4/16/2017 20BestStocksFrom30EquitySchemes

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20 Best Stocks From 30 Equity Schemes

Debashis Basu and Namrata Patel
14 April 2017
8

The financial year 2016-17 started with a strong upward move (the market made a
low on 28th February last year) and was on course for a major rally right until late-
October, when the note-ban pushed the economy into major uncertainties. However,
stocks have put in a strong rally from early January 2017 and ended the financial year
in style. While the Sensex is just below its all-time high, the Nifty has already breached
it. The Sensex delivered a 17% return and the Nifty 18.5%. Many equity mutual funds
(MFs) have, of course, done far better than the two indices, especially MF schemes
focused on smaller companies or those with the flexibility of investing across
companies of different sizes.

If you know nothing or very little about investing, it is better to go with some well-
known schemes from large well-established fund houses. But can we do better? Should
one rely on the skills of the fund manager or should one create ones own portfolio of
stocks? We have addressed this issue on two previous occasions and we are back with
the same approach again this time. We say combine the two. We return to our annual
study that we initiated some years ago: selecting the best stocks from top-performing
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equity schemes and creating a better-quality portfolio. In other words, the attempt is
to use our stock-picking skills and cherry-pick stocks from the best equity
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schemes,

leaving out stocks from their portfolio that are likely to underperform.

This Cover Story offers a fresh listing of the best stocks, based on the latest portfolios
of best-performing schemes. Again, we consider a mix of large-cap, multi-cap and mid-
cap schemes. (Refer to our Methodology for details.)

Cherry-picking
This year, three stocks from our previous years list will continue in the portfolio, as
many companies ranking has either gone down, or they are no longer present in the
portfolio of top equity schemes. Like last year, this year too we have 20 stocks on our
list. As we have highlighted in our prior analyses as well, please remember, this is not
our list of recommended stocks. We are merely compiling the best stocks present in the
portfolio of top MF schemes, leaving out the possible laggards. With this exercise, we
expect our cherry-picked portfolio to outperform most equity schemes; it has done so
in the past.
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Our selection, which is based on a formula that combines value and return, along with
insight into industry trends and corporate governance, has worked well. This is similar
to the strategy we apply to the stocks selected for Moneylife Stockletters. This
approach has been rewarding for us in the past. As in the previous years, our portfolio
continued to do well in the past year. Our equal weighted portfolio delivered a return
of 26.61% from January 2016 till February 2017. Our portfolio outperformed 104 out
of 133 large- and multi-cap schemes.

Topping our list, once again, this year is TVS Srichakra, one of Indias top two and
three-wheeler tyre manufacturer. With manufacturing units in Tamil Nadu and
Uttarakhand, TVS also has a network of over 2,400 dealers and 34 depots. For exports,
this mid-cap company manufactures industrial pneumatic tyres, farm and implements

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tyres, skid steer tyres, multipurpose tyres and floatation tyres, among others. It exports
to the United States, Europe, South America, Africa and Australia. TheBUYlaunch of Feedback

technologically-advanced radial tyres in August 2016 is expected to offer strong

growth opportunity in view of the increasing sales of bikes in the higher CC categories
150cc and above.

The company is completing its capacity expansion programme in Madurai and
Uttarakhand, under which it is boosting total capacity to 2.5 million tyres a month,
from 2.3 million tyres. It is also expanding the number of dealers during this year. In
March 2017, TVS showcased the TVS Eurogrip range of off-highway tyres for
construction, industrial and agriculture uses, including farm implements, at a mega
expo for the automobile industry. This business is currently dominated by Balkrishna
Industries. Sales of TVS have been flat at 4% for the past five quarters and the
operating profit was up by 8%. The average operating profit margin (OPM) for the last
five quarters is 15%. The price-to-earnings ratio (P/E) of the stock is 15.33, which is
low for a company that has a high return on capital employed (RoCE) of 44%.

