»Profit Hunter by Equitymaster

On This Day - 13 APRIL 2022
Stocks with Titan-Like Wealth Potential? Think 4D...

The world was barely recovering from a pandemic.

Indian stock markets had seen one of the worst corrections a few months back. The BSE Sensex had been hammered more than 20%.

Bad loans of the banking sector were just coming off the peak ratio of 9%.

Most corporates were gasping for breath. Many had been referred to the Insolvency Board (BIFR).

The year was 2004.

The coronavirus was SARS (Severe Acute Respiratory Syndrome).

It took grit, determination, and discipline for a long-term investor to invest in Indian stock markets even back in 2004.

Not only was the macro environment as challenging as it is today. But even the best businesses seemed to be in distress.

A particularly well known, trusted and well managed consumer durable company was bogged down by debt. Its debt to equity ratio was almost 3.5. Its return on capital of 9% was measly.

But one particular segment of the business had the potential to explode.

And explode it did!

With profits soaring over the next five years, the company became debt free. Its return on capital multiplied to 34%.

After that, there was no looking back.

The stock of Titan gained over 350% in six years after I first recommended it to StockSelect subscribers in January 2005.

So, every lakh turned into Rs 4.5 lakh.

Holding on to the stock till date would have fetched Rs 1.4 cr!

And there is more.

You did not even need a big sum to accumulate these crores. Even a tiny investment of Rs 1,000 per month in the stock of Titan, since 2002, would have led to mouthwatering results.

Now for Titan, the exponential gains over past two decades may have come of the back of deleveraging and improved cash flows.

Deleveraging is yet again a key reason for the earnings surge among large and midcap companies.

The debt to equity ratio of Indian companies is currently one of the lowest in nearly a decade. This is a function of improving earnings outlook, as well as ability to raise money from secondary markets, from IPO markets, and strategic investors.

Indian companies are reducing debt and increasing their cash balance. Firms are selling assets and avoiding debt laden capex ahead of the rising interest rate cycle.

A reduction in overall corporate debt levels also means that banks will be more willing to lend to the deserving sectors.

So companies acquiring leaner balance sheets and healthy cash flows are the ones to watch out for...yet again.

But apart from deleveraging, there are three more Ds, set to create massive tailwinds for a handful of businesses.

Digitisation

Digitisation is the biggest or the most powerful themes right now.

Pretty much every kind of business in India has taken advantage of AI, machine learning, and internet of things. The trend played out in economies like the US and China since 1980s and 90s. It started to play out in India only a few years back. We are still at the inflection point.

Digitisation does not necessarily need to be about tech companies. Even companies into businesses like digital insurance, diagnostics, consumer platforms etc, are all benefitting from the wave of digitisation.

Defence

First, the government banned on import of defence equipment.

Second, it permitted the private sector to cater to the needs of armed forces.

Both the moves were game changers. Not just defence producers, but the entire ecosystem of defence related manufacturing, including electronics, surveillance etc, has become a very viable and lucrative investments.

While there are several legacy defence companies riding this tailwind, there are plenty of non-defence companies too that are using this 'D' to boost their earnings and valuations.

De-carbonisation

India is among the largest renewable energy markets in the world, ranking third in solar, fourth in wind, and fifth in hydro power capacity.

India's energy needs are constantly on the rise because of growing economy. Moreover, countering air pollution has become one of the government's top priorities.

To achieve this, India has set out the world's largest expansion plan for renewable energy - a 5x increase of installed capacity to 450 gigawatt (GW) by 2030.

The government also plans to set up over 50 solar parks targeting over 40,000 megawatt (MW) of capacity.

Although the sector is still evolving, India's renewable energy capacity has more than tripled over the past five years.

So de-carbonisation is not only about electric vehicles.

Stocks at the forefront of de-carbonisation or what is commonly called the green energy megatrend are likely to be from sectors as varied as power, auto ancillary, agriculture, chemicals, consumer durables, and utilities.

So as you see, is possible to accumulate a few crores by investing small amounts in steady businesses.

And I have not one but four reasons to believe that there are many more Titans in the making this decade.

Thanks to the four 'D's, 2022 could be for these stocks what 2004 was for Titan.

Of course, the broader markets may be volatile. So, your plan to increase exposure to the stocks you pick will have to be staggered.

Happy investing!

Warm regards,

Tanushree Banerjee
Tanushree Banerjee
Editor, StockSelect
Equitymaster Agora Research Private Limited (Research Analyst)

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