Tuesday, March 24, 2015

Mining for opportunities

Thought for the day
"Gray hairs are signs of wisdom if you hold your tongue, speak and they are but hairs, as in the young."
-          Rabindranath Tagore (Indian, 1861-1941)
Word for the day
Gibber (v)
To speak inarticulately or meaninglessly or foolishly.
(Source: Dictionary.com)
Teaser for the day
Masochism of all governments in India is intriguing. They don't like to do anything unless put on mat by media and thrashed!

Mining for opportunities

Considering the corporate earnings outlook, plateau in the domestic macroeconomic good news, mostly assimilated political & policy environment, and fragile global financial conditions, it is reasonable to believe that we are some distance away from a new secular bull market. Though, it is always a good idea to prepare the ground and sow the seed well in advance; doing it too early may result in total dissipation of effort and resources.
I have opined in many earlier posts also, that the bull market in Indian equities will commence mostly due to cyclical recovery in domestic economy. The global factors, primarily liquidity and soft commodity prices may provide some extra impetus. Readjustment in global capital and currency markets due to reversal of rate cycle in US when most other major economies are continuing to be accommodative, shall continue to cause spells of heightened volatility and uncertainty.
Therefore, the investor positioning in Indian equities has to be based on primarily domestic growth drivers, adequately accounting for higher volatility.
In my view, decent investment opportunities may exist in the following broad areas from a 5+ year investment horizon.
Railways could be to 2015-2020 what roads were to 2003-2007. I would however focus on technology leaders rather than generic stock (wagons and wheels) suppliers. In my view, under the new governance paradigm and rising wage rates, it would be difficult for the contractors to make even normalize profits. Companies with proprietary technologies in process automation and productivity enhancement should be preferred.
Agri productivity as an economic activity will likely enjoy highest priority for the incumbent administration. Focus should again be on technology innovators and market leaders rather than generic fertilizer producers.
Cyclicals. Buy cyclicals and industrials with god balance sheet and decent operating leverage (cement, capital goods, auto and EPC).
Global businesses (IT, pharma, auto & ancillaries) as INR completes its correction over next 12-24months.
Consumers (FMCG, 2wheelers, pharma, textile, finance, media) for demand pick up on rise in employment and general household income level.
To put in simpler words, the investment opportunities may be explored in the following areas:
(a)   Industrial companies with market and technology leadership, strong brand equity and access to global markets. Product companies rather than services companies are more preferable as they gain from inventory correction, pricing power among other things. I prefer the companies with substantial operating leverage and lower financial leverage.
(b)   Consumer companies both in staple and discretionary space which may benefit from rising consumption demand, stable global economy, weaker INR, lower commodity prices.
       Correction in stock prices in this space due to poor rural demand in next couple of quarters may be a good opportunity to accumulate.
       I would prefer a good mix of staples and discretionary products with special reference to the youth. Though, tobacco is something which I would continue to avoid.
(c)   Local units of global corporations that may see larger participation through more investment, hike in stake or transfer of manufacturing operations for regional exports. Heavy engineering companies with proven track record and leadership in railways and defence technology would be my preferred picks.
       A 10% weakness in INRUSD from current level may prompt some buy backs, especially in companies with material cash hoard.
(d)   Financials will inevitably participate in any bull market. Reduced financial stress, better yielding bond portfolio, higher credit demand, geographical spread due to deeper financial inclusion efforts, and recapitalization are some ideas that will drive value of financial stocks higher from FY17 onwards.
       However, as a matter of strategy I continue to remain circumspect about the PSBs. I would therefore suggest private sector lender including select NBFCs
(e)   One of the primary premises of my bull case is softer commodity prices. I would therefore not suggest any global commodity exposure. Domestically however cement could see a major spike up due to better utilization rate. Financially unleveraged large players with good operating leverage could be looked upon.
(f)    Some companies from textile, construction material, auto ancillary, and consumer durable have done amazingly well to acquire technology, market and product leadership in global sphere. These companies enjoy premium valuations, deservedly though.
       A correction in prices from current levels, would be a good opportunity to buy these companies.
(g)   The exporters especially IT and pharma should continue to do well. A correction due to cyclical strength in INR would provide a good entry point.

1 comment:

  1. A huge lots of valuable data which you have shared here. It is actually a great and informative article for us. Keep posting, Thank you. consulting engineers Sydney

    ReplyDelete