Five interesting stocks from TIA’s 20-20 Ideas Summit

The summit is so named because TIA selects 20 distinguished speakers who choose a stock of their choice and present on the stock. Each speaker gets 20 minutes to present during the summit. TIA is an actively run Investors Association based in Chennai. It was the first investor association to be registered by the market regulator SEBI in 1992.

To be sure, TIA emphasizes that the presentations are for educational purposes only and should not be construed as stock recommendations. Also, all speakers disclaim this effect. The speaker also discloses his holding, if any, in the stock and details of the factors favoring the stock.

This year the 20-20 Ideas Summit was organized on 18 February at IIT Madras Research Park, Chennai. Around 350 stock enthusiasts attended the event in Chennai and another 150 joined virtually. Here are five stocks (chosen at random) that were presented at the summit.

Usha Martin (Speaker: Jatin Khemani, Managing Partner & CIO, Stalwart Investment Advisors LLP.)

Khemani said late Rakesh Jhunjhunwala, a noted investor, believed in betting on earnings growth and quality ‘transformation’, and market sentiment led to the re-rating of the stock. Khemani’s stock pick was Usha Martin, a leading manufacturer of steel wires and ropes used in the construction of lifts, cranes, bridges etc. He said that this is a company where he sees many positive changes happening.

Khemani said the company’s products are highly specialized and mission critical in nature that serve as a high entry barrier, and have a steady projected demand similar to fast moving industrial goods, or FMIG. Usha Martin’s high EBITDA (earnings before interest, tax, depreciation and amortization) per tonne was an important metric. compared to 20,000 4,000-5,000 for some other steel converters.

“The company has fallen off the radar due to several factors such as weak demand and oversupply, bankruptcy risk in 2018 and family feud for control of the business,” Khemani said. But he feels that the situation is changing while the market sentiment is not. The stock is trading at a price-to-earnings (P/E) ratio of 20 times. On one hand, global demand in sectors such as oil and gas, mining, infrastructure, etc. is improving, and on the other, China is not a threat to supply as it has negligible presence in global trade. India’s relatively cheap steel prices are another positive.

Among other factors, he pointed out that the company is set to become debt free in 2022, and is currently expanding capacity. The family dispute has also been resolved, providing clarity on the leadership of the company. The lack of sell-side analyst coverage of the stock, and low institutional shareholding in the firm are other favorable factors.

Kaynes Technologies (Speaker: Ravi Dharamshi, CIO, ValueQuest.)

Emphasizing the huge potential for local manufacturing of electronic components in India, both for domestic consumption and exports, Dharamshi chose Kaynes Technologies for his presentation. Mysore based electronics manufacturing services company primarily focused on PCB (Printed Circuit Board) manufacturing. “Globally, it is going to be a $3 trillion industry by 2025, from $2.5 trillion at present. In India, there is 80% localization in auto components but only 3% in mobile. Hence, there is huge scope for localization in electronics manufacturing and within this, PCB is a huge opportunity,” said Dharamshi.

Highlighting the positives at the macro level, he said, “China’s demographic issues due to one child policy, and India’s largest and youngest workforce make India globally competitive in this segment.”

Factors in the company’s favor are its diversified revenue profile – it has customers in automotive, industrial, medical, railways and other sectors. The company is moving up the value chain, and its order book has grown—by simply 300 crores two years back 2,500 crores now. He expects this growth momentum to continue, and return on capital employed to exceed 25% after 4-5 years of capital expenditure. However, given the company’s high inventory days and receivables, Dharamshi said the company faces working capital risk.

Life Insurance Corporation of India (LIC) (Speaker: Deepak Shenoy, Founder & CEO, CapitalMind.)

For Shenoy, LIC is a stock to watch- it enjoys the trust of majority of Indians, generates more Steady state profit of Rs 6,000 crore per quarter and no debt. And they expect the company’s profits to increase further. Currently, non-participating policies account for around 10% of LIC’s effective annual premium, and this share is expected to increase to 25% in the next few years. Under such policies, the entire surplus goes to the shareholders. The fact that single premium policies are expected to be phased out by 2024 will bode well for the company.

For them, the insurance giant has multiple targets- its market leadership (seven times that of the second largest player), multiple sources of profit and government support, and comfort on the valuation front. LIC stock is currently trading at 13 times its annualized earnings. On a broader level, India’s increasing insurance penetration will be another favorable wind.

Public sector companies generally do not think about returns to shareholders. According to Shenoy, this is a potential risk for investors. Tax changes are another risk factor as is any future dilution of equity stake by the government. The higher tax exemption limit under the new tax regime announced in the budget may encourage people to spend more and put less money in insurance policies. Moreover, the government’s proposal to reduce its stake to 25% may hurt LIC stock price in the interim.

Krishna Diagnostics (Speaker: Aditya Khemka, Fund Manager, Incred Healthcare PMS, Incred Asset Management.)

Khemka piqued the interest of the audience by saying that the BSE Healthcare Index has outperformed the Nifty 50- Investing in Healthcare Index turns 100 315 against in the last 10 years 300 in Nifty 50. And the difference in returns widens when the investment is made only in the stocks in the bottom half of the healthcare index- 100 would have increased six times 600 so far.

He highlighted that diagnostics companies saw an increase in their earnings amid the Covid pandemic; His valuation multiple also shot up. Now the multiples are de-rating them below their average. “The best time to invest is when earnings and multiples are below long-term averages,” said Khemka.

Elaborating on his reasoning, he said the B2G (Business to Government) company is a pioneer in the Public Private Partnership (PPP) asset-light model where it bids for government tenders to set up diagnostic centres. The company has not faced receivables issues and has maintained its debtor days at a reasonable level of 50 days. It generates industry level EBITDA margins of 28-30% with return ratios in the mid-to-high teens.

According to Khemka, the company’s revenue growth in the medium term (after the high growth in FY24) is likely to be 10-18% per annum. “We value Krishna Diagnostics at 10 times EV/EBITDA (enterprise value to EBITDA), which is in line with companies with similar tender business models in other sectors.”

Among possible risk factors, he touched on media reports related to the company’s undisclosed earnings. 100 crores. However, he is hopeful that the company will get a clean chit and this will act as a re-rating trigger for the stock.

HDFC Bank (Chairman: Balaji GR, Head of Research & Co-Fund Manager, iThought Financial Consulting LLP)

Balaji pitched HDFC Bank as an ‘all-weather stock’ and said it would be a big player in India’s growth story. The bank stock, he highlighted, has returned 17% CAGR on a 10-year basis, and has beaten the market in every 10-year period since 2002.

Pointing to the bank’s ability to continue growing despite its size, he said HDFC Bank is the third most profitable company among NSE 500 firms based on net profit (trailing 12 months). So, is the bank well placed? According to Balaji, it is well capitalised, has the strongest deposit franchise among private sector banks, and is strong on risk management, customer engagement and cross-selling. The average GNPA (gross non-performing assets) ratio of the bank was only 0.9% to 1.4% in the last decade marked by demonetisation, NBFC (non-banking financial company) crisis and even economic shocks . Covid pandemic.

According to Balaji, the key revenue drivers for the bank will be its above-market loan growth, expansion of gold loan portfolio and wealth management business, and value unlocking in HDB Financial Services or HDFC Securities. Among the risks, he highlighted high operating costs of the bank, which he expects to normalize in the medium term, and regulatory issues related to housing finance behemoth HDFC’s merger with itself. At a price-to-book value of 3.35 times, the stock, though not cheap, is in line with its historical valuations.