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).

Tata communications Ltd: A Treasure Under Sea-2nd Part. Also Covered: Cybertech Systems

Tata communications Ltd (TCL) was recommended at 400 (Click here for earlier study). It touched 780 but last day declined 10% to 640. Market has given thumbed down to its Mar-17 quarter results in which it has posted a loss of 209 cr. But it is appearing bad only on the surface as the results are impacted by issues like one time provision of 872 cr, one of cable repair expenses, demonetization effect and low revenue after sale of data center business etc. Now is the season for mangoes in India. But mangoes are sweet only if left for proper ripening. But if we consume them raw and after finding them bitter may discard the tree cheaply. Friday’s fall was just like throwing away raw mangoes when the need was to wait for the maturation. And I have picked up more of TCL at 640 (Avg cost is 400) and will be buying more at every fall.

TCL is in massive reconstruction phase…big strategic planning is underway. It has made big investments in making the capacities which are huge even by global standards. Like its Subsea cable network of 500000 KM (200000 km is underground) is the largest globally owned by a single owner. TCL owns this large network independently while other big networks are owned by consortium of global companies like Airtel and Reliance. This large network provides TCL strong pricing and better cost control. TCL is reshuffling its product and services portfolio to bring in better synergy, focusing on its core area of communication solutions and more sweating of its assets. I remember it had grand plans for Data center business few years back but this year it sold off majority of the data center business to cut the high debt. So decisions making and changes are happening fast here.

TCL is transforming its Commodity business into Value added services

In last 5-6 years it has transformed itself from commodity business of wholesale of voice and data services to a new age communication technology company providing high valued enterprise solutions to global giants like Formula one. In its earlier Avatar the company mainly offered wholesale cable capacity or bandwidth to carriers like telecom or Mobile service operators (like Airtel, Idea etc.) who then pack their voice and data services on it and sell it to general public and businesses. With largest sea fibre network in the world it is going to see huge growth in managed service business. It is already a force to reckon in the field of Cloud and IOT. It has already started its IOT services in Bangalore and Mumbai. 

After the sale of majority stake in its Data center and Neotel business, its debt is down by some 5000 cr (Need to recheck) which will further raise the margins. This quarter Interest cost is down to 78 cr from 100 cr which will come down further. Last day, one analyst was comparing TCL with other Telecom stocks and saying that the fall was expected in line with the other telecom stocks. But TCL is very different from them…most of all it is in B2B business which surprisingly is a better model in telecom due to low competition (Due to client stickiness as business houses don’t change their service provider frequently), lesser regulations (No TRAI), low capex (No high spectrum costs). 

Moreover business houses are yet to fully embrace the communication revolution in their businesses although at personal and individual level communication storm has penetrated deeply. But businesses are realizing the power of lightening communication in a world of scarcity of resource and cost pressures amid cut throat competition. So any disruptive technology solving this for organizations is a big revolution in itself. Like use of IOT (Internet of things) in power management can save big money (Some have reported around 15% cost savings which are huge by any standards), sensor fitted big machines talk and communicate the state of operation and any danger (like overheating). Machines communicate if there is a repair required which if prevented before breakdown can save high repair costs and production losses. Shipping lines can better utilize their sensor equipped containers as they know their position real time.

So IT systems were the most significant industrial revolution (of course after Electricity) and machine to machine communication will be the even bigger as it will result into much higher degree of control over business process.

I feel that opportunities are much bigger in B2B than personal mobility sector. Personal mobile phones are made to consume data (Low creativity/productivity scope) but things like IOT and Bundled services by TCL offers huge benefits to business houses. In recent deal with US media giant Vice Media, TCL will provide them complete solution starting from high speed data capture, transfer, storage, security, cloud, processing capabilities; all of which are accessible across different geographies as if they were in the same location. IOT can bring in big cost savings and better use of costly resources.

Like for F1 racing, Tata provides extremely high speeds of 1 Gbps at all tracks to handle all of the data needs. Cars fitted with 150 censers transmit large volumes of data in real time to data centre located inside the race course (which may be in US) and also send the same to their Europe headquarter in real time. HQ and guys in the stadium can tell a driver to take a particular angled turn to save one-tenth of a second and that one-tenth can be the difference between winning and losing!!!

