"Make sure you never,
never argue at night. You just lose a good night's sleep, and you can't settle
anything until morning anyway."
—Rose
Kennedy (American, 1890-1995)
Word
for the day
Ambrosial (adj)
Exceptionally pleasing to taste or smell; especially delicious or
fragrant. Worthy of Gods.
Malice
towards none
The paranoid media is quick
to brand all acts of individual violence as "terrorist attack".
Politicians are in a hurry
to respond to "breaking news".
First random thought this morning
Many of my friends live in Mumbai. They all are good, except that
they all suffer from a strong notion that unlike Mumbaikars, North Indians are
gaudy, clumsy, and lack in commitment. Regardless that most of these friends
actually have their roots in North India.
I watched two of my favorite 1970s Hindi movies (Chhoti Si Baat
and Rajnigandha) this weekend. Both movies show visuals and life of Mumbai city
extensively. It was indeed a simple and beautiful city back then.
Anybody who has visited the maximum city recently, would agree -
it no longer is the city, it used to be. Place has changed, people have
changed, so should the notions!
What's driving markets - 2
As mentioned last Friday (see here)
a seed of worry is sprouting somewhere back at my mind. The more I strive to
find the drivers of current equity rally, the more I get confused.
I do not see the current earnings or dividend yield sitting at the
driver seat. It is therefore purely the PER re-rating that explains the current
upsurge in equity prices.
As a broader benchmark, a conservative investor like me is usually
comfortable with a PER between 10-20 for non-cyclical businesses. For cyclical
commodity businesses the comfort would end in 8-10 band.
I do not like valuing asset heavy businesses with relatively
longer and unpredictable revenue cycles on price to book (P/B) or replacement
cost basis; because it goes against the principle of going concern. If at all
these businesses might be valued at Net Realizable Value (NRV) for limited
purposes of judging solvency conditions.
Evaluating financial stocks purely on the basis of net book value
is also mostly not a good idea. It is important to consider the profitability
and reliability of the book as such.
These days any query on corporate database would throw a long
(ominously long) list of stocks trading at EV/EBIDTA ratio of over 20. (EV =
Market capitalization plus Net Debt; and EBIDTA is broadly pre-tax cash
earning). It is even more scary to read research reports early in the morning
which find stocks with EV/EBIDTA ratio of 20+ as attractively valued.
In case you find this blabbering of mine too academic, I agree.
Whenever I suffer from indecisiveness or I am confounded, I go back to text
books in search of a solution.
In my view currently the following three are the primary drivers
of equity prices in India:
(a) Hope of material
improvement in corporate earnings. Rise in public expenditure (both revenue and
capital); hope of revival in rural consumption post good season of rains; lower
cost of production (persistently lower global commodity prices, lower cost of
funds, and improved productivity) and better realizations are some factors that
are kindling this hope. Though not completely baseless, in my view hopes of
20%+ earnings growth in FY18-19 may not materialize. The prices may therefore
have crossed over the line of reasonableness and heading towards the territory
of bubbles.
(b) Incessant flow of
foreign funds. Negligible cost abundant availability od funds in developed
economies is motivating many investors, traders and arbitrageurs, to look for
opportunities in high yielding places like India. This trade I have seen many
times before. Trust me, every time it had been ferocious. On the way up and on
the way down. The upswing we are witnessing and enjoying. Please keep your
seatbelts fastened for the descent, though it might be some time away.
(c) The alternatives like
gold, bonds, real estate are looking even worse.
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