Given the multiple headwinds since last Holi (March 18, 2022), we have seen the benchmark indices growing in the lower single-digits, and declines outnumbering advances in the BSE 500 index.
The Nifty50 has gained 2.5 percent and the BSE Sensex climbed 4 percent, while the BSE Midcap and Smallcap indices have risen 4 percent and 1.4 percent, respectively, in the last one year.
The first headwind was the invasion of Ukraine by Russia, which lifted oil prices and created inflationary pressure. This was followed by policy tightening by central banks to control the shooting inflation. As a result, some sectors have been under pressure due to higher input costs, higher interest rates, and fears of a possible global slowdown in the next financial year.
Hence, we have not seen a major rally in the stock market, though in early December the market managed to report a record high, but then reversed some of those gains to hit a four-month low recently.
On the sectoral front, we have had a mixed trend with BSE Auto, Capital Goods and FMCG rising the most (22-24 percent), followed by the Bank index (12 percent). However, IT, Commodities, Consumer Durables, Healthcare, Metals, and Power underperformed the broader markets, falling 10-16 percent since last Holi.
“Corporate earnings over the last four quarters have consistently been below expectations on account of a series of cyclical issues. While the aggregate print is still decent enough, the bigger problem has been in terms of breadth. Different sectors have behaved very differently in the recent past,” Shailendra Kumar, Chief Investment Officer at Narnolia Financial Services, said.
Commodity price volatility triggered by the Ukraine crisis is the key issue here. Last year, the March, June, and September quarters saw poor numbers from consumer stocks due to higher commodity prices, Shailendra said. In the December quarter, while commodity and cyclical stocks witnessed margin compression owing to falling prices, consumer stocks too saw lower profit growth due to inventory write-offs, he added.
But there were five stocks, which generated multi-bagger returns, headwinds notwithstanding. State-owned Mazagon Dock Shipbuilders is the first stock in this list of five, surging 187 percent since last Holi, given the government’s rising focus on the defence sector. For FY23-24, the allocation to India's defence budget has been increased 13 percent to Rs 5.94 lakh crore, up from Rs 5.25 lakh crore in the previous year.
At Rs 792 crore, Mazagon Dock has registered a massive 75.5 percent year-on-year (YoY) growth in consolidated profit for the nine-month period ended December FY22-23, driven by healthy operating performance and higher other income.
Consolidated revenues — Rs 5,749 crore — for the period grew by 32.5 percent, while EBITDA (earnings before interest, tax, depreciation and amortisation) jumped 64 percent YoY to Rs 587.2 crore. At 10.21 percent, margins expanded by 197 basis points (bps) compared to the corresponding period last fiscal.
“Other than renewables, I think defence is a sector where a country like India will invest a lot. We’ll see such sectors growing because as a percentage of GDP, both the defence sector and the government’s defence outlay is lower compared to the developed world,” said Santosh Joseph, CEO and Founder of Refolio Investments.
Therefore, there is reason to believe that while renewables is a global theme, defence is a good domestic theme that has a long runway, he added.
The second stock is Mahindra CIE Automotive, the auto ancillary company which has climbed 133 percent since last Holi. After forming a double-bottom in late May 2022, overall, it has been in an uptrend with higher highs and higher lows. The company ended the calendar year (CY) 2022 on a strong note, though higher input costs impacted operating margins.
Consolidated profit during CY 2022 surged 80 percent (to Rs 711 crore) compared to the previous year, with revenues rising 29.4 percent to Rs 8,753 crore. The company registered a 24.5 percent growth in EBITDA, at Rs 1,172 crore, with a margin contraction of 53 bps compared to the year prior.
The banking sector remained and is expected to remain in a sweet spot given the cleansed balance sheets, higher net interest margins (NIM), and lower credit costs. Among the lenders, UCO Bank jumped 129 percent. The rally was started in October, but there was some profit-taking this year.
The public sector lender has clocked a whopping 107.4 percent YoY increase in profit, at Rs 1,281 crore, for the nine-month period ended December FY22-23, due to a sharp fall in provisions for bad loans, even though there was a sharp decline in other income and operating profit. Net interest income grew 11.4 percent to Rs 5,371 crore in the same period.
Going ahead, Kumar feels that while credit costs would remain benign, the risk would come from NIM compression.
“The NIM is at a multi-quarter high. Banks have been able to pass on the interest rate hikes to borrowers but the same has not been done with depositors to the same extent. But as credit off-take remains strong and deposit growth is lagging, course correction will take place during the next financial year,” he explained.
Lloyds Metals and Energy has been another star performer in the last one year, rallying 124 percent. The rally actually started in May 2021, and since then it has been hitting higher highs and higher lows on the daily charts.
The direct reduced iron manufacturer has posted a consolidated loss of Rs 557.6 crore for the nine-month period ended December FY22-23, against a loss of Rs 26 crore in the same period last year, largely due to a large exceptional loss of Rs 1,194.4 crore. Otherwise, profit from operations before exceptional items and tax was significantly higher at Rs 637 crore against Rs 25.3 crore in the same period the year prior. At Rs 2,516 crore, revenue from operations grew sharply by 591 percent on YoY basis.
Number five on this list is Varun Beverages, PepsiCo’s second-largest bottling company outside the United States. Rallying 114 percent since last Holi, the stock has broadly been a star performer since March 2017, barring intermittent correction and consolidation.
At Rs 1,550.1 crore, the company ended the financial year 2022 with a profit growth of 108 percent over the year prior. This was driven by high growth in operational revenues, improvement in margins, and a transition to a lower tax rate. At Rs 13,391 crore, operational revenues increased 49.5 percent over the previous year.
“Strong recovery in demand post the pandemic and our continued efforts towards expanding the distribution network across markets resulted in a 41 percent growth in consolidated sales volumes. Additionally, realisation per unit grew through strategic measures such as selective price hikes, rationalised discounts and incentives, and improved product mix,” Ravi Jaipuria, Chairman of Varun Beverages, had said on February 6.
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