There are many ways to skin a cat and a few more to identify great stocks. You can run a screener, call that stock market friend, attend an investors’ meet, or join a telegram group.
One such source to identify great stocks is Momentum. Price Momentum is an important of our process at Capitalmind.
Listen to this snippet from Deepak:
We all like stocks that are going up. Mainly if fundamentals back them, there are many instances where the fundamentals follow the price—investors’ perception of the stock and, more importantly, the company changes. A positive feedback loop kicks in & the company gets on a growth path. An intersection of good fundamentals & strong momentum is the sweet spot.
This post is one of many by-products of our idea-generation process. Based on initial scans, companies that we get interested in getting shortlisted for further evaluation. Some get discarded as they fail other criteria; some make it through to the point where they get added to the portfolio. Therefore the stocks discussed in this post are not ‘Buys’ or recommendations. Think of them as illustrations of stocks showing positive fundamental developments combined with strong price momentum.
Eicher Motors: Riding on global aspirations
In a nutshell
Royal Enfield as a brand is now turning global. Given the balance sheet strength, brand value, management expertise, and new product launches – the next 3-5 years looks interesting for Eicher.
Market cap: 88,000 Cr
The company has two business segments:
Royal Enfield is the oldest motorcycle brand in continuous production since 1901. It is mainly focused on mid-sized motorcycles (250cc – 750cc). Royal Enfield commands a domestic market share of 90% (down from 96% in 2018) in this segment. It contributes 88% of the overall revenue and is the main focus area for both management & investors as well. The company manufactures around 6 Lac units every year.
VECV is a joint-venture between Volvo & Eicher formed in 2008. The company is the third largest player in the commercial vehicle segment, with a market share of 16%.
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Five Whys?
- The entire auto pack is coming out of a five-year winter. Markets have de-rated them since 2017 on the back of de-growth in their revenues. Cut to mid-2022; things are slowly getting back to normal. The demand for 2W & 4W is inching up, and consumer sentiment is at its peak in the last five years.
- After capturing 90% of India’s mid-sized motorcycles market, Mr Siddhartha Lal turned his lens toward International markets. Exports grew from 9% in 2019 to 16% in 2022. During the same time, the export volume increased by 3% to 12%
- RE is launching two new bikes, Hunter & Scram 411 targeting the GenZ and global consumer. It also has a strong pipeline of new products for the next five years.
- The VECV segment is seeing a growth revival. Despite Covid’s second wave, the sales of VECV grew by 38.3% in FY22. The exports grew by 67% in FY22
- Decent revenue growth with a strong balance sheet and holding ~$1B in cash
The company is currently trading at an Enterprise Value of 76000 Cr and an EV/EBITDA of 30 times. Historically the management proved themselves to be strong capital allocators. Keep an eye on this company for the next 2-3 years on the back of revival in both RE & VECV.
AIA Engineering: Fast Moving Industrial Goods (FMIG)
In a nutshell
The HDFC Bank of the Industrial sector has been delivering consistently since inception.
Market cap: 24,000 Cr
AIA belongs to that category of companies where everyone likes it, but few understand it. Per the company’s definition, they are into manufacturing, designing, developing, installing, and servicing high chromium wear, corrosion, and abrasion-resistant casting used in cement, mining & power sectors.
Aasan basha mein, AIA manufactures grinding equipment. It is used to crush limestone, clinker, mineral ore, coal etc.
AIA (25%) & its global competitor Mogatteauxas (55%) together command a market share of 80%. The remaining 20% is with Chinese players. On the other hand, AIA has a 90% market share in the domestic cement sector and enjoys a strong moat in its segment.
Why it’s interesting?
- AIA operates in an oligopoly market with a 25% global market share
- Recently expanded its capacity by 12% from 3.9 Lac TPA to 4.4 Lac TPA. The company planned for an additional Capex of 200 Cr in FY24
- It has an order book of 502 Cr as of Q1FY23
- The company has strong pricing power. For instance, in FY22, the company successfully passed on 100% of the rise in input costs to clients.
