Best Multibagger Stocks And Sectors For 2019

Chemical Sector To Bring Green To Your Portfolio

India is among the largest chemical producers and rank 7th globally. Moreover, India is the third largest agrochemical producer and contributes around 16 percent of dyestuff and dye intermediates production. Indian chemical industry covers around 70,000 commercial products.

Being an export-oriented sector, rupee movements have a significant impact on the stocks from the sector. We see a promising future for the sector from macro-economical aspects as well due to a competitive edge. Here are some of the key pointers which suggest the future story of the chemical sector.

1.Depreciating Rupee: Being an export-oriented sector, rupee depreciation remains one of the vital drivers for this sector.

2.Chinese Policy Change Advantage: China is India's closest competitor in the chemical production space. However, recent changes in Chinese policies have given a competitive edge to Indian chemical companies. On January 1, 2019, Chinas new Soil Pollution Prevention and Control Law came into effect. Under this law, the non-compliant party can be penalized up to Yuan 2mn on the principle of polluters pay. It is expected that the major impact of this law if passed, will be on companies that manufacture, processes and trade in chemicals. The law imposes civil, administrative and even criminal liabilities for violations. This law will lead companies to spend more on legal and technical counseling as any non-compliance can attract penalty up to Yuan 2mn and executives may face administrative detention. Owing to this, expenses for the Chinese companies would go on the higher side which in turn get reflected into the prices of their products sooner or later. The phenomena is expected to aid companies from Indian chemical sector and write a phenomenal story for it.

3.Lower Employee Expenses: India is known for its lower labour cost and makes it cost-efficient for the companies. The lower labour cost compared to China is the key driver for the chemical businesses as it makes them more attractive on price points as well as aid them for bottom-line growth.

4.Competitive Edge In Benzene Chain: India benefited in Benzene chain. Benzene is derived from crude oil (during the refining process) and India has a surplus refining capacity (vis-vis the domestic demand). Therefore, India is also surplus in benzene. In fact, benzene (HS code: 290220) is one of the highest exported organic chemicals from India. On the other hand, for China, benzene is one of the highest imported products. China has been an importer for benzene for last 5 years. This would substantiate our argument that Indian organic (like Benzene) intermediate manufactures were globally competitive even before the recent environmental issues in China. We can, therefore, conclude that China does not have a strategic advantage in benzene and its derivatives. Thus, Indian companies in the benzene chain are likely to be less impacted if Chinese production restarts.

Stocks to watch - Aarti Industries

Why Aarti Industries?

Aarti Industries is a leading manufacturer of Specialty and Pharmaceuticals chemicals with expertise in benzene-based products. It is one of the most unique global entities that is both forward and backward-integrated in its range of chemicals and across various value chains. Around 45% of the revenue comes through exports. Aarti is present in the value-chain that makes it easy for them to pass on any raw material price increase.

Aarti is going beyond benzene chemistry and started operations of Nitrotoluene facility at Jhagadia which reached utilization of 40% by the end of FY18. Peak utilization is expected to reach by FY22 and estimated revenue visibility is of c. INR 3.5bn-4bn per annum. Aarti plans to introduce toluene and ethylene-based chemicals for end-use applications of agrochemicals, engineering polymers, pigments, and additives.

It also earned a multi-year contract with global chemical measures. The supply contract is worth Rs 900 crore, spread over 10 years, starting Q4 FY21. To implement this deal, Aarti Industries has to do an upfront capex of $15 million (Rs 108 crore) for setting up a dedicated plant in Gujarat. This multi-year foray adds to the company's product portfolio and supply contract and implies average annual revenue accretion of Rs 90 crore per year (around 2.5 percent of FY18 sales).

Revenue grew at 12% five-year CAGR and PAT grew at 19% CAGR. ROE and ROCE stood at 23% and 17%.

Textile Sector On An Upswing

The textile sector of India is one of the oldest sectors of the economy. The sector has witnessed a hard time post demonetization and GST transition phases. However, post enough correction in the stocks, sector seems to be much more attractive. With the government's supportive policies and favourable demand scenario, the sector is expected to create many multibaggers. Here are some of the key pointer which could emerge this sector as a gem.

1. The rising domestic demand environment remains one of the key factors for the robust future of the textile sector. The Strong rise in the private consumption expenditure would aid the industry in FY19.

