Sandip Sabharwal is famous as the former fund manager of JM Mutual Fund. During the very first year of his tenure, the equity assets of the fund spurted from Rs. 200 crore to an eye-popping Rs. 5,400 crore. The reason for the euphoria was because his funds were amongst the best performing funds of the time. However, it is believed that Sandip Sabharwal got too aggressive with his stock picks and some of the schemes suffered a loss and under-performed the benchmarks for a long time.
In the present, Sandip Sabharwal runs a paid stock advisory service where he charges a stiff fee for providing stock tips. So, it is appreciable that he has now volunteered to provide stock recommendations to us free of cost.
Let’s take a quick look at his recent three stock recommendations. He has assured that the “growth will be very good” in all three stocks and that they have “scope for re-rating”:
|Three Top-Quality Mid-Cap Stock Picks Of Sandip Sabharwal|
|Stock||CMP (Rs)||Market Cap (Rs Cr)||YoY Return (%)|
|L&T Finance Holdings||94||16,500||35|
Manappuram Finance enjoys the unique distinction of being everyone’s favourite stock pick at present.
Ashish Dhawan, the whiz-kid founder of ChrysCapital, was amongst the first to recognize the potential of Manappuram Finance.
In September 2015, he bought a truck load of 7,50,000 and 90,04,871 shares at the throwaway price of Rs. 20.20. His cumulative holding as of 30th June 2016 stands at a mammoth 2,45,14,818 shares.
It is unbelievable that while Ashish Dhawan bought the stock at Rs. 20.20, it is today, less than a year later, standing tall at Rs. 88. That’s an eye-popping gain of 335%.
Muthoot Finance, the other gold finance company, is up nearly 100% on a YoY basis.
The surprising aspect is that despite the steep surge in the stock price of gold finance NBFCs, the ace investors are not deterred from recommending these stocks.
Sunil Singhania, the whiz-kid fund manager of Reliance Mutual Fund, opined recently that “there is a lot of potential in niche NBFCs” and that “there is a lot of value left to be unlocked in these NBFCs”.
He referred specially to a gold finance company (perhaps Muthoot Finance) and said:
“We have a gold finance company in our portfolio. It was very cheap, six months back. We believe it is still cheap despite having run 100 percent. But the only headwind which we used to get was that gold priced don’t seem to be rising and the moment gold prices rose 10 percent the stock went up by 100 percent.”
He added that even if the gold prices were to fall 10% there is nothing to worry about:
“Nothing changes fundamentally in a significant way if this happens but the valuations are such that even if nothing were to happen to gold prices in three years time the book value would have gone up by 50-70 percent. So, even in the worst situation you would have ended making 15 percent compound annual growth rate (CAGR)”.
It is worth noting that Manappuram Finance is, despite the steep surge in its stock price, still quoting at a PBV of 2.67x. This is not unreasonable given the growth trajectory that it is on.
Kapil Krishan, the CFO of Manappuram Finance, assured that the loan book, which stands at Rs. 1,000 crore as of March 2016, will grow by at least 20-25% every quarter. He said that the loan book would double to Rs. 2,000 crore by the end of FY17 and that the Return of assets (RoA) would be maintained at 4.5%.
The detailed road map of how this ambitious target will be achieved is spelt out in the investors’ presentation.
What we have to note that if the book value is indeed to double by FY17, the present PBV of 2.67 looks quite cheap indeed.
Neeraj Deewan of Quantum Securities recommended a buy of Manappuram Finance on the logic that “Most of the gold finance companies have been showing very good numbers and the growth in asset under management (AUM) is 28-30 percent. So, Manappuram Finance will be one where even inspite of the run up, I feel there is still upside for the stock based on the numbers and one should be looking at buying on dips.”
Motilal Oswal endorsed this opinion by also recommending a buy with a target price of 114 (upside of 31%). The logic is as follows:
“Manappuram is today geared up to tap financing opportunities across the spectrum and has realigned its business model to derisk it from volatility in gold prices as well as to sustainably grow its AUM at over 20% in coming years. This shall be achieved by: (i) Focusing more on shorter term products (3 months) which eliminates the risk of any steep fall gold prices impacting the company; (ii) Adopted push approach instead of pull earlier by reaching out to customers through enhanced marketing and branch activation efforts and linked employee incentives to sourcing business, timely recovery and default rates; (iii) Foray into synergistic non-gold businesses -Microfinance, Home Loans and CV Loans (to form 25% of AUm by FY18 from 12% in FY16. Company aspires to reduce its good AUM to less than 50% of the total AUM by focusing on growing its Microfinance AUM to 20% of total and Home Loans AUM to 30% of total in the long run.”
Jain Irrigation was first recommended by Ambareesh Baliga on the back of solid logic. He described Jain Irrigation as a “fallen angel” and explained that it has “huge potential waiting to be unlocked” and that it could be the “story of 2016”.
This theory appears to be playing out as per script because Jain Irrigation reported robust results which has sent its stock price soaring 25% in just the past three months.
Anil Jain, MD, Jain Irrigation assured that he expects the company to grow by 18% in FY17.
Anil Jain, MD, Jain Irrigation: Expect company to grow by 18% in FY17. pic.twitter.com/SJZXM4K6dT
— CNBC-TV18 News (@CNBCTV18News) August 16, 2016
However, there is still a great deal of “disbelief” about Jain Irrigation which has kept its valuations low, Sandip Sabharwal said.
He explained that Jain Irrigation has witnessed a huge operational improvement both in terms of control of cost as well as reduction in interest cost. He added that the Company does not need to do any capex for the next three-four years as the capacities are already in place.
He emphasized that for FY17, the Company is expected to report profits near Rs 300 crore this year. If that happens, there will be a re-rating of the Company. “The operating leverage itself will take earnings up by 30 to 40% next year also” he added.
“By next year, I am seeing the stock doubling from here” Sandip Sabharwal said with ice-cool confidence.
Motilal Oswal has endorsed this theory in principle by opining that:
“In view of better monsoon and Maharashtra government’s thrust on irrigation, we expect a bounce back in MIS business. Overall, we expect 15% revenue CAGR to INR83.2b and 20% EBITDA CAGR to INR11.7b over FY16-18, translating into PAT CAGR of 101% to INR4.2b in FY18, mainly to lower interest outgo. We maintain Buy with a TP of INR90, 11x FY18E EPS (rolled over to FY18).”
L&T Finance Holdings:
L&T Finance Holdings is an evergreen and “fail safe” stock. The pedigree of its blue-chip parent, the behemoth L&T, is sufficient to evoke confidence in the minds of novice investors like you and me. We can invest large chunks of money into such stocks without having to nervously look over our shoulder for hidden dangers.
L&T Finance Holdings is one of Daljeet Kohli’s favourite stocks. When the stock had slumped a few months ago owing to poor results, Daljeet had implored investors to take advantage of the dip to buy aggressively. Needless to say, the stock has notched up hefty gains since then.
Sandip Sabharwal has not provided much detail as to why he recommends L&T Finance Holdings except to say that it would also will do very well over the next one-one and a half years.