BUDGET 2019 – Auto industry to change fast

With the increase in excise duty on petrol and diesel and the GST cut on Electric Vehicles will is going to be a big blow to the Auto sector, which is already reeling under huge pressure of declining sales.

The message is getting out clear that, manufacturers have to speed up with EV launches, else they perish. Tight cash flows in the market due to closing of funding tap of the NBFC’s, has impacted Auto sales to a very large extent.

In the last 3 months, almost all the companies in this space have registered continuous decline in sales numbers. Many of the big names have shut down their facilities for short period to adjust for the inventory build up at the distributor level.

Now the next step will be offering discounts to clear off inventories. It will be a better decision for the manufacturers which will reduce cost of funding these unsold inventory. Buyers will enjoy getting their favorite vehicles at a discount.

Yet, as the message from the government is getting more clear about the fast pace expectation to switch to EV’s. Buyers will prefer to delay their purchases, though not on a big scale, it will impact sales.

The biggest threat will be to Auto anciliary businesses. EV’s don’t require all the parts that are presently used in an automobile. Either they fast pace their production to include products required for EV’s or perish.

Auto stocks are already down to their bottoms, now it will go down even further. If you hold any auto stocks in your portfolio or find exposure to auto in your Mutual Fund portfolio, take exit. It will deteriorate further.

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.

1000% Gainers, How Many Do We Have In Our Portfolio?

SENSEX hit 30000 on 5th April 2017 and reached 35000 on 17th Jan 2018. It took 198 trading sessions to gain 5000 points, a 17% gain. In this period there were a couple of companies whose stocks have managed to grow between 100 to 1000%. The following is a list of those stocks.

If someone had invested in all of these stocks, the kind of money they could have made would be hard to imagine! While all these numbers are relevant in hindsight and no single account could have captured all of them at the prices stated here, there are possibilities that some portfolios could have some of these stocks or even a majority of them.

In our portfolio, we had invested into 11 of the 20 stocks which have helped us achieve 44.34% gains at the same time when the SENSEX made 17%. Most of the stocks named in the list are from the specialty chemicals, electrodes, carbon black, housing, automobile ancillaries & jewellery sectors. Majority of them have gained because of the pollution ban in China which was never anticipated at the beginning of 2017. Only a process driven approach could identify these stocks and make profits out of them.

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.

Above 3% gain in June 2016.

stock-june-2016

For the month of June 2016, our markets took a breather from its rally. We had pressures from 2 events which were surprising, Raghuram Rajan exit and BREXIT. While both were shocking, none had any broad based impact on the markets. In BREXIT became an advantage to our markets. Post BREXIT, emerging markets became favorite’s among fund managers & India had an advantage.

In this period of uncertainty our portfolio had an edge. We had a gain of above 3% on our portfolio against the 2.40% gain achieved by the broad based indices.

Good news is that we have achieved this out performance against the benchmarks with only 60% exposure to Equity. Not fully exposed to the market is also an indicator that the markets are in the wait and watch mode yet. Following June and September results, we should see full loading to happen.

SENSEX could manage to be flat for the month, giving a clear indication that front line stocks are yet to show reasonable growth. It is the Midcaps and a selected few among them that are in good strength. Infrastructure sector had begun to show strength; we have about 5% exposure to the Infrastructure, Cement, Construction and Reality sectors. Most of the stocks in this sector have registered good gains.

ARSS Infrastructure has reached 100% gain within 30 days of our investment giving strength to the exposure we have in this sector.

Sugar & Paper along with NBFC’s are the leaders in the current market. Media stocks have shown growth, with the big releases like SULTAN, KABALI etc., to hit the screens this year, the rally here is likely to continue. We have PVR in our portfolio.

Automobile and Pharma exposure in our portfolio is getting considerably reduced. We have used the system rules to move of stocks and the action also eventually coincided with the future developments. There are news that Auto sector is likely to under perform and stocks are getting downgraded. Following the system diligently helps us be in the right sector at the right period and this has largely helped us outperform all the benchmarks.

Look forward to more fireworks in price moves in the coming months.

Post BREXIT…..

brexit

BREXIT was a shock to the markets on Friday morning because markets closed pretty much positive on Thursday. The sharp recovery after the shock in the same session though gives a relief that there is not much damage caused; it has shaken the beliefs of the traders whose activity is most needed for the markets to function.
Due to this high impact move last Friday SENSEX is likely to be on sideways range for a good amount of time. Automobile stocks have begun to move out of the portfolio because Europe was a bigger market for this sector.
Our markets are stronger when compared to the other emerging markets which will force fund flows that will keep the prices rising. There can be new sectors and leaders in those sectors that will begin to dominate in the performance in the coming months.
Infrastructure stocks are showing strength on their balance sheets as well as on their stock prices. There are likely chances of the Infra sector taking lead in the next rally are higher.
In our portfolio, though we have been adding new stock and increasing exposure, having a near 60% exposure into Equity and the rest of the capital parked in debt is helping us protect the impact of volatile market moves.
For the month of June we have had 2 negative news flows, Raghuram Rajan exit which was a kind of shrugged off and BREXIT which had a hit. Like how we have day and night in a day, markets also should have ups and downs, only then the fatigue of the earlier day can be overcome and new opportunities can be identified to have stronger growth to our savings.

