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Metropolis Healthcare Ltd

Rationale

When most sectors were hit hard due to the lockdowns, the Indian diagnostic industry emerged as an attractive investment arena. Metropolis, one of the nation’s leading diagnostic chains could be on track to post robust double-digit growth over the next two years driven by a change in demographics, a rise in precautionary testing, and the government’s healthcare push. Given a PAN-India network of 129 pathology labs and 2,716 centers and attempts to increase penetration in the Northern and Eastern regions, Metropolis is well poised to take advantage of the above growth levers.

Moreover, with an ROE of 30% and ROCE of 36%, one of the highest among peers and minimal leverage as evidenced by its debt-equity ratio of 0.16, the company boasts of a robust balance sheet. Even in terms of profitability, the company has delivered a noteworthy profit growth of 21% CAGR over the last 5 years. Rising contribution from the margin-accretive B2C segment, planned network expansions over the next 3 years, higher sales and patient volumes as compared to competitors, and cost optimization practices make this a great prospect for investors to hold in the long term.

Asian Paints Ltd

Rationale

Asian Paints is the largest paint company in India with industry-beating growth over the last 3 years. Its 70,000+ dealer network enables access to the nooks and corners of India. The company has around 60% share of the decorative paints market, which accounts for 80-85% of the Indian paints industry. In this segment, the company is further cementing its market position and gaining market share.

It is also expanding its product portfolio from paints to other categories like Home Décor, Designer Tiles, and so on to diversify its presence across the value chain. The strength of the business franchise is reflected in its remarkable resilience, with a 5-year sales CAGR of 9.4% even amidst pandemic-related disruptions. Additionally, the company has been a consistent wealth creator for its stakeholders for over 5 years now with an average ROE of ~ 28% and ROCE of ~39%.

The gross margins of the company have taken a hit in the most recent quarter primarily due to rising crude and chemical prices. However, the company remains confident to take price increase in its products and to maintain its EBITDA margins in the 18-20% range. With the shift in the sector from unorganized to organized players expected to propel its medium to long-term growth, we remain positive on the paint-maker due to its strong portfolio mix coupled with a robust distribution channel.

ICICI Lombard General Insurance Company Ltd

Rationale

With a 7.9 % market share, ICICI Lombard is the biggest private sector general insurance provider. Because of its dominant position and strong parentage of ICICI Bank, the company has reached benefits. Its constant focus on profitable areas, as well as its cautious investment /reserve policy, are significant long-term positives.

Further, its recent acquisition of Bharti AXA in the present environment, where organic development has stalled for a variety of reasons, will augur well for the company’s growth prospects. Additionally, the insurer has not only delivered good profit growth of 23.75% CAGR over the last 5 years but has also maintained a healthy dividend payout of 21.33%. Its gross direct premium income grew at a CAGR of 11.7% for the past 13 years. The moat of the company is comprised of its strong brand, qualified management, and healthy returns, which makes it a keeper in an investor’s portfolio.

Computer Age Management Services

Rationale

Computer Age Management Services (CAMS) operates in a highly regulated Registrar and Transfer Agent (RTA) industry. It is a market leader with a market share of ~70-72% of total Mutual Fund AUM in a duopoly RTA market. CAMS has maintained its leadership position since 2005-06 and has outperformed MF Industry’s AUM growth by 3% from Mar-14 to Mar-20.

It has a strong and consistent financial track record of compounding sales and profit growth by 8% and 13% respectively over the last 10 years. It also rewards its stakeholders which is visible from a robust average ROE & ROCE of around 36% and 52% respectively in the last 5 years. Additionally, India has one of the lowest MF penetrations globally with an AUM-GDP ratio of 12% vs a world average of 65%, this itself offers long-term growth potential for the overall MF and RTA industry. Being a fundamentally strong company, CAMS has a huge potential to grow in India's underpenetrated Mutual Fund Industry.

Dabur India Ltd

Rationale

Dabur is the world’s largest Ayurvedic and natural healthcare company. It has a strong brand value and has over 400 trusted products, over 1,000 SKUs, and a strong rural reach. In the last year, Dabur reported an impressive ~15% YoY growth in domestic FMCG sales led by stellar ~32% YoY growth in healthcare. It has been a consistent compounder for over a decade now with improving operating margins from ~17% in FY15 to ~21% in FY21. The company has successfully given the average return on equity and capital employed of around 31% and 36% respectively for the last 5 years.

The world is now recognizing the importance of Ayurveda which is increasing the inclination of a wider audience towards natural products. In the wake of the pandemic, the demand for Ayurvedic Healthcare products witnessed a surge, and Dabur, with its strong lineage and market positioning, strong Research & Development capabilities, and healthy financial metrics, is a clear beneficiary. All these factors coupled with its comparatively lower beta, make Dabur an attractive investment bet.

