Market Update: Stocks covered Redington India, KPIT Tech, Snowman logistics, Kennametal India, Blue Dart, Hercules Hoist, Venky's India.

On the expected lines, we are witnessing some type of correction in the market. The main reason is the muted show in March quarter results...but sometimes market falls because it wants to fall...simple...no reason. Because here too i think muted results are also on expected lines...demonetization has also impacted this quarter's show...there is no doubt about that. Inflation numbers are in control (although i don't think it is due to some planning by Govt...Govt only plans for Tax revenue). 

FII's are selling and they should sell as i see them turning a minnow in next few years. Domestic inflows are very strong and this is saving the market from the fall...and this will save in the future also. But again irony is that market is falling after the entry of retail investors. They always are late because they want to time the market. In stock market, short term forces are always beyond control and beyond perception. I can't guess the each global scenario impacting the Indian markets...but at least i can try to reduce the exposure to stocks having exposure to so many of global events.

I have never tried to time the market even when i feel that chances of market fall are more. I love a stock (latest is Hercules Hoist and EID parry) and I’ll just buy it. This is in my hands but timing is not in my hands. In short term market is always smarter than me...it'll outplay me most of the times and i am ready to accept the defeat as after the initial windy storm and lightening what follows is the life giving Rain. we just need to withstand the initial blows. When we are going after 10-15 times gain, initial 10-15% plus minus doesn't matter much.

 India is going to be stunning growth story. The main reason is-our consumption story is natural and organic. it is not forced upon us by some Government with cheap money as there are still big number of Humans believing in Over-consumption led growth. Whether it is milk, meat, Staples, electricity, Entertainment or fashion whenever it comes to consumption India is nowhere near the global average. We are just at the initial phase of demand boom and only thing which matters is that we should be able to meet this demand as so far our story is mainly about wastage and missed chances. Huge population is going to create huge demand for resources and with efficiencies coming in there are high chances that we'll be going to see great growth stories and high end innovations in meeting the demand sustainably. At least we can learn from the mistakes of developed world in going for the consumption without caring for the natural resources. 

And only role the Government can play is to inflict minimum damage to this natural growth…Government can only correct their past mistakes…i have never seen them adding any value and I wish I am wrong. Government is just a mechanism to extract as much money from the earners in order to offer freebies to attract more votes…just like us its only concern is its own survival. But the difference here is that we are Humans and Government was supposed to be a SYSTEM to play the role of a catalyst channelizing the resources from unproductive to productive products. But now the roles have been reversed; we are a system to earn more and more money for the Government whose only concern is its own survival.

We are losing around 30% of our agricultural produce valued around 100000 crore and it is going on for ages…what has been done by the Government to stop this!! They were unable to provide cheap electricity for high quality warehouses (when Our power plants are operating at PLF of 60-70), they were unable to build roads from villages to place of consumption, they were unable to safeguard the prices of agri produce in case of a bumper crop, they were unable to create facilities for farmers to store their produce cheaply in case of falling prices and enabling farmers to get cheap loans on the basis of warehouse receipts as collateral, they were unable to guide the poor small farmers while deciding for a particular crop for sowing, they were unable to create a suitable Crop insurance product for them. The list of inefficiencies is way too big. But still they are wasting money on useless subsidies; on fertilizers leading to over use of these, on offering high minimum support prices (MSP) and thus disrupting the natural flow of the market. They think they are very smart but where is the result? Our farmers are still poor, our productivity is amongst the lowest in the world. The reason is simple- You can go on feeding a beggar for ages and he’ll remain a beggar. Government is just giving the farmers something more, like, they are earning x and Government is adding y into this and this is going on for long time. No natural environment is available for farmers to grow big…Government should have been focused on removing the obstacles…not giving them crutches for limping along. 

Just recently, a lot of activity is happening in Electric Vehicle (although just Noise) in India and it looks like that world is getting serious on EV. I amn’t sure about the man made global warming but man made concentrated air pollution is real and dangerous. In electric vehicle, I am still looking for the candidates but I think KPIT technologies looks interesting. KPIT is not like our conventional IT company just like Tata Elxsi it is predominately a system design and product engineering company with main focus on Auto sector. It has even developed its own products like Hybrid vehicle kit Revolo. It has very strong research capabilities with around 50 patents. Off late, it is focusing big time on electric vehicle, IOT, Intelligence transport system, Cybersecurity etc. New Delhi parliament is using the electric bus from KPIT. Its Hybrid electric vehicle kit Revolo is a revolutionary product which is getting high accolades across the globe. 

