system is a source of incremental tax revenue for the Centre.

Tremors left over in 2017 can pull the returns down in earlier months but it should pick up later. Considering the GDP expectation for FY19, the equity market growth is expected to be around 9-12 per cent.

Debt

A lower inflation in 2018 can boost sentiments of debt market investors. Keeping real rate intact, the inclusive policy by RBI can help ease the liquidity situation and hence availability of funds. It is rather a cost-push inflation, which can be addressed through reduced food prices and subsequent rate cuts.

Investors who want better post-tax returns can enter at current levels and can reap benefits through next 3 years. The major capital gain probability lies in 2018.

But here again, movements in crude oil prices weigh. The duration bets too can make returns over next 2 quarters once the food inflation eases and triggers another rate cut.

Overall, the debt market is promising for investors entering the market now and staying invested through next 2-3 years.

Short-term income funds

With AAA-rated mutual fund portfolios now giving more than 7.75 per cent yield-to-maturity, this is one investment choice for investors with a 3-year horizon. After 3 years, the real return after deducting average inflation, of say 4 per cent, would be more than 3.5 per cent, which is a good proposition for a conservative investor. The improving rating upgrade ratio also will boost capital gains in these funds.

Gold

There will be a fine battle between the bullion and the dollar next year. With the dollar set to benefit from rate hike cycle by the US Fed, any unanticipated political event can help gold to perform. At current levels, I recommend not more than 20 per cent of the investment going to gold in 2018. If you already hold good allocation in gold, then it’s better to refrain from more investments.

2017 indeed was an acid test for the market with two major policies kicking in and saw mixed response from market participants.

Hoping that no planned shocks are on the anvil for next financial year, most of it depends upon interest rates and political events.

Asset allocation recommendation — equity diversified: 40-60, debt short-term: 20-30 & gold: 10-20

Equities & bitcoins: The past & the future - Anand Dalmia (Co-founder, Fisdom.com)
The markets are presenting unanticipated movements across the two hot assets available – equities and bitcoins (not sure if this is an asset yet, or not; given the store of value we shall assume this to be an asset). It would be interesting to look at the past, present and try to understand the future of these.

Equities

The history: Equities have always been an inflation-beating asset class, which inadvertently translates to be one of the most rewarding assets available to the public. Equities typically tend to offer returns in the ballpark of nominal GDP, which is simply the GDP growth rate plus inflation. While equities are driven by sentiments in the shorter term, over a longer horizon it tends to normalise returns to the rate around nominal GDP.

In the short-term, equity prices are driven largely by investor sentiments and behaviour (often irrational) more than any fundamental valuation. With millions participating on both sides of the spectrum – demand and supply of equities -- it’s almost impossible to gauge aggregate behaviour and time the market. In fact, many experts also fail to predict market movements.

A classic illustration of the fallacy in the entire concept of timing the market is the consensus expectation vs actual performance. The breadth of deviation clearly reflects the unpredictable nature of the market. Probably, the best person to predict the market precisely needs to be a time-traveler. Thus an investor should essentially avoid speculating equity market movements in the short-term and instead focus on participating in the long-term uptrend.

Fun Fact: If you had invested in the Nifty at any point in time from 2000 and redeemed after 7 years, you would have never incurred a loss. Try it out.

The present: The market is in a state of dizziness after the euphoric rally where despite big-bang structural reforms and voiced dissents, the equity market kept going on the back of strong macro-economics, abundant liquidity and an overall belief in the India growth story. The way the numbers are shaping up only strengthens the case for the Indian macros.

Outlook & opportunities: The various growth measures like recapitalisation of state-owned banks, announcing the mega highway plan and a spike in the minimum support prices for rabi crops have generated an uptick in investor sentiments.

While the bank recapitalisation will allow for better visibility of capital for banks and consequently assist in improving the credit cycle resolution process, the ambitious highway project holds great potential in spurring activities in the infrastructure space. The MSP should help in boosting consumption in rural areas, which is a meaningful component of the Indian economy.