Emerging markets like India to drive the huge growth in data consumption benefitting TCL More

99% of the global internet traffic is routed via subsea cables. Subsea cables are being used for long and dated back to 1854 when first inter-sea cable was installed for telegraphic service. At present, Antarctica is the only continent which is not connected via physical subsea cables mainly due to tough terrain and commercial issues. Satellite internet is being used there but due to low bandwidth and latency issues the research stations produce more data than what can be transmitted via satellite internet. Satellite internet is just 1% although for some applications like Shipping/Air Travel satellite internet is the best option along with the hinterland where laying cable is very difficult involving huge capital investment as compared to low number of prospective customers. Furthermore, with submarine cables data is guaranteed to go from A to B, whilst with satellites a strong weather phenomenon could cause disruption to data transmissions. 

Laying subsea cable is very costly and time consuming. But in spite of the huge growth in Data consumption worldwide which has been doubled in last 2-3 years and still growing at breath neck speed, still the utilization levels of international subsea cable are at old levels. This is due to advancement in technology which has enabled more data transmission (from 10 GBps to 100 GBps) via same cables implying ample capacity worldwide to meet the future high demand for data. They have developed optical fibre cables which can transmit data at 99.7% of the speed of light!!! Also there is huge capacity unused in “dark cables” worldwide. Dark cables are subsea cable networks which are not being used currently but will be switched on to cater to the future high demand.

Emerging markets like India will be at the forefront in the growth of data consumption. TCL have cable landing stations in Mumbai, Kochi and Chennai. These are the places which connect India to international subsea cables network. Tata Communications is the only Tier-1 global telecommunications company in India. Tier-1 companies are those having large global network of cables connecting places across the globe; these networks serve as the backbone of the global internet. TCL has huge bandwidth available at these landing stations and around 50% cables are “dark cables” and I think with huge growth of data consumption in India TCL is going to gain big as its capacity utilization levels will increase. As India is connected to world via port cities hence cost of internet to Northern cities is more and there is high latency (Means slow internet speed). But now a cable is being established from Bangladesh to Agartala which will cater to Northern Indian markets.

TCL to become a force in IOT

TCL is investing big for the growth of IOT in India. It is working on the execution of Low powered Wide area network (LPWAN) based on LoRa IOT technology which has shown great results. Actually things are different in IOT. In IOT machines (or devices) are supposed to communicate with other devices and send small bits of data over long ranges which is quite opposite to the conventional 3G/4G technology which are suited for sending large volume of data. But data generation is low in IOT although it may be continuous or at specific breaks so current networks 3G/4G will not suit for IOT as they consume high power (The reason your smartphone battery is always out before lunch). So IOT will require different set of networking solutions and hardware (sensor etc.). LoRa operates in 900 Mhz band which is suitable for transmission of data over long ranges, low power consumption. Traditional long-range wireless networks are not designed for low data rate devices that run on either no battery or a small size battery which are the main features of IOT networks. So LPWANs are designed for IOT where data transfer rates are not the prime motive, but range, battery life and cost are. Tata’s LoRa based LPWAN’s has shown much better results enabling communication in deep water or 50 meters underground making this technology better suited for metro stations and car parks where GSM and Wi-Fi are not suitable.

So design of the IOT application will be the key as each application has different power requirements like door lock system doesn’t require frequent power supply as it doesn’t need to relay data over distance continuously. It needs to send data periodically or at some predefined trigger like forced entry. So if it can be designed in a way to switch on “Sleep” mode in it then this can save a lot of power. This switch thing can be brought in by including some type of “Microcontroller” in the application design which will put the application in sleep mode or low power mode as per pre-defined set of events or triggers. Similarly for applications where data transmission rate is high like wearable devices for medical purposes then in order to ensure the continuous power supply energy harvesting solutions like solar power systems can be embedded into the application.

