Blog Posting Date : 01 Jan 2024
Disclaimer– For Educational Purpose Only, Should not be considered as a Investment Advice
“The Conviction Club” Knowledge Series Post
For the past 2-2.5 years, FIIs have sold a lot. Even after that we did well because of strong DII flows, thanks to domestic flows. There are 5 types of institutions which can propel the
markets. FII’s, DII’s, AIF’s, Family Offices, PMS’s. Until now FIIs were sellers, now just think what will happen when all 4 will join the bandwagon? For the Next 3-4 Months, the Same Thing is Likely to Happen.
Many People Think that FIIs Make a Lot of Money in India. However, that’s not the case. Even if they make money in India, most of it is lost in dollar trade. In the last 12 Years they
haven’t made money.
For the first time, they have an opportunity in India to make big money. Investors’ portfolios are green for them now, investors pour more money when they start making money, this is irrational, because people don’t put money looking at the valuations, but they invest based on their past experience with investing. But that’s how the world works.
Asset Management is a big business across the world, asset managers create different products when they see AUM Coming in and they see a big opportunity to play. This
substantiates the increase in flows. India as we all know is at a bright spot and the world knows that, this decade is of india. We have reduced our oil dependencies, Created competitive landscape, Modi Ji has marketed well, the image of India across the world over the past 10 years, this also leads to the big flows which were a small number of FII and FPI earlier. Now just think what happens when they all start thinking in the same direction.
Over the past few weeks since Mid of November, FIIs have turned buyers and they have bucked their old trend. Usually we should not give much importance to FII data, because most of the time their calls are tactical in nature and they might even sell if the fundamentals of a country might be good, but their tactical decision might make them sell. However, when Sensex in Dollar Terms give a breakout from a long consolidation zone, this is the time, one should start tracking FII Data.
FIIs Have Turned Buyers from Nov 15th,2023 and the trend of selling has changed which lasted for 1.5 years
So, Tsunami of Foreign Funds Coming in is Inevitable
Now the Question Comes- What are the Stocks/ Sectors/Sub Sectors/ Which will be benefiting the most from this phenomenon. Well, We know well that Maximum money flows to the businesses where there is maximum safety and an opportunity to create alpha. Basically -Asymmetric Bets, Heads i Win Big, Tails i Don’t lose Much Kind of Bets. Now look at the pockets -where this criteria gets qualified.
FIIs are not great likers of Small Caps, because of liquidity issues, They Prefer Large Caps and Midcaps. Many of the DII’s have stopped taking lump sum investments into Small Cap Funds Because of Valuation Discomfort, Because of this, there is limited gun powder available which can propel the valuations of smallcaps. So smallcaps are at a disadvantage when it comes to FII Flows. So it’s Quite Clear, Large and Midcaps will be the flavour of the season in Q4 FY 2024.
What are the Asymmetric Bets/ Themes to focus for us and them as a Opportunistic Investor/ Strategic Investor /Trader?
I have been talking about the old economy for some time. In fact, I wrote a blog in Feb 2020 on Bull Market Leaders Create Fortune. Why is there a strong case for old economy stocks to become upcoming bull market leaders? Read it Here
If you have read it, you have got the clarity of why the Old Economy- Basically Commodity stocks/ PSU/ Capital Goods/ Infra/ Real Estate will rule until 2025. But Since the blog is 3 Years Old, let me give you the latest update on it and check whether, still there is an asymmetric opportunity available? Let’s look at some data points.
Nifty Metal/ Nifty SmallCap Ratio Chart
Above Chart is a Nifty Metal to Smallcap ratio chart, there is a Morning Star Pattern which has been formed in the month of December 2023. And it’s a Reversal Pattern. What it means is, the ratio will be moving upwards. For the ratio to move upwards, the numerator has to outperform the denominator. What it means is- Metal Sector should outperform the smallcaps going forward. So as Small Caps are already overvalued, This makes a clean sense for incremental money or part of existing smallcaps should move to metals. Risk/Reward is favourable in metals than Small Caps going ahead.
Nifty Metal Index Value(Pink) Vs Nifty Metal- Price to Book Value(Black)
Even though Metal Index is Trading at All Time High Levels, Valuation of Metal Companies is not Trading below 2021, 2010 and 2008 Valuations. This bodes well for a serious buying of the metal stocks from FII’s.
Similar Data can be plotted for Metals, Real Estate, Power, Infra, basically Old Economy. India is more of an old economy than a new economy as compared with the US. Maybe in the next decade we may have many tech companies as part of Nifty50 . But until then, if someone wants to play India, they have to play the old economy theme.
Now, Why am I Interested in Metal Companies More than any other old economy businesses?