- In the last ten years, AIA has consistently maintained 20%+ EBITDA
The company is currently trading at an Enterprise value of 23,000 Cr and EV/EBITDA of 25 times. Even in a cyclical industry, the company never leveraged its balance sheet and always maintained a debt-free position. The company had consistently delivered year after year in all parameters, and so did its stock price.
Craftsman Automation: Striding ahead
In a nutshell
A proxy play on Auto & Engineering sectors. The company enjoys the best EBITDA margins among the auto ancillary pack. Craftsman is deleveraging its balance sheet and has strong growth visibility.
Market cap: 5800 Cr
Craftsman is a leader in precision manufacturing in diverse fields like automotive, industrial, and engineering. The company has three main segments:
- Automotive Powertrain: (Revenue Contribution: 52%): A leading player in the machining of critical engine and transmission components, primarily for M&H CVs, tractors and off-highway segments.
- Automotive Aluminium: (Revenue Contribution: 20%): A relatively new entrant in the aluminium die-casting business and is involved in casting and machining of parts like crankcases and cylinder blocks for 2-wheelers and passenger vehicles.
- Industrial & Engineering: (Revenue Contribution: 28%): This segment mainly deals with contract manufacturing, assembling & storage facilities.
Here is an interview of the founder Mr Srinivasan Ravi. A bit old, but an excellent start to understanding the business.
Growth Triggers:
- After a lull of about three years, the fortunes of the M&H CVs segment are poised for a turnaround – driven by an uptick in economic growth, a pick-up in the private CAPEX cycle and a higher freight demand. BS6 and changes in axle load norms have further led to an increase in content demand
- Craftsman has widened its presence across the automotive sector. The passenger vehicles segment had received orders to supply fully machined cylinder blocks & heads for a leading domestic OEM and other machine engine components for a European PV OEM.
- Over the medium to long-term, aluminium content in vehicles is expected to increase owing to the light-weighting trend driven by increasingly stringent emission and fuel efficiency norms, premiumization and the addition of new features. Moreover, the rising penetration of electric vehicles is driving the increasing use of Aluminium because OEMs need to compensate for larger battery sizes and weights to extract maximum range.
The company currently has a debt of 800 Cr, reduced from 1050 Cr in 2020. It is trading at an Enterprise value of 6515 Cr and EV/EBITDA of 10 times. If the management walks the talk, the current valuation looks reasonable from a 3-5 year perspective.
JK Paper: Flying high
In a nutshell
The most significant listed paper company in India. Tailwinds include a supply crunch in Europe & re-opening of schools. Mind you, as with all cyclical companies; the exit is just as important as the entry.
Market cap: 7,200 Cr
The paper stocks are flying. Last year, all the paper stocks were up anywhere between 50% to 100%. Two main reasons can be attributed to this rally:
- Re-opening of schools & offices had increased the paper consumption
- Europe produces around 26% of the world’s paper consumption. The looming energy crisis in Europe had decreased the supply of the global paper industry.
But why JK Paper?
- JK Paper commands a 28% domestic market share in copier paper, 19% in packaging boards, and 10% in coated paper.
- It is the largest listed paper company in India in terms of revenue
- The management is targeting 5000 Cr of revenue & confident of maintaining 25% EBITDA margins in FY23
- Apart from these points, it doesn’t make much difference. You can go ahead with any other decent paper stock like West Coast, Seshasayee, TNPL etc., to play the paper cycle. The result more or less will be the same.
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The risk of buying cyclical
- Buying cyclical stocks is like playing a maze. Easy to enter & challenging to exit. Experienced investors in the market will resonate with this.
- Never fall for the lower valuations. They look cheap at the worst possible time. When the earnings are at their peak, the PE will be in the single digits & appears reasonable.
