It is a super period to be in equities:
Though the Nifty has given 26-27 percent returns in the last one year, if you zoom out five years, we have gained only 60 percent on the Nifty which is less than a 10 percent compound annual growth rate (CAGR). If you zoom out 10 years you see that market has delivered about 300 percent which means just a shade over 15 percent CAGR. So, the returns in the past have been despite several problems. Now, that these problems are being resolved, over the next 5-10 years this is a super period to be in equities.
Oil Marketing Companies – slight tweak in margins has disproportionate impact on profitability:
Oil Marketing Companies (OMC) like Indian Oil Corporation (IOC) have indicated that the under-recovery burden has gone down significantly and they are expecting their profitability to improve quite a bit.
Though, these stocks have run up too, the crude oil prices have fallen, their subsidy receivables have fallen drastically and balance sheet healing has taken place.
Over the next few years I expect diesel marketing margins to improve. In specific case like HPCL, diesel distribution margins or marketing margins have been stagnant for a number of years. A small tweak in these numbers, which is what the government would surely do, has a disproportionate impact on profitability.
I am very excited on HP for the simple reason that the sensitivity to diesel marketing margins is very high and that is one lever which is going to be moved in a while as what we suspect.
Tata Communications – deliver disproportionate growth:
Things are unclear about Bharti and Idea owing to the entry of Reliance Jio and its impact on pricing power. These companies have also gone a little overboard in the spectrum auction. but for reasons that are completely out of their control.
Tata Communications has a very interesting enterprise service mix and has a very interesting set of businesses which will grow disproportionately versus the rest of the telecom space in the next few years. It is in the enterprise data and connectivity services at a global level. At a global level, enterprises are spending more and more on data services, on hosting, on connectivity, on hosted solutions, on VPNs and so on and that is the part of business mix in Tata Communications that is going to deliver disproportionate growth. They are also divesting a not very good business in the form of Neotel in South Africa which is going to help them net de-leverage their balance sheet and give them a little bit of cash to aggressively up capex over the next two or three years in their enterprise database business.
Federal Bank & Cholamandalam Investment – high quality lenders:
Cholamandalam is a high quality company. It is well poised for delivering good growth when the commercial vehicle (CV) cycle revives. It is a wholesale borrower and its borrowing cost will come down in the near-term. It can give 2x or even 3x returns in the next few years.
Orient Cement and Sanghi Industries – beneficiaries of the demand for cement due to urbanization:
These mid-cap companies have ready capacities and will benefit due to the increasing demand for cement.