The Answer Lies here First- Metal and Mining and Commodity businesses are in my circle of competence. Read more about it, here
Secondly, the data points below-
1) Metals and Commodities are Available at Cheapest valuations in comparison to other sectors on a historical basis
2)Risk/Reward is better in Commodities than Equities
3) Last time commodity bull run Which started in Oct 2020 got halted in March 2022 because of Interest rate Hikes by the FED to control inflation. Stocks got beaten down, SAIL Fell from the Highs of 125 to Lows of 65 in a Few Months Time.
SAIL was trading at 65 Rs then, Since then it’s been 2X Already.
4) Possible rate cut created a major breakout in SAIL and Many Metal Counters, Posted about it on Nov 2nd 2023. 35% Move in SAIL has happened in the last 2 months itself, reason for that being- possible rate cut from FED
5) Dollar Index Softening is correlated with FED’s Interest rate cut, It brings large moves in commodity and commodity stocks. Moves started well before the rate cut happened, in the anticipation of a rate cut Many Metal Stocks moved 30-40% in the past 1-1.5 Month. Market now believes that rate cuts is on cards.
And Finally on 13th December Fed Officially indicated about the cuts, So Market was ahead in time here
6) When Rate Cut Happens Interest Rate Sensitives do well- Commodities / Real Estate/ NBFCs/Auto’s, Basically Old Economy
7) Steel Prices Bottoming Out – Below Analysis was made on 6th Dec 2023- Since then Prices have moved higher, So Steel Prices have confirmed their bottom. Prices moved from 556 to 580.
So, All in All- Old Economy Should Do Well for Next 3-5 Months at least, But My Favourite play is Undervalued Steel and Specialty Steel Sectors (Because of PLI Scheme). But, creating a basket of other old economy/ financials will help mitigate risks well. So below is the basket which i have created.
Top 10 TechnoFunda/Value Bets
1) Stocks Nearing 52 Week Highs/Lifetime Highs but Valuations are near 10 Year lower ranges, this can bring rerating of stocks in quick succession.
2) Market Cap above 1000 Cr(Except-Mcleod Russel )
3) Stocks having relative strength vs market.( This is important because if market falls, these stocks should fall less, if market rises, these stocks should outperform- basically creation of alpha)
4) Old Economy Commodity Companies Benefiting from Dollar Index Breakdown, Interest rate reversal, FII Flows
Stock Prices as on 1st Jan 2024
SAIL (CMP : Rs. 124)
Key Aspects :
1) Undervalued Compared to other Steel Players
2) Possible Privatisation Play- Possibility of an Anticipated Rally on the cards before Lok Sabha election results.
3) Replacement Cost of 21.5 Million Ton Steel Plant is 1.35Lakh Crores- Current Market Cap is Just 55000 Cr, During the last metal cycle in 2004-2008, it traded at 2 Times its replacement cost. Will the same happen again as privatisation picks up?
4) SAIL is already working like a Private Organisation, It had a total headcount of 102000 in 2012 and currently it is at 62000. Is this hinting at the possibility of a privatisation going ahead?, Department of Divestments is working closely with the organisation.
5) SAIL has a huge dump of 33 Million Tons of Low Grade Iron Ore Fines, when commodity becomes scare because of price rise, this will turn into a revenue generating source for SAIL, Opportunity of 5000Cr Revenues which most of it can directly flow down to P&L
BEDMUTHA (CMP : Rs. 180)
1) Bedmutha Industries is a leading manufacturer & exporter of Wire Rope, Tyre Bead Wire, Galvanised Wires among other types of wires.
2) Key Beneficiary of PLI Scheme on Speciality Steel.
3) Bedmutha has awarded/got a sanctioned subsidy of 31Cr to set up a plant and current market cap is 450 Cr, this gives a sense of undervalued ness from a growth perspective.
4) WireRope and Strand Machine Strand Capacity will increase from 7800 to 14400 MTPA by 31st March 2024.Wire Rope is a direct play on Private Capex/ Infra Spend in the Country. wirerope businesses grow multifolds during economic expansion. Bedmutha stands to benefit.
5) During the channel checks we understood that bedmutha’s products give a tough competition to tata steel’s products.
MAITHAN (CMP Rs. 1195.70)
1) Debt Free, Cash Rich, lowest Cost manufacturer. Around 1000 Cr cash on B/S(Currently Invested into stocks), Current Mcap is 3400 Cr, High level of margin of
safety in valuations
2) Largest producer of Ferro Manganese in india.
3) Trustworthy and capable promoters.
4) Strong 20 year track record of doubling the production every 4 years.
5) Stock Price near 52 Week High, Valuations from P/B perspective near lifetime average. Giving Valuation Comfort.
NALCO (CMP : Rs. 134.70)
Key Aspects :
1) NALCO manufactures and sells Alumina and Aluminium, Aluminium is the metal of the future, whoever wants to reduce the weight but not want to compromise
on strength will shift to Aluminium. It’s a good proxy for EV Play.
