1. Environmental scanning and situation Analysis
These are difficult times and how many of us have seen
- Negative oil price
- Whole country under lockdown
- Entire globe reeling under the pressure of a virus with no vaccination or cure
Nothing we ever learnt in our lifetime could be of any help when it comes to investment management.
- Has the market hit the bottom?
- When will the rebound start?
- How much appreciation one can expect?
- Which businesses will go belly up?
- Is it going to be a V or a U shaped recovery?
- Who will be the new leaders of the future Bull Run if ever that happens?
No one has answers for any of the foregoing. None could be wiser
When Bahubali recommends ‘Trident Viyuga’ to combat the Kalakeyas, everyone opposes because no one has ever used Trident Viyuga. But Raja Matha Sivagami endorses it precisely for the reason that if no one has ever used it then KalaKeyas also have never broken into it.
- If it is unprecedented then is it a level playing field for everyone?
- Can that alone be the dominant logic to explore exposure to stock market?
- Are there any other drivers?
Macro Drivers
Low oil price, low current a/c deficit, low inflation, low Interest rate regime and low corporate tax rates certainly augur well for Indian economy. Policy response and response to policies will be a major driver. RBI’s Bazooka – 2 is a case in point. World is in a disarray but we are not an ‘export led’ economy and Domestic Demand could be the trigger once “business continuity” is restored and all supply side disruptions are addressed. Aggregate demand revival with enhanced purchasing power will be aided primarily by ‘state support’ i.e. relief measures (helicopter money?) and pent up demand taking care of the rest.
India has never wasted a crisis and only got better (Gulf war, East Asian fall, 1991 – confiscated gold pledge, sub-prime etc.). RBI has always added stability to the external balance. Business leaders would figure out frugal delivery models with optimized cost structures aided by technology and consolidation albeit painful resulting in ‘economies of scale’. Such optimized cost structures satiating a huge domestic demand can reduce ‘marginal cost’ and offer pricing power to aid exports . All these are huge challenges. Bharat may be short of many things but strong leadership isn’t one of them.
Even before testing the hypothesis it would not be out of order to define the deployment plan, if at all the analysis leads to any investment.
2. Key Rules for Deployment
- No leveraging in any form should support one’s investment. If one has availed the regulatory forbearance of 3 month moratorium , then no part of her disposable income during this period could find its way into any investment , least of all stock market . Threat of Income contraction is looming large .
- The market could correct another 15 % to 20 % and hence the investment however small has to be staggered – 4 or 5 rounds over next 6 to 9 months.
- 3 years could be the minimum holding period. Therefore only a small fraction of one’s Net Worth which need not be monetized in the next 3 years may be exposed. The rebound may take longer and it will get worse before getting better.
- One may want to buy as many stocks i.e. companies as possible so that risk per stock is lower. Select Blue- Chips requiring no close monitoring. Such a portfolio gives the elbow room to keep booking profits and contain loss per stock.
3. Criteria for shortlisting
- One should have conviction on residual longevity and be certain that the Unit will survive for next 10/15 years. Stock price will certainly fluctuate.
- Strong Promoter / Management / Balance sheet
- Zero Debt or Very Low Leverage. No debt in any form either on the Balance Sheet of the company or the promoters.
- Decent Dividend yield to cushion the high holding period.
- Contra call on some beaten down sectors like auto/ pvt banks may be counter intuitive but rewarding.
- Price value equation – 52 week low or 30 % /40% cheaper than 52 week high etc. But that alone cannot be a criterion. If it is cheap, it is cheap for a reason.
- As earnings visibility is zero focus on cash flows
- Select only those stocks where, if price goes up one is happy and happier if price goes down and buy more. This calls for a strong conviction that it is not a “falling knife” situation and only “Dollar cost averaging”
4. Probable Universe
- MRF
- Bajaj Auto
- Maruti Suzuki
- Hero Motor Corp
- RIL
- RIL
- IOC
- ONGC
- Coal India
- ICCI Prudential Life Insurance
- Federal Bank
- IDFC First Bank
- Sun Tv
- Avanti feeds
- Infy
- ITC
5. Investment Hypothesis
A) Auto Stocks –
MRF/Bajaj Auto/Maruti Suzuki/Hero Motor Corp
- Beaten down stocks
- No unknowns- BS VI, hike in Insurance premia , EV push – all are known and are probably priced in
- Good Rabi crop may revive rural demand for 2 wheelers.
- Some of these auto manufactures cut production by 20% when demand contraction was 12% to clear BS IV stocks. Once normalcy returns, production may increase and units like MRF tyres may benefit.
- Strong Balance Sheet – MRF & Bajaj Auto are probably the 2 strongest Balance Sheets in India with great management – nothing can tempt them not even GROWTH. Never diversified despite having all the cash in the world. Bulk of the ‘owned capital’ is retained earnings and ‘owed capital’ is something between Nil and Negligible.
- Post Covid -19 recovery – a segment of customers may develop aversion towards ‘shared mobility’ and may prefer personal vehicles. Some realized the need for a personal vehicle as they could not depend on shared mobility during a crisis.
B) Energy stocks
RIL – Bellwether stock. Retail & telecom value are to be unleashed. Facebook deal is just a tip of the iceberg in the long journey of ‘value realisation ’.
ONGC /IOC/ Coal India –
- None of them may go belly up in the next 10 years.
- With disinvestment target of Rs. 215 K Crs. becoming a stretch target EPSEs may hike dividend payout aided by corporate tax cut. Oil price being what it is they need not subsidise open market price.
They may embrace inventory loss in the interim given the low oil price.
D) Federal /IDFC First Bank / ICICI Prudential Life Insurance
Banking & financial services sector has the toughest next 6 month. Strength or the lack of it of their credit evaluation system, client connectivity and customer stickiness etc. will all show up post the moratorium.
But how could one ever build a portfolio without BFSI which is the mini-me of the economy.
Disasters like Covid -19 make people realise the value of life and economic security for their dependents and propensity to insure should only increase. Hence ICICI Pru Life. But Insurance is a long term game.
E) Sun TV /Avanti Feeds /Infy/ ITC
Zero leverage and therefore there will be no ‘death by debt’.
Sun TV’s library assiduously built over 25 years helps it during lock down. Their customer segment is below the premium pricing segment of Netflix. Sun is vertically integrated with content ability (Robo/ Peta / Sarkar / Kanchana -3) and last mile connectivity through cable and dedicated DTH flat form. Ad revenue will pick up only post recovery and IPL is not going to add any revenue in the near term.
Infy may benefit out of currency depreciation. Has decent amount of cash on B/S. Infy has exhibited ability to adapt from being a mere Y2K operation moving up the value chain proactively as a progressive problem finder over the last 2 decades .
Despite all the foregoing, inflows esp. FPI inflows may only decide the direction of the market. Value wins but only in the long term. Growth wins in the medium term. Liquidity wins in the short term.
Whether to conserve liquidity or deploy is a personal call. If one has ‘vision to see’ and ‘courage to buy’ and ‘patience to hold’, the Sun may shine on her
What you think ?
Disclaimer
- This is a mere discussion paper for academic purpose and not a recommendation to buy or sell any securities.
- The author is not a certified investment counsellor
- The author may have exposure to some of the stocks discussed above and he may buy/sell some of them from time to time.
- Readers have to consult their Investment counsellors and independently validate.