So these are still early days for IOT development and I am keeping a keen eye on this sector picking up some stocks which I feel are doing substantial work in this field like KPIT technologies, Schneider electric infrastructure. I have also picked up Cybertech systems and Software Ltd which is doing a great job in the Geo-spatial field and so many municipalities like Bangalore and Nagpur are using its geospatial product Geo-Civic for better controlling their revenue and city development. 

Tata Communications has been working closely with Semtech Corporation, a semiconductor company, to build the world’s largest IOT machine-to-machine network. The company is keen to contribute to India’s smart cities programme with this technology. I am sure that TCL will be one of the leaders in this space.

Demerger of Land Bank: A big catalyst

Also the most interesting part of the story is 740 acre land bank owned by the Company which was not the part of the deal when Tatas bought VSNL from govt. There is a quite bit of confusion in the market about the impact of solution land deal dispute as some are concluding that benefit of the land deal will accrue to TCL. Although the reality is something else. There was a dispute regarding payment of Stamp duty (around 500 cr) and capital gain on transfer of Land pursuant to the demerger of land holdings from VSNL. Actually NDA government didn’t want to sell the huge land holdings of VSNL; they only wanted to dis-invest the voice service business. So they designed their offer in that way only. As per the offer after the divestment land holdings was to be demerged into a separate company and shareholding pattern of the new demerged entity should be the mirror of shareholding pattern of VSNL prior to divestment. Hemisphere Properties India Ltd (HPIL) was the company that would hold the surplus land after the demerger

Prior to divestment of VSNL, Govt of India was having 51% share, 25% was with ADR ( VSNL was listed in New York Stock Exchange), 4% with Tata group and 20% with other shareholders. But after the divestment of 25% share by Govt to Tata, Tatas further bought 20% via open offer from existing shareholders. With their early 4% share, shareholding of Tata group became around 50%.

But in order to bring the shareholding of new demerged entity to be the mirror image of pre-divestment levels; deal required Tatas to transfer their 25% share (which they bought in divestment) in new demerged entity to Govt of India and 20% to old shareholders the shares of whom were bought by Tatas in open offer. So this was a complex set of thing. The main reason behind this complex deal was the fear of NDA government that if they try to sell the land before divestment then existing shareholders might object to it as they might take it as nationalisation of the VSNL.

But soon after the disinvestment, things became more complex. After the divestment the dispute arose as to who would pay the Stamp duty charges and capital gain tax on transfer of land. Actually the demerger of land holding from TCL (Resultant Company after the divestment) was tax free as per existing tax laws as shareholding of demerged entity was going to be same as of TCL. But it was going to be changed as per the earlier deal wherein Tatas were required to transfer around 45% share to Govt and old shareholders so effectively this demerger was a sale transaction and capital gain was required to be paid on this. Board of TCL refused to pay stamp duty and CGT as Tata wasn’t going to get anything from the demerger or sale of land. Tatas were right in their refusal but government didn’t take any decision for almost 14 years even when the benefit was going to accrue to them only. Tata blamed that they had to incur maintenance cost of the land every year although there was no activity on the land. Tatas even proposed to buy the land at a fair value which was also declined by the Govt. Due to this indecision by the Govt, Tatas were not able to raise or infuse further equity for growth instead they had to pile up expensive debt for all these years.

Finally the issue was settled by passing of Taxation laws (Amendment) bill in 2016 as per which Government exempted such type of transactions from capital gain tax. As per the bill, In case a public sector company is divided and as a result of the demerger the land or an asset comes to the government, this transaction is exempted (from capital gains tax) by putting in an explanation in The Income Tax Act. So the path is clear for Government to demerge the land holdings into another company. Most of the value will accrue to Government and Minority shareholders (Like us)….and the value of land (Around 10000 cr) per share is around 170-200!!! 

Thus, the major beneficiary of the proceeds of the sale of land now would be government, which has 51% stake in HPIL. Minority shareholders and ADR holders will get around 45%, while around 4% will go to the Tata group.

