Budget 2019 & industry view on it…..

Just back from a meeting with Manish Gunwani, CIO of Reliance Mutual Fund. His views about our markets are that we are at a sweet spot where India markets will perform well. Election outcome if the seats are in the range of 180 to 250 for BJP, markets will not react. Less than 220 seats, will see a new Prime Minister, likely candidate is Nitin Gadkari. It was a little out of the box to hear Modi is not a choice, challenges of a bigger democracy.

We have very less contributors on exports. IT contributes $100B and NRI remittances at $80B. Apart from these 2 there are no big contributors. Pharma was giving some support, now with a lot of regulations, it has gone down. While our imports from Oil which is $100B and Electronics at $40B, almost takes away all of our income.

Oil price should reduce which it eventually will over a few years, due to the advent of electric vehicles and solar panel usage. With #MakeInIndia, as we begin to consume more of electronics made from India, both the big shareholders of our Forex expenses will come down. This shows a very bright future for India.

In the immediate period, 2019, though fund houses and fund managers are saying that we will have 10-15% growth, I don’t see a potential, it might take another year to get a boost for our economy.

The budget shows too much dependence on PSU disinvestments. This year Rs.90K crores to come from PSU disinvestments. Every year if we keep selling what will be left. Already government ownership in many big PSU’s have come to 50-55% levels. As it is, they are poor performers, and would not fetch good price, hence finding buyers will be a challenge.

Among PSU’s some are called Nava-Ratna’s & Mini-Ratna’s or Gems. These Gems got their shine because of government business which was like a light shown on a plain glass. Once they come to the outside world and face competition, they are very poor performers. When the light goes off, it is only plain glass with no value.

Continuous selling is also bringing down prices. Example is Coal India, where the stock was offered for sale at one price, then 5% discount, again at 3% discount and it continues. As the sale keeps happening the stock price is not moving up, thereby not giving any growth for the investor.

Now again government want to sell some more shares, which might not be an achievable target. Due to this the planned deficit of 3.4% will not be achieved. There were talks that, for the last 10 years we have been trying to maintain deficit at 3% and not achieved.

Next big damage in this budget was the bringing of a permanent expense of Rs.75K crores in the form of payments to farmers. These kind of facilities cannot be rolled back, no government will want to bit that bullet of non-popularism.

2019 probably might not be a big winning year for the markets. One very good advantage of this condition is that, if there is 2 consecutive years of no or negative returns next subsequent year will be a super star year.

2019 will set the tone for the blast off in 2020.

Phillips Carbon Black – A Phenomenal Growth Story

In June 2016 when we invested in Phillips Carbon Black, we wondered if it was the right call. The stock was priced high at Rs. 158 levels but since it was our research recommendation, we would follow the system. The RPG group was getting bad press due to news of issues within the group. However, we also knew of their achievements, one of them being HMV (His Master’s Voice, now SAREGAMA).

Today, it is 18 months past the investment date and the stock has reached Rs. 1500 plus levels, giving us a 900% return on our investment. We have added to our position at various levels, even after their September ‘17 results when the price was above Rs. 1100. At today’s price, even the last addition has made about 35% gains.

Company Outlook

The company is in the business of manufacturing carbon black- an input raw material for tyre companies, along with other rubber products and plastics. Seeing as auto sales have increased at double digit rates since 2012, it is only natural that demand for the raw material goes up too. Any automobile needs a tyre replacement after 3 to 4 years of usage. As the auto industry continues to grow, the demand for carbon black has multiplied due to OEM usage and replacement market for tyres. PCBL is one of the major producers of carbon black in India and holds a large share of the market. There are only two listed companies manufacturing carbon black, with the other being HEG.

The company turned around in 2015 and is now staying on top by leveraging all potential opportunities and also investing in capacity expansion. Demand for the company’s products is expected to grow in the long term, which will be beneficial to the company’s stock price in the coming quarters.

BTT REVIEW

Today, our investments in speciality chemicals with PCBL, HEG and Graphite India contribute to our ability to outperform the market. In the first six days of trading in 2018, our portfolio has managed a 7.15% growth against the SENSEX which grew only 0.88%. A near-ten-times higher growth than the benchmark index thanks to our strong portfolio of holdings.