- Usually, in cyclicals, the price peaks much before the earnings
- So, no matter how bullish the revenue & earnings outlook be. No matter how vital the management commentary is, always keep a Stop Loss / Trailing Stop Loss to play this theme
KSB Limited: Peter Lynch will like it
In a nutshell
For over half a century, the company focused on one thing – pumps, and they delivered the best. The company has a 10% domestic market share, is cash rich & an MNC tag.
Market cap: 5,900 Cr
KSB Limited was founded in 1960 with its HQ in Pune. The company is a subsidiary (40% holding) of KSB Group based out of Germany. KSB India is mainly into the manufacturing of pumps (which contribute 71% of revenue), valves (18%), and other control systems (11%).
The company has seven manufacturing units across Maharastra & Kerela. Domestic markets contribute 80% of overall revenue, while the remaining 20% comes from exports.
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Why does KSB look interesting?
- Simple & boring business.
- KSB holds ~10% market share in the pump segment
- Like all other MNCs, KSB is also debt free with a strong balance sheet
- The share of exports has been continuously increasing over the last years from 15% to 20%
- The current order book stands at 900 Cr, which is around 60% of FY22 revenue
The company is currently trading at an Enterprise value of 5600 Cr and EV/EBITDA of 20 times. KSB had shown consistent growth in terms of revenue (5Y CAGR at 13%) and PAT (5Y CAGR at 18%). Given the planned Capex & the order book, the growth story still looks intact.
Varun Beverages: A thirst to perform
In a nutshell
The maker of 8 out of 10 Pepsi bottles sold in India.
Market cap: 66,600 Cr
VBL is part of the RJ Corp group, which also owns Devyani International. VBL is a key beverage player in India and PepsiCo’s second largest franchisee (outside the United States). VBL has over 30 years of strategic association with PepsiCo accounting for 85%+ of PepsiCo’s beverage sales volume in India. It produces and distributes a wide range of carbonated soft drinks and a large selection of non-carbonated beverages, including packaged drinking water sold under trademarks owned by PepsiCo.
It continues to improve the presence, product mix, and utilization levels. VBL is also increasing penetration in the newly acquired territories on the back of our robust distribution network, diversifying product portfolio, and greater penetration in rural and semi-rural areas.
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Growth Drivers
- In 2019, Varun Beverages acquired PerpsiCo’s west and south operations, wherein Pepsi has historically limited penetration compared to north and east. The newly acquired regions form 57% of the soft drinks market. Hence, Varun Beverages would look to enhance its presence in these regions with new product launches and distribution expansion to expand volumes and gain market share.
- Post-acquisition in 2019, these plans were halted in 2020 due to Covid-19 induced lockdown. However, with business returning to normalcy, expansion in these new territories should continue.
- More than two-thirds of the company’s revenue is generated from carbonated beverages. However, in carbonated beverages, the growth of cola drinks has slowed, but growth in non-cola categories like lime, orange, etc., has remained strong. Key brands like Mountain Dew, Mirinda, etc., are relatively under-penetrated in India, and Varun Beverages will focus on pushing the distribution of smaller units of these brands.
VBL trades at a PE of 50 times and EV/EBITDA of 30 times. Surely not cheap. The company is slowly reducing its dependency on Pepsi and focusing more on other beverages like Tropicana, Aquafina etc. Over the last two decades, the management has delivered its best. VBL has now become a synonym for Pepsi India. Considering all these points, Varun Beverages is an interesting company to keep an eye on for the long term.
Schaeffler India: Strong parentage & prominent market share
In a nutshell
One of the top 3 suppliers for leading OEMs in India. Proxy play for automotive & industrial sectors. The company has delivered consistent growth with a strong balance sheet & commands an MNC premium.
Market cap: 46,000 Cr
Schaeffler is primarily into developing, manufacturing, and distributing high-precision roller and ball bearings, engine systems and transmission components. Schaeffler is amongst the top 3 suppliers for leading OEMs in India.