Our second pick is eClerx Services, a knowledge process outsourcing (KPO) company
providing middle/back office operations support to over 30 Fortune 500 companies.
Headquartered in Mumbai, their five delivery centres across India support a diverse
global client base. Client relationship offices are located in New York, San Francisco,
Chicago, Austin, Philadelphia, London, Dublin and Singapore. In May 2012, eClerx
acquired Agilyst Inc, a specialist outsourced services-provider serving the broadband,
cable and telecom industry in the US and UK. In August 2016, Agilyst Inc USA, having
its registered office in Philadelphia, has been merged into eClerx LLC, USA, a wholly-
owned subsidiary of the company, having its registered office in New York. The merger
aims at administrative convenience and maintaining lean corporate structure and is
effective from 1 January 2017.

In February 2017, the chief financial officer of the company announced that the
company is aggressively looking for digital business opportunities and strongly
pursuing inorganic growth. Sales of eClerx Services have been up 18% for the past five
quarters and the operating profit grew exceptionally at 31%. The average OPM for the
past five quarters is a healthy 34%. The P/E of the stock is 14.49, which is low for a
company that enjoys a huge RoCE of 41%.

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Hero MotoCorp is the worlds largest manufacturer of two-wheelers. Its extensive sales
and service network spans over 6,000 customer touch points. On 22 March
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2017, it

rolled out the first bike produced at its greenfield plant at Halol (Gujarat). Halol is the
sixth plant of the company, which already has manufacturing facilities in Haryana,
Uttarakhand and Rajasthan, as well as Columbia in South America. The companys
second global manufacturing facility is coming up in Bangladesh and will be
operational later this year. It is also planning to set up another plant in Andhra
Pradesh. The first phase capacity of the Halol plant is 1.2 million units per annum,
while overall production capacity planned is 1.8 million units. It has undertaken
Digital Twin project to transform the conventional manufacturing approach into
digitally enabled manufacturingthe first of a kind for any two-wheeler manufacturer
in India.

In March 2017, the company announced that it is working on a new range of two-
wheelers. It is developing futuristic products, such as the iOn. Sales of Hero MotoCorp
grew at 5% for the past five quarters and the operating profit grew at 30%. The
average OPM for the past five quarters is 14%. The P/E of the stock is 18.43 and it has
a high RoCE of 55%.

Indo Count (IC) has been an exporter of its combed cotton yarn to various countries
and has established a niche in the global market. In 2006, the home textiles division
was set up, making it a vertically integrated textiles manufacturing and exports
company. It operates in three business segmentshome textiles, yarn and consumer
goods. It is the third largest exporter of bed-linen from India and the fourth largest
bed sheet exporter to the US. Apart from the US, it also exports its products to Europe,
United Kingdom, Japan, Latin America, the Middle East, Canada and Australia. Indo
Count has successfully managed to generate rising operating cash flows, coupled with
declining debt, on its balance sheet. It launched the domestic home textiles brand,
Boutique Living, a premium brand offering high-quality bed-linen in a variety of rich
designs. The revenues of Indo Count grew at 8% for the past five quarters and the
operating profit grew at 28%. The average OPM for the past five quarters is 19%. The
P/E of the stock is 15.90 and it has a high RoCE of 49%.

Bajaj Auto is the worlds sixth largest manufacturer of motorcycles and the second
largest in India. It is also worlds largest three-wheeler manufacturer. Headquartered
at Pune (Maharashtra), the auto-maker has two plants in Maharashtra and a third
facility is at Pantnagar (Uttarakhand). Bajaj Auto had achieved the BS-IV emission

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norms well before the 31 March 2017 deadline and its entire portfolio of motorcycles
and commercial vehicles is compliant with BS-IV. In December 2016, it launched a new
variant, V12 of its V-brand motorcycles. It also launched the all new Dominar 400
motorcycles, to chip away at Eichers dominance in the high end segment with its
Royal Enfield brand.

In March 2017, Bajaj Auto and Japanese Kawasaki decided to end their decade-old
partnership for sales and services from India. Bajaj Auto is now focusing more on its
collaboration with KTM of Austria and converting its pro-biking outlets into KTM
dealerships. In its December quarter results, Bajaj Auto stated that external factors like
economic crisis and constraints in availability of foreign currency, amongst others, had
continued to drag its performance. For FY16-17, Bajaj Auto reported an increase of

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5%, to 225.4 million units, in its domestic sales, while exports fell 19%, to 141.1
million units. Sales of Bajaj Auto have increased only 1% in the past five
quarters,while the operating profit was up by 5%. The average OPM for the past five
quarters is 20%. The P/E of the stock is 20.44 and it has a RoCE of 35%.

