Want to spot stocks like Rakesh Jhunjhunwala or Ramesh Damani ? Here are 6 guru mantras

One needs to track sectors to identify emerging trends and companies within the sector that can leverage from the emerging trend.

I’m certain if you are somehow related to stock markets, you would have heard of successful investors and stories about their stock-picking skills. For example, Rakesh Jhunjhunwala spotting an opportunity in Titan, late Chandrakant Sampat’s portfolio stocks such as HUL and Nestle, portfolios of Chetan Parikh, Ramesh Damani etc.

The obvious question is, how do they pick stocks? Well, here are few things that I’ve learned by observing and learning from some of these highly seasoned investors.

General Observation

This may sound rudimentary, but believe me, this is one of the best ways to develop a stock idea. All you need to do is keep your eyes and ears open and observe the economic activity around you.

Observe what people are buying and selling, see what products are being consumed, keep an eye on the neighbourhood to see what people are talking about.

In fact, Peter Lynch, one of the most illustrious Wall Street investor advocates this method in his book “One up on Wall Street”. Personally I have used this method to pick some of my investments – PVR Cinemas Ltd (because I noticed PVR multiplexes mushrooming in the City), Cummins India Limited (because I noticed most of the buildings had a Cummins diesel generator on their premises), and Info Edge Limited (Info Edge owns naukri.com, which is probably the most preferred job portal).

Of course once you identify stocks based on “general observation” you will have to investigate further to ensure it qualifies key investment criteria such as balance sheet strength, growth rates, margins, and management quality etc.

Stock screener:

A stock screener helps to screen for stocks based on the parameters you define and therefore helps investors perform quality stock. For example, you can use a stock screener to identify stocks that have a ROE of 25% along with PAT margins of 20%. A stock screener is a very helpful tool when you want to shortlist a handful of investment ideas from a big basket of stocks.

There are many stock screeners available; I personally like the stock screener from Smallcase and screener.in.

Macro Trends:

Keeping a general tab on the macroeconomic trend is a great way of identifying good stocks. For example - As of today there is a great push for infrastructure projects in India.

An obvious beneficiary of this push would be the cement companies operating in India. Hence, I would look through all the cement companies and apply the checklist to identify which amongst all the cement companies are well positioned to leverage this macro trend.

Sectoral Trends:

This is sector specific. One needs to track sectors to identify emerging trends and companies within the sector that can leverage from the emerging trend.

For example, the non-alcoholic beverages market is a very traditional sector. Mainly, three kinds of products are sold - coffee, tea, and packaged water. Hence, most of the companies manufacture and sell just these three products.

However, there is a slight shift in the consumer taste these days - the market for the energy drink is opening up and it seems to be promising. Hence the investor may want to check for companies within the sector that are best positioned to leverage this change and benefit from it.

Special Situation:

This is a slightly complicated way of generating a stock idea. One has to follow companies, company-related news, company events etc. to generate an idea based on a special situation.

One example that I distinctly remember was that of Cox & Kings. You may know that Cox & Kings is one of the largest and the oldest tour operator in India. In late 2013, the company announced the inclusion of Mr. Keki Mistry (from HDFC Bank) to its advisory board.

Corporate India has an immense respect for him as he is known to be a very transparent and efficient business professional. A colleague of mine was convinced that Cox & Kings would benefit significantly with Mr. Keki Mistry on its board.

This alone acted as a primary trigger for my colleague to investigate the stock further. Upon further research he figured out that the company also has good fundamentals, hence he happily invested in Cox & Kings Limited. Good for him, as I write this today I know he is sitting on a 200% gain.

Circle of Competence:

This is where you leverage your professional skills to identify stock ideas. This is a highly recommended technique for a newbie investor. This method requires you to identify stocks within your professional domain.

For example, if you are a professional from the pharmaceutical industry your circle of competence would be the healthcare industry. You will probably be a better person to understand the industry than a stockbroker or an equity research analyst.

All you need to do is identify which are the listed companies in this space and pick the best based on your assessment. Likewise, if you are a banker, you will probably know more about banks than the others do.

So, leverage your circle of competence to pick your investments.