They have three primary business segments:
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- Automotive Technologies (39% revenue share): This division includes manufacturing components like chassis, clutches, engine components and precision products.
- Industrial (37% revenue share): The division offers bearing solutions, ranging from high-speed and high-precision bearings with small diameters to large-size bearings that are several metres wide.
- Automotive Aftermarket (9% revenue share): This division includes after-sales market like repair, services and spare parts.
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Favourable trends:
- The GOI-initiated scrappage policy will help boost the auto sector as old and unfit vehicles are replaced by newer efficient vehicles
- With the adoption and manufacturing of electric and hybrid vehicles, the ICE to EV transition will witness a tremendous acceleration.
- An increased supply of chips will boost manufacturers after a long struggle for components.
Inox Leisure: Navigating challenges
In a nutshell
The combined entity PVR-Inox will have a 40% market share in the exhibition industry. Bollywood has handed over the torch to regional cinema. A paradox of rising stock price & falling expectations.
Market cap: 6,700 Cr
It is the second largest multiplex chain in India. In March 2022, the Boards of PVR and INOX Leisure approved the merger of the two entities. INOX shareholders will receive three shares in PVR for ten shares of INOX.
Post the merger, the promoters of INOX will become co-promoters in the merged entity along with the existing promoters of PVR. The merged entity would become the largest cinema exhibition company in India, operating over 1500 screens across 110 cities.
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The road ahead for FY23:
- To open 77 screens through internal accruals
- The merged entity (PVR-Inox) will benefit from the scale of expansion, faster growth trajectory and another cost synergy
Risks:
- High inflation & low consumption
- Change in audience taste & preference. They prefer OTT over theatres for a routine/average movie.
- The ongoing trend of boycotting major Bollywood films
If any of these risks continue, the current valuations are not sustainable, and the stock price will adjust accordingly.
Hindustan Aeronautics: PSU that deserves a closer look
In a nutshell
In Jan 2019, HAL faced its most significant ever cash crunch. It had unpaid dues of around 19,000 Cr from IAF. At one point, they took an overdraft of 962 Cr to pay salaries and meet operating expenses. Cut to 2022; things are back to normal. The company is in a strong position with a healthy order book and 14,000 Cr cash on the books. But being a PSU, the risk of late payments will always be there as a hanging sword.
Market cap: 75,000 Cr
HAL is in the business of manufacturing, repairing, and maintenance of Aircraft and Helicopters.
In the past decade, the aerospace and defence industry has grown consistently. HAL depends on the GOI for more than 90% of its revenues and the orders typically extended by the Ministry of Defence. More often than not, the company is exposed to the risk of delayed payments, which leads to poor working capital management in the company.
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On the flip side:
- The order book remains strong at 82,154 crores as on Q1, which is more than 3x of the company’s revenue
- High entry barriers. HAL is the sole domestic supplier to the Ministry of Defence and is highly immune to competition by private players
- Strong liquidity with cash and cash equivalents of 14,343 Cr as of March 31, 2022. Also, the Capex commitments are expected to be met through internal accruals
Summing up:
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We reiterate these stocks can fall 50% from here. Or more. It would be best if you did your research before jumping to add any stock to your portfolio. Like any stock, these might fall significantly from current levels.
Keep your eyes & ears open. We never know where that next multi-bagger idea may come from.
Further reading / listening:
A session by Deepak & Anoop on identifying great stocks using momentum:
Seven GARP stocks that look more attractive after a correction [Premium Access]
We hold some of these companies as part of Capitalmind Premium model portfolios. Please read our note on recent additions: Adding three new stocks to the Focused Portfolio [Premium]
The complete portfolio on the Dashboard: CM Focused Portfolio [Premium Access]
Would rather have us manage your money? To discuss whether the Capitalmind PMS is right for you, get in touch with us here
Disclaimer: This article and the analysis presented are for informational purposes only. Nothing mentioned here is investment advice.
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