Castrol India is the largest producer of automotive and industrial lubricants in India,
with a market share of about 48%. In India, Castrol has five plants and a network of
about 270 distributors. In March 2017, the company launched Castrol Superpower1
Cruise, an advanced premium quality engine oil, for cruiser or touring bikes in India.
During 2016, the company witnessed strong business from its two-wheeler engine oil,
Castrol Activ, and passenger car engine oil, Magnatec. It also witnessed a turnaround
in its commercial vehicles engine oil business with the re-launch of its CRB+ diesel
engine oil. During the year ended December 2016, Castrol India integrated its
organisation structure for its automotive and non-automotive business to streamline
synergies, risks and returns associated with business operations. Castrol India sees
2017 as a challenging year but remains optimistic. We expect the volatility to increase
in the first half of 2017, with rising input costs and the continued impact of
demonetisation, says Omer Dormen, managing director, Castrol India. Sales of Castrol
India were flat for the past five quarters but the operating profit grew at 11%. The
average OPM for the past five quarters was 26%. The P/E of the stock is 31.74 and it
has a very high RoCE of 167%.

Mahanagar Gas Limited (MGL) is a natural gas distribution company listed a few
months ago. MGL connects 0.87 million households, 2,800 small commercial
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establishments and 60 industrial establishments. It also supplies compressed natural

gas (CNG) to more than 0.48 million vehicles in Mumbai, Thane, Mira-Bhayander,
Navi Mumbai and beyond. It is expanding the city gas distributor (CGD) network in
Raigarh district (Maharashtra). Over the next five years, MGL plans to add 83 CNG
stations (currently 197 stations) and about 675km of pipelines (currently 4,762km). It
plans capital expenditure exceeding Rs200 crore each over the next two years. Sales of
MGL fell by 4% in the last three quarters but its operating profit grew at 29%. The
average OPM for the past three quarters was 24%. The P/E of the stock is 23.36 and it
has a high RoCE of 34%.

Eicher Motors owns the iconic Royal Enfield (India) motorcycles and also
manufactures trucks, buses, motorcycles, automotive gears, and components. In July

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2008, Eicher formed a joint venture with Volvo, which paid off handsomely. But the
big driver of its profits is, undoubtedly, Royal Enfield. During FY16-17, Royal Enfield
reported a 31% jump in its sales, to 66,600 units, from 50,800 units a year ago. Its
exports leapt 64% to 15,383 units, from 9,363 units, in the same period last year. Due
to its large order book, the company says it had cleared all its BS-III inventory in due
time and all its customers would receive motorcycles that are compliant with BS-IV
emission norms from April 2017 onwards. Sales of Eicher Motors grew at 7% for the
past five quarters and the operating profit grew a humungous 44%. The average OPM
for the past five quarters is high at 22%. The stock doesnt come cheap. The P/E is
high at 44.42 and it has a high RoCE of 40%.

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Apollo Tyres Ltd has four plants in India and one in The Netherlands. The company
earns around 70% of its revenues from the domestic market, around BUY Feedback
25% from the

European market and the rest from other geographies. It is building its second
overseas factory in Hungary and expects production to begin in 2017. In March 2017,
Apollo Tyres signed an agreement with the Andhra Pradesh government to set up a
greenfield manufacturing plant in the state with an expected investment of about
Rs525 crore in the first phase. The state government had approved 100%
reimbursement on value added tax, central sales tax and state goods and service tax
and power tariff rebates for 20 years for Apollo Tyres from the date of commencing
commercial production, or up to realisation of 50% of fixed capital investment,
whichever is earlier. Apollo Tyres plans to invest around Rs4,025 crore, in three
phases, in this facility. Sales of Apollo Tyres grew at 5% for the past five quarters and
the operating profit grew only 2%. The average OPM for the past five quarters is 16%.
The P/E of the stock is a low 9.49 and it has a RoCE of 20%.