Any positive news on commercialization will be a big big positive as indian Govt is also having grand plans for electric mobility. KPIT is trading lower due to slower growth in recent past and high debtor days which it is improving fast. Higher salary cost was the reason for margin drop. But it is cheap at 10 PE and 2% dividend yield. But it looks a bit risky.

The agri produce wastage is huge area so as water. So we can see that even by eliminating the wastages we can achieve significant growth leave alone the demand push growth. Star Agri warehousing and Collateral management and Sohan lal commodity management Pvt Ltd are into crop collateral financing business. Star Agri is coming up with an IPO.

I am sure that we are going to see big innovations in Agricultural supply chain. With the growth of high tech warehouses, the short term loans on crop collateral will be another big growth area. I am already adding major players in this area like Snowman, Concor, Redington india and the hunt is on for adding something big in this area. Like GST will spur the demand for very large warehouses with size up to 5 Lac Sq feet. Presently majority of warehouses are small (As companies are required to be present in every state to save the extra Inter-state taxes and entry taxes) with no economy of scale and no automation whatsoever. But GST will make large companies like Suzuki, Hero, Uniliver to make one huge warehouse in Nagpur for covering, say, entire western India market. So the demand for Automation will be huge to cover the scale of operations.

Here I am adding Hercules Hoist (at 160) which I think can get big business as it is already into Material handling and material retrieval products. Growth of other industries will also spur the high growth in the future. Its market cap is 500 cr but it is having stocks of Bajaj group and MF valuing 240 cr...2 acre vacant land in Mulund in Mumbai (I think it should get around 70-80 cr)...so out of 500 cr, 60% belongs to Investments and land.

It is a consistent dividend player. I am a big fan of Bajaj group and just like Kennamatel India (also added at 570) this one can show big turnaround. Kennametal is a US based global hard metal products and machine tool giant. It is not performing well for last 3-4 years. I don't know the reasons as I couldn't do the analysis so far...but may be due to general slowdown in auto sector in India and cost pressures. But i like the company and products. The same was shared via email at 575. It has shown good results in past 2 quarters and it is at 626 now after touching 700. 

Also buying Snowman logistics (Click here for ealier study) regularly around 56. It is having assets of 500 cr but market cap is just 900 cr. From this year we'll see the govt focus on improving the agro supply chain in India as we are wasting more than 1 lac cr of agro produce. Around 75% of our cold chain is for Potatoes which is of primitive technology. But in other part of the world, Top 25 USA cold chain companies have around 15% of global cold chain capacity. So we are in urgent need of doing something serious to solve our agriculture mess. Even Govt has realized this and they are providing subsidy for setting up cold chains across India. Our other Pick Balmer Lawrie has also set up 3 cold chains after getting subsidies from Govt. This is my 2nd phase of investment in Snowman...last year made initial entry at 80 and then bought good qty in 50-60 range.

Most of us are already having Redington India (click here for earlier study) from 100 levels on the same theme. Redington is one of the largest IT product distributors which will derive high working capital gains post GST. It is also a big player in warehousing. It has been advised from time to time and it is way cheap at 10 PE and dividend yield of 2%. It is continuously improving its cash flows for last 2-3 quarters but market is sitting unaware and it is still taking as a player with huge amount blocked in working capital. Also after GST, for its IT distribution business, supply chain will be better managed and lesser amount will be blocked in stock. So I am seeing significant improvement in the business profile and it is re-rating candidate. 

Some doubt on Redington due to low promoter holding of some 10%. Actually promoters are doing it deliberately to make it professionally run company just like L&T where nobody will have big stake....FII's and other financial organizations are biggest shareholders in it. Also, Redington promoter R Srinivasan and singapore based Kewalram Chanrai group never had the majority shareholding of 50-60%. It was and still having global PE players like Standard chartered (12-13%) and Fidelity (5%) as shareholders, USA based distributor giant Synnex is having around 24%. As far as i know Mr Srinivasan, he wants the company to be management run with nobody having shareholding more than 26%. Mr Srinivasan does not believe in promoters having a substantial shareholding in a company...he admires L&T and HDFC. He views that promoters with a substantial shareholding become arrogant as they are not answerable to anyone before going public. I love this company and quite hopeful of a long clean road.

I am also looking to buy Blue Dart...it has already fallen to 4200 levels from 5100. It’ll be another big beneficiary of the growth of E-commerce and warehousing/Supply chain after GST. It is in under my watch for long but i am waiting for something quantum in its performance in order to justify its premium valuations...its PE is still 70 even after the recent fall. So in order to justify this valuation, it needs to whack with high growth. But it has muted last 2 years...mainly due to difficult business environment and slowdown in e-commerce. I am having my apprehensions on sustainable E-commerce business model in India. Reality is biting now most of the players so consolidation will be even faster. They need to add some value beyond suicidal discounts.