2. An 11% increase in cotton crop production coupled with the rising acreage at 19% is expected to moderate the cotton prices in the upcoming year. In the near terms, the industry has faced cotton pricing hurdles due to pink bollworm issue. The softening of cotton prices would ultimately aid the operating margins.

3. The government of India has raised the basic customs duty from 10 to 20% on almost 500+ textile products. The move is expected to boost Make in India and indigenous production.

4. Textile exports are also expected to see a robust growth in the upcoming years. The rupees depreciation remains the key reason behind the export growth. Moreover, the government's progressive policies to promote exports are expected to bode well ahead.

Stocks to watch - GHCL, Vardhman Textiles

Why GHCL And Vardhman Textiles?

GHCL

1) Key Highlights

GHCLs Q3FY19 revenue grew 21% yoy to Rs8.70bn (Emkay estimate: Rs8.06bn), driven by 11.5% yoy growth in Soda-ash and 42% yoy growth in the Textile segment which was largely driven by capacity expansion and realization improvement in the spinning business. EBITDA stood at Rs2.05bn, up 49% yoy on stable performance in the Soda-Ash segment and the Textile segments turnaround. EBITDA margin expanded 439bps yoy to 23.6%, driven by a price hike in Soda-Ash and better utilization in Textiles. PAT rose 44% yoy to Rs1.02bn. Interest cost stood at Rs272mn, down 21% qoq and 3.4% yoy, while depreciation increased 14% yoy to Rs289mn due to the commissioning of newer capacities. The silver linings during the quarter were the sequential turnaround in Home Textiles EBITDA, stable Soda-ash pricing outlook, and tight soda-ash supply situation globally.
2) Inorganic Chemicals realization and growth outlook remains firm
Inorganic Chemicals business revenue grew 11.5% yoy to Rs5.48bn, driven by better realizations. Volumes were down 1% yoy to 2.30 lakh MT, while overall realization increased 13% yoy and 8% qoq on a price hike. The next round of capacity addition in Soda ash should come at the end of Q4FY19. We expect Soda-ash revenue to grow 10% yoy and 7% yoy in FY20/FY21E.

3) Textiles delivered strong operational performance
Revenue of the Textiles segment increased 42% yoy to Rs3.2bn, led by better performance from the spinning business and the recovery in Home Textiles. The prolonged weakness in the segment seems to be a thing of the past with positive performance in the last three quarters. EBIT margin improved to 7% from -3% in Q3FY18. Management is positive on the Home Textiles business, and we expect positive EBIT performance (vs. negative estimate), with 6%/10% yoy revenue growth in FY20E and FY21E.

4) Outlook remains positive
The Soda-ash business witnessed an uptick in realization along with healthy volume growth outlook on periodic capacity expansion. We expect the benefit of increased realizations to fully percolate in 2HFY19 and FY20E. The tight global supply situation and steady demand in Asia comfort us on the stability in the Soda-Ash realization going forward. Further, the ongoing recovery in the Home Textiles segment is likely to become better, thanks to a decline in cotton prices and weak INR.

Vardhman Textile Ltd

1) Key Highlights
Revenues for the quarter grew 10.6% YoY to Rs. 1685 crore (I-direct estimate: Rs. 1618 crore). Revenues from the textile segment grew 10% YoY to Rs. 1591.8 crore while acrylic fibre reported healthy revenue growth of 28% YoY to Rs. 117.5 crore. Gross margins for the quarter improved 659 bps YoY to 50.8% (Idirect estimate: 48.9%) mainly on account of low cost cotton inventory. Subsequently, EBITDA margins improved 667 bps YoY to 19.6% (I-direct estimate: 17.0%, Q1FY19: 17.2%). Absolute EBITDA grew 67% YoY to Rs. 331 crore (I-direct estimate: | 274.0 crore). On segmental front, EBIT margins for textile and acrylic fibre expanded 570 bps and 620 bps YoY to 17.8% and 11.7%, respectively. Lower other income (down 18% YoY to Rs. 42.1 crore) coupled with high taxation rate (30.6% vs. 19.7% in Q2FY18) stemmed the PAT growth. Resultant PAT grew 47.5% YoY to Rs. 196.4 crore (I-direct estimate: Rs. 146.8 crore).