Rossari Biotech Ltd

Rationale

Rossari Biotech is a specialty chemical maker which caters to home, personal care, textile specialty chemicals, and animal health & nutrition segments. With a portfolio of 3,500+ products, the company’s revenue stream is well-diversified and well-equipped to bear the brunt of a downfall in any segment. The largest textile specialty chemical maker is expected to close FY22 with at least a 50% jump in both the topline and bottom-line driven by rising demand for its offerings and a substantial price hike that will ease the pressure on margins.

The two acquisitions announced are expected to extract synergies by catering to a wide customer base, newer geographies, and cross-selling opportunities. Given an almost debt-free balance sheet, a healthy track record of ROCE and ROE, and robust profitability, the company’s growth outlook remains solid. Rossari Biotech can be a good addition to your portfolio due to its resilient fundamentals and bright outlook.

HDFC Bank Ltd

Rationale

HDFC Bank is one of the leading banks in India and has maintained its dominant leadership position with healthy operational performance over various cycles. With a capital adequacy ratio of 20% which is well above the regulatory limit and among the lowest GNPAs in the banking industry at 1.35% for the recent quarter, the bank has a well-cushioned and strong balance sheet to capitalize on growth opportunities. The company has delivered a robust financial performance with an average ROE of 18% over a decade, growth in advances and deposits at an impressive CAGR of 19.55% and 20% respectively for the last 5 years, and net interest margins which have been consistently above the industry average. It is able to stay ahead of the curve, thanks to its strong customer focus, a suite of personalized products, services coupled with an unparalleled geographical footprint.

Through increasing investments in technology, the bank has also recently kicked off Project Future Ready to enable it to develop future growth engines and to improve its offerings and delivery of services. The lifting of the ban on credit card issuance will also aid its retail ambition. With strong earnings visibility, improving loan mix, stable asset quality, HDFC bank remains one of the resilient stocks in this sector and an attractive investment opportunity.

Affle India Ltd

Rationale

Affle is a leading ad-tech company that helps enterprises drive user acquisitions, engagements, and transactions through relevant mobile advertising. It is the only listed stock in this space in India. Over the past 4 years, the company has delivered robust financial performance visible in its ~45% CAGR in revenue from operations, ~42% CAGR in EBITDA, 35% CAGR in operating cash flows.

The management of the company indicates the operating margin to be sustainable and expects to deliver at least 25-30% revenue CAGR in the next 5 years. Affle predominantly focuses on emerging markets where the scope of digital advertising growth is expected to be faster at over 20-25% CAGR. It is also well-positioned to benefit from the industry tailwinds in India such as higher smartphone penetration, faster adoption, and increasing interest usage. The uniqueness of the business and high multiyear growth potential make Affle a compelling portfolio addition.

Relaxo Footwears Ltd

Rationale

Relaxo Footwears Ltd (RFL) is a leading footwear manufacturing company and has established itself as India's largest non-leather footwear player. It caters to diversified product categories including the value footwear category, customer segments and geographies which makes this open footwear major (85% portfolio) an attractive player. The company possesses a wide distribution network of over 50,000 retailers, over 700 distributors, and 396 exclusive brand outlets enabling it to establish a Pan India presence. It has registered sustained double-digit volume growth in the past few quarters despite COVID-19 led challenges.

The gradual shift from unbranded to branded products in the sector provides the potential for the company to grow in the Rs. 55,000 to 60,000 Crore Indian footwear market, of which ~50% is unbranded. The company has grown its revenue and profits at a CAGR of ~9.3% and ~25% respectively for the last five years and is maintaining healthy ROE and ROCE of 21% and 27% respectively. The immense growth potential, strong balance sheet, and efficient working capital cycles make RFL a strong investment addition.

LIC Housing Finance Ltd

Rationale

After a difficult phase during the first and second waves of COVID-19, India's second-largest pure-play mortgage lender, LIC Housing Finance Ltd (LICHFL), is ready to rebound. Improving the real estate sector is generating higher disbursements, which will likely translate into gradual improvement in collections, bode well for LICHFL in the medium to long term. Its disbursements for the most recent quarter stood at 132% of a pre-covid level. Despite COVID-related challenges, LICHFL achieved its best-ever operational performance in FY2021, with strong customer retention and a lower cost of funds, resulting in a maintained market share.

Further, in the last quarter, it delivered a strong 15% year-on-year growth in individual home loans. A rise in ECL coverage and the recent capital issuance provide comfort on the regulatory cap front. The HFC also benefits from LIC's strong brand equity, as well as access to its agency network for loan origination and finance assistance. In addition to this, the industry is in a sweet spot with interest rates at historical lows, attractive property prices, robust demand, and improving collection efficiency. Considering these tailwinds, despite strong competition, investors can reap decent returns from this HFC.

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