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.

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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.

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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.

NBFC leadership & our position in it…..

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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.

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.

27 PSB’s lost 1.14 Lakh Crores in 4 years.

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27 Public Sector Banks have written off 1.14 lakh crores of bad debts in the last 4 years. Here is the efficiency of the banking sector in the hands of the government management. It is disturbing to realize the poor condition our banks are being managed. On the other hand the private sector counterparts are doing good business. What does this mean? Very poor competency among the PSB management, next to zero responsibility in delivering results.

Couple of days back there was a question to me; SBI has come down to 200 from 320, can we buy? The reason behind this thought was that, the SBI stock had been at a higher price very recently, now it has fallen and hence it is cheap. The answer I gave was, the price was at 320 was for a reason and it is the same when it is at 200, now. It is not cheap. In a couple of days from this discussion, SBI stock price came to 160, and again there was the question, now that it is at 160 can we buy now?

What this indicates is, that people of India have developed so much confidence on this bank; it has been part and parcel of their life for generations. Little do they know that, what was in the early days is history, there was no competition, though the management did not have the competency or responsibility, they had the advantage of opportunity at their hands, they got some of the best and some that were useless too, on the whole they made money.

Now the situation is different, private banks are giving this irresponsible bank management a run for their money. All the quality assets have gone to the private players because of the quality and service they provide. Now, the left over business is crap and that is where these PSB’s are rolling their funds. Very soon all the confidence that the citizens of India have on SBI or the PSB’s on the whole will vanish into thin air.

In our portfolio, we don’t have banking exposure since 2013. It was very early for us to move away from banking investments, the reason we got out was because our system did not qualify banks for investment, and their growth was fairly lower in comparison to companies that were showing super strong growth. Hