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.
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