Rajan’s continuation and the markets

Raghuram-Rajan-3

Central bank direction on interest rates both national & international always used to be big expectations and directions of the markets would take course after the announcements. For the first time in the history of our financial markets, expectation was not on interest rates.  It was the governor himself who became the news, the expectation of Raguram Rajan’s continuation as the Governor for the second term became hot.

Press had a joy ride, at least which was what Rajan told in the press meet when asked about the rumors. It is strongly believed that he will continue as governor for the second term, still there are some weak hands which are speculating and are wanting to en-cash on the rumors.

After all why would he not continue, financial markets world over has regarded him as the very best central bank governors in the world today. Very few can match his experience, expertise and knowledge. As a country too none of us would want to lose a person of his caliber. The day he took over as governor in 2013, financial markets turned for good and has been continuing. A lot of bold decisions like the cleansing of the PSB’s would not have happened, if not for him.

It is because of this cleaning that NBFC’s became attractive and companies like BAJAJ Finance, SKS Micro, Chola Fin, etc have had very good price rally. Automobile, Pharma and many more sectors benefited. We do have some of the above businesses in our portfolio which have been making good gains.

He will continue for sure and India is going to see one of its very big growths happening in the next 3 years. And probably, after that, move ahead to become a developed economy. All of it will happen not only because of Rajan, it is the whole circuit of people who have lined up along with Narendra Modi, economic conditions, business just in the cusp of a great growth.

Be invested in the India story; make a killing as the time is ripe.

Not in a hurry to turnaround……

Slow TurnaroundThe Indian stock markets which had an euphoric rally in 2014, turned down in 2015 and is looking to have another negative year in 2016. Price increase in stocks are always backed by earnings growth, and when earnings show a slowdown, price moves either get flat or decline based on the interests each individual stock has built in it.

In 2014, earnings growth was very good and it supported the price increase following which expectations got higher and it fuelled the valuations to get a little bit stretched. Once the reality set in to show that the expectations were wrong, rather it was in fact the other way around, a slowdown in the growth rates, investors were in for a surprise. All of a sudden all the buy orders became sell orders and hence the larger fall we have had in the markets post Chinese market crisis.

Automobile companies which were leaders in 2014 began to slow down on their growth. Infrastructure restructuring which was expected to be big and to support the banking sector, has been taking more than the anticipated time to get on the roads. New sectors that began to show strength were NBFC’s and Pharma along with export based businesses. Each one went on to face its own challenges. As spending declined, which has been shown in the top line growth of the Indian businesses in their December financial results, with sales growth in the lower single digits and profits showing an increase which means, companies have resorted to controlling operations to increase profits, which is also a negative in a growth story. Controlling operations expenses cannot continue for a long period. Without sales growth, it will bring in more challenges. This facilitated the weakness in the NBFC sector. USFDA played the devil’s advocate to pharma companies, big names in the Pharma space began to fall like nine pins. Between 20-30% drop in prices of stocks like Dr. Reddy’s Cadila, Cipla etc.,

Exports sector went into a different challenge, external forces played against them, all of a sudden they become un-competitive to their markets following the devaluation of Chinese currency. Orders began to slow down and some of the prominent stocks have lost more than 50% from their peak price.

With big time damages done to the markets, Indices Nifty and SENSEX breached their near term supports and turned bearish. Within few months what was the world’s best economy became the opposite. Now, it will take a little longer than anyone could guess for the markets to turn around. Government through its next arsenal, “THE BUDGET” looks like not to give any big fillip, with just a couple of days for the budget, markets don’t show any kind of strength. Next triggers can come only from the Q4 results, which already shows weakness as banks like SBI have announced that, they are going to show more bad loans in their books.

The best way to approach the market at these troubled times is to wait on the side lines, ready with funds to take the next opportunity early on. In our portfolio for our clients, we have liquidated most of our holdings baring very few best performing stocks like Bajaj Finance, Pidilite etc., Being invested in short term debt will help our capital grow at nominal rates till the next opportunity arrives. In Equity investing, if we deploy this method of getting in when the markets are strong and out when it is weak, it is possible to outperform the benchmarks over a longer period. Hence, again it gets proved that, buy and hold will not be the best strategy in Equity investing. It can only give returns to the extent of that which is got from FD’s. Rarely one can find stocks that have given super normal returns on a continuous basis for decades.

Take a look at your portfolio and do a churn of holdings wherever required and be in cash to take the next opportunity.

When will the market go up?

ConsolidatePost China crisis, our stock markets have moved into correction mode. There were continuous challenges in the form of disturbances like the Volkswagen scandal, Bihar election results, attack on Paris along with the regular nuances like the FED rate hike and the selling by the Foreign Portfolio Investors (FPI) in our markets, which has almost become like a monthly issue.

