FM’s thoughts on Oil & Loan Waiver

Jaitley’s talk at the ET awards, “Users should pay for oil… else fiscal deficit will rise and add to the current account deficit. It will push up inflation, weaken rupee. Tax on fuel prices should come down not by creating fiscal deficit, but through an increase in the non-oil tax to GDP ratio, which is on the rise since last few years. We must create a sense of maturity among people” Very nice thought, if we contribute by way of higher compliance, it will help in getting other benefits.

It felt like, we have only been asking without contributing. When we talk about this to people, they get agitated about paying taxes. It is because, for generations we have been on the receiving end.

Want farm loan waiver, how can that happen? Vice president Venkaiah Naidu said, “Loan waiver can happen only if there is a deposit waiver’. We did not want FRDI to come because we stated poor man’s money in the banks should not get used for the bank’s non-competence. All the deposit holders should be given highest safety on their investments. At the same time banks should waive off loans. This can happen only from the profits that banks make.

And unfortunately our banks don’t have that edge too, because of people running the banks who don’t have big vision.

Happened to hear a banker say that, “De-Mon was good and GST was good, while it was wrongly timed and not executed well. Government should have planned well to avoid the problems that it came across in implementing both these great reforms.”

We are the world’s biggest democracy having diversity of Africa to Europe in our mindset. When it comes to paying taxes we are like Africa, the most corrupt. There could not have been an opportunity to learn from some others mistake before bringing these two reforms. We should only learn from our own experiences. That is how it can be…..

There is an urgent need to move out of the comfort zone of protectionist mindset to accept reality & face the world as it is. It will strengthen us as a country and prepare us to have more luxuries.

 

Next big opportunity to invest in Stocks –

Stock markets go through cycles with up & down phases on regular periods, those who are able to identify them early and take advantage end up getting the best returns from the markets. Like the cycles we have in commodity prices. Crude or steel goes up in price when there is demand and comes down when supply increases.

As there are cycles for the whole market, there are similar ones for sectors too. Like for example metals sector went through a down phase when there was huge supply from China and when China stopped production, demand took the prices up and now the metals index is up 200 plus percent from the bottom it hit in early 2016.

Identifying and investing into sectors when they are at the bottom and about to turn up gives immense opportunity to grow wealth. Such opportunities come up often and 2 such conditions are available at present.

One among them is the Pharma sector, it went through a tough time since mid 2015 due to USFDA
clearance issues which forced many companies lose access to lucrative markets and thereby report losses. Now the condition has changed, most of the manufacturers have now adopted to the required standards, generics market has brought good opportunities and after a bottom or base formation any small growth will show up big and that will bring added value to the stocks.

This valuation gap will get filled with prices of stocks going up. Pharma stocks have already began their upward journey many stocks like GLAXO, ASTRA Zeneca etc are on the upward spiral. It is good time to pick up investments into a good Pharma specific mutual fund to ride this rally, which should last for more than 2 years and give some very big gains. 

Another opportunity waiting to happen is in the PSU Banking sector. All of us know of the challenges that our PSU Banks have gone through in the recent past due to their bad loans. Cleaning their balance sheets brought immense decrease in valuations and big loss in their stock valuations.

Now the cleaning activity is almost coming to an end, in another quarter or two most of the balance sheets should get cleared of all their NPA’s and even if the banks do not show robust performance on their numbers, just their regular profit reporting will give a big strength to their balance sheets which will attract valuations.

Again a very good opportunity to make more than 100% gains in the next 2 years by investing into this sector. The best way to capitalize on the rally that this sector will have is to identify mutual fund schemes that have more exposure to PSB’s and invest in them. One other alternative will be to invest into PSU Banking ETF’s.

These are pure sector calls which will go through high volatility and requires timing to enter and exit.
Getting in late into the rally or overstaying will give results that are opposite to what one expects from the investment. Have lesser allocation so that your investment does not go through volatility as well as help capture the gains of the next big opportunities available in the market.

Your investment advisors should be of help in choosing the right schemes along with timing entries
& exits.

Performance 2017

Positives and surprises of 2017 comprising North Korea war fear, DOCKLAM standoff, Gujarat elections, GST implementation, US interest rate fears. Expectations for 2018 for the market which is a moderate positive with volatility in prices.

SENSEX at 33000, our portfolio takes rest

Government announced 2.11 lakh crores of support to the PSB’s, market goes berserk. PSB stocks like SBI, PNB goes up more than 30%, PNB made 46% gains. Private banks took a hit, NBFC’s which were leaders lost big value. Broad indices move up a percent and our portfolio goes down a percent. After having had continuous out performance, which saw big alpha generation against the benchmarks and our portfolio. Now the reverse has began to happen.

NBFC stocks had big run up, which stretched their valuations, now probably the market is selling them to accumulate PSB’s. In my opinion, just infusing capital cannot take a business out of mess, unless the management is responsible. One more thought that I heard from the markets, banks get capital from Government and soon there is election and they will have to waive off farmer’s loans, which will eat up 61K crores.

