Strongest stocks turn the weakest…..

Our portfolio had higher exposure in the financial sector followed by Sugar, Paper and Cements. All these businesses were doing very good growth on their sales and profits and that showed in their stock prices. Having these high growth stocks helped us achieve 8.50% gains in the month of October.

Following the demonetisation and Trump win in the US elections, the very same high growth sectors went into the receiving end. Pressure on liquidity brought various kinds of pain to the businesses in these Industries.

A couple of articles published in ET after the event showing the impact of currency on the sectors.

 

Nov 17 2016 : The Economic Times (Bangalore)

NBFCs Recover Some Ground, but Gains may be Short-Lived

Anandi C Mumbai

VALUATIONS HIGH Non-banking financial cos’ loan against portfolio book expected to be squeezed due to demonetisation; valuations still rich given prospects hazy

Non-banking finance companies on Wednesday got a break from the sell-off on the bourses post the government’s demonetisation move that has dragged their shares down by 13-20% in a week. Shares of the financiers such as Bajaj Finance, Cholamandalam Investment and Finance and LIC Housing Finance, among others rallied 3-10% on Wednesday but the gains could be short-lived amid worries about rising bad assets and rich stock valuations.

Non-banking finance companies (NBFCs) have been among the best performers on Dalal Street in 2016 as rising consumption and increased demand for housing led to voracious appetite for loans especially in Tier 2 and 3 towns. Since March 01, when the market rebound began after falling in January and February, Bajaj Finserv soared 81%, Bajaj Finance jumped 51%, Dewan Housing Finance rose 50% and Can Fin Homes gained 46%.

Now, with demonetisation expected to result in a decline in property prices, the loan against portfolio (LAP) book of NBFCs will be squeezed, resulting in higher bad loans.

“Finance companies which have bet big on LAP and mortgage loans in last couple of years and expanded their balance sheet rapidly will be among the most impacted because many of them will start seeing pressure on asset quality,“ said Ritesh Jain, chief investment officer, Tata Mutual Fund.

Dewan Housing, Repco Home Finance, Shriram City Union, CanFin Homes and Capital First have fallen 17% in a week. Companies lending to commercial vehicles could be among the biggest hit by the demonetisation move.

“commercial vehicles would be affected as they heavily rely on cash.This short-term cash mismatch could impact their business in the coming two quarters,“ said Siddharth Purohit, senior equity research analyst, Angel Broking.

Valuations of many of these companies have moderated after the recent sell-off but they are still rich given their hazy prospects, said fund managers.

“The valuations of many of them are quite steep at current levels and any bounce back would be temporary ,“ said Jain of Tata Mutual Fund.

Analysts said that it would take more time to determine the right valuations which had inflated over the past one year.

“Only if the prices correct quite significantly compared to the past five years’ rise can we say that meaningful corrections have come in,“ said Paras Bothra, president equities, Ashika Stock Broking.

 

Nov 17 2016 : The Economic Times (Bangalore)

A Real Estate in Pain is Bad News for Cement Cos

Rajesh N Naidu & Ashutosh R Shyam
ET Intelligence Group

CREDIT SUISSE has cut EPS projections for UltraTech, Ambuja & ACC by 16-27% for FY18 after govt’s demonetisation move

The government’s demonetisation drive has affected cement companies badly as they rely a lot on the real estate sector, which is bearing the brunt of this initiative. Analysts have cut the earnings per share (EPS) estimates of cement companies for the next two fiscals between 10 and 20%.

The annual volumes growth of the cement industry is pared to 5-6% in the next three years, compared with 8-9% earlier -in FY16, the total cement consumption was close to 278 MT. Given these factors, cement stocks are likely to fall further and more downgrades are expected.

In the past few years though, cement companies had caught the fancy of investors as it was believed that utilisation levels would go up to 90% by 2020 from 69% at present. It was estimated that cement companies would record superior operating margins as seen in the last upcycle during 2004-2009.

Besides, increase in infrastructure spending, no significant capacity expansion and the ability of these companies to maintain and increase prices in most regions, except east India, helped improve their valuations. Before the recent correction, cement firms were trading at a 15year high EVEBITDA.

