Cracker Stocks: Experts' Diwali Picks To Light Up Your New Year

Sudip Bandyopadhyay: Wish all your viewers a very happy and prosperous Diwali and New Year.

Yes, there are a lot of dark clouds hovering on the horizon. The geopolitical situation as far as the world is concerned is extremely sensitive. There is no solution in sight, as far as Russia-Ukraine war is concerned. There are significant pressures in the economy of Europe. The US is battling inflation and one is not sure about how the economy is going to look up.

As far as India is concerned, I think, the biggest question is the oil prices as well as domestic inflation. Now, there are two components we know, imported inflation as well as domestic inflation, both are looking bad, and RBI has been continuously increasing interest rates. Now, this definitely is going to have an impact on growth, and we are all worried.

Now, translating back to capital markets. Yes, if there is a slowdown in growth, interest rates keep going up, and at some point, the markets will start reacting negatively. We still have been a beacon of outperformance and the global markets are looking at us but there are a lot of worries. I would like to bring one factor, which is in addition to what all we know, and we talk about all the time, what's happening as far as Chinese markets are concerned, Chinese economy is concerned, and Chinese governance is concerned.

Now, why it is relevant is because globally, emerging markets funds have risked trillions of dollars for investing in emerging markets and a large chunk of that, you know, anybody’s guess between 70 to 80% was deployed till recently in China. Now, with what's happening in China, the way the Chinese markets have kind of collapsed, the way the governance structures and the rules have changed, investors are really worried as to how the future capital market in China will work and we have been seeing a lot of money coming out or trying to come out of China.

Now, we believe that if some part of it, I am not saying significant here, which may be the case, but at least some part of it will have to flow into India, you know, whether it will flow in next month, six months down the line, one is not sure. But this is the silver lining in the dark clouds we are seeing, and this will propel India ahead. 

Rahul Arora: I wish you and your entire team, and your families a very happy Diwali. So, in some strange ways, Lord Rama has returned back to India. Over the last few months, FII money has come back to India and that's something that we were waiting for and asking for and I think that's supplemented the domestic liquidity very well.

But I think, without getting too much into, you know, the silver linings or the dark clouds that are hovering above us, I think, money making is going to be very tough next year. I think, we need to call a spade a spade. It's been relatively easy to outperform the indices so far. But I think the point Sudip made about crude is well taken and you know, Europe is getting into a very, very severe winter and the kind of challenges they are facing with power, I think there's probably another leg-up for commodity prices in November-December. I wouldn't be surprised if crude heads back to $105-110, you know, inflation still continues to be an issue in the early part of the next calendar year.

So, I think it's going to be very difficult to make money. I am not saying that the opportunities will not present themselves, but the kind of ease with which money has been made over the last two years, incrementally, it may not be that positive, or that easy to make it from here on because I think you know, at sell-side, the one of the things that we have done is we have actually rolled over to FY25 just to justify buy calls and if I was not a sell-side analyst, I would think that that was too early to do and the reason that's been done is because of the one-year forward, you are not able to justify stocks, you will not, you know, it doesn't matter whether it's my brokerage or Morgan Stanley or anybody else, it is going to be very difficult to justify stocks on a one-year forward basis.

So, that itself tells you that things are probably a little ahead of themselves where it should be right now and given where inflation is, given where the economies are primed to be in the better part of next year, which is a slowdown if not a recession, in most developed markets. I think people need to be a little more disciplined in the way they approach investing because it's not going to be all that easy to make money. 

Amisha Vora: Diwali wishes to you and all the viewers.

Of course, I heard, and I acknowledge the concerns, pros and cons of each of the previous speakers. But I feel that you know, when the Covid hit the world and Indian economy was in dire straits, there was just no business and the markets kept on moving. So, now would be the time when our economy is doing comparatively, extremely well, after I guess, almost a gap of six to seven years.

When I am speaking to corporates, across the length and breadth of sectors and I have not come across the corporates saying that their business is not good at the moment, despite all the inflationary pressures. So, now is the time when the economy may do very well and at best markets could be range bound.

The good part of the economy and the strength may not allow it to go down quite a lot. But the global fears and the reducing liquidity, both from global markets and also India, because we try to support our currency and it's about a bit of the liquidity, will keep a cap on the upside. But I believe both markets will give positive returns from here if one takes Diwali to Diwali.

It is a very bold view, but yes, I do believe in that, and I believe that while stock-picking will be important, the choice from across the sectors will be very good because we not seen order books flowing the way they have been from a very long time.

Rahul Arora: Certainly, things have changed for the multiplex industry, I have had the privilege of setting up a business channel in India, along with one of the biggest producers of Bollywood movies in India, which is Bloomberg UTV at that time, and I saw the way UTV actually changed the way content was approached in Bollywood and the way content writers, who are now being paid so much more as opposed to historically made even a decade back, and I think that probably gave us the birth of actors like Irfan Khan, Rajkumar Rao, Ayushmann Khurrana.