The point is that the trigger for investigating stocks may come from any source. In fact, as and when you feel a particular stock looks interesting, just add it to your watchlist and keep evaluating the same for investment opportunities.

Source - Moneycontrol.com

Future Retail may buy Hypercity from Shoppers Stop – a win-win for both

After taking over four regional retail brands (Bharat Retail and Big Apple in north India, Heritage Fresh and Nilgiris in south India) to strengthen its store network in the past, the Kishore Biyani-led conglomerate Future Group has set its eyes on the prospect of acquiring Hypercity.

After taking over four regional retail brands (Bharat Retail and Big Apple in north India, Heritage Fresh and Nilgiris in south India) to strengthen its store network in the past, the Kishore Biyani-led conglomerate Future Group has set its eyes on the prospect of acquiring Hypercity.

About Hypercity

Hypercity, a subsidiary of Shoppers Stop (also co-owned by K Raheja Corp), is one of India’s most renowned supermarket retail brands. Its 19 big-box format stores span marquee locations of Mumbai, Hyderabad, and Bengaluru, Bhopal, Ludhiana, Amritsar, Jaipur, Pune, Ahmedabad, Delhi, and Noida. It derives roughly 60/20/20 percent of its revenue from food items/garments/home furniture, respectively.

About Big Bazaar

‘Big Bazaar’, FRL’s flagship brand, is India's largest organised store-based retail market, with nearly 20-25 percent market share. The brand’s 253 outlets are spread across 127 cities in 26 states of India (as on June 30, 2017).

How does Future Retail benefit?

With Hypercity next on the checklist, FRL aims to leverage on its retail capabilities (by adding about 1.4 million square feet of retail space to its existing 13.8 million square feet area), building economies of scale, reducing overall cost of operations, expanding the number of small/convenience outlets (especially in the metros), and pushing the sales of its margin-accretive private label consumer products.

Moreover, the company is likely to shift its product mix in favour of apparel, especially on the value fashion front, to boost margins. Since there will be no gestation period on the Hypercity stores (which are fully functional at the moment and may not require any major capex), benefits of the arrangement will start accruing to the company’s turnover almost immediately. How things pan out at the operating and bottom-line levels solely depend on how optimally the company manages to sweat the new assets under its purview post-acquisition.

Furthermore, the company’s aggressive consolidation strategy is directed at competing with efficient players of the likes of D-Mart (operated by Avenue Supermarts), one of the bigger players in western India.

Future Group is targeting an ambitious turnover of approximately Rs 1 lakh crore by FY21 end. Inorganic strategies lie at the heart of this target.

Shoppers Stop stands to gain as well

Though the contours of the deal are far from final, prima facie, it appears to be a good deal for Shoppers Stop, too, as it gets rid of one of its loss- making businesses. This should enable Shoppers Stop to focus on its core retail business segments (clothing, merchandise, accessories, cosmetics) that should be margin-accretive in the medium to long term.

As is evident from the financials, Shoppers Stop should definitely witness an improvement in financials should they succeed in selling the loss- making division of Hypercity.

What will the transaction value be?

The valuation is largely a function of the financial parameters. Given the rather subdued operating matrix of Hypercity, it is unlikely that Shoppers Stop would command a premium for this entity. We expect the deal to be valued close to 0.7x FY17 revenue that translates to a valuation of close to Rs 974 crore. However, the exact contours of the deal in terms of payment of consideration by Future Retail to Shoppers Stop (by way of cash disbursements, taking Hypercity’s debt on its books, allotment of shares in Future Retail to Hypercity shareholders, or a combination of the three), remain to be seen.

Source - moneycontrol.com

Face of Tata group to change in next decade, Ratan Tata says

MUMBAI, Sept 20, 2017 - The face of salt-to-software conglomerate Tata will change in the next 10 years as it moves forward with adopting new technologies and responds to the needs of a fast-growing nation, former chairman Ratan Tata said in a CNBC TV18 interview on Wednesday.

Hinting at consolidation and possible divestments of certain businesses which once defined the group, Tata said the conglomerate may look very different in the next decade, although the 150-year-old group will always strive to retain its culture.