But now with the government’s decision to do away with high-denominated currency notes, the demand for housing is likely to take a hit as builders stare at a cash crunch. And the government’s infrastructure projects aren’t enough to negate the possible slowdown in the sector.

This is because the governmentsupported projects -roads, irrigation and railways -consume only 6% of the total cement produced.What’s worse, this comes at a time when input costs are rising as pet coke and coal prices are rising.

Foreign brokerage Credit Suisse has cut its EPS projections for UltraTech, Ambuja and ACC by 1627% for FY18, which has led to a lowering of their target price in the range of 7-20% for these firms.

 

 

 

Jhunjunwals’s portfolio drops 15%. So was ours, many of the stocks in his portfolio also adorned ours and we are holding on for our tables to confirm their exits.

 

Nov 17 2016 : The Economic Times (Bangalore)

Jhunjhunwala Loses Rs 1,480 cr in Just 16 Days

Jwalit Vyas Mumbai:

MAXIMUM VALUE erosion of Rs 397 cr in Titan, where share price fell 15% in Nov

Rakesh Jhunjhunwala, the big bull of Dalal Street, has seen value erosion of over $200 million or `1,478 crore since November 1, 2016 on his portfolio.This does not include the value erosion on the investments in his recent top pick DLF, which is down over 30% in the last 15 days, as his exact holding in the company is not public.

Maximum wealth erosion in terms of value for Jhunjhunwala has been in Tata group owned jewellery company Titan, which saw share price fall 15% since the beginning of the month, leading to a total value erosion of `397 crore.From the peak in August this year, Jhunjhunwala’s holding value in the company is down by `840 crore.Holding value in the other Tata Group stocks such as Tata Motors and Rallis have also come down significantly.

In terms of percentage, the big gest loser in the big bull’s portfolio is the casino company Delta Corp, whose shares plummeted over 40% in the last 15 days.

Jhunjhunwala was bullish on the Indian real estate sector.Other than DLF, he holds 3.2% in Dewan Housing Finance, which lends money to the real estate de velopers and home buyers. The stock tanked 28% in the last 15 days, wiping out al most `100 crore for the big bull.

Other real estate stocks in his port folio include Delhi-based Mumbai-based D B Anant Raj and Mumbai-based D B Realty and Man Infraconstructions, stocks down 15% to 33% in the last 15 days. The only exceptions in his portfolio are MCX and CRISIL, which have remained flattish in a falling market. He owns 3.94% and 1.7% in the two companies, respectively .

 

 

 

We don’t own CAPF, while the stock is in our buy list and the entry price has been consistently moving down following the drop in the stock’s price.

 

Nov 17 2016 : The Economic Times (Bangalore)

ET NOW Q&A – Only 1.5% of LAPs Paid Back in Cash: Capital First

 

In an interview to ET NOW, Capital First chairman V Vaidyanathan, said that in the loan against property book, only 1.5% is collected in the form of cash and that the issue about loan against property (LAP) is overdone.Edited excerpts:

What’s the first hand experience of demonetisation at Capital First?

We should distinguish between a liquidity issue and a solvency issue.Right now, it is only liquidity issue.Basically, traders which are a substantial part of the people to whom we lend, small shopkeepers, traders, entrepreneurs, etc., they have the cash. They go and deposit the money in the bank. They are unable to withdraw it because of withdrawal limits and therefore, they are in a situation where they might have a temporary mismatch in terms of being able to pay. It is not ability to pay issue. In our case at Capital First, 100% of our customers can pay us in the form of PDCs, or electronic clearing instruments. Only the customers who return their cheque, which is the about 10%, when we go back and collect from them which is also close to about 5% That means about 5% pay by cash. Clearly, the moment cash comes back in people’s hands, the repayment cycle will start again. If this issue stretches on for three or four or eight months or something like that, that could become a solvency issue.

Your MSME segment operates mainly on the LAP book. What kind of an impact could we see there?

In our loan against property (LAP) book, 98.5% of our collection is coming through electronic instruments, that is only 1.5% is collected in the form of cash. In LAP, we should not forget it is not the property that is paying you, it is cash, it is the businesses that are earning money and paying you back.So as long as liquidity comes back, solvency remains same, customers will pay. This issue about loan against property is overdone.

