Query Desk

Dear Sir,

Our views are still the same (since the date we had recommmeded) as we believe the growth potential in the company is humongous.

We are currently bullish on Five-Star.

Regards,

Analyst

Dear Sir,

Our suggestions for next 1 year that you can further evaluate-

Polycab – Market leader in Wires & Cables segment, with tailwind of growth in Capital Goods sector. Management is confident to achieve the Revenue guidance of 20000 before FY26.

Zomato – We believe Zomato should be able to sustain its high revenue growth rates for the year (Overall Revenue Guidance of 40%), with focus on scaling up Blinkit and Hyperpure very fast.

Pricol – Given the Premiumization trend and marginal positive volume growth in the Auto Industry, Pricol should be benefited by these factors while leveraging its high market share in Driver Information Systems.

Indian Hotels – Hotel industry has seen a dramatic recovery post Covid and with record high industry occupancy rates (70%+). Indian Hotels being a market leader here, should do well with the continued rush of domestic tourism.

Action Construction – With revenue guidance of 25% and incremental EBITDA Margin expansion, ACE stands to benefit from the strong demand in manufacturing and infrastructure activity over FY24.

Dear Sir,

Diagnostics, we believe is now a commoditized business. Last year in particular had very weak performance by all the listed players.

There are twin challenges being faced by these firms. 1^st one is the intense price-based rivalry that is going in the industry. There is hardly any differentiation if a patient does a Blood Test from one firm or the another, as the medical equipment used to get the test results are more or less the same. 2^nd one is that larger Hospital Chains are focusing very aggressively on allied businesses of Pharmacy and Diagnostics. Examples are Max Healthcare with Max Labs, Apollo Hospitals with Apollo Diagnostics, Fortis with Agilus Diagnostics.

The way these Diagnostics firms are overcoming these challenges is to focus on ‘Super Speciality’ tests and increasing inorganic acquisitions of standalone labs to have wider scale and volumes. While, Dr Lal being the market leader here, will command normally higher valuation multiples as compared to its smaller peers, we are not very gung-ho on the sector. We believe integrated Hospital chains like Apollo and Max could do relatively better as a long-term structural theme instead of Diagnostics.

Dear Sir,

Any news impact to a stock needs to be judged whether it has to have a Temporary or a Permanent impact on the business model of the ‘high conviction compounder list’.

There are three key reasons for the negative stock price action for the Bank

1) NIMs are expected to be under pressure (20-30 bps) over next few quarters due to excess liquidity requirement and accounting adjustments (post-merger with HDFC Ltd)

2) Rise in NPA due to the legacy corporate loan book of HDFC Ltd.

3) Higher Cost-to-Income Ratio post-merger (Due to accounting changes up fronting of sourcing costs under IGAAP for HDFC Ltd vs amortization under IndAS).

On the positive side, the Bank has not made any changes on its loan book growth outlet. The bank’s advances had grown at 20% CAGR since last 10 years and it still has < 10% Market Share in the Industry. With continuous gains in market share by Private Banks from PSU Banks in addition to the normalised Industry Credit growth, we believe this is event does not have any significant impact on our view for the long term.

On the whole though, we believe that the Bank will outperform the Index (12-16%) kind of CAGRs, as with increasing size, scalability does become challenging.

Dear Sir,

Its already uploaded, screenhot below

Regards,

Ajanta Pharma was one of the first companies to focus on Africa/Latin America Markets segments in early part of last decade when everyone else in the industry was only focused on US. If you see the margin history, it used to earn 30-35% EBITDA, which has now gone down to 21-25% EBITDA. While their India and Africa Branded Generics Business seems to do well, the performance of the US Generics Business and the African Institution Business has been mediocre. Unless a company is an Pharma ‘Innovator’ or the ‘Lowest Cost Producer’, there is very limited scope of ‘Moat’ in the industry. Ajanta in our opinion is a very mature business and would grow at typical 10-15% rates. Alternatively, you should look at Mankind Pharma as well. It is a market leader in the Domestic Branded Generics segment.