The wide divergence in historical and expected earnings across sectors clearly suggests the scope for growth in new sectors in the distinct future. Notably, it’s worth understanding that while new sectors are opening up scope for value creation, there are a few categories that have essentially reached a certain level of penetration and would experience a natural dip in growth. This is typically because of an improvement in income distribution, consumption and subsequent shift in demand from necessary to comfort goods, which is a good thing.

The market holds a lot of potential waiting to be unlocked. In line with the introductory paragraph, the index has been trailing the nominal GDP growth at ~7.5-8.5 per cent. Consequently, India’s market-cap to GDP is still low at ~70per cent and is expected to continue.

The equity market has been proved to be a mechanism to transfer wealth from the impatient and undisciplined to the patient and disciplined. The opportunity lies in an adequate mix of focus sectors and diversified equity funds while maintaining asset-allocation at the core.

Bitcoins vs ethereum

While speculators and investors all around the world are raving about bitcoins and the same clearly reflects in the price that has shot up 17x this year and almost 64x in the last three years, this trajectory has clearly superseded the growth in the infamous ‘Dutch tulip mania’. The most troubling feature of bitcoins are the hazy and negatively skewed regulatory view along with being a momentum driven asset or cryptocurrency or who-knows-what. Bitcoins, today, hold all typical characteristics of a bubble – momentum driven rally, lack of intrinsic value and attracting demand from the common-ignorant.

So, what’s next? There’s a rising star in the making that can be looked at - ethereum. Not that it’s recommended as an asset, but definitely worth understanding. For those who are yet a novice in the cryptocurrency space, ethereum is a digital currency, which at its core is much more than just a digital currency. Ethereum is an open-source network, which is technically far more superior compared with the blockchain technology. So, while ethereum is essentially the technology, it’s the underlying to the network’s digital currency – ether. So, essentially when you buy ether, you are essentially powering the ethereum network and hence ‘ethereum’ is used synonymously with the digital currency -– ether. Typically, every time you buy ether, you own a share of one of the most powerful ledger systems.

Efficiency: One of the key reasons where ethereum has an edge over blockchain is that ethereum is a turing-complete coding language. It essentially means that it’s much more flexible in allowing a wide variety of applications to run on it. Also, it has a faster transaction processing speed at 17 seconds as opposed to the bulky blockchain that takes an average 20 minutes.

Strong backing: The advent of Enterprise Ethereum Alliance (EEA) has added a lot of heft to the long-term prospects of ethereum. EEA is a consortium of firms, which include many Fortune 500 companies that have decided to collaborate on strengthening the proposition for ethereum technology with an ulterior motive of implementing it in their respective businesses.

Though Ether prices have increased significantly on the back of rising awareness about digital currency and the hype around bitcoins, it continues to grow at a pace healthier than bitcoins.

Though the point here is not to promote one cryptocurrency over another, but instead to broaden your vision and scope of understanding if you wish to explore this well-hyped space of digital currencies.

Best picks for 2018 - Kunj Bansal (ED and CIO, Centrum Wealth Management)

Aditya Birla Capital

ABCL is the holding company of all financial services businesses of the Aditya Birla Group. It has presence in segments like life insurance, asset management, private equity, corporate lending, structured finance, project finance, general insurance broking, wealth management, equity, currency & commodity broking, online personal finance management, housing finance, pension fund management and health insurance.

For FY17, aggregate revenue of ABCL stood at Rs 10,600 crore and profit before tax at Rs 1,150 crore. Between FY13 and FY17, the assets under management (AUM) witnessed a 23 per cent CAGR to Rs 2,46,300 crore. In the lending business under Aditya Birla Finance, the loan book witnessed a 44 per cent CAGR, with 35 per cent growth coming in at Rs 34,700 crore as on March 31, 2017 and the same stood at Rs 36,200 crore as on Jun 30, 2017. The return ratios in the business improved over the years from 14.3 per cent RoE and 1.9 per cent RoA in FY13 to 15.8 per cent RoE and 2.1 per cent RoA in FY17. Asset quality also improved with GNPAs declining from 1.23 per cent at the end of FY13 to 0.47 per cent in FY17.

