Mid overs

Dear Friends,

its been a long time since I interacted through the blog, though I have continuously interacted on twitter and wherever I spoke at conferences. Much of the lower interaction has been to do with the state of the markets, the run up to elections prior to May which often leads to policy freeze, the lack of an annual budget till July all of which impact both sentiment and corporate action. Much of the corporate sector has been in a no man’s land and there has been a stress in terms of liquidity , eveident most in declining auto sales and credit outflow. To add to that the stress of ILFS, Anil Ambani companies, Dewan housing, Jet airways, aggressive write offs by Yes bank (more in line with what they should have done for some years per RBI), a now overvalued consumer sector in valuations, a one sided 12 odd scrip rally in the likes of TCS, HDFC BANK, KOTAK BANK, RELIANCE, INFOSYS, HINDUSTAN UNILEVER etc and nothing great across most of corporate INDIA has stressed markets.

Indeed most companies are way off their lows, with a fall of anywhere between 40-70 percent across many companies, particularly in mid and small caps. The results of corporate INDIA have been in a state of 5 years of subdued or inadequate growth and much of the nifty earning growth has come from superficial earning caused by less than historic write off of NPA by the likes of state bank, axis bank, Icici bank. Software and consumer have been sectors that have shown growth but even there there is a biopolar makrnet with large IT shining, mid and small IT struggling (barring few exceptions) and in counsumer too there are both winners and losers.

 

chemicals too have been a biopolar sector contrary to the illusion of outperformance. On one side there have been companies like atul limited and srf that shone on specialised chemicals and move away from general with a china support while many fancied chemical stocks are also at new lows. Many of the heroes of the mid cap bull market are sitting in a state of sentimental sulk with an indecisive bet on what lies ahead.

same story across footwear (2 leaders many losers), cement, hotels (eih, Indian hotels have marginally outperformed , rest have been bullied).

I have not seen such disparity in the market in many years. Some of it seems justified in premium with so many skeletons coming from some companies, including in terms of governance specially in small caps. But all of it is surely not justified. At least to me.

we are over several excesses. Including in the 2016-2017 barrage of multibagger chases, investor conferences, paid advisories giving recos on unheard of companies, social media and tv going all out on pushing companies and a state of over confidence and get rich easy.

this has reflected in more sanguine valuations, clean up on governance, hiccups of gst and demon setting in. Fear seems to be paramount in market now and the premium for the best ha she come too severe. No one wants to buy anything but 12 odd companies quite reflected in a overdo of their ownership across several mutual funds and portfolios.

it has become more fashionable to sell outs and short stocks than to search for basics- cash flows, business longetivity and most importantly valuations. Indeed, many companies with no debt or pledge and decent cash flows are also being punished in this tired state of the markets.

this is a good time to reflect on mistakes. Both of omission and commission. It doesn’t matter where your stock hasn’t fallen what matters is whether it is priced cheap relative to its potential. Price anchoring is a mistake to avoid and value mapping is a screen to adopt. It is impossible to believe that Indian markets will be lead by 12 scrips or that other companies will not have the zeal to come out of this stagnant growth phase.

There is a huge role that needs to be played by the government. It has come to power with absolute majority and a claim of benefit to all. It is a bet to make that no govt in the world can ever ignore corporate profits and economic growth. Already deliberations have started to kick start the economy and while I won’t bet on time, I will bet it’s impossible that after 5 years too growth will elude india.

I have read two interesting pieces in the papers today. One by Uday Kotak who says the nbfc liquidity is not a permanent risk and the second by S naren of Icici who says the market Fears are greater than the substance of the problem. Earlier Aditya puri of Hdfc bank has echoed the same views and Nirmal Jain and Mr shah of edelweiss have also asserted that.

To me it appears that there has been a showdown but also a sentiment burn out. What started from over valuation and exuberance and was messed up with reclassification of holdings post Sebi directives has lead to too much of energy loss and belief in most parts of the markets.

Bruised portfolios don’t have the confidence to do what they should-buy when there is pessimism and disbelief. The Indian economy is not shutting down and even against govt grows sheer,y driven by a huge consuming and saving population. We haVe some rock star companies with decades of growth and no where d,one to saturation of market shares.

the best thing to do is to keep at your sip. If you do direct equity, nibble now at many mid caps (I prefer them over unknown small caps), look for history of wealth creation and valid too crowded trades both on the buy and sell side.

these are mid overs after a buoyant start, loss of wickets but of a champion team called corporate INDIA.

more to follow.

cheers

disc- not Sebi registered. Views are personal.

 

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One thought on “Mid overs

  1. amitdipsite says:

    My dear Safir, Thanks for summarising the current state of play for all. I reckon full time investing must be a difficult job requiring an emotional framework to cope unless one were lucky to be index linked investor, and that too works in some periods and not others. Excesses such as these are partly justified, always find a mid ground, the gravity of common sense eventually prevails. Run on banks is finally close to reality in our country. Best regards

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