So although TCL won’t get much from the demerger (only 4%) but the most significant gain will be in the form of its ability to raise further capital for expansion. As due to this hangover and indecision on the part of Government, TCL was not able to raise more equity for their expansion plans as Government didn’t allow dilution of their stake in the company (26%) as they were not sure how this would impact their rights to the land holdings. Also, other investors might also have preferred the solution of this case before committing any investments into TCL. So TCL had to go for the debt route to raise capital for their expansion. I think this move will provide further re-rating as I am sure equity infusion will be done at much higher valuation due to inherent strength of TCL and lesser need for capital for growing the asset base. For me this is one of the most significant events in the time line of TCL.

The demand for data is only going to be got bigger and bigger. So there is no doubt that TCL is in a sunrise sector and it is doing most of the things right now. So I feel that things are only going to be better from hereon.

Good buy at CMP of 640 and even better buy at every fall.

(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)

AK Capital Services Ltd: A Revisit

As shared from time and time, I am seeing a bright future for Bond market in India. We have picked CARE Ltd and AK Capital services Ltd as they were going to be the major beneficiary of the growth in the bond sector in India. CARE Ltd was advised at 1000 (Click here for earlier study) and AK Capital was advised at 270 (Click here for earlier study). CMP of both are around 1600/- and 415/- respectively. CARE is in Bond rating business while AK Capital is the largest private sector merchant banker in India dealing in the placement of corporate bonds into the market. Ak Capital is having around 8% share of the Non-Bank corporate debt market in India. So at CMP of both, we are already sitting at decent profit. But this is nothing compared to the huge possible scale of growth in Bond sector. This year, as expected Bond sector has grown 20% as compared to credit growth of 5% of banks. Corporates are finding it cheaper to raise funds via bonds than getting the loan from banks. Further high NPA's has limited the risk taking capacity of banks and they are playing safe. But still bond sector is very small as compared to the size of Indian economy. I also feel that in order to play safe, Banks will resort to retail lending especially Housing loan business as i think this is the low hanging fruit which was somewhat ignored by Banks earlier as their focus was on Wholesale loan growth so we may witness some fight over here with banks lowering lending rates to compete with housing finance NBFC's. That's why so far i have tried to pick only those NBFC's which have diversified business model like Sundaram Fin, JM Fin, Edelweiss, TUBE (Cholamandalam), Piramal Enterprises Etc.

75% of the bond market is of Govt securities. Corporate bond market is very small at around 4% of the total debt raised by corporate houses. This figure is at 17% in China and some 14% in USA. These figures of china/USA are coupled with mature equity markets so India with less developed equity markets may need even more participation from Bonds. Even out of this 4%, some 80% bonds are placed privately by Public financial institutions like NHAI which are bought by Fund houses and pension funds.

 Public participation is very small in India. Indian Bond market is severely hampered by credibility, efficiency, reliability and liquidity issues which make general public to shy away from it and park their invest-able corpus in bank fixed deposits. But off late, RBI and Government has realized the vulnerability of banking system due to their higher exposure to corporate debt sector. So RBI is taking vital steps in promoting the bond market in India.  Bonds are the best option to finance huge funding requirements of Indian Infrastructure. Quite contrary what most people think, banks are not the best option for long term infrastructure funding requirements of the country due to their assets and liability mismatch as their liabilities (Term deposits like FD) are payable on an average after 3-5 years but their long term Infrastructure assets stay alive for around 15-20 years.

RBI has always expressed displeasure at banks not passing the cut in interest rates by RBI to public and corporates. Also after the demonetization, Banks, who are witnessing huge funds inflow, are reducing the interest rates on deposit steadily. So sooner people will realize the high return prospectus in Bond market just like they are investing more in equity markets as their traditional investment options like Gold and Real estate are not yielding any meaningful returns for long time instead these have turned quite risky. In the same way, people who prefer steady returns (like bank FD) will turn to bond market. So i feel that bond market will grow even bigger and should grow at 30% this year.

AK capital's promoters have raised their stake from 62% to 67% in last 2-3 quarters. Also AK Capital Finance, a subsidiary of AK Capital, has raised funds through Bonds issuance of 235 cr offering 9.55% to 9.70% with five to ten year maturities. Its Investors include provident funds, family offices, banks, high net-worth investors and corporates. This shows the trust in AK capital by the market participants. 