The loan book in the housing finance business under Aditya Birla Housing Finance (ABHFL) has grown at a rate of 29x over FY15-17 to Rs 4,136 crore and stood at Rs 4,816 crore as of June 30, 2017. Of the ABHFL’s total loan portfolio, 56 per cent is individual housing loans, 32 per cent LAP and 12 per cent corporate finance. The business has healthy NIM of 3.2 per cent as on March 31, 2017. In the mutual fund business, Aditya Birla Sun Life AMC has witnessed 26 per cent AUM CAGR over FY13-17 to Rs 210,740 crore with domestic market share increasing from 9.4 per cent in FY13 to 10.7 per cent in FY17. The segment’s revenue and PBT witnessed a CAGR of 24 per cent and 33 per cent over the years.

In its life insurance business, Aditya Birla Sun Life Insurance’s new business premium increased to ~Rs 2,600 crore in FY7 against ~Rs 1,800 crore in FY13. The value of new business margins improved to 17.4 per cent in FY17 against 14.1 per cent in FY15 along with an increase in 13th month persistency ratio at 71.5 per cent in FY17 vs 62.2 per cent in FY15. The embedded value of the business stood at Rs 3,430 crore at the end of FY17.

Going ahead, with presence in high growth businesses aided by a pan-India presence and healthy financials, the company is expected to perform well on consolidated basis.

ICICI Lombard

Set up as a joint venture between ICICI Bank and Fairfax Financial Holdings, ICICI Lombard is the largest private non-life insurer in India based on gross direct premium income (GDPI) in FY17. The company has an extensive distribution reach through 51 corporate agents as on June 30, 2017, including ICICI Bank, which provides access to its 4,850 branches along with 20,775 individual agents. ICICI Lombard has a diversified composition of insurance products with major contribution coming from three major categories – motor insurance (36.5 per cent of Q1FY18 GDPI), crop insurance (21.8 per cent) and health insurance (18.2 per cent). Over FY15-17, the GDPI witnessed 26.7 per cent CAGR thus exceeding the Rs 10,000 crore mark in FY17.

According to Swiss Re, India was the 15th largest market in the world and the 4th largest in Asia in 2016 and has also been amongst the fastest growing non-life insurance markets over 2011-16, growing at 14.5 per cent. But despite its size and growth profile, India continues to be an under-penetrated market with a non-life insurance penetration of 0.77 per cent against the global average of 2.81 per cent as on December 31, 2016. As per Crisil, over FY17-22, the GDPI is expected to grow 2-2.5x in India, thus providing a substantial growth opportunity for the company.

Over FY13-17, the net premium earned witnessed a 12.3 per cent CAGR to Rs 6,158 crore. The operating profit and profit before tax also grew at a healthy pace of 17.3 per cent and 18.2 per cent, respectively. Net profit grew 5.2 per cent.

The under-penetration and low insurance density in India provides ICICI Lombard with a substantial scope for growth. This along with the healthy financials and extensive distribution reach is expected to drive the company’s future growth. Hence, we are positive on the stock of ICICI Lombard, which is trading at 9.5x its FY17 book value.

KPR Mills

A vertically integrated player in India, KPR Mills is engaged in the business of textiles, which includes manufacturing of yarn, fabric and knitted garments, sugar that includes sale of molasses and co-generation of power, and automobile and cotton waste. Textile business constitutes 86 per cent of FY17 revenue. Of this yarn & fabric contributed ~60 per cent and garments 26 per cent. Sugar contributes 6 per cent and rest of the businesses ~8 per cent to FY17 revenue. On a geographic basis, domestic market contributes 62 per cent to FY17 revenue. KPR’s clientele includes ~1,200 regular domestic clients for yarn & fabric and ~50 leading international brands for garments. The company has 12 manufacturing facilities – 1 in Tamil Nadu and one in Karnataka.