For Gravita, Growth here has been exceptional, they remain focused on the Recycling of Lead, Aluminium, Plastic, Rubber while also focusing on Turnkey Solutions. The Revenues here have grown at the rate of 28% CAGR for the last 5 years while going from 655 Crores in FY2017 to 2801 Crores for FY23 while PAT in a similar time frame has gone from 35 Crores to 204 Crores which is more or less on a similar growth trajectory indicating sustainable Margins and Performance.

The Company here is going to increase its capacity from 228,000 MT to 425,000 by FY26. They are going to spend 80 Crores for existing Verticals and 200-250 Crores for New Verticals in the next Couple of years. The Company expects to generate an Asset Turn of 8-9x in with the Current Ongoing and 2 years of Additional Capex that they will be undergoing. There seems to be limited peers in the the Organised Metals Recycling industry, which have benefit Gravita to a large extent.

Glenmark Lifescience is the API manufacturing division of Glenmark Pharma which was set-up and listed separately. Glaxosmithkline (GSK) Pharma is the domestic arm of the International firm with market leadership in Vaccines and has a large variety of prescription medications. Both the firms have okayish management quality, reflected by their mediocre growth, especially incase of GSK with a 10-Year Revenue CAGR of only 2%. For Aarti Industries, majority of revenues comes from manufacturing its Benzene-based specialty chemicals. The company has experienced very high volatility in Sales Growth and Margins in last 3-4 years. Overall, we are not very gung-ho on these companies and believe other opportunities could be favourable looked upon.

Stocks you could look at are: (Pricing Power)

Nestle

Westlife

Asian Paints

Page Industries

Rainbow Hospital

A good proxy to Options Trading theme in India is Angel One. Its the 2nd largest player already and management is aggresively focused on growth. 

1. Cash management service industry. couple of listed players at very reasonable valuation like CMS /Radiant etc .possiblity of PE rerating here considering since demonitisation cash in circulation has increased more than 20x irrespective of digital push.

Demonitisation impact might have been already seeded away as it has been few years now. The premise with these cash management companies (Radient, CMS) etc is of two fold. 1^st one is that many PSU Banks still do not completely outsource their ATMs maintenance/servicing to outside vendors (this trend is changing now and hence is a growth driver for these businesses) and 2^nd is focus on ancillary businesses likes of cash management for Organised Retail and Cash Logistics/Transit facilities. These businesses may not grow at very high rates (>25%+) and hence in our opinion a re-rating would be difficult to come about. More importantly, with UPI growth at such high rates in the country wherein even the smallest businesses do not require a lot of cash (irrespective of the management’s view that cash transactions will be prevalent in future), there will always be a question of assigning a large terminal value to these stocks by investors, which is another factor which may restrict multiple expansion further.

2. Explosives : large export , defence and space opportunity opening up with very high barrier to entry considering most partnerships require multi year approvals. example: premier explosives

Defence has been a theme for the last about the 1.5-2 years with most stocks like HAL, Bharat Electronics, Solar Industries, Data Patterns etc having given extremely high return CAGRs in a relatively quick time. We do not track the sector in detail, but essentially just like other B2G Businesses, you should look at the growth in order book to ascertain the longevity of the defence trend. A near term risk would be any change in Government policy (Defence Budget allocation) post the upcoming general election. In addition, it also important to tract the Receivable Days of these companies and see that they get paid on timely basis from the Government.

3 Regional players competing with monopolies : like jyoti resins growing fast with realizations equal to pidilite with ultra low sales and marketing cost

Monopolies by themselves are those players who dominate the industry with essentially the largest market share. Regional players could be defined as those have a ‘relatively’ higher market share in their region as compared to a national monopoly (Eg Thangamayil dominates the rural Tamil Nadu market where Titan has limited presence). A risk with a regional player is that the growth can be impacted due to localized event (Eg. Bandhan Bank was impacted due to instability in Assam/West Bengal, SKS Microfinance (Bharat Financial Inclusion) going under severe distress with the MFI Ordinance bill passed by the Andhra State Government). On the flip some, some regional players do very well too (Eg Indigo Paints growing faster as compared to Asian Paints). Or likes of Yatharth Hospital growing faster than Max/Apollo.  However, in our experience we would largely prefer monopolies over regional players. There are many monopolies like Indigo Airlines, Sula Vineyards, PB Fintech, Crisil, Polycab, Uno Minda, Zomato that have built very powerful moats around their business model and regional players will find it difficult to compete with them. Monopolies normally have superior pricing power, established management bandwidth and have withstood many crises in their respective industry to emerge as the largest player. Markets hence tends to give higher valuation multiples to monopolies as comparted to the regional rivals. 

