Indian markets are quoting at reasonable valuations all round. Even with this year's rise, we are still near historical average valuations for Indian equities. The cyclically adjusted valuations are actually lower than historical averages as we are currently at very low Margins for Corporate India. As Indian growth picks up, we will see operating leverage kicking in and several companies exhibiting strong earnings growth. Indian markets has all the ingredients for a Bull Market - Valuations, Sentiment, Policies, Earnings, Flows etc. Hence we will expect investors to Buy good businesses at attractive valuations. It is easy to get lost in the noise that comes from Financial markets each day and ignore these huge positive changes that are happening, opined Gokul Raj, Head Of Investments, HBJ Capital
While these are our macro views, our stock selection and portfolio strategies are purely based on Bottom-Up process. There are only a handful of businesses that can benefit sustainably from the Macroeconomic positives without passing every benefit to customers or getting hurt by competition. Thus it's very important that Investors stick with quality businesses and invest with a long time frame. Investors should look for businesses that can amplify the economic positives while the risk of downside is minimal. These stocks when held for long term can continue to compound at higher rates, enabling investors to grow their wealth multifold, Raj added.
He is currently bullish on stocks such as City Union Bank and Heritage Foods. These are great 5 year Investment opportunities.
City Union Bank (CUB): The stock is one of the most efficient ways to play the economic recovery. It is a well managed franchisee that is focused on lending to MSME segments. It benefits immensely from the overall economic recovery (Lower NPA's, Gains on Bond Portfolio etc) and the policy impetus from the Government (Make in India, SME Manufacturing focus etc). There could be an added bonus of valuation Re-Rating from increasing bank consolidation (as seen with the ING-Kotak merger).
Bank is well funded with CAR's of 16% and has several quality investors backing the stock. Management team headed by Mr. Kamakodi has delivered well on execution and has strong growth plans for the next 5 years. We estimate that the bank should be able to post 480 Cr Rs of profits by the end of FY-16. While the recent capital raising will keep return ratios suppressed for the next few years, ROA's will eventually bounce back to 1.6-1.8% levels and ROE's to 20%+ levels. The stock is currently available at around 11X Price/ Earnings and 1.7X Price/ book on FY-16(E). With a strong balance sheet and attractive Co-Investor profile - CUB should deliver higher risk-adjusted returns for Investors from current levels.
Heritage Foods: It is one of South India's leading dairy brand. The company has built strong procurement capabilities, processing capacities and distribution network (Moats) that allows it to earn strong ROCE's ( >50%) on its dairy business. This business is a cash and carry business, leading to strong cash flows aided by a negative working capital cycle (Float). The company has been strengthening its Value Added Dairy Products portfolio that earns more than 12% EBIDTA margins compared with liquid milk margins of around 6%. This along with strong Industry tailwinds in terms of demand growth will enable the company to grow its profits strongly over the next 3-5 years. Dairy industry has seasonal and temporary volatilities that affects companies such as Heritage once in a while. This along with the Retail division of the company which has been a cash guzzler has led to overall mediocre results. Our calculations show that this Dairy franchisee adjusted for cyclical issues is available at around 6X EV/ EBIDTA multiple on conservative estimates which is extremely low on both absolute and relative valuations. The Management has been clear in saying that the Retail division would be spun-off to a separate entity by FY-17 which would be an added bonus for Investors.
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