But considering property is a critical factor do you not feel that there will be some cases where payments would bounce?

Usually about 90% customers clear their instalments in the first attempt.That leaves 10% of them. As I said, about 8.5% pay you back again in the form of cheques again that is 1.5%. I am saying it is not really a big deal.

This sudden change in our markets due to two most important events have left almost all the businesses in our country stare at huge loss of business. December Quarter results are going to be a washout, and it will take more than 4 months to get back to normalcy. With more than 10 lakh crores of cash moving into the banking system, which will increase the liquidity in the economy, interest rates are likely to fall by about a percent from here and that will be 6% interest on bank deposits.

Excess liquidity in the system, as there is no much demand for credit from the corporate will move into G Sec’s which will propel high government spending in the coming year and propel the economy to bigger growth.

As we are in the mid of the 3rd quarter, till results are out, much decision on the churn of portfolio will not be likely apart from a few stocks moving out and getting replaced by new one’s. The impact on portfolio performance is going to be prolonged.

 

 

 

 

 

 

 

 

NBFC leadership & our position in it…..

running-horse-black-white-2

Banking sector went into a turmoil following NPA’s and bad asset management. Public Sector Banks went out of investor favor. The Private Banks which always commanded rich premium among investors too began to lose attraction because of more and more regulations tightening their hands on growth. While all this was happening and keeping the financial sector at the razors edge, NBFC’s went to become leaders in the financial sector with phenomenal growth in their valuations.

The reasons behind NBFC’a gaining strength were –

  1. They are healthy on NPA’s.
  2. March quarter profit growth was 32%, while private banks had 23%.
  3. Home loan portfolio increased by 12%, all of it grabbed from the private banks.
  4. Focused approach made them best placed to grab opportunities arising from the base of the pyramid.
  5. Bountiful monsoon that is expected this year is likely to boost rural income, where NBFC’s are well placed.
  6. Most of them are positioned in the lower income segment, where the budget provision of more deduction on interest payment for the first time home buyers for loans upto 35 lakhs, came to their advantage.

Investors moved away from richly valued private banks to NBFC’s which shows in their stock growth in the last 1 year. NBFC’s had registered between 20 – 60% growth in the last 12 months. Toppers among them are Chola Finance, GIC Housing, Repco Home, Shriram Transport, Canfin Homes, Bajaj Finance etc.,

In our portfolio, 22% percent of the total equity exposure is in the financial sector and we do not have any banks in our portfolio. We hold all the top names along with stocks like SKS Micro, Edelweiss, which have shown good growth in their top line and bottom line. Our entry into these stocks was fairly early, giving us the edge to capitalize on their growth. Most of our investments have given above 15% growth since we have invested.

As an automatic process, our research identified the stocks in this sector for our investments.

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.

May 2016 performance

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Performance of our portfolio is trailing the benchmarks in the 1 month to 6 month period. The broader benchmarks like the SENSEX have done better because of the Large Cap stocks that have had good increase in price, following their results announcement. Most of them have shown increase in profits, while sales numbers are yet to catch up.

Public Sector Banks (PSB’s), that have become untouchables in the last one year, have after the sharp clean up done on their balance sheets, getting rid of NPA’s, now showing good upward price moves. This turnaround in the PSB’s is not because of positive growth in them, it is just that, they have cleaned themselves and going forward, the expectation is that the performance will be good. Bank stocks have moved up on anticipation of better results in the coming quarters.

Turnaround is just happening and it should take another quarter or two to show up on the top line of companies’ performance. We have been adding stocks to our portfolio, following the March 2016 results. Our portfolio was moved out of stock exposure when the markets turned weak, and presently with new additions in the Paper, Sugar and NBFC sectors, our exposure have moved up to just above 50% and soon it should be reaching full loading.

Stocks like Balrampur Chini, Bajaj Holdings, Chola Finance, Bajaj Finance, DCM Shriram that were added in the last fortnight have been doing very good and going forward, these businesses are expected to give stronger growth to our portfolio.

We invest only in those business that show both Sales and Profit growth, hence, our portfolio does not carry Large Cap stocks in the current market, while we will be adding stocks that show strength, unbiased on the category or sectors.