"The market, like the Lord, helps those who help themselves. But unlike the Lord, the market does not forgive those who know not what they do." Warren Buffett
The stock markets around the world are going through a volatile phase. Over the last one year, the Sensex has given around negative two per cent return. But it is nothing new. The markets are expected to correct ones they overheat and rebound ones they punish too much. As investors, what we have in our hand is not to lose our focus. We can get some good ideas by tracking the moves of expert mutual fund managers.
In this article, we have analysed three stocks, wherein mutual funds have raised their stake the most in the last six months (from December 2018 to June 2019).
Incorporated in 1975 as a thermal power generation company, it is the country's largest power utility company, with a market share of 23 per cent and 16 per cent in power generation and installed capacity generation, respectively, as of FY19. The company's principal business includes power generation and selling it in bulk. It sells power through long-term power purchase agreements with state distribution utilities. It has an installed capacity of 52.3GW (including joint ventures and subsidiaries), which is mainly coal-based (85 per cent), while the remaining is shared among gas, hydro and renewables.
With a total installed capacity of 357.9 GW, mainly dominated by thermal power (64 per cent), the power sector in India is going through a disruption phase. Renewable energy is fast emerging as a major source of power in India. The Government of India has set a target to achieve 175 GW installed capacity of renewable energy by FY22. While the overall sector has faced various challenges, such as a drop in the price of renewable energy, a shortage of coal supply and the precarious financial condition of state distribution companies, the growing demand on the back of the government's push for electrification of households, a reduction in the gap between the average cost of supply and realised revenue on account of the UDAY scheme and a push towards the use of electric vehicles remain a silver lining.
The company has targeted to achieve a total installed capacity of 130 GW by 2032. With this, it intends to increase its renewables share (including hydro) from the current 3.2 per cent of installed capacity to 28.5 per cent, thereby reducing its dependence on thermal. In the last three years, the company has increased its earnings by 5.3 per cent while maintaining return on equity (ROE) of around 10 per cent. The stock currently trades at a PE of 9.9x as compared to a five-year median PE of 12x.
With total volume sales of 7.8 million units in FY19, Hero is the world's largest two-wheeler manufacturer. The company has an overall market share of 36 per cent in the two-wheeler industry, along with 50.7 per cent market share in the motorcycle segment within the country. The company operates in around 37 countries and has seven manufacturing facilities in India (Five), Bangladesh and Colombia, with a total production capacity of nine million units. It manufactures motorcycles in all the three major segments- HF Deluxe in the entry; Splendor, Passion and Glamour in executive and Achiever and Karizma in premium. It also sells Maestro Edge, Duet and Pleasure in the ungeared scooters segment. In FY19, the company ventured into two new product segments with Xtreme 200R motorcycle and the 125CC scooter category with Destini 125.
The auto sector share of GDP of the country is at seven per cent and is expected to increase, going further. On the other hand, the two-wheeler industry within the auto sector recorded total sales of 21.2 Mn in FY19, a growth of five per cent year on year. However, the sector is going through a tough time, with sales getting affected because of agriculture slowdown, an increase in insurance costs, liquidity crunch post the IL&FS crisis, deteriorating consumer sentiment because of economic slowdown and difficult job environment and regulatory changes in relation to moving towards BS-VI emission norms. Besides, the industry is experiencing disruption following the government's push towards electric vehicles. Nevertheless, industry insiders feel that it is a cyclical change and not a structural one and that the auto sector will bounce back on the back of decreasing lending rates and growing momentum in the economy.
Hero has taken a strategic bet on a Bangalore-based electric two-wheeler start-up, Ather Energy, by owning around 35 per cent. This investment is expected to help the company make a transition to electric vehicles.
Over the last three years, the company has increased sales by 6.1 per cent, while its consolidated profit has grown by 3.1 per cent. The company's balance sheet remains strong, with a debt to equity standing at 0.02 and the three-year average ROE at 31.3 per cent as of March 2019. As revealed by the management, the build-up in the inventory of Rs 1,250 crore as of March 2019 will smooth out because of festive sales and thereafter pre-buying of BS-IV vehicles before the sale of BS-VI vehicles starts in 2020. The stock currently trades at a PE of 13.8x compared to a five-year median PE of 19.9x.
Larsen and Toubro
Headquartered in Mumbai, L&T is a technology-driven engineering and construction organisation, having interests in manufacturing, financial services and information technology. Founded in 1938 by two Danish engineers, L&T today is a professionally run company with no promoter and one of the largest shareholders being the L&T Employee Trust with a 12.5 per cent stake.
The main business of the company is infrastructure, which contributed 51.4 per cent to the total revenue of Rs 1.4 lac crore in FY19. The second-largest segment is services, including the information technology and financial services division, which contributed 22.8 per cent to the total revenue during the same period. While the company's operations are mainly domestically led (68 per cent of FY19 revenue), it has a presence across the Middle East (17.3 per cent), the US and Europe (9.1 per cent) and other parts.
Being an EPC (Engineering, Procurement and Construction) player, the company's future growth largely depends on infrastructure needs of the country. The present government has a plan to spend Rs 100 lakh crore in infrastructure projects in the next five years, which reflects well for the company. L&T increased its order book by 12 per cent in FY19 to Rs 2.9 lac crore out of which, around 20 per cent came from outside India. Reform measures like GST, RERA, Debt clean-up through IBC and others are expected to remove bottlenecks for private investments in the economy, while the public investment continues. On the other hand, a slowing global economy, accentuated by the US and China trade war, volatile oil prices etc can negatively affect the company's order inflow.
In July 2019, the company acquired a 60.6 per cent stake in the mid-tier IT company, Mindtree, whose number will be consolidated in L&T's financials, going forward. Also, in May 2018, the company divested its Electric and automation (E&A) segment to Schneider Electric for Rs 14,000 crore. Both these moves are in line with the company's FY17-21 strategic plan, Project Lakshya, wherein it intends to boost its ROE to 18 per cent by FY21. In the past three years till FY19, the company grew its revenue by 11.7 per cent, while its consolidated profit grew by 28.1 per cent on the back of improving operating margins. The stock currently trades at a PE of 20.1x as compared to a five-year median PE of 25.9x.
Disclosure: The intent of the article is not to recommend any specific stocks. If you wish to invest in any of the above-mentioned securities, please do thorough research.