2) New yarn and fabric capacity to be fully operational in Q2FY20
FY18 was a subdued year for VTL with revenue growth of 3% owing to subdued demand and various regulatory changes like GST negatively impacting revenue growth. We expect revenue growth in FY19 also to remain moderate owing to capacity constraints as the new capacity would come in phases while the revenue impact would only be visible from H2FY20. VTL is focussing on increasing the share of fabrics in the overall revenues and expanding its fabric capacity from 140 million metre to 180 million metre by start of Q2FY20. Also, the company is adding 100,000 spindles, of which ~ 30,000 are expected to commence operation in March 2019 while remaining 70,000 are expected to be operational by June 2019. The management indicated it would incur a capex of | 1400 crore in next two years with 50% to be spent on fabric capex and the remaining for expanding yarn capacity.

3) Outlook and Valuation
FY18 was a tough period for Vardhman due to various issues like high cost cotton inventory and GST related issues, which led to a decline in margins. We expect revenues to grow at a CAGR of 9.1% in FY18-20E to | 7442 crore in FY20E as the expanded capacity is likely to come onstream in Q2FY20. In spite of being in a capital intensive business, Vardhman has continuously maintained debt equity ratio below 1. The focus of the management would be on converting more yarn to fabric, which would lend better stability to EBITDA margin. Factoring in the better margin in Q2FY19 and the management reiterating that EBITDA margin is likely to remain in range of 18-22%, we marginally upgrade FY19E, FY20E earnings estimates.

Paper Industry To Write A Multibagger Page

With the rising domestic demand, the Indian paper industry has become more promising. The industry seems to be underpenetrated in the Indian origin and shows a huge potential for growth. Lets shed some light on the key drivers which can drive this industry to produce multibaggers in the upcoming period.

1. The overall demand for the paper industry is expected to grow at a CAGR of 6-7% in the upcoming year. The anticipated pickup in the education sector, as well as the growing literacy rate, is expected to bode well for printing and writing segment thereby supporting the demand growth.

2. Paper industry is at a sweet-spot with 40% rise in paper prices in the last few months due to capacity shutdown in China due to the ban on import of waste paper by the Chinese government. So packaging paper prices rose by 40% since August 2017 which unlikely benefited Indian paper companies.

3. Growing demand from e-commerce industries is boosting the packaging paper and board segment.

4. The packaging paper segment also serves the need of industries such as FMCG, food & beverage, pharmaceutical, textiles, etc. However, growing urbanization raises the requirement of better packaging quality of FMCG products marketed through organized retail and increasing preference for ready-to-eat foods

Stocks to watch - Orient Papers, JK Paper.

Why Orient Papers And JK Paper?

Orient Paper and Industries Ltd

1) Key Highlights
GHCLs Q3FY19 revenue grew 21% yoy to Rs8.70bn (Emkay estimate: Rs8.06bn), driven by 11.5% yoy growth in Soda-ash and 42% yoy growth in the Textile segment which was largely driven by capacity expansion and realization improvement in the spinning business. EBITDA stood at Rs2.05bn, up 49% yoy on stable performance in the Soda-Ash segment and the Textile segments turnaround. EBITDA margin expanded 439bps yoy to 23.6%, driven by a price hike in Soda-Ash and better utilization in Textiles. PAT rose 44% yoy to Rs1.02bn. Interest cost stood at Rs272mn, down 21% qoq and 3.4% yoy, while depreciation increased 14% yoy to Rs289mn due to the commissioning of newer capacities. The silver linings during the quarter were the sequential turnaround in Home Textiles EBITDA, stable Soda-ash pricing outlook, and tight soda-ash supply situation globally.

2) Largest player in Indian Tissue paper segment due to edge over peers
The Indian tissue paper industry is witnessing a) an improvement in domestic demand on rising disposable income and increasing hygiene awareness, and b) a rise in exports due to benefit to domestic producers following the sharp rise in global pulp prices vis--vis decline in domestic wood prices. Tissue paper exports from India grew by 46% in FY18 and 57% in 2MFY19. OPIL is the largest player in Indias Tissue Paper segment in India and had a 44% share of tissue paper exports in FY18. The company has an edge over its peers due to its established presence in both the domestic & international market on the back of its first mover advantage in India (in 1997) whereas most other major paper manufacturers have not yet entered this segment.