If you even go back five, six years, you will find that it was only Eid, Christmas, Diwali, some of these occasions where the big releases of the Khans or an odd Akshay Kumar movie will be releasing.

The good part is that the predictability of content has gone up so much more. It's become so much more multi-language. I mean, south as an industry has just, you know, gone through the roof, and the fact that those movies are getting dubbed in different languages across the country and doing well in those languages and just the fact that even in Bollywood, you have a lot more Rs 50 and Rs 100 crore movies that have come through.

I do understand the last five, six months have been a lull, but that's because you have had a lot of these movies that were either in post-production just before Covid or had to be rushed through production in Covid, so that they meet their deadlines. A lot of this inventory was relatively old, but I think come this Diwali, where you have an Ayushman movie later this year, you have a Ranveer Singh-Alia Bhatt movie, the entire situation will revive.

Most of these multiplexes have worked their cost structures really well in the pandemic. The thing to realise is that the advertisers are also coming back, that's about 95% gross margin business. F&B is something which we all complain and crib about, the prices of popcorn and coke, you know, that enjoys about a 77-78% gross margin business.

So, once the footfalls come back, the operating leverage in this business is very, very strong and you know, this is essentially going to be a monopoly business once the merger goes through and given that someone like Netflix is cutting back it's India content by almost 60%. It tells you that there is definitely a space for someone like a PVR.

So, I don't think valuations are that exorbitant. These companies are now going to operate structurally at maybe 18-20% kind of RoVs and RoCs and the fact that content predictability is going to be a little bit more. I am happy to pay even the current price you know; I wouldn't be surprised if you tide over this interim pain, the stock probably would give return of even 30-40- 50% over a certain period of time.

This is in some ways a recession-proof industry. I mean, you will probably go in and watch a movie, even when things are bad, because you know, where the higher end of the price points are inflation and impact may not be felt that much. So, I think it's a great mid-cap stock to have in your portfolio. 

Amisha Vora: One is the entire portfolio and the way they want to focus but the portfolio itself is aligning a lot with the bigger theme, that of consumption, and the consumption which is experiential, people want to experience, and that trend is going to become bolder and bolder.

Having said that, they are very, very bullish about the bag segment, the Caprese and then they are re-launching with a huge vigour with the new CEO, with the line-up with Manish Malhotra and they are very, very focused on that. Even if we have taken just the 30% growth, management is expecting this to be a 5x in three years, which is really ambitious.

I think, apart from that, the important part is that the way now things are aligned with China, exposes a huge opportunity and they are also tripling their franchise centres across tier-II, tier-III cities. All this combined with the fact, that the cost had been so much elevated currently and already prices are suffering, thus their indigenisation is increasing. I think, it augers extremely well for both 35% and another 25% bottom-line growth, zero debt almost, extremely high RoEs upwards of 30% and so I think it's a very consistent CAGR story with high growth.

Sudip Bandyopadhyay: Absolutely. Let's go back to the beginning. I would say that there is no question mark about cement. Pretty much everybody is sure that cement is going to do well in the foreseeable future. Forget what they had come up with in Q2 because it was a monsoon kind of a quarter, but the tailwind is definitely behind cement and infrastructure, whether private or public capex, housing for all everything, road construction, everything requires cement.

And you can't increase capacity overnight. Yes, Adani is taking over Ambuja and ACC, but the capacity cannot go up overnight. Yes, they are talking about increasing capacity. Of course, there is this consolidation or so to say acquisitions in the pipeline everybody's talking about, but remember, these things do take time, and this doesn't change the installed capacity. Acquisitions don’t change installed capacity.

If you look at the installed capacity UltraTech is way ahead of the ACC-Ambuja combined as well. They are very well spread-out cement manufacturing units across the country, supplying pretty much all the markets and don't forget, they are also in the game of acquisition.

So, while we are assuming you know, the new players will go on and do the acquisitions, the existing entrenched market leader surely can also do acquisition. UltraTech is also talking about expanding capacity, they already have a significant lead over everybody else. So, considering all that, I think, to write off UltraTech and to put all your money behind Ambuja and ACC may not be the right strategy.

We believe that this is one sector, where probably, will see the Asian Paints syndrome play out, which is the industry leader keeps doing better and better, keeps on moving leaps and bounds ahead of others and I think UltraTech has all the ingredients of doing that. Specifically, analysing performance, I think, you know, the cost pressures which were there on the industry to an extent, is thing of the past.

They have taken price hikes, and in the next couple of years, I think the new capacities are not going to come up in a hurry and suppliers will have, to a great extent, some control over pricing. So, that augers very well for the industry leader, as far as the margins, as far as profitability and business is concerned.