"There will be companies who were not there earlier and companies that were there, not there 10 years from now, because they may not be relevant or they may be sold off or transferred to other companies," said Tata, who is currently chairman of the trusts that control two-thirds of holding company Tata Sons.

Earlier on Wednesday, one of the conglomerate's oldest companies, Tata Steel, and German rival Thyssenkrupp TKAG.DE agreed to merge their European steel assets, creating the continent's No. 2 steelmaker. is important to retain the ethical fabric of the Tata group and its current chairman N. Chandrasekaran is the "right person" to steer the group in the right direction without losing its historical culture, he said.

Chandra, as the current chairman is commonly called, earlier headed the group's most profitable company -- Tata Consultancy Services. He was named head of Tata Sons, the holding company of the diversified group, in January three months after the surprise ousting of former chairman Cyrus Mistry.

Mistry was fired after differences arose between him and Tata. Mistry had accused Ratan Tata and his associates in Tata Trusts of interference in the running of the various companies of the Tata group. Tata Sons, on the other hand, accused Mistry of failing to turn around ailing companies in the group after almost four years in charge.

Tata said he is currently working towards the transformation of the Tata trusts to address the needs of India which requires technology, automation, healthcare and nutrition.

Tata, 79, said he would continue to engage with start-ups and look for opportunities in younger companies backed by the vision and passion of their promoters.

Tata personally has investments in some start-ups such as mobile wallet Paytm, e-commerce firm Snapdeal and ride-hailing service Ola.

Source - investing.com

What is P2P lending and why has the RBI decided to regulate it ?

Peer-to-peer lending (P2P) platforms would be treated as non-banking financial companies (NBFCs) and regulated by the Reserve Bank of India (RBI), the Government said in a notification on Wednesday.

The central bank will soon release the final guidelines for these platforms.

What is P2P lending ?

P2P lending is a crowd-funding model (largely online) where people looking to invest their money with people who want to borrow can do so. The concept is centered around savers getting higher interest by lending their money instead of saving and borrowers get comparatively lower interest rates.

Borrowers are either individuals or small businesses. But unlike a traditional savings account, one can lose money if the borrower defaults.

Regulation in India

Till April 2016, there were around 30 start-up P2P lending companies in India. Although nascent in India and not significant in value yet, the potential benefits that P2P lending promises to various stakeholders (to the borrowers, lenders, agencies etc.) and its associated risks to the financial system are too important to be ignored, according to RBI.

Global cumulative lending through P2P platforms at the end of Q4 of 2015, had reached 4.4 billion GBP (approximately Rs 38,300 crore) from 2.2 million GBP (about Rs 19 crore) in 2012.

At present, it is partially or fully regulated in Australia, Argentina, Canada (Ontario), New Zealand, United Kingdom, France, Germany, Italy and USA while it is banned in Israel and Japan. China has the largest P2P market in the world, with hundreds of platforms offering diverse services, but the sector is not regulated currently.

How does it work?

Firstly, decide on how much you wish to lend, and for how long. The investors’ funds could be tied up for up to 5 years, so it’s important to be comfortable with this timescale. Remember, you are lending to those wishing to borrow, and 1-5 year loans are the norm.

Some companies offer the option to withdraw your funds during the loan term. There may be a cost for doing this and you'll have to wait until another lender comes in to replace you, but it is there should you need it. Ideally though, you want to avoid doing this, as you’ll lose out on the great rate of return.

Operation model in India

P2P lending platforms are largely tech companies registered under the Companies Act. Once the borrowers and lenders register themselves on the website, due diligence is carried out by the platform and those found acceptable are allowed to participate in lending/borrowing activity.

The companies often follow a reverse auction model in which the lenders bid for a borrower’s loan proposal and the borrower has the freedom to either accept or reject the offer.

Some platforms provide several additional services like credit assessment, recovery etc. In most cases, the platform moderates the interaction between the borrower and the lender.

Documentation and checks

P2P platforms leverage metrics such as credit scores and social media activity to link borrowers and lenders at favourable interest rates. At present, such platforms have very low regulatory restrictions because they merely act as intermediaries between borrower, lender, and partner bank.