Although there is not much information about AK Capital in the analyst arena but the group seems credible and I think can turn out to be one of the biggest gainer of the growth of Bond market. I have invested more at 415.

(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)

EID Parry (India) Ltd: All Sugars are not Same-2nd Part

EID parry was advised around 170 at this blog in Oct-2015 (Click here for earlier study). Its CMP is 300 but i feel major growth is yet to come. Today i invested more at 300 and I’ll be investing much more in days to come. Apart from one of India's largest and most efficient producer of Sugar, it is the holding company of Coromandel international with 62% shareholding. But EID is investing big in diversifying its business to overcome the cyclical nature of its Sugar business. In sugar,  due to its high quality and ethical standards,  it is the preferred supplier to FMCG giants like Coca cola, Pepsico etc.  it is getting 32% of sugar business from these biggies. Sugar business is at 1800 cr out of 2500 cr. Sugar sector is out of the woods as global supply glut is ending but main factor behind the revival is much needed Government policies and focus on Ethanol blending. I have covered its sugar and Ethanol business in my earlier post. So in this post I’ll try to cover some more details about its other businesses.

Its other businesses have huge growth prospectus and these are in Niche areas. It has big ethanol business which is growing fast (300 cr turnover, with Op margins more than 20%). In Bio Pesticides, (Turnover 100 cr) it is one the largest global producer of Neem based pesticides. There is growing demand for organic pesticides across globe. But the most interesting part is its Nutraceutical business under which it produces Algae based new age super foods-Spirulina, chlorella, Astaxanthin. EID is the only company in the world producing these 3 algae based super foods.

Spirulina: An Incredible Super food

Demand for Spirulina is growing fast globally as it provides amazing health benefits.  It  is an incredible  source of high quality protein, vitamins, antioxidants, and other nutrients. As one of the oldest life forms on Earth, the use of spirulina as a food source dates all the way back to 9th century.  It does not need fertile land for cultivation, grows very fast in just 20 days, needs lower energy and water. It produces more oxygen than trees per acre by consuming carbon dioxide (Photosynthesis). So it is incredibly environment friendly. It even beats eggs (which are a global benchmark for protein) in protein concentration as it contains 65-70% protein as compared to 50% of whole dried egg (not our normal shell egg). But Eggs still win the race here as Spirulina is very costly (around 20-30 times) so it shouldn’t be taken as source of protein but for other great nutrients. It is better to stick to other sources of protein like fish, eggs or other veg sources.

Consumption of Spirulina have shown amazing health benefits like lowering of Blood pressure, prevention and recovery from cancer, energy boost, weight reduction etc. It improves eyesight and reduces the effects of age-related eye disease. Even NASA is using it for their astronauts in space. Spirulina has an extraordinarily high antioxidant count, which may help to fight free radicals that enter the body. Some animal studies suggest that spirulina lowers blood sugar to a great extent. In some cases, results show that spirulina has outperformed some of the most popular diabetes drugs, including Metformin. According to some evidence, spirulina can be effective not only on animals but humans as well. One study had 25 patients with type 2 diabetes take two grams of spirulina per day for two months, which significantly reduced their blood sugar levels.

Spirulina was used to treat those suffering from radiation sickness after the 1986 Chernobyl disaster. Doctors found that radioactivity levels in children were reduced by 50 percent in 20 days of dosing them with five grams of spirulina a day.

Two USA Subsidiaries: Never factored in by Market

So far EID is getting around 86% from export market where there is stiff competition so it is just like another company. But it has now shifted focus to India and its organic Spirulina is available under Parry's brand at Amazon in India. The standalone turnover of this vertical is around 70 cr and with growing demand for healthy foods in India, i think this one can witness huge growth in India. EID has two subsidiaries in USA for its Nutraceutical business: Valensa International (Based in Florida, USA) and Alimtec SA. Valensa is into Astaxanthin based formulations for cardio, joint and Eye health with turnover of around 170 cr. Alimtec is basically a supplier of Astaxanthin to Valensa with turnover of around 5 cr. Valensa is not a small company but it can be another potent force. Its formulations are using Astaxanthin which is a rage in western world due to it being regarded as the most potent Antioxidant nature has offered. It is known to cure joint problems, such as rheumatoid arthritis, BP, liver diseases, heart , cancer. It improves athletic performance because it is 550 times stronger antioxidant power than vitamin E, and is 6,000 times more potent than vitamin C!!!

