HIGH GROWTH STOCKS FOR FU Rae TAN ites PORTFOLIODear Subscribers Being part of a herd worked well for our earliest ancestors, It was probably the best and only way to survive attacks from predators. And it may take many more generations for human beings to shed that notion. To this day, the elders in the family insist that youngsters follow religion, pursue education, take up jobs and get married as per the family tradition. All with the purpose of staying part of the herd and staying safe. But thanks to Buffett, Munger and other value investing gurus, the herd mentality is considered a sin in investing. Every financial bubble known till date, starting with the tulip bubble, has its origins in the herd mentality. Yet people get trapped in it time and again. So, you have heard stories of investors who found comfort in Harshad Mehta stocks in the early 1990s. Then dotcom stocks in 2000. And then real estate and infrastructure stocks in 2007, The herd mentality was that no one wanted to be left behind when everyone else around them was making money in these stocks. And the consensus about the rising stocks amongst the herd members, made everyone comfortable about them Ifyou look for consensus today, bluechips have become a ‘no-go area. Simply because the Sensex is far too expensive as compared to the BSE Smalicap index. In fact, if | were to ask you to list the drawbacks of blue-chip stocks, these are some that might come to your mind + Low probability of being a multi-bagger + Slow capital appreciation + Not so great dividend yield (due to of higher stock prices) You wouldn't be wrong. Yet, these are not convincing reasons to shun blue chips altogether. Remember there are always exception. Bluechips can, in fact, be a safe haven. Especially when smaller businesses are staring at big disruptions. 2 High Growth Stocks for a Millionaire's Portfolio 12The world is awash in technologies that are transforming the social and physical landscape in which we live. These disruptions have reoriented consumers, businesses, and the markets in ways few could have anticipated just a few years ago. Pagers, wrist watches, landline phones, Sony Walkman, Yellow Pages, travel and insurance agents and restaurant guides were all victims of disruption Exponential change is already remaking the investment map. And more shape-shifting is likely in store. The need for agility remains constant. Companies which have the experience of tiding over disruptions and the cash flow to remain sustainable, will see exponential growth over the long term, The stocks initially identified by me for this report were Cummins India and Symphony. However, in recent sessions the stocks have breached their maximum buy prices. Please see the detailed reports on the stocks here and here, respectively. In this report, | am replacing the two stocks with actionable recommendations on ITC and Petronet LNG. Do take note of the maximum buy price and maximum allocation to these stocks. The disconnect between the near-term fundamentals and valuations of indian equities mean that volatility is here to stay coming weeks and months. Therefore, in the current markets it is important to take a defensive approach even while holding on to stocks that are expected to create long term wealth. Since | can't predict if and when there will be yet another sharp market correction due to the second phase of the virus, | urge you, dear subscriber, to prepare for a near term downside. Expect me to recommend buying partial stakes in strong businesses over next few months. Happy investing! Tanushree Banerjee Editor - StockSelect 31 2 High Growth Stocks for a Millionaire's PortfolioStep on the Gas with this Efficient Green Energy Stock Sheeladevi, of Haripur village, of the Khagaria district in Bihar, got a cooking gas connection in June 2016. All her life she had been using an old biomass chulha which affected both, her health and family income The cooking gas, under the Ujwala Yojana, rid her of the troubles of using biomass. Most importantly, it allowed her to spend more time on her tailoring business. Sheeladevi's semi-urban counterpart, Parvati, lives in the outskirts of Delhi. The newly acquired LPG cylinder saves her cooking time and allows her to work in two more houses as a domestic help. The Pradhan Mantri Ujjwala Yojana is just five years old. But LPG connections under the scheme have already crossed 130 m. The country now has about 275 m LPG connections which covers 96.9% of households. Even then India's share of global gas consumption is miniscule. Against 25% globally, natural gas accounts for just 6.5% of India's primary energy mix. This is mainly due to insufficient domestic gas production, lack of pan-India gas pipelines, and lack of sufficient import