Ultimately, Government is playing, using the banks as a tool. With the kind of moves that the banks had today, it brings concern on the future rally in the markets. Mutual Funds having exposure to banking stocks will show enormous gains tomorrow, while the same will not stay for long as what goes up has to come down too. And here, there is no real value, so the fall will also be drastic.

Liquidity from retail participation has been driving the markets where the earnings have been subtle, now the current move to breach 33000 on the SENSEX will bring in more investments. People who were waiting on sidelines will take a plunge, just to ensure that, they don’t lose even more opportunity. And this money is coming into the markets after seeing the gains of the past 12 months, expecting that the same will repeat. Even a slight unsteady move from here, the same retail money will become a pressure to the fund managers as they have to sell to meet redemption requests.

Then, they will go out and complain that Mutual funds are not good investments, it is a gamble.

We have been waiting for a correction since 7 months now, the markets have defied expectations and gone far away. Now, if it has to fall in place, the impact will be high too. Looking forward to some challenging times in the coming months.

Beating the benchmarks continuously

We had another good day for our portfolio today. After having very strong gains from our portfolio stocks which has been giving us the edge to out perform the benchmarks on a continuous basis, today again we managed to hold strength.

SENSEX was down 0.36%, MidCap was flat & Small caps managed a positive close of 0.36%. Our portfolio managed a 0.30% positive close today. As we are holding just above 20% of our capital in cash, it has been a good number for the day.

Edelweiss Logo

Stars for the day are Edelweiss with close to 5% gain and Zuari with a near 7% gain. Zuari has 1% capital exposure and is a fairly recent entrant while Edelweiss has been there in our portfolio since last year. Hence on the value terms Edelweiss has topped for us today. We do have a couple of under performers in our portfolio like Vijaya Bank which had lost 5% today & has given a total loss of 30% so far, having been one of our very poor holdings, while we are holding this stock as its balance sheet numbers were good and that is the reason this stock qualified its entry into our ranking tables. Himadri followed with a 3% loss for the day, while this stock has had a good run up, so, giving back small gains is normal.

Print

In spite of tensions across the globe due to the nuclear face off by North Korea, where the global equities took a hit, our portfolio has been standing strong. Works around the thought that, there is good flow of money into the market and all that money is chasing quality stocks.

Sectors that have been doing good in the markets now are Home construction, Cement, housing finance & NBFC’s. As we have good amount of exposure in all these sectors and not have any of the weak sectors in our portfolio, our performance is great.

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.

 

 

 

 

 

 

 

 

Performance report for July 2016

Markets have been doing well and there are media reports that there can be some correction. Which is true? Fundamentally on a broader perspective there is not much change seen in the earnings of companies. Then, why did the market take off post budget? Foreign Portfolio Investors who moved out of our markets post China crisis have returned back. FPI’s have poured more than $1 Billion into our markets.

Perf.31.07.16

When such high amount of money comes in, it will move the whole markets and that is what has happened. Businesses that were fundamentally strong, though there were very few, began to

Following BREXIT, markets have taken off well due to FPI inflows. More than a billion dollars have been invested in our markets in the last one month, which has helped in markets giving a good growth.

Metals & Infrastructure sectors were leaders in returns as they are moving up from the bottom, while on the fundamental side, the companies in these sectors are yet to show strength.

BREXIT and saturation in the BFSI segment which was contributing to growth in the Technology sector has turned the sector into the weakest in the prevailing markets.

SENSEX gained above 4% in the month of July, in line with our performance which stood at 4.20% for the month of July.

Our Exposure:

Being exposed to the right sectors that have the potential to get the best growth in the prevailing markets gives us an edge in performance. Our systems have ensured that we are invested in the right sectors. Presently, we are overweight on Financials, Cement, infrastructure, Sugar& Paper. NBFC businesses have got into an advantage position against the traditional banks. NPA’s position of NBFC’s has been fairly low when compared to the PSU peers. They are also placed well in the rural markets where the next thrust on the business growth is expected to happen. Likely boost in the consumption pattern after the 7th pay commission is getting factored into the market.

Financial sector has above 12% exposure in our portfolio. Bajaj Finance & Bharath Financial has been consistent performers following their robust result announcements.

PRS.Sector.31.07.16

We have had increased exposure into the Basic Materials sector comprising Metals and Chemicals, the sector that was down in the last year. After a good base formation there are some green shoots visible in this sector. Exposure was reduced in the Technology sector following weak performance numbers from the businesses in this sector.

Merger of Oil Marketing Companies into a single company was good news which helped the leader of this sector HPCL have good gains.

Result season though not very good on the broad perspective, it has pretty well on specific stocks. Stocks like Bajaj Finance, Bharat Financial, etc., have given phenomenal gains following result announcement. Good monsoon and subsequent rural demand have been helping in companies that have good rural presence gain momentum in the markets.

GST becoming a reality soon is also helping service sector businesses to gain as they are the biggest beneficiaries of this move. Following no new stimulants that have uncertainty in them, which can drive the markets from here, we are having small corrections and this correction is required often the markets to move out of weaker holdings and add new stocks into a portfolio.