4.Recent MCI order mandating doctors to prescribe only generics : Giving benefit to pharmacy chains having their own generic brands like Medplus which is adding 1000 stores every year with highest revenue per square feet in retail with setup cost per store being only 7 lakhs and revenue for mature store of around 2cr.

This is a significant risk to domestic-focused Pharma companies (Likes of Mankind, Eris Lifescience). The latest I have read about is that the order was put under hold by the National Medical Commission (NMC) and is under review post the objections raised by the doctors. We will need to wait and watch how the regulatory risk evolves here. This indeed will be positive for pharmacy retailers like MedPlus, however the current operating business performance of MedPlus has been poor. The company is struggling on the store-level economics and has large investment plans to grow aggressively. Their idea is to first capture the market share and then 'think' about profitablity.  

Dear Sir,

Thank you for being part of the Stallion family and your continuous support!

Amit Jeswani had addressed the rational for closeing the RA Desk in our email on 16th Aug 2023 itelf, which I quote below.

''We Fundamentally believe that we will be in a Business to be Number 1 or not be in that business at all. The Research Analyst Business we don’t believe we can deliver the Greatest value ever without a 'Model Portfolio'. Stallion Asset has an Amazing Portfolio Management Services. We would want to give our 100% there."

Our Focus remains on wealth creation for our clients via the PMS product. 

Thank you,

Five-Star operates in the segment of Micro-Loan Against Property (LAP) within finance industry. Micro-LAP is a product segment that deals with individual borrowers who want to avail a loan by mortgaging their property to the lender (secured loan). The loan amount is given as a certain percentage of the current market value the property.

Five-Star had grown its AUM at a CAGR of 60% over FY15-FY23 to 6900 Cr and has one the highest Return on Asset (ROA) in the industry at around 7-8%. Five-Star caters to a large market with estimated size of micro-LAP (Loan Against Property) segment to be approximately 22 Lakh Cr. We have always liked small sized, fast-growing financials who can manage risk well and Five-Star is currently the best in this segment in our opinion.

While, no doubt the market has recognised the quality of the business and hence the valuation is on the expensive side currently. There are many stocks that have not performed over the short time period (going thru phases of temporary overvaluation), but give great returns over the long term.

In the below cases too, while the earnings continue to fire (although on slower pace), the price action has been mediocre.

But, over the long term horizon, the price action does follow the ‘earnings growth’ broadly.

For Five-Star’s case, the three key monitorables are

1) Spread (Does not go below <14%),

2) ROE (Does not go below < 15%)

3) AUM Growth (Does not go below <30%).

We continue to be positive on Five-Star notwithstanding the current price action, as we feel the business should do well over the long term with our expectations of growth, and hope that the markets would reward us over the next few quarters.

We agree that Safari has done really well in the last few years. A unique aspect for the industry is that Luggage takes lot of space, which means retailers will only stock up well established ones leading to some kind of moat for the three organised luggage players in the industry.

Safari is acting like a ‘Challenger Brand’ to the Market leader (VIP) and gaining share. There are very few companies that can gain share from the Market Leaders normally. Same thing is happening for TVS Motors (Gaining share from Hero/Bajaj).

Indeed, the valuations multiples for Safari are stretched currently and to expect a repeat of the CAGR achieved in the last few years would have a very low probability.

In fact the entire Small Cap space in our opinion in currently in overvalued zone. Below depicts, the ratio for BSE Small Cap/Nifty 50 Index. The current values have crossed the Dec 2017 peak values.

While high growth small caps like Safari will do well on the business front, the returns could be muted in the near term.