Portfolio Review - Quarter 3 FY2022

While Ukraine War, US inflation & surging crude price will dominate headlines what has gone unnoticed is 

• Lowest unemployment levels at ~6% 
• ~10% wage hike by private sector
• Skymet predicting normal monsoons
• Zero allocation to PSU bank recap in the budget 
• Merchandise exports have grown ~40% after years of stagnation
• IT Industry exports are expected to double to $ 350 bn in 4-5 years

This quarter further reiterates that Indian economy is stronger & more vibrant than ever. We have seen demand recover across board & guidance being steadily raised by most companies. The capex cycle has kickstarted & RBI has made it clear that 'Growth' is more important than 'Inflation'. Economic indicators make us believe this correction is short term Blip. 

We have given a snapshot of the performance by some of our key holdings. On an average revenues have grown by 24.2% & EPS by 103% YOY which showcases the underlying strength of these businesses. Since this will be available to the public thus valuations/ outlook have not been discussed. 

Saregama India 

• Revenues grew by 11% & EPS by 24% YOY
• Management is hopeful of growing at 20% CAGR for the next 5 years 

The music business has seen a transformation with the advent of legitimate streaming platforms, short video apps & bluetooth speakers. Creating content is a costly & long drawn affair thus those sitting on a library have become big beneficiaries. Saregama already has India's largest catalogue of 135,000 songs, further they are acquiring content & have added a 1700 song catalogue in Telgu. The larger the player the better the pricing it can negotiate from platforms & Saregama is playing this game well. In the music appliance(Carvaan) business multiple variants of Carvaan are Amazon Bestsellers / Amazon Choice. The newly launched soundbar is being recommended by dealers thus another interesting business being nurtured. 

TIPS Industries 

• Revenues grew by 40% & EPS by 61% YOY
• Management has signed content sharing deals with new platforms & still has scope to add  many more deep pocketed platforms exists.

Besides Saregama the only other listed play on music streaming, Tips is also in the midst of a demerger. The movie vertical will be carved out & listed separately. The management is focusing on creating content for OTT platforms instead of theatrical release which has worked well for the last release & also looks like a promising business if costs & timelines are managed. 

GNFC Ltd 

• Revenues grew by 57% & EPS by 124% YOY
• The management busted the myth of GNFC being just a TDI player. They indicated that the favorable pricing trend continues in Q4 & capacities are fungible to make use of the best spread.

The company has completed debottlenecking TDI this quarter & is on track for another 1200 crore capex spend towards backward integration over the next year. This is equivalent to adding another 50% to the chemical fixed asset base which has asset turns of 2.5x & ROCEs of 35 - 75% depending on the pricing environment. 

Canara Bank 

• Revenues grew by 2.5% & EPS grew by 100% YOY
• NPA recognition & provisioning are on the verge of completion after 7 years for this space & they trade at miniscule multiples to operational profits which has begun trickling down to PAT

A question often asked is will PSU banks get value ? 

Look at IDBI, it is 1/4th the size of Canara & trades at a 20% higher market cap as it is up for privatization. 

The government & LIC have re-capitalized PSU banks by ~11 Lakh crores in the last 7 years add to it another ~10 Lakh crores of operating profit on which no taxes & dividends have been generated. It is in the interest of the government to exit these businesses & thus we feel besides SBI & maybe BOB all other banks will be privatized steadily.

MSTC Limited

• Revenues grew by 19% & EPS grew by 271% YOY
• Auction of Coal, Iron Ore, Bank NPAs are now gaining traction besides scrap.

Being a PSU is a massive advantage as it evokes a feeling of  'trust & transparency'. No questions are raised on any official for using this platform. Even private players are now approaching MSTC for multiple requirements.

TV Today    

• Revenues grew by 15%  & EPS grew by 12% YOY
• The digital revenues grew by ~50%.

The MOA was modified to include Gaming & education as business verticals. The company has been conducting physical & virtual gaming leagues for various online games. The optionality on this business is high. This article will be insightful in understanding India's Gaming Moment
     

CESC Limited

• Revenues grew by 1.5% & EPS was flat YOY
• The focus is on distribution CESC has won the franchise for Chandigarh

This is the most reasonable play on the power distribution space & the management has calibrated growth plans for this vertical only. This will a big beneficiary of the Electricity Amendment Bill which will delicense the distribution business thus throwing up tremendous opportunities for efficient private players to compete against inefficient state PSUs. 

Accelya Solutions 

• Revenues grew by 22% & EPS grew by 55% YOY
• Travel is expected to revive & the billing model is linked to number of travelers thus making it a quasi platform benefiting from the growth in traffic.

40 new airlines were launched in 2021 & another 50 are expected to be launched in 2022. This opens up newer opportunities.

Sarda Energy 

• Revenues grew by 43% & EPS grew by 44% YOY
• A long gestation capex of hydel power & commencement of Gare Palma coal mine will add linearity to the revenue stream.

Sarda continued with its expansion in the low interest regime & has emerged out of Covid by tripling its fixed asset base. The debt repayment cycle has begun but not at the expense of capex as was the case with some peers.

Matrimony.Com  

• Revenues grew by 11% & EPS grew by 4% YOY
• Marketing spends & competitive intensity amongst the three players remains high.

FDC Ltd 

• Revenues were flat & EPS fell by 53%
• Domestic branded business grew by 14% this quarter & 25% in 9 months outpacing the industry.

The company saw price erosion in an ophthalmic it was exporting to USA which was the prime reason behind this margin compression. New ANDAs, domestic volume growth & impetus through NLEM price increase should see profitability improve going ahead.  

Prestige Estates 

• Pre-Sales grew by 110% & Cash collections grew by 71%
• The company has revised the annual pre-sales target to 10,000 crores & Mumbai will start contributing from Q1 FY23 thus opening another big frontier

Real Estate accounting is complex as the regulator allows sales to be booked on P&L only after completion certificate is received. This camouflages the real sales that happens for the larger part of the project life. Prestige is a strong brand & manages to sell a large part of its inventory at launch or within a year of launch. Thus a better picture emerges out of pre-sales & balance sheet rather than the P&L statement.

Avadh Sugar 

• Revenues grew by 7.4% & EPS grew by 675% YOY
• The company benefits from the ethanol blending program which has changed the return ratios for the foreseeable future. 

The government sees ethanol blending as a simple way to lower crude imports. They have generously incentivized the sector & Avadh has significant capacity to make use of the same. The blending ratio has been increased aggressively & is expected to go up further. We are far behind the likes of Brazil where blending is 50%.

CSB Bank 

• Revenues grew by 9.3% & EPS grew by 179% YOY
• CSB focuses on secured lending & is in the midst of a management change post takeover by Prem Watsa.

Monte Carlo Fashions

• Revenues grew by 15% & EPS was flat YOY
• Company continues to build both online & offline distribution. The sales mix is migrating to cotton thus overcoming seasonality. 

Disclaimer : We have reviewed the performance of some of our key holdings. Every advice offered is different & constitutes stocks based on the then prevailing scenario. Thus do not construe this as a buy or sell advice and the present recommendations might or might not include the names above.