Finolex Industries Limited (FIL) is Indias largest rigid PVC pipes and fittings
manufacturer and the second largest PVC resin manufacturer with manufacturing
plants in Maharashtra and Gujarat (250,000 metric tonnes capacity per unit.) Its PVC
pipes and fittings are used in agriculture, housing, telecom and construction
industries, in applications such as manufacturing of pipes, insulation of cables,
window profiles, flooring, blister packaging, etc. As part of its PVC complex, FIL has
set up an open sea cryogenic jetty, the first of its kind in the private sector in India.
The US-based Lubrizol Corporation, one of the leading global manufacturers of
chlorinated polyvinyl chloride (CPVC) compound, has joined hands with FIL for the
manufacture of Finolex FlowGuard Plus CPVC pipes, to snatch market share from
Astral Poly Tecknik, which has pioneered the use of CPVC pipes that are replacing iron
pipes because they allow the flow of hot water and can also withstand higher pressure.
The business environment in India has been characterised by slow growth; so revenues
of FIL were flat over the past five quarters but cost efficiency, scale of operations and
lower raw material prices have improved margins and, hence, operating profit grew at
138%. The average OPM for the past five quarters is 10%. The P/E of the stock is
23.97 and it has a high RoCE of 41%.

SQS India BFSI Limited (SQS) is a software company (business assurance and testing
specialist) focusing exclusively on the financial sector. It has served 150+ customers in
APAC, USA, UK and Middle East. With over 7,000 completed projects, SQS has a
strong customer base, including half of the companies listed in DAX-30, almost a third

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of the companies in STOXX-50 and 20 FTSE-100 companies. In 2016, the company

announced that it would hire another 1,100 people by 2018 at its newly expanded
facility in Pune, where it now has 900 people. In creating the new facility, the
company has invested Rs95 crore, which makes the new facility the largest for the
German-headquartered company. It has announced a big shift in operationsall its
global vertical heads will be located in India. Sales of SQS grew at 16% for the past
five quarters and the operating profit grew at 70%. The average OPM for the past five
quarters is 17%. The P/E of the stock is 19.96 and it has a high RoCE of 41%.

Orient Refractories (ORL), a multinational, offers a wide range of refractory and
monolithic products for the iron and steel industry. The company has a manufacturing
facility in Bhiwadi (Rajasthan) and its product range includes continuous casting
refractories, slide gate plates, nozzles and well blocks, etc. All its products are custom-
made to suit the casting conditions and grade of steel being cast. It has close to 300
small- to medium-sized iron and steel producing Indian companies as customers. It
also exports to over 35 countries, including Germany, France, Spain, Turkey, Egypt,
Indonesia, Saudi Arabia, Thailand, UAE and Greece. Sales of ORL grew at 12% for the
past five quarters and the operating profit grew at 25%. The average OPM for the past
five quarters is a high 18%. The P/E of the stock is 23.10 and it has a high RoCE of
47%.

Hexaware Technologies is a provider of IT, business process outsourcing and
consulting services, especially in robotic process automation, converged technology,
design thinking, rapid prototyping and customised service offerings. Hexaware added

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a delivery centre at Pune, in January 2017. It announced a buyback in January 2017 at

Rs240 for each share. Sales of Hexaware Technologies grew at 14% for
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the past five

quarters and the operating profit grew at 10%. The average OPM for the past five
quarters is 17%. The P/E of the stock is 15.27 and it has a RoCE of 36%.

Triveni Turbine is a leading manufacturer of steam turbines and has over 2,500 steam
turbines installed across 18 industries, in over 50 countries, including Europe, Africa,
Central and Latin America, SE Asian and SAARC countries. The company has now
entered the aerospace and defence field, leveraging the four decades of experience in
rotating equipment. For FY15-16, 27.9% of the total revenue was derived from
exports. The manufacturing facility of the company is located in Bengaluru and has
production capacity of 150 turbines per year. Triveni is increasing the capacity to 350
turbines per year. It has acquired a 24-acre plot near Bengaluru and has started
construction for a new facility which will aim to be a benchmark in turbine
manufacturing, equipped with the most modern shop floor, R&D facility and a learning
centre. The first phase is expected to be ready for operations soon. Sales of Triveni
grew at 14% for the past three quarters and its operating profit went up 34%. The
average OPM for the past three quarters is 20%. The P/E of the stock is 37 and it has a
high RoCE of 50%. This is an expensive stock, but its cash flow is very strong.

