Investment Shastra

Casinos are better than today’s Stock Market!!

Corporate India has had one of the terrible quarters in terms of growth. Rather, last few quarters have consistently came in below expectations.

Investors have been waiting for some meat but alas they have got a raw deal! They have bet money at very high valuations that even God would find difficult to justify. In return, did they get any profits from the investee business?

We are seeing large amount of funds flowing into the mutual funds on hopes. An illusion that the economy is on the cusp of turnaround has misled many. We do not expect the economy to change course abruptly. We see the process to happen more gradually than what the market expects. Don’t you think the longer it takes, lower will be the yield from the investment made today? Given the stress in the economy, are we asking for enough risk premium?

As opposed to what the market feels, the economy can’t kick start without public sector banks coming out of asset quality woes. Private sector banks are too small to fund growth in the country.  To give you an estimate, going by the asset size SBI and BoB together are bigger than ALL Private Sector Banks put together. Total Public Sector banks are 4 times bigger than private sector banks. How far can the investment cycle go until the concerns of PSBs are addressed? Look at credit growth of Top PSBs as a leading indicator of economic turnaround.

The government is focusing on infrastructure investments through railways, ports, power, roads and telecom. We do see some activity on this front. However, there aren’t many good investment ideas here as the companies are either highly leveraged or generating very low returns on assets.

Turnaround favourites –capital goods and commodity companies –are facing slow order book movement, high receivables and under-utilization. The pricing power is low due to low demand and peak capacities. Obviously it will result in low returns from investing into such companies.

We understand that India is likely to have a secular bull market. But the time horizon for that to materialize is very subjective. We will be happy to advise stock ideas when asset prices reflect true earnings power of the company and provide us risk adjusted returns on our investments.

One would argue that we haven’t mentioned mid cap and small stocks making news for their phenomenal profit growth. However, we understand that current profits do not reflect true earnings power. Most of the profit has come from lower commodity prices or lower interest outgo or low base effect. They lack a secular growth as of now which can tarnish expectations of many. Revenues are not sustainable and currently pumped up through channel stuffing.

Despite all concerns, the stocks are trading at their all-time high multiples. They are priced to perfection. Any negative news around the story can result into precipitous fall in share price. You might have seen this in many of the quality stocks as well like Eicher, Page, Jubilant Foodworks, Emami, Amara Raja, Bosch, Motherson, etc. We are seeing low income growth and increasing unemployment levels of skilled labour. A poor monsoon has dented the hope from the bottom of the pyramid as well. Can the discretionary spends go up with low income growth? At current multiples, the earnings yield is less than 2-3%. Even if the growth expectation materializes, the returns from these price levels may be tepid given such elevated multiples can’t sustain into the future. Be very cautious while assigning >20-22 PE multiple on forward earnings.

We have been advising our customers to sell many overvalued stocks and hold cash during these times. It’s ideal to hold 20-30% in cash & park the same in bonds/FDs. Consider the opportunity cost as an insurance premium  you are paying to protect your downside. We strongly believe that this is not the market for ‘investors’. Investing at these prices can result into loss of capital or years of low returns.

We are investors who invest in hope of making a return from earnings of the company. We shouldn’t pay heed to speculative re-rating or de-rating of multiple. This can create wealth in the future.

Oh boy, we do not wish to waste time discussing some punts by ‘market experts’ who give free advice. It doesn’t qualify as investing. It cannot help you accumulate wealth. Gambling was once taboo, but now it is popular and legal as well. Refer to the article from The Hindu here. For gambling, we suggest going to Casinos. Even if you lose some capital, the mesmerizing spaces and champagne give you joy. Stock market is no place to gamble.

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Ketan Gujarathi

Manager - Equity Research; Based in Pune, a Total of 7 years of work experience ranging from equity analysis, credit rating and banking. MBA in Finance and a Bachelor's degree in Engineering. Passionate about studying companies. Likes reading history & business books. Spends free time with friends and family.

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