terminals. The country has been battling a severe pollution problem. Meanwhile, India has been a signatory to the Paris Climate Agreement. So, India now aims to increase its dependence on natural gas to 20% by 2025. The government has been pushing investments in gas pipeline infrastructure. But it is the demand for gas from households, factories and the auto industry that is set to take a leap. India's domestic gas demand is at an inflection point. It is expected to see a 66% volume growth over the next five years. From June to December 2020, the six months following Covid-19 lockdown, natural gas was the only fuel to show double digit (12% YoY) growth in demand. A significant demand is expected to come from fertiliser and chemical industries over the coming years. 2 High Growth Stocks for @ Millionaire's Portfolio 14But the bulk of the demand will be led by city gas distributors (like Mahanagar Gas and Indraprastha Gas) who are bidding for licenses in new geographic circles every year. What must draw your attention here is the company that is often called the gateway to natural gas supplies in India. Petronet LNG is the single largest company in India responsible for the development of facilities for the import, storage, and regasification of liquefied natural gas (LNG) It is the biggest LNG importer for India and caters to around 40% of the country's gas requirement. Petronet supplies around 70 mmscmd (million standard cubic meters per day) of LNG collectively from its Dahej and Kochi terminals. It owns 53% share of the country’s existing regasification capacity with a capacity of 175 MMTPA (million metric tonnes per annum) at its Dahej terminal and 5 MMTPA at its Kochi terminal. Petronet LNG's Dahej terminal is the world's fourth largest terminal by throughput capacity. Apart from offering world-class regasification facilities at its Dahej and Kochi terminals, Petronet LNG is also diversifying in many other businesses across the LNG value chain. Itis offering LNG as automotive fuel through its chain of LNG stations in collaboration with oil marketing companies and city gas distribution players. The company's profitability depends on consistent and high utilisation of its capacities ‘Surplus Capacity of Petronet LNG 18.0 rp 120 16.0 140 + 100, 12.0 6 10. } 80 . l I l l | | 60 60 FYIO FYI FYI2 FYI3 FYI4 FYIS FYI6 FYI7 FYI8 FYI FY20 mm Capacity (mmtpa) —Utilisation (%) equitymaster Date Source: Company 51 2 High Growth Stocks for a Millionaire's PortfolioThe immediate earnings catalyst here are: + Commissioning of the Kochi Mangaluru gas pipeline in January 2021 Delay in the pipeline’s commissioning for nearly five years had meant that Petronet was not able to reap the benefits of its 5 mtpa (million tonne per annum) Kochi terminal. While Petronet's Dahej terminal (175 mtpa capacity) clocking optimum utilisation levels kept driving earnings, utilisation levels at Kochi remained subdued at about 15%. This can now improve to 60% plus level in three years, with gas supplies commencing from the new pipeline and rising further over time. + Delicensed LNG Terminals The Petroleum Natural Gas Regulatory Board (PNGRB) announced in June 2020 that any entity can set up an LNG station in any geographical area without a license. Petronet LNG being the largest LNG infrastructure company of India is likely to be the biggest beneficiary. It can facilitate LNG dispensing infrastructure across the country on major national highways and invite oil marketing and city gas distribution (CGD) companies to partner up for the project. Petronet LNG has entered a MoU with Gujarat Gas to set up five gas stations on the Delhi- Mumbai highway. Indraprastha Gas would also set up three stations on the highway, taking the total count to eight. Another MoU has been signed with IOC for setting up five LNG stations in South India. This infrastructure of gas stations on national highways is expected to add fillip to the growth of CNG powered vehicles in the country. Petronet's terminal in the east coast (Gopalpur) would be the biggest beneficiary of CGD gas demand in that region. This LNG project would strategically place PLNG (providing access to the western-southern-eastern coasts) and aid in gas swapping in the CGD network in the country, It would further facilitate the supply of gas to consumers on recently launched exchanges by delivering gas in various proximities. This clean energy player has a lean balance sheet to tide over crises. The stock also offers a mouthwatering dividend yield at nearly 5%. Notwithstanding the chances of some temporary correction, due to firmness in gas import prices, the stock offers opportunity to ride India's clean energy megatrend, quite safely. 