Nesco Ltd, earlier known as New Standard Engineering Company, works in three
segments, IT park (to build private IT park and to provide space on licence basis),
exhibition and convention centre (to provide space to trade fairs, exhibitions,
conventions and conferences) and manufacture of machinery, equipment and capital
goods (in the surface preparation and allied segments). Its engineering segment
provides equipment to Indian Railways, ordnance factories, forging plants and others.
But its main revenues come from Bombay Exhibition Centre, situated along the
Western Express Highway in Goregaon, which is a permanent venue for conventions,
exhibitions and trade fairs in India. The company has started construction of IT
building 4 in Nesco IT Park, after IT buildings 1, 2 and 3 have been fully occupied by
well-known companies. It has decided to expand its machine building division at its
Visholi Complex (Gujarat). Sales of Nesco grew by 22% for the past five quarters and
the operating profit grew by 32%. The average OPM for the past five quarters is a
huge 71%. The P/E of the stock is 18.55 and it has a high RoCE of 32%. The company
had an operating cash flow to sales ratio of 0.45 and is among the highest cash-flow
generating companies in our sample.

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Manappuram Finance is one of Indias leading gold loan finance companies. It also
offers forex and money transfer services, commercial vehicle loan andBUY
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services from 3,747 branches across India and has a workforce of 19,372. The stock of
Manappuram has continued to climb, despite many hurdles, such as demonetisation
and sluggish gold prices. In March 2017, the Reserve Bank of India (RBI) said that
finance companies cannot lend more than Rs20,000 in cash against gold and have to
issue cheques. Earlier, this restriction was at Rs1 lakh. It remains to be seen whether
Manappuram can overcome this hurdle too. It has now launched online gold loans to
make delivery easier for consumers. The net income of Mannapuram grew at 37% for
the past five quarters and the operating profit grew a massive 106%. The average OPM
for the past five quarters is 23%. The P/E of the stock is 11.99 and it has a RoNW of
25%. The company had a price-to-book value ratio of 2.64.

Lakshmi Vilas Bank (LVB) is an old generation bank which has been undergoing a
change under a new dynamic leadership. LVB has operations spread over a network of
481 branches (plus seven extension counters), predominantly in Tamil Nadu, one of
the more progressive and industrialised states in the country. The bank is active across
the entire spectrum of customer segments - retail, mid-market and corporate. It also
offers para-banking products in association with life and general insurance companies,
mutual funds, stock-broking houses and money transfer/remittance companies. In
March 2017, LVB launched LVB VYAPAAR Current Account, aimed at addressing
business banking requirements of small merchants, traders, such as fruit and vegetable
vendors, flower vendors, small eateries, medical stores and kirana stores. The new
leadership is hiring seasoned professionals from private financial institutions to build
growth with profitability. It hopes to grow at 20%-25% per annum up to 2025, notch
up return on assets of 1.5% and RoNW of 18%. LVB plans to raise Rs400 crore via
preferential allotment to meet medium-term growth requirements. Its net income grew
at 16% for the past five quarters and the operating profit grew at 29%. The P/E of the
stock is 12.59 and it has RoNW of 16%. The company had a price-to-book value ratio
of 1.62.

Divis Laboratories sells active pharma ingredients (API) and drug intermediates from
manufacturing plants in Vishakhapatnam, Nalgonda and Hyderabad. It expects to
invest Rs500 crore to set up another facility at Kakinada (Andhra Pradesh). The new
facility is expected to be operational in the latter part of 2017-18 and will be funded
through internal accruals. Divis also undertakes contract research on process
development for discovering new compounds for leading multinational drug

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companies across the world and partners with them for the supply of APIs. In a major
setback, the US drug regulator, US Food and Drug Administration(USBUY Feedback
FDA), inspected

Unit-II of Divis Labs Visakhapatnam plant between 29 November and 6 December

2017 and issued a Form 483 to the unit, with five observations. A Form 483 is issued if
the investigators observe any conditions that in their judgement constitute violations
of the Food, Drug and Cosmetic (FD&C) Act and related legislation. The five
observations were: lack of proper controls over computer systems to ensure drug
quality, improper maintenance of facility and equipment, R&D division allowing
activities inconsistent with manufacturing norms, failure to investigate batches of
products containing impurities and improper maintenance or falsification of records.
Concerns over the severity of the observations led to shares of Divis Labs plunging
26%.