To offer better products and improve realisations, KPR has upgraded its entire yarn capacity to value added yarn – compact, mélange, colour mélange and polyester cotton yarn. These value-added yarns carry a premium pricing against normal yarn, which is expected to bode well for the company. In addition, to diversify itself and expand product offering KPR has been focusing on its better margin (20-22 per cent) garments business where it has expanded capacity to 95 mppa, making it the largest garment manufacturer in India. Better utilisation of the garment segment would help improve Ebitda margins going forward.

KPR made strategic investments in its business so as to modernize and upgrade existing machinery along with capacity expansion. Even though KPR under went capacity expansion over the last few years (~Rs 500 crore over FY15-17), it has been able to maintain positive cash flow from operations and free cash flow positions. More over the company has maintained stable asset turnover of 1.2x and low debt to equity of 0.5x (FY17 basis).

Probable pick up in the consumer demand mainly from the garment segment would help boost the capacity utilization, which in turn drive business momentum. Currently, KPR trades at 13x P/E on FY19E basis, which is justified given the healthy financials.

Strides Shasun

SSL is a global pharmaceutical company engaged in manufacturing of niche active pharmaceutical ingredients (APIs), formulations and bio-pharmaceuticals products. It has 4 major segments – regulated markets (34 per cent of FY16 revenues), emerging markets (14 per cent), institutional business (19 per cent) and pharmaceutical services & active ingredients (~33 per cent).

SSL, created after merger of Strides Arcolab with Shasun Pharmaceutical, is one of the top 15 listed Indian pharma company by revenues. The merger helped SAL secure the back-end manufacturing of institutional business and enhanced its R&D pipeline (over 100 products) in the US.

SSL has the 2nd largest generic drug product range in Australia, offering 149 molecules and a pipeline of over 51 new generic molecules. SSL has signed long term supply agreements and is a preferred partner for large wholesalers, making it the 3rd largest player in the Australian generic drug market.

The company is now focusing on enhancing front-end presence and wants to emerge as a fully integrated B2C player in the emerging markets by introducing new molecules and increasing medical representatives’ strength. It also plans to increase R&D spending and built a portfolio of niche and complex products, which would enhance margins and drive earnings in future.

At the current market price, the stock trades at 14.3x P/E its FY19E EPS. We believe steady product launches in regulated market, inventory de-bottlenecking in emerging market and backward integration of APIs for institutional business will be the key growth drivers going ahead.

Can Fin Homes

CFHL, promoted by Canara Bank (30 per cent stake as on September 30, 2017), is a niche player in the affordable housing finance segment. CFHL provides loans having an average ticket size of ~Rs 19 lakh with high exposure in South India, especially large cities like Bangalore, Hyderabad and Chennai. It primarily caters to salaried class (84 per cent of its loan book), thus maintaining better asset quality.

The company is expected to benefit from the increasing demand for need-driven housing in urban areas backed by overall economic recovery. The management’s focus to aggressively expand business led to a 32 per cent loan book CAGR over FY14-17.

CFHL has increased its branch network from 52 in FY12 to 132 branches, 12 affordable housing centres and 33 satellite offices currently and is targeting to reach 300 branches by 2020. Over FY17-19E, we expect loan book to witness 30 per cent CAGR to Rs 22,431 crore.

CFHL enjoys one of the best asset qualities in the housing finance industry with GNPAs at mere 0.40 per cent and 0.18 per cent net NPAs as on September 30, 2017. To maintain healthy asset quality, the company has restricted its exposure to non-housing loans (11 per cent of total loan book) and minimal developer loans (0.05 per cent of total book).

CFHL is expected to benefit from the government’s emphasis on affordable housing segment. The management aims at ~28 per cent loan growth in FY18 to Rs 17,000 crore and has maintained its ‘Vision 2020’ of loan book at Rs 35,000 crore. Over FY17-19E, we expect 30 per cent loan growth with higher return ratios of +2 per cent RoA and 26 per cent RoE. At CMP, the stock of CFHL is trading at 3.7x its FY19E ABV.

http://www.mydigitalfc.com/fc-weekend/10-big-investment-ideas-2018