2 High Growth Stocks for a Millionaire's Portfolio 16The Upside Potential Petronet LNG has generated average return on equity (RoE) of 20% over the past decade. While FY21 could be a dampener, | expect the company to regain its consistent return ratios in the next three to four years. The company's zero debt and healthy cash balance are the additional safety nets The stock of Petronet LNG has traded at average book value multiple of 3x over the past five years. Given that it's a cyclical business, | have valued the stock at 3 times FY24 estimated book value. The target price for the stock is Rs 312 over a period of three years. So, the stock of Petronet LNG is expected to offer compounded annual gain of 14% (excluding dividend yield of 5%) over three years. Irecommend subscribers to buy the stock of Petronet LNG (50% exposure) at the current price. | will alert subscribers as and when the opportunity arises to add their exposure to the stock. Action to Take + Buy Petronet LNG (50% exposure) at current price or lower. + Maximum Buy price: Rs 255 Please refer to the detailed report on the stock. According to us, in a scenario of ideal allocation of funds, bluechip stocks could be considered to comprise at least 60% of one's total equity portfolio. Further, we believe that a single bluechip stock should ideally not form more than 5-6% of the total portfolio. However, please note that this allocation will vary from person to person. For something that works best for you, we recommend you talk to your investment advisor. 7 2 High Growth Stocks for a Millionaire's PortfolioPlease keep referring to the StockSelect Performance Review, which is part of the StockSelect recommendation report, scheduled to reach your mailbox, on or before the last Friday of every month. Market Data Force ones ae) | 52-week High/Low (Rs) (280/171 NSE Symbol PETRONET BSE Code 532522 No. of Shares (m) 1,500 Face value 10.0 FY20 DPS. 12.5 Dividend Yid (FY20 at current prices) 5.2% Free Float 56.3% Market Cap (Rs m) 360,000 2 High Growth Stocks for a Millionaire's Portfolio leThe Underdog Amongst Consumption Stocks In the early autumn of 1910, British Tobacco Company set up a modest office in the narrow confines of Radha Bazar Street, Calcutta. it would have been impossible for the lone expatriate manager to even imagine what future would have in store for the company he represented. In fact, if you ask a rickshaw puller in Kolkata, even today, most believe that ITC is only a leading hotel company. Thanks to the grand and imposing ITC Sonar in the heart of the city. Many in the city ignore the fact that the 100-year-old giant has products ranging from cigarettes to paperboards to packaging to FMCG to branded apparel and foods. ITC's journey, over a century, has indeed been one of extraordinary transformation. Only a handful of enterprises in the world have traversed a 100-year journey and managed to remain contemporary, relevant and competitive. From being a one-product category, ITC's portfolio now spans 20 categories with over 1,500 stock keeping units (SKUs). Today, a network of 100 factories churn out ITC's products, compared to just six units set up in the first 50 odd years. What has been the driving force behind this transformational journey? Without a doubt, it was a series of visionary CEOs who led ITC at different points of time in its history. Catering to nation's interest was as central to the CEOs' visions as growing ‘shareholder value’, A stellar example of national interest driving ITC's early diversification is its entry into the hotels and paperboards businesses in the mid-1970s. The potential to generate significant foreign exchange earnings (at a time when India was starved of it) and its multiplier effect to create large scale employment in the tourism sector were the triggers for ITC's foray into the hotels business. Similarly, the opportunity to contribute substantially to the economic turnaround of a backward region like Bhadrachalam (in the then Andhra Pradesh) was the prime motivator for ITC's entry into the paperboards businesses. Equally, these diversifications were backed by sound strategic rationale. Unlike other conglomerates, ITC was never drawn to diversification for the sake of it. Rather its strategies were anchored to its core competencies and the managements’ skills. Driven by the aspiration to become a leading FMCG company, ITC created a bouquet of world-class Indian brands that are popular household names today. Its vibrant portfolio 81 2 High Growth Stocks for a Millionaire's Portfolioincludes brands such as Aashirvaad, Sunfeast, Bingo!, Yippeel, Kitchens of India, Fiama, Vivel, Engage, Wills Lifestyle, Mangaldeep and Aim, to name a few. The strong brands helped ITC reach out to customers well beyond that of a tobacco company. For backward integration, ITC