Again, in March 2017, the Vishakhapatnam unit of Divis was put under import alert
due to violation of good manufacturing practices, which led to another round of price
crash. The import alert means certain products manufactured in the unit will not be
allowed to be marketed in the US. The US drug regulator has, however, exempted 10
drugs from the import ban, Divis Lab said in a stock exchange filing. It can take
anywhere between two to three years to resolve import alert-related issues and the
companys earnings may remain under pressure, analysts feel. We believe that the
price will move up earlier than that if the issues get resolved. For FY15-16, 85% of the
total revenue of the company was derived from exports. Sales of Divis grew at 17%
for the past five quarters and the operating profit grew at 14%. The average OPM for
the last five quarters is a high 38%. The P/E of the stock is 14.84 and it has a high
RoCE of 31%, although these numbers are not relevant as Divis tries to find its feet
from the double blow of US FDA.

Development Credit Bank (DCB) is a small private sector bank that is in the process of
turning around. It has a network of 248 branches and 496 ATMs spread mainly across
Maharashtra and Gujarat. The Bank is amongst the first private sector banks to waive
advisory fee and service charge for mutual fund investments. Over the past five years,
the Banks interest income has grown at 24%, while its profit has grown 37% each
year. Its net interest margin (NIM) at 3.9% stands higher than the industry average of
3.3% and gross (non-performing assets) and net NPA of 1.6% and 0.7%, respectively,
indicates that the Bank has a tight leash on its asset quality. What's more, at the end of
FY15-16, the Banks management set itself a target of doubling its loan book in the
next three years through rapid branch expansion and cross-selling of its products. Over

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the years, the bank has reduced its risky credit portfolio and increased its exposure to
mortgages. At the end of FY08-09, advances stood at 3,274 crore. Since
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then, the loan

book, which currently stands at Rs12,921 crore has grown at an average of 21.66%. It
consists of mortgage loans, which make up 44%, SME loans (11%), corporate loans
(16%) and the agriculture and inclusive banking segment (17%). The rest is spread
across small commercial vehicle loans, construction finance loans, auto loans, personal
loans and gold loans. The unsecured loan book is presently negligible, at 3.6%. In
March 2017, the board of directors approved raising of capital by way of issue of
equity shares to qualified institutional buyers to the extent of Rs400 crore, inclusive of
share premium. Its net income grew at 20% for the past five quarters and the
operating profit grew at 22%. The OPM for the five quarters is 18%. The P/E of the
stock is 22.51 and it has a RoNW of 12%. The company has a price-to-book value
ratio of 2.58.

Accelya Kale Solutions (AKS), formerly known as Kale Consultants Ltd, is a software
solutions provider to the airlines and travel industry, such as revenue accounting, audit
and revenue recovery, card management and miscellaneous billing. It also helps its
clients gain insights on business performance, using decision support tools and data
analytics. It has over 200 airlines customers, with operations spread across nine
countries and a team of over 2,000 professionals worldwide. For FY15-16, domestic
revenues accounted for only 18.84% of the total revenue; 81.16% of the total revenue
came from exports. In September 2016, it launched its analytics and consulting
services to help leading global airlines, with overlooked opportunities and savings, in
their existing operations. AKSs analytics and consulting experts will be using a
combination of advanced analytics and deep understanding of the aviation industry to
identify hidden business potential within airlines processes, such as network planning,
revenue management, sales and marketing, alliances and finance. Revenues of AKS
rose by 13% in the past five quarters and the operating profit grew 25%. The average
OPM for the past five quarters is 37%. The P/E of the stock is 23.09 and it has a high
RoCE of 119%.

Thavaseelan K
What do you think?... Write your comments

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