So, I have no hesitation in recommending UltraTech in an uncertain environment, which I think pretty much all of us, including Rahul, are commenting on, that things are not very clear. So, probably we are a bit more optimistic than we should be, under the circumstances, for an investor. I think stock like UltraTech is a good bet. 

Rahul Arora: I think the beauty of this company is that, I think, we had initiated on this company at about Rs 50 or 60 if I remember correctly, and the price today is about Rs 500 or thereabout. As you rightly pointed out, it is a market leader, the bulk of the capex is actually you know, that was put up over the last 7-10 years. That actually is coming up in the next two years. That itself shows you the kind of efficiencies that they have brought into the system.

The good part is, that they are going into B2C as well through their continental brand. So, one is, they are adding about 85% of their existing capacity over the next two years, which is going to be a very big fillip in terms of being a volume driver. They have most of the global companies like Strauss, and you know at one point, they were actually a very big supplier for Nestle as well, not anymore.

So, they have got some very, very big international brands across the world in their fold. In fact, recently added one in North America. I am not sure the management alluded to that in your conversation with them. But I think, the fact that this is a company that has the potential to take its B2C brand to over Rs 500 crores over next half of the decade. They have been able to show capital efficiency and their capex in such an efficient way, and despite the fact that half of it is brownfield and half of it will probably be greenfield.

It just fits right. It's a consumer company, like you said, you know, there are not too many that are doing spray dried, freeze dried and all of it in totality and making a success of it. There have been issues, you know, there was obviously the Russia shipment issue when the war started. There was a bit of a crisis in Vietnam with respect to shipments last year.

These kinds of things happen in the running of every business, and I think, every kind of fall that the stock gives you is a good opportunity to buy. And so market leader, gaining market share, capital efficiency 85% of incremental capacity coming on, strong return ratios, very good balance sheet and good reasonable valuations for a consumer related stock, I think, it's a good brew to have in your portfolio, so to speak. 

Amisha Vora: First and foremost, I think the chemicals sector as all of us know is doing very well. It was till now China plus one or competition to China. But the way energy prices are shooting-up across the globe and particularly Europe where a large part of production specialised chemical production sites which also gets consumed.

I think we have a much longer road ahead for chemical companies and some of the key names like Gujarat Fluorochemicals, Naveen, or Bessel, I think will continue to do well.

But we picked Jubilant for a purpose. We thought and we understand that a large part of their business composition is changing for good, from a commodity-driven business within chemicals, a good push is moving to specialty, which is almost 30- 31% currently to 60-65 % in two years and that finally leading to almost a doubling of net profits, will also command rerating.

So, we thought that this is a story where we get good profit growth and therefore, we picked this within the sector.

Sudip Bandyopadhyay: Absolutely. I think, that's one of the reasons why I suggested this. I will lay out a couple of facts for all of us here. I think, the first thing as far as L&T is concerned is pretty much the same thing which I talked about UltraTech, there is a tailwind, and the tailwind comes from the construction boom, infrastructure boom, where we all know L&T is undisputed leader as far as Indian construction infrastructure space is concerned.

That's the go to company for projects, big projects. The second thing is, we all know what is happening to oil prices, you know, we all have our views, but the fact is, oil is on a boil, and that kind of gives L&T a big opportunity in West Asia. They have been already in hydrocarbon sector in a big way but in between oil prices came down, so their hydrocarbon business suffered, and now they are gaining traction once again.

The third thing, which never happened in L&T before and that's the reason for this, you know, subpar or sub-average return, was the asset monetisation, that was not happening, there was a conglomerate discount. But that has started happening and we know how things have been moving as far as the technology companies in the L&T fold are concerned. It has given fantastic results, though it has still not captured in L&T valuation fully, but more and more asset monetisation is happening and this is in a way an excellent step, because the company needs to focus on things which they do, rather than, you know, these businesses which have no direct linkages or bearing with the core business. So, asset monetisation is happening and that is resulting in improvement in working capital, liquidity and pretty much everything.

Last but not least, a massive amount of digitisation is happening as far as their core business, which is the construction, infrastructure, and that's going to give multiplier returns as far as efficiency is concerned, which again, will translate into profitability and growth.

Overall, we believe the time for L&T is coming now. Whether it's going to happen within a couple of months, six months, I am not sure, but definitely at current level when the market is a little bit of wobbly, corrections are being seen, it will be an interesting strategy to pick up L&T.

Again, I will repeat the fact that you know, the world is volatile, so, rather than moving to tier-II, tier-III stocks, which may promise interesting prospects, but the risk also becomes proportionately high, I would recommend investors to stick to large-cap, known names, solid management, established business. There is very little chance for you to go wrong when you pick up an UltraTech or L&T.