I think GST with large centralized warehouses, supported by faster Air cargo services can provide them a chance to squeeze some margins. Besides e-commerce, traditional Air cargo business is minuscule at present in India which has the potential of huge growth. Air Cargo business at present mainly is tied with metro cities only, Export cargo is the main revenue source but here competition is high, domestic inbound cargo is low due to infrastructure issues in tier 2& 3 cities which is a great opportunity as Air infrastructure is growing fast in India. 

India has high potential for moving high valued, important and perishable cargo (Like Jewellery, Pharma)  via air. Blue dart has un-matchable technologies and reach....way ahead of competition. So i don't any see any reason for not growing fast in the future. I think at 4200/- it is near its bottom; historically it has enjoyed premium valuations. Blue Dart’s passion for customer service is something which is never heard in Indian corporate houses. Its top management is always in touch with their customer. Its passion for customer service is such that last year its CEO of DHL (Parent of Blue Dart) on its Indian visit opted for meeting its customers like Amazon, Flipkart rather than meeting Government officials. It has its own fleet of freight aircraft (6-7); only of its kind in India. It gets big export business from its parent DHL. It is building giant scale warehouses to cater to the demand after GST.

Future enterprises Ltd is another one in Warehousing. It is the holding company of Future supply chain Solutions ltd which is one of the biggest logistics player in India. Its turnover in 2015-16 was 525 cr with NP of 30 cr. It was recommended at 18 and it is trading at 29 now after hitting 34. still a good buy.

Corporate results are not conclusive in this march quarter and I think apart from demonetization, GST may be another reason behind this muted growth. I think so many companies might have shunned their investment plans due to GST implementation in July-17. Actually under GST, a lot of players will be able to get the input credit for taxes paid on factors of productions like plant and machinery, like for Telecom and Multiplex owners like PVR. Input is adjustment of taxes paid earlier to the Government from the output tax liability for goods supplied or services provided.

Multiplexes like PVR at present pays a variety of taxes like service tax on lease rentals, Excise/VAT/CST on Infrastructure like machines for exhibition, Service tax and VAT for food and beverage business. But they charge Entertainment tax on their customers although they pay service tax for movie rights and Excise/VAT on equipment. As Entertainment tax is different from service tax and VAT, so PVR can't claim the benefit of Input here and so service tax and VAT paid by them is a total loss for them. So Input of these taxes are either nil or limited (like in case of F&B, input is available).

But with the application of GST, they will be able to get the input credit of GST paid on all the above components used for the supply of final service. As they will charge GST and pay GST for service and movie rights, Equipment. So GST will result in the margin improvements if Multiplexes decide to not to pass on the benefits to consumers which is most likely. Same thing will happen with Telecom companies and DTH as at present they pay heavily for equipment but as their final product is a service so they lose heavily for taxes paid for equipment.

So I think most of the recent planned investment has been shifted to post GST period. Another issue is de-stocking by the dealers and distributors due to pending clarity over issue of input credit of Excise duty paid on stock in hand as on July 1^st 2017. Actually as per GST Act, the credit of Excise duty paid on the opening stock in hand as on GST implementation day will be allowed. But they have given a condition that 100% will be allowed only to those having “Excisable Invoice”. In the absence of this, input credit will be available only up to 40%. This has created enough doubts in the minds of dealers and Distributors as they don’t get excisable invoice from their supplier/manufacturers. So as per current wording they won’t be able to get the input credit for 100% of excise duty paid and this will be a big loss for them. So I think this can be another reason. 

I am planning for a more detailed post on GST after some clarity over so many other issues is provided.

Venky's India Ltd has given great results. Turnover at 625 cr vs 600 cr but its operating profits have shown huge improvement from 28 cr to 77 cr mainly due to reduction in raw material cost, Interest charges and other expenses. NP is at 42 cr vs 20 cr after accounting for huge tax outgo this quarter. For the full year NP is at 125 cr vs 38 cr!!! Great show!!

Total debt has been reduced to 470 cr from 700 cr. EPS is around 100...at moderate PE of 15 it is touching 1500 shortly although i think it should command minimum PE of 20 so in my view 2000 is on the cards....but don't want any bad news from recent IT raids...which looks remote...so finger crossed. Venky’s India has already given us great returns; trading at 1220 from 200. But it is still a hold.

(Views are personal and should not be taken as a recommendation for buying or selling a stock. Stock markets are inherently risky so kindly do your Due Diligence before investing. I am not a certified Sebi Analyst and holding the shares discussed in this Post).