The documentation for the lending and borrowing arrangement is facilitated by the P2P platform. The lender transfers money from his/her bank account to borrower’s bank account. The platform facilitates collection of post-dated cheques from the borrower in the name of the lender as a proxy for repayment of the loan.

The P2P forum, in general, also helps in the recovery process and as part of this, follows up for repayments and if need be, employs recovery agents too.

The regulatory concerns in such cases would relate to KYC (know-your-customer) and recovery practices. Since all payments are through bank accounts, the KYC exercise can be deemed to have been carried out by the banks concerned. Though these platforms claim to follow soft recovery practices, the possibility of use of coercive methods cannot be ruled out.

 Source - moneycontrol.com

SBI Life’s Rs 8,400-cr IPO kicks off today. Should you subscribe to the issue ?

Brokerage houses largely recommend subscribing to the issue, citing healthy valuations and better business prospects.

SBI Life's USD 1.3 billion (Rs 8400 crore ) initial public offering (IPO) is set to open on Wednesday.

The issue, with a price band of Rs 685 to Rs 700 per share for its Rs 8400 crore issue, is expected to be the largest in the insurance space. The IPO closes on September 22.

This IPO includes an initial public offer of up to 120 million equity shares of face value of Rs 10 each through an offer for sale by State Bank of India and BNP Paribas Cardif where each will be selling up to 80 million equity shares and up to 40 million equity shares, respectively.

The book-running lead managers to the offer are JM Financial Institutional Securities Limited, Axis Capital Limited, BNP Paribas, Citigroup Global Markets India Private Limited, Deutsche Equities India Private Limited, ICICI Securities Limited, Kotak Mahindra Capital Company Limited and SBI Capital Markets Limited.

In FY17, SBI Life's embedded value was Rs 16,537.9 crore as of March 31, 2017. Their value of new business was Rs 1037 crore while annualised premium equivalent stood at Rs 6727 crore for FY17.

Brokerage houses largely recommend subscribing to the issue, citing healthy valuations and better business prospects.

Centrum

The broking firm too highlighted that the valuation seemed fair compared to its peers. “Going ahead, the company is expected to benefit further from the vast bancassurance and private agent network along with its extensive reach and market share,” the report stated.

Further, it believes that the company will be able to attract adequate investor interest on the basis of its leadership position and expected healthy growth compared to peers.

“Given that the current valuations are mature, investors can subscribe to the issue from a long term perspective. However, it must be noted that, insurance being a steady business, it may not attract major listing gains,” the broking firm said in its report.

Quant Capital | Fair valuations against listed peers

The brokerage house said that the company’s issue price will value it close to Rs 70,000 crore. This is a steep 52 percent appreciation from the previous transaction in December 2017, where investors KKR and Temasek Holdings bought 3.9% stake by valuing the insurer at close to Rs 46,000 crore.

Having said that, the brokerage said that the same is relatively fair against listed peers such as ICICI Prudential Life, which is trading at 5.5 times EV FY17. “Considering the company’s market leadership position, underpenetrated industry and healthy growth opportunities, the valuation is fair,” the brokerage house said in its report.

Hem Securities | Rating: Subscribe

Hem Securities said that the company is bringing the issue at P/E multiple of 55-56 on post issue Q1FY18 annualized EPS of Rs 12.54.

“At upper band, the company is trading at P/EV multiple of 4.23x which is slightly higher. Although, it has enjoyed superior growth but looking after valuation, we recommend subscribe on issue for long term,” the broking firm said in its report.

GEPL Capital | Rating: Subscribe

GEPL Capital said that the IPO stands to gain from operating leverage. At a P/B of 12.6xs of FY17 BV, we believe that SBI Life demands a discount to its domestic peers, the brokerage said in a report. It recommends subscribing to the issue.

SMC Research

Considering the valuation at upper price band of Rs 700, SMC Research said that EPS and P/E of FY2017 are Rs. 9.55 and 73.33 multiple, respectively. The broking firm also said that at a lower price band of Rs. 685, P/E multiple is 71.75; at upper price band of Rs. 685 , book value and P/B of FY2017 are Rs. 58.79 and 11.91 multiple respectively and at a lower price band of Rs. 685, P/B multiple is 11.65. It sees no change in pre and post issue EPS and Book Value as the company is not making fresh issue of capital.

