ValuePickr Forum

Identifying Sector Trends For 2019 and beyond

Very Few Companies have been able to consistently deliver Shareholders Returns over multiple Investment Cycles. A few names that come to mind are steady compounders like HDFC Bank, HUL and couple of other MNCs which when looked through survivorship bias do stand out.

Keeping these companies aside, the rest of the market has its own cycles and trends.
In the past, each trend whether it be cyclical or any other trend, has given good returns.
And here lies the problem too. And that is the Entry and timely exit.

Some of the Great Investors have been doing this timely entry and exit over the last many years and have seen their portfolio expanded many times and when they are wrong, have seen the huge drawdown too.

Starting this thread to keep sharing my notes and to understand more about forthcoming trends and cycles to have a better sense of entry and exit.

Looking forward to Everyone thoughts on this subject

7 Likes

I am going to go, bit off the rails (pardon the pun) and say the sector I see, which could make big waves is Railways.

Why Railways & Why now ? Railways been a sector which has been lacking in infrastructure foe decades but there has been recent push to get them up to speed. Also, Government’s disinvestment policy mean that many Railway miniratna have now come up (coming) with IPO in recent past.

A look at the sector offering.

  1. IRCON - Turkey construction of railway lines, station, elec substation etc (least interesting in this space)
  2. RVNL - Engineering services but has a possible gold mine in HSRC (High Speed Rail Corporation of India Ltd) as its subsidiary
  3. RITES - Railway Project Management Consultancy
  4. IRCTC - Internet Booking Engine, Catering & now another potential gold mine in running private premium trains
  5. IRFC (readied for potential IPO) - Railway Finance corp, who is the banker for the projects
  6. RailTel (readied for potential IPO) - Telecom,Network, Wifi, Cloud , Data Center with Licensing model
  7. BEML - though not technically railways but a PSU which caters for Metro rolling stocks & rail equipments…

Biggest advantages of this sector play is,

  1. Mostly monopoly. Even if there are competitors, they are the preferred operator by Government by signing MoU with Railway ministry
  2. No impact from Macros - oil, liquidity crisis - largely no impact here
  3. Most of these are profitable, no debt , high cash companies - which also means good dividends

Only thing to look at is, is Govt pushing for railway based infra - answer currently is resounding yes. Whether its Metros or Freight Corridor or High speed rail or Private trains or even talk of bullet trains in future.

Recent listings have come in very good valuations for the investors. Only risks in all these is the Government willingness or unwillingness to invest in the projects. Atleast going by the projects sanctioned whether its metros or DFCs or high speed rail, the sector has a positive outlook.

Disc : I am already on the train of RITES since its IPO, Tracking RVNL, Subscribed to IRCTC

Good Topic.
In my view there is pricing power issue for PSUs. A while ago govt reduced margins for BEL and the stock crashed. Similar situation with Cochin shipyard…

Govt can play with margins of PSUs catering to railway sector

But the biggest difference for Railway PSUs are , even in national budget, they have a separate Railway budget. This is one of the reasons, Railways PSU often enjoy good margins. Also , execution wise they are good. Railways is often seen as a prestigious ministry and often projects are announced & there is willingness to execute.
Politicians always seem to have that thrill to flag of a train or metro :slight_smile:

In history is any guide these kind of govt dominated psu has hardly created wealth over medium to long term for investor. Railways defense and coal etc fall under these categories. Govt is not known for timely payment for ordered executed and under table dealing for getting contract and getting money is still way of life in India. Even though from time to time even defense sector is considered lot of opportunities and with annual budget of around 50 billion USA dollar it have huge opportunity but so far no players able to create sustainable business model around it . In India these sector by and large is considered as main income generating areas for politicians and their close supporters. Still quality of food in railways for price paid is a big issue which is relatively easy to fix but no attempt is made to fix it. So overall if at all these companies can create wealth for investors I have my doubt though irctc may be exception due to its business model which is customer oriented and transaction based.

1 Like

Nalco

I completely agree with your view.
Railways is one area where there is a lot of thrust.
Direct or indirect companies associated with this sector has a lot of room to grow I feel.

1 Like

Hi @narenarora,
Could you please elaborate on any specific pricing controls the Govt put on Cochin Shipyard? I could not understand why this, once though as a more efficient of all the ship builders, is trading at < 9 PE. The recently listed Garden Reach Shipbuilders & Engineers Ltd is trading at >15 PE, though Cochin Shipyard scores far better wrt financial figures.