In October, there was the fear of the FED hiking interest rates which got postponed to December, now the fear has come back again on the thoughts that, whether there will be a re-thinking by Yellen. And every time there is this news about the interest rate hike, it gets followed by the withdrawal of the FPI’s from our market. We have been so much at the mercy of foreign investors to support our market; a small change in their thought itself creates a downturn in our markets. As an emerging market, we have got used to this foreign investment to support our markets.

While in reality, the present situation in our markets has taken a different direction. Dependency on foreign money to move our markets are slowly coming to an end. From the data that is available it is clearly visible that the foreign support is no more required for our markets. In the April to October period, domestic institutions and retail investors have bought stocks worth 51000 Crores, on an average the domestic funds are buying stocks worth 6638 Crores or just about $1 billion, every month since May 2014 as against the FPI contribution of $787 million in the same period.

These figures show that any kind of selling by FPI’s is getting absorbed by the domestic purchase. The investment dynamics of the Indian public have had a dramatic change; SIP’s used to be about 1000 crores per month before 2014, which has now got increased to 2500 Crores per month. The beauty here is that, all this money is going into the midcaps and not the large caps. When we talk about so much inflows and the market is still weak, doubts arise as to why it is so?

The FPI’s are mostly invested in the large cap stocks, which they are liquidating, apart from the fact that the reduced interest rates will become attractive for these investors to be invested in their economies; they are realizing the mistake of wrong investments. Large cap stocks have become poor performers in the present market. The SENSEX dropped 1.48% on 18th November 2015, while the mid cap index dropped only 0.68%, the reason was FPI selling in large caps. Stocks like Larsen & Toubro, ONGC, TATA Steel etc., have been losing heavily, while their mid cap counter parts like Eicher, Page etc., are gaining big time. In the last week alone Dr. Reddy’s lost more than 25%, along with it all the frontline Pharma companies losing a large portion of their value, while stocks like Aurobindo Pharma, Cadilla, Glenmark etc., did not lose much.

Pressure of the USFDA investigations have brought down the stock prices of most of the big names in the Parma Sector. Again, this USFDA is one another issue that has been haunting our markets often. There is too much of dependency by our frontline Pharma companies for their sales from the US markets and the US is commanding, this situation will change soon. Our companies will realize that there is a similar market available in the rest of the world and with the medical facilities getting improved in India, one of the biggest economies by population, India sales itself will have a bigger contribution in the years to come.

In the first 20 days in November, FI’s have sold in our markets to the extent of 7200 Crores while the domestic institutions have bought for 17360 crores. It is close to 150% more than the sales that have happened. Most of the selling was in the frontline stocks and the buying was in the mid cap space. To some extent the selling pressure is getting absorbed by the local institutions and that is the reason we have the markets going up and down in short periods. It is like a sort of confusion and will result in a prolonged consolidation.

FPI’s are forced to re-align their portfolio if they have to make money from our markets, hence the selling pressure. Whereas the domestic funds are already loaded into mid-caps which have had a very good run and are also adding to their portfolio taking advantage of the correction in the market. Our markets witnessed an above 40% straight rally after the new government got elected, from such a steep rise, it has to get re-adjusted before it takes off again and this readjustment will take a little more time. The way the charts are formed, the bullish sentiment is pretty strong. If the next round of bullish move has to be even stronger, like the experience we had in the 2003-2008 bull market, the markets have to consolidate and re-shuffle leadership.

happy-investorsLast year Automobile stocks had a great run supported by good earnings from the companies, while this year, they have a kind of taken back seat. Most of them have completed their dream runs. Now the leadership position is slowly getting shifted to Pharma and NBFC stocks. September quarter results were muted, the average sales growth has been around 1.50% while the earnings growth is at 7%, which shows that companies are cutting down costs to increase profits and this cannot continue for long. Soon, we will have sales numbers showing up.

This change in leadership is going to take some time to get aligned, maybe till the 3rd quarter results are out, in which there can be some positive surprises. Till that time, the markets will not turn bearish; it will consolidate at the present levels and then break out. The longer the consolidation, so much stronger will be the next rally, while in the consolidation period; it will kill the patience of anxious investors. For those who stay with patience, the next rally will be a bigger reward. The same happened in 2014, before the 45% rally we had between March 2014 and April 2015, the markets consolidated for a full long year staying within a 15% range in 2013.

With Money BagsPresently the consolidation is again at 15%, the more it gets stretched, and the chances of another 45% rally are higher. In such a scenario the SENSEX should be at 43500 and the NIFTY at 13150. At present these numbers look a little too over optimistic, while it was the same when there were talks of SENSEX to reach 30000, in early 2014, hard to believe, while it did happen. The SENSEX breached 30000 in March 2015.

As I complete this writing, I myself am getting euphoric, how throwing a little light on the hindsight has given a very beautiful picture to look at in the future. For those who have missed the 2014 opportunity, there is one more chance waiting to happen, take advantage and grow your savings faster.