Source - moneycontrol.com

‘Bitcoin is a Bubble’, says the head of the world’s largest hedge fund

Earlier, CEO of JP Morgan Jamie Dimon had also criticised the cryptocurrency and had termed it as a 'fraud'

Ray Dalio, founder of Bridgewater Associates, the world's largest hedge fund firm has said that Bitcoin is just a bubble. The American investor stated that cryptocurrencies such as the Bitcoin meet his firm’s criteria for being termed a market bubble.

According to Dalio, cryptocurrencies like Bitcoin have several limitations that affect its liquidity. He was quoted in a report by CNBC saying that “…you can't make much transactions in it (Bitcoin). You can't spend it very easily…It's not an effective storehold of wealth because it has volatility to it, unlike gold,…Bitcoin is a highly speculative market. Bitcoin is a bubble."

The billionaire investor maintains that cryptocurrencies like Bitcoin fail to perform the two roles that are essential for any valid currency i.e. ease of transactions as a medium of exchange and being a "storehold of wealth."

Dalio said that while the idea may work conceptually, lack of transactions and high volume of speculations surrounding it will make Bitcoin a failure in the long term.

Dalio is not the only market guru to lash out against the Bitcoin. Earlier, CEO of JP Morgan Jamie Dimon had also criticised the cryptocurrency and had termed it as a ‘fraud.’

The news is crucial for India, which is considering its own cryptocurrency backed by the RBI.

The US Fed has also come up with the idea of a Fedcoin. Similarly, a consortium of Canadian private banks is already exploring the possibility of clearing and settling large value payments using blockchain using a token called CAD-coin.

In an earlier conversation with Moneycontrol, Sandeep Goenka, COO and co-founder of Zebpay, India’s largest bitcoin exchange had said that some experts scrutinize the digital currency, Bitcoin, as it is deregulated and maintains the anonymity of its holders, but they do not talk much about the benefits one can reap from the underlying software – blockchain --  that empowers it.

Source - moneycontrol.com

Prataap Snacks IPO - An Avoidable Chip

IPO Rating - 41 (Risky)*

About the Issue

The forthcoming IPO of Prataap Snacks Ltd consists of fresh issue of equity shares with face value of Rs 5 each worth Rs 200 crore and offer for sale (OFS) of 30,05,770 equity shares worth Rs 220 crore, with the issue size aggregating to Rs 420 crore. The minimum lot size is of 15 shares with a price band of Rs 930-938 per equity share. The issue will remain open between September 22-26, 2017. The company would be listed on both BSE and NSE, post allotment.

Purpose of the IPO

Each of the selling shareholders will be entitled to their respective portion of the proceeds from the OFS and hence the company will not receive any proceeds from the OFS.

The net proceeds from the fresh issue will be utilized towards –

-  Repayment/pre-payment, in full or part, of certain borrowings availed by the company

-  Funding capital expenditure requirements in relation to expansion (including, through setting up of a new production line and construction of a building) and modernisation of existing manufacturing facilities    

-  Investment in the company's subsidiary, Pure N Sure, towards enabling the repayment/pre-payment of certain borrowings availed of by the subsidiary

-  Marketing and brand-building activities

-  General corporate purposes

Company Background

Prataap Snacks Ltd. is one of the top six Indian snack food companies in terms of revenues and is the fastest growing company in the Indian organised snack market. It is present in three major snack food categories in India, namely extruded snacks, chips and namkeens and sells these products under the Yellow Diamond brand.

Extruded snacks are processed, reconstituted and shaped potato or cereal-based snacks which may be flavoured or unflavoured. This segment is further sub-divided into two categories, including shaped extruded snacks, which includes puffs, rings and pellets products; and random extruded snacks, which includes the Chulbule product. Chips include fried, sliced chips or crisps made from potatoes, hummus, lentils etc. It includes flavoured and unflavoured chips, and may be standard chips, thick-cut and crinkle-cut. Namkeens are a type of traditional savoury Indian snacks, which includes products such as moong dal, masala or fried nuts, sev and bhujia. In FY2017, share of revenue from extruded snacks, potato chips and Namkeen was 62.99%, 23.85% and 12.23%, respectively.