2) Debt Free, Cash Rich-1971 Cr cash on B/S, lowest cost manufacturer, PSU company.
3) Possible privatisation play, Employee count is less, looking at BALCO Success in 2004, NALCO also can move on the same path from a divestment perspective.
4) Stock price at all time high, valuations from price to book perspective is near 10 year lower range. Valuation Rerating candidate.
5) Provides Dividend Yield of 3.4% which is currently less because of less profitability, dividend yield in past has gone as high as 10%, can expect 6% dividend yields at least
IMFA (CMP : Rs. 500.05)
Key Aspects :
1) Indian Metals and Ferro Alloys Limited (IMFA) is a leading, fully integrated producer of Ferro Chrome in India which is primarily used in the production of stainless steel. Largest producer of ferro chrome in India.
2) IMFA Accounts for 25% of india’s exports, its a large company trading at smallcap valuations.
3) Co.’s plants are located in close proximity to chrome-ore and coal mines which provide significant cost savings in terms of lower inward freight costs.
4) Stock price is trading at lifetime highs, but valuations from a price to book perspective is trading near 10 year lower ranges. All time high P/B is 3.5 Times, current P/B is 1.5 Times. This warrants a significant valuation rerating if ferro chrome prices support(Which is likely) and also when dollar index moves downwards (Which is already happening).
5) Key Beneficiary of PLI Scheme on Speciality Steel Segment.
GENSOL (CMP : Rs. 868)
Key Aspects :
1) Gensol Engineering Ltd is engaged in the business of Solar consulting & EPC.
2) FY23 revenue of 363cr and mgmt says revenue to touch Rs 4,000 crore by FY 2026.
LIC HSG FIN (CMP : Rs. 541.80)
Key Aspects :
1) LIC Housing Finance Limited is a housing finance company registered with National Housing Bank (NHB) and is mainly engaged in financing purchase / construction of residential
flats / houses to individuals and project finance to developers, Loan against Property (LAP), Lease Rental Discounting (LRD)for commercial properties as well as purchase of commercial
2) Interest Rate cooling off brings biggest advantage for NBFC’s Like LIC Housing Finance
3) Has all the ingredients of becoming a FII Favorite Stock
LIC OF INDIA (CMP : Rs. 833.05)
Key Aspects :
1) It needs do introduction. its a insurance behemoth of india.
2) Got listed at 850- Even though valuations were not expensive, stock got beaten down to 550 Levels. Value of holding companies is more than the current market cap of the company. Holding value is 11 Lakh Cr and urrent Market Cap is 5.26Lakh Crores. LIC is like owning India as it owns 100’s of companies’ stakes. It’s like investing in Nifty and getting the insurance business for free.
3) LIC Deserves a serious valuation rerating and it has all the ingredients of becoming FII Favourite stock
MCLEOD RUSSEL (Potential Darkhorse) (CMP : Rs. 27.50)
Key Aspects :
1) Largest Producer of Tea in India in the listed space owned by williamson magor’s group. Khaitan Family.
2) Going through debt issues, promoters might get changed or debt resolution should happen with restructuring, this might happen sooner than many people think. Majority of the stake has got sold from lenders by pledge invocation.
3) Value of tea assets is more than 7X of the current market cap of the company
BAJAJHIND (Potential Darkhorse) (CMP : Rs. 28.05)
Key Aspects :
1) Bajaj Hindusthan Sugar Limited (BHSL) was incorporated in 1931 under the name ”The Hindustan Sugar Mills Limited”. The Company is engaged in the manufacture of sugar, alcohol, ethanol, and the generation of power.
2) Bajaj Hindustan holds an inventory of 2500Cr, Current Market Cap is 2500 Cr. Their Inventory turnover has been lowest in the industry. However, the upcoming rally in sugar prices might make this an opportunity in adversity. In 2006 sugar price rally company reduced its inventory from 180 days to just 5 days, possibility of repeating that if there is a sugar price rise globally and govt allows exports of sugar. It’s a huge uncertainty, at this juncture whether the government will allow exports or not, and it’s unpredictable.
3) The government has recently hiked the prices of Ethanol. BHSL is also one of the largest capacities of ethanol in the country, this should benefit the company.
4) BHSL is the cheapest stock in the entire sugar space, reason being BHSL is in Corporate Debt Restructuring. But sugar cycles can change its fortunes forever. In Fact this company can turn debt free. Management is taking every step in right direction over the last 3 years
Very important note: The objective of this blog is to share knowledge and info about multi-bagger ideas/opportunities. Neither is this trading website nor an analyst website nor a Buy/Sell call website. For stock market success, always do your homework, own analysis, and make your own decisions. StrategicAlpha is not a SEBI Registered Investment Advisor/Research Analyst, The content should be consumed only from a educational perspective.
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