"Everything that exists
is in a manner the seed of that which will be."
—Marcus Aurelius (Roman,
121-180)
Word
for the day
Whizzo (adj)
Absolutely first-rate;
superb; excellent
Malice
towards none
Why overanalyze everything?
First random
thought this morning
In all likelihood GST will
become a reality from 1st July. This will mark a big change in Indian trade and
commerce landscape.
Such big changes, especially if
these happen after a considerable amount of deliberation spread over a long
period of time, are mostly good for the economy at large. All apprehensions
about any major disruption in the businesses might therefore be misplaced.
In my view, all pieces will
fall into place within 4-6months, and businesses will move forward strength to
strength. If some businesses face existential threat, GST might only be a small
push not the reason for their extinction.
Mid Year Review 3
After 4QFY17 results, we have heard a number of
corporate management giving positive bytes about the future outlooks, especially
those from cyclical financials, capital goods sectors. Auto, consumer durable
and staple producers did also sound optimistic about the growth in FY187 and
FY19.
A careful analysis of the
commentary shows that most of the optimism is flowing from the government
promise to invest more in infrastructure & capacity building, and spend
more on social sector. Corporates also seems to have built in a lower interest
cost in their projections.
The commentary on global demand
has remained cautious. It is therefore safe to assume that most of the growth
projections rely on the pickup in domestic demand.
Though, the outlook seems to have
been well accepted by the market participants, there remain some areas of
doubt. For example, FY18-19 growth projections assume a stable macro
environment, including achievement of fiscal and inflation targets, and a
stable current account.
My feedback from industry and
lenders suggests that, regardless of falling interest rates there is almost no
visibility of investment demand picking up in next 12-15months, as the capacity
utilization continues to remain poor and falling. The fact that
underutilization of capacities is a global phenomenon, does not help either.
The recent data shows significant
deterioration in private savings in India. This trend juxtaposed with rise in
personal borrowings, might imply constraints on household investment and
consumption growth also.
Rising reliance on government
investment and consumption, along with additional resource requirement for
meeting political promises (farm loan waiver) and NPA resolution (bank
recapitalization, UDAY funding etc.) may challenge fiscal discipline and
therefore limit easing of interest rates.
Under the circumstances, I would
like to discount the corporate optimism adequately. I may therefore not work
with the premise of 18-20% CAGR in earnings over FY18-19. I am however quite
optimistic about the improvement in earnings efficiency (ROCE), due to better
capital allocation, financial restructuring and cost efficiencies.
I am thus willing to give a
premium over long term average PE multiple of ~15x.
Assuming a 16% CAGR in earnings
over FY18-19 (FY17 Nifty EPS Rs420) and discounting of 18x, 12 months Nifty
target comes to 10173, a mere 6% return from the current levels. Most of these
return may be front ended, leaving little for 2018.
I shall therefore work with the
assumption of a bad 2018 in terms of benchmark equity returns, at least 1H2018.
I shall therefore focus on niche
businesses that have the capability to do well even in challenging macro
environment. Being a tiny investor, I can afford to buy these business even if
these are micro sized. Leveraged trade is a strict no-go zone for me, unless
market corrects 15-17% from the current level.
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