created livelihoods for around 6 million farmers through its revolutionary e-Choupal initiative. But when it comes to investors, they still see ITC as a tobacco company rather than a diversified conglomerate in the consumption space. Yes, ITC still derives 45% of revenues from the tobacco business (was 65% until FY11). And this is regularly subject to heavy taxes. Plus, there is no promoter stake in ITC, unlike in other MNC and domestic FMCG majors. With the absence of a promoter, investors remain skeptical about the company sustaining its dividend track record. The risk of another sharp GST increase remains an overhang on the stock. While ITC trades at a discount to Indian and MNC FMCG peers, there is no denying that it is at a premium to global cigarette majors We believe that as the FMCG business starts contributing a bigger share of revenues and profits over the years, the risk associated with ITC's cigarette business will decline. Given the limited downside risk in valuations, the stock is a strong contender for creating long term value. ITC is currently putting all its weight behind the FMCG business through large-scale investments to build scale. The management believes there is headroom to grow in every segment given the low levels of penetration across different categories. ITC launched more than 60 products in FY19. It also increased offerings in the high-potential dairy segment and entered the fast-growing frozen snacks segment under the ITC Master Chef brand. The packaged food portfolio (Aashirvaad, Sunfeast, Bingo, Yippee, etc.) now contributes about 77% to the FMCG business. Most of these brands are market leaders in their respective categories. In the last 10 years, ITC's FMCG business has sharply improved its operating margin. Similarly, the return on capital employed (ROCE) improved too. Moreover, the management thinks big in terms of its aspirations for the FMCG business. ITC's long-term vision is to achieve Rs 1 trillion revenue by 2030. This means the company needs to grow its FMCG business at a compounded annual growth rate of 20.8% till 2030. 2 High Growth Stocks for a Millionaire's Portfolio 110Key Brands ITC is Currently Focused On eiama Vivel i a Ww L i ITC Eee St MASTER i i “CHEF ‘Source: Company Profitable and cash rich operations {in the tobacco business) have enabled ITC to build huge cash reserves over the years. Also, the company has been always debt free. The strong reserves are likely to aid the company in its FMCG expansion plans The Upside Potential ITC has traded at an average price to earnings multiple of 31 times over the past 10 years and 24 times over the past 5 years. At 16 times FY22 estimated earnings, ITC is currently trading at almost 30% discount to its 5-year average multiple. Given ITC 's significant market share, robust balance sheet and expanding franchise, the risk-reward ratio is favourable. The target price for the stock is Rs 325 over a period of three years, which offers compounded annual gains of 14%. The dividend yield is currently 4.6%. Irecommend subscribers to buy the stock of ITC (50% exposure) at the current price. Iwill alert subscribers as and when the opportunity arises to add their exposure to the stock. 11 2 High Growth Stocks for a Millionaire's PortfolioAction to Take + Buy ITC (50% exposure) at current price or lower + Maximum Buy price: Rs 250 Please refer to the detailed report on the stock According to us, in a scenario of ideal allocation of funds, bluechip stocks could be considered to comprise at least 60% of one's total equity portfolio. Further, we believe that a single bluechip stock should ideally not form more than 5-6% of the total portfolio. However, please note that this allocation will vary from person to person. For something that works best for you, we recommend you talk to your investment advisor. Please keep referring to the StockSe/ect Performance Review, which is part of the StockSelect recommendation report, scheduled to reach your mailbox, on or before the last Friday of every month. Market Data Foiceonmecs Dae) a 52-week High/Low (Rs) 239/135 NSE Symbol Itc BSE Code 500875 No. of Shares (m) 12,305 Face value 1.0 FY20 DPS. 1015 Dividend Yld (FY20 at current prices) 4.6% Free Float 100.0% Market Cap (Rs m) 2,694,819.09 2 High Growth Stocks for a Millionaire's Portfolio 12DISCLOSURES UNDER SEBI (RESEARCH ANALYSTS) REGULATIONS, 2014 INTRODUCTION: Equitymaster Agora Research Private Limited (hereinafter referred to as "Equitymaster’/"Company") was ncorporated on October 25, 2007, Equitymaster is a joint venture between Quantum Information Services Private Limited (QIS) and Agora group. Equitymaster is a SEBI registered Research Analyst under the SEB! 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