3) Balance sheet to remain highly comfortable, despite implementation of recent capex plan
OPIL has a strong balance sheet position, with gross debt of only INR 69 crore in June18 vs expected CFO of INR 119 crore in FY19. The company has recently announced its plan to enhance pulp capacity from 72.5 ktpa to 100 ktpa to eliminate its reliance on market pulp at a cost of ~INR 75 crore and setting up of new recovery boiler at a cost of ~INR 150 crore. The project is proposed to be completed by September 2020. We believe the balance sheet to remain light in the future as the proposed capex will be funded out of internal accruals and/or divestment of equity stake in Century Textile & Industries Ltd (CTIL). The management has already intended to divest its investment in CTIL in the near-future.

4) OPIL to benefit from timely enhancement in tissue paper capacity in a favourable environment
We believe the company that can add capacity and source pulp from the domestic market stands to gain the most in this favourable environment. While almost all domestic paper manufacturers are operating at full capacity, OPIL stands to gain the most due to the timely enhancement of its tissue paper capacity from 25 ktpa to 50 ktpa in May 2017 and its low dependency on market pulp (<10%) for its current paper manufacturing operations. OPIL plans to increase its pulp capacity from 72,500 MTPA to 100,000 MTPA by Sep 2020, which will completely reduce its reliance on market pulp over the long-term

JK Paper

1) Key Highlights

The company generated a nearly two-fold jump in its standalone net profit to `109.57cr mainly driven by volume growth and sales realization. It had posted a net profit of `56.63cr. Total income rose 17.47% to `795.46cr as against `677.11 cr in the same period previous fiscal. Margin improved further to 26.1% in Q2 (FY18 21%) on the back of improving realizations, reducing raw material costs and improving operating efficiency. During the quarter, JK Paper took possession of the Sirpur Paper Mills and refurbishment and overhaul of plant and machinery is underway. Revenue remained flat on a sequential basis as production was impacted due to plant shutdown in Rayagada, Odisha following a strike by workers.

2) Prominent Paper Industry Outlook

India paper market is calculated to grow with a CAGR of more than 10% in value terms during review period starting from 2011-12 to 2016-17 and the market is anticipated to reach more than Rs.75,000 crores at the end of the forecasted year 2022-23. Paperboard & industrial packaging paper, paper stationery, newspaper print, and specialty paper altogether creates the overall paper market. As the paper industry of India is becoming more competitive by adding improvements of key ports, roads & railways and communication facilities, revision of forest policy is required for wood-based paper industry so that plantation can be raised by industry, cooperatives of farmers and state government.
3) Capacity Expansion to drive volume
As operating at full capacity, the management plans to increase capacity to achieve meaningful volume growth. It announced a brownfield investment of Rs.1,450 crores for setting up additional packaging board capacity of 1.5lakhMT. Though commercialization of new capacity addition is likely to take more than 24-30 months, acquisition of Sirpur Paper Mills is a near term positive. So from 4.5 lakh tons capacity, Sirpur acquisition will make up capacity to 6-lakhs. Therefore, in two years time, capacity will move up from 4.55-lakh to 7.5-lakh tons and will become the number two paper company in the country.
4) Acquisition story:
JK Paper acquired Telangana-based Sirpur Paper Mill at ` 371cr through NCLT insolvency process. This consists of a cash payment of `166cr and issue of equity shares of `43cr and preference shares of `162 cr. Also, would help increase capacity at a total investment of around ` 671 cr, including incremental capex towards modernization. The capex, for both the planned organic and inorganic expansion, would lead to an increase in leverage, especially over FY20-21. However, the staggered nature of the capex, with favorable industry fundamentals, mitigates the risk to some extent.

Outlook
Volume growth, higher realizations coupled with improved operating parameters and abridged finance cost resulted in uptick in profitability for the quarter. Having current capacity at 4.55lakh tones, JK paper is all set to commence the additional capacity of 1.38 lakh tones from Sirpur plant in Telangana, to help venture into the color paper segment, the very first time by April 2019. Likewise, will further increase its capacity by adding 1.5 lakh tonnes in the next two years from Gujarat plant stemmed to focus on the packaging board vertical. Both would help to grow revenues at 15% CAGR over the next 5 years.