Its diversified portfolio has enabled the company to cater to a wide range of taste preferences and consumer segments, including adults and children. The products in the extruded snacks category are primarily targeted at the youth and children, while the potato chips and Namkeen category of snacks are for all consumer segments. As of Jun 30, 2017, its distribution network included 218 super stockists across 26 states and one Union Territory in India and over 3,500 distributors. The company owns and operates three manufacturing facilities, one located at Indore, Madhya Pradesh and the other two located at Guwahati, Assam. In addition, it has two facilities engaged on contract manufacturing basis, located at Bengaluru, Karnataka and at Kolkata, West Bengal.

Industry Outlook

The snacks market in India is estimated at approximately Rs 550 billion, out of which organised snack market is estimated at Rs 220 billion. The market grew at a CAGR of 14% between 2012 and 2016. It is estimated to grow at 14.6% CAGR between 2016 and 2021. While some of the segments such as chips and snacks (nuts and popcorns) are expected to witness only moderate growth of about 9-10% as they have already reached maturity, the market for Namkeens is expected to witness highest growth, at about 17.8% between 2016 and 2021. With increasing competition and cost pressures, there has been a gradual shift from unorganized to organized sector across various product segments.

Other players in each segment

In the organised snacks segment the market has been historically dominated by major FMCG companies such as PepsiCo, ITC, Parle Products, etc. PepsiCo, with its Lays’ and Kurkure brand has dominated the chips and extruded snacks market with close to 50% market share in each of the segments.

Extruded snacks - PepsiCo is the market leader with a 44% value share in 2016 with their 15-year-old brand Kurkure. However, the dominance of PepsiCo has been challenged by companies such as Prataap Snacks, Balaji Wafers and DFM Foods. Prataap Snacks became the market leader in rings (extruded snacks) with its product Rings in 2015 and continues to remain so in 2016, followed by DFM Foods with its product Crax.

Chips - The share of market leader PepisoCo’s Lays’ has eroded over the last few years with mid-sized companies such as Balaji Wafers and Prataap Snacks chipping away market share from PepsiCo. Prataap Snacks is currently a major player in North, West and East India.

Namkeen - Haldiram is the undisputed market leader in Namkeen. Bikaji Food and Bikanervala Foods are other companies that have always been associated with the Namkeen market. Prataap Snacks is also another upcoming player, witnessing 40% growth with a strong presence in eastern and western markets.

Financial Performance

For FY13-17, the company's revenue has grown at a CAGR of 27.34%. Its EBITDA grew at CAGR of 10.38% during the same period. As we can see, although revenue is showing growth, the growth rate is decreasing on a YoY basis. Its PAT has not been showing steady and consistent growth.

Valuation and peer comparison

On the upper price band of Rs 938 with EPS of Rs 4.77 for FY17, the company’s P/E works out to be 196.65x. We can compare with some listed players like DFM Foods and Britannia Industries, whose P/E stands at 110.07x and 48.11x, respectively for FY17. Also, we see that Prataap Snacks needs to invest into marketing, distribution network and innovative products to stay competitive. The Indian snacks market has changed and the margins are thinner with customers' expectations of higher quality along with freebies. Considering the above, we see moderate growth with margin pressure to continue. Also, the valuation of Prataap Snacks is very high.

Our View

There is stiff competition in this industry with many FMCG players grabbing major market share. Also, entry of new players affects the market share of small and medium-sized companies like Prataap Snacks. Profitability has been on a downward trend in the last five years due to increasing operating expenses. The company is planning for capacity expansion which would increase the production levels. If demand remains constant, then it might aid company's revenue, but looking at its valuation, we find the investment risky and hence advice investors to avoid this IPO.

*40 or lower – Avoid Investment, 41 to 45 – Risky, 46 to 50 – Invest with limited exposure, 51 to 55 – Investment recommended, 56 & above – Excellent Investment.

Source - dsij.in