Expert Analysis of the Global Macro Events & News affecting the Indian Markets

Green Sharks – Episode 2

We had an interaction with J Kumar Infra this week, this is part of the Smallcap Compounders Smallcase. Especially if you’re invested, we highly recommend you watch the interview at 1.5x speed. It’s always enriching to understand the stocks you invest in. 

Here is the synopsis of what we had discussed: 

• Why does Q4 revenues always show a positive seasonal effect?
  Mainly due to favourable weather, psychological effect of workers to fast-track work since its year end, and public holidays are relatively lesser during Q4. 

The first order they received was worth INR 15,000, and now orders they receive are close to INR 3,000 Crores. 

• How is their financial position?
  Zero net debt with INR 11,200 Crore order book (3-year revenue visibility). Operating margins are extremely stable at 14% as they are very selective when deciding which projects to work on.
  
  Company hasn’t had a single rupee of bad debt since the last 40 years, and every order they work on is thoroughly analysed.
  
  If you see, during 2008-2009, many infra companies went under thanks to execution delays and payment delays.

• What makes them stand out?
  The orders they do are complex and done via unconventional methods. Shallow tunnels, multi-layered flyovers, and several other intricate projects. Another fact is, many of their projects are done in between heavy traffic while having minimum disruption on traffic flow.

• Where do you see the company in FY27?
  The company plans to hit a top line of INR 8,000 Crores ($1 billion) by FY27, and have an order book of INR 20,000 Crores.
  
  In FY24, they are targeting a minimum order inflow of INR 5,000 Crores and revenues of INR 4,000 Crores.
• Despite this bullish commentary and their track record, the stocks trades at 7x Price-to-earnings and 0.17x of Orderbook multiples. If you take KNR Constructions which is their peer, they trade at 18x Price-to-earnings and 0.9x of Orderbook multiples.

OPEC Output Cut and Effect on the Stock Market

This might come as a surprise, at least to me it did, that the US produces more crude oil than Saudi Arabia. But as you may have guessed, their consumption is larger than their production, and hence they are very sensitive to the verdicts of the OPEC+ and OPEC meetings. 

 Late last week, the OPEC+ decided to cut their oil supply by 1.16 million barrels per day, not because they don’t have the capacity to produce or sorts, but they want to maintain a relatively high price for their oil. This may seem minuscule compared to the global demand of 99 million barrels per day, but these cuts have a profound impact on prices. OPEC+ commands 80% of the world’s proven oil reserves and 40% of the world’s supply.

Saudi Arabia is endeavouring to boost their coffers as they venture into unparalleled infrastructure projects. They are working on so called ‘Giga Projects’ and this requires close to a trillion dollar in funding. This output cut will enable them to combat the negative sentiments with banking crisis and global slowdown that were being priced in to the oil markets. 

Also, with high oil prices, its not just Saudi Arabia that stands to gain, but Russia will now bag an additional $10 per barrel they sell to India, China or any other country. 

Geopolitics and Macro aside, how does it affect the Indian markets? 

Despite the fact that we are buying oil from Russia at a $10-15 discount to international markets, spike in crude prices mean higher inflation, a higher current account deficit (crude accounts for 20% of India’s import basket), and eventually greater pressure on the RBI to increase interest rates. 

Higher interest rates and inflation are a curse for small and mid-cap firms in particular (especially in the short term). During the recent spike in inflation, many firms were able to pass on the inflation spike to their customers, but the passing over the cost comes with a lag and takes an impact on margins. And markets react violently to a drop in margins!

Upcoming Economic Event

US crude oil stock: After the recent oil price saga, everyone has an eye on this data. The level of crude oil inventories is a significant determinant of petroleum product prices and can have a noteworthy impact on inflation. An unexpected increase in crude inventories indicates a weakened demand for crude oil and can lead to a decline in crude prices. This condition is considered bearish for crude oil prices as oversupply can result in a decrease in prices. Conversely, decrease is bullish for prices.

Update on the Portfolio Companies 

Titagarh Wagons Limited 

We want to speak about Titagarh Wagons which is part of our Smallcap Compounders Smallcase this week. Yes, we have spoken about it in our previous newsletter, but it’s worth another mention. India has third largest rail network in the world.

 Although our trains do not abide by schedules a lot, but it is still quite efficient. Call me a geek, but I cannot talk about trains without talking about Titagarh Wagons Limited! So, what’s new with the company? 

Very recently, in order to reduce dependence on imports, under Atma-Nirbhar Bharat Scheme, Indian Railways placed a tender for supply of around 80,000 forged wheel sets every year for 20 years – it is an order of whooping 15,40,000 wheel sets worth over INR 12,000 Crore (over the next 20 years)! And guess what? 

Consortium of Ramkrishna Forgings Limited and Titagarh wagons Limited, turned out to be L1 bidder for this contract, and they received the Letter of Award last week. That’s addition of another long-term contract in the company. With strong order book, efficient execution and healthy balance sheet; this company doesn’t fail to amaze our team. 

It has a market cap of INR 3,400 Crores, but has an order book for next three years of over INR 12,000 Crores and is now adding longer term contracts in its portfolio giving us good revenue visibility. In fact, government’s highest ever allocation to railways in this budget adds on to our confidence in the company and the sector. There is a beautiful bias in finance named ‘Loss-aversion bias’. 

It explains how investors are lethargic to realise a loss but hasty in realising gains of the same magnitude (of the same amount). I am sure many investors are planning to book profits in this stock as it’s at an all time high, however, we consider this price well below our expected price. If the company fundamentals are excelling faster than the growth in stock price, this is when we want to hold onto the stock, irrespective of what the stocks chart and technical may say.