                                               Astaxanthin Farming

There was a thought behind the acquisition of Valensa by EID. Valensa is a potent force in algae based formulations in USA along with Cyanotech. Currently Valensa is the distributor of Parry’s organic Spirulina in USA. There is a growing tendency in Americans towards meat substitutes and Spirulina is one of the best source of high quality protein. I can’t remember any veg protein source except Spirulina containing all the essential amino acids (Types of proteins).

The only factor hindering the growth of Algae based food supplements like Spirulina is awareness of people about it. I haven’t met anybody who has ever heard about it. So here I feel the responsibility is on companies like EID Parry to carry on big brand promotion wave to make people aware about it. But worldwide demand for algae based products is growing big and fast and it is only the matter of time when this will catch the attention of India just like Cod liver oil. Although i feel that these algae based veg supplements will replace Fish oils (for Omega 3) as it is not logical to use massive amount of fish for minute supply of fish oil.

Also, algae super foods are not an easy product to master and produce in bulk quantities. The demands for nutraceutical purity and set standards of nutrients needs highly sophisticated technological expertise. That's why the growth of algae was slow even in USA due to these quality factors as products of so many producers were lacking quality. Acceptance of Spirulina produced by EID in USA points towards high technical prowess.

Further, EID is working on developing natural food colors from Algae like Spirulina. Demand for natural food color is growing fast amid concerns regarding the harmful effects caused by synthetic food colors. So any positive outcome in this area will pave the way for further growth.

Branded Sugar: India is waiting for it

Further there is not any established Sugar brand in India whereas we have super brands in other staples like Salt (Tata), Floor (Ashirwad), Rice (India Gate, Daawat), pulses (Tata Sampann) etc. So EID has ventured into this area and its Parry's sugar brand (sulphur free sugar) is growing fast. It is spending big on brand promotion these days. It has also launched Parry Amrit sugar brand last year in Chennai and Bangalore which is 100% natural cane sugar (just like Jaggery) with all the goodness of essential nutrients. As I have mentioned many times brand loyalty for life essential products like food staples are very strong as we usually don’t want to play with our health whereas brand loyalty for sensory foods like Soft drinks or Maggie is relatively weak as we always love to try something new.

Moreover with rise in income and awareness levels, Indians are also going after premium quality products whether it is food or fashion. People are ready to pay more for a premium and high quality product like Parag Milk Foods's organic same day fresh milk (Under Brand Pride of Cows) is selling at Rs. 85 a litre in select cities like Mumbai, Pune. The demand is very strong and Parag is now expanding its reach and entered Delhi and Surat. This shift towards premium branded products is going to get much bigger with rising income levels of rural India, GST creating level playing field for Organized and Unorganized sector, improvement in the infrastructure and logistics enabling companies to penetrate deeper into India. So if EID is able to create something in this field one can imagine the future scope of scale. EID has all the essentials to successfully create a brand out of sugar- strong Murugappa group, financial clout, experience in brand creation, absence of a branded product etc. So I think if planned properly sugar can turn into Gold.

Most of all, Its 62% holding in Coromandel International (after giving 30% holding company discount) is valued at 5000 cr which, in fact, is the current market value of EID Parry!! This means its standalone business (With NP of around 150 cr to 200 cr) is available free.

EID parry is lauded across the globe for their Farmer friendly practices and the management is ethically very strong. In 2011, there was a storm in Tamil Nadu which destroyed all the cane crop of nearby villages. Farmers were devastated but then EID did something unexpected and bought the entire crop at regular prices to save the poor farmers. This feat was something from other world.

I am sure EID can create a brand out of Sugar. Madhur sugar brand from Renuka sugar is here but the group is deep into debt.

Good buy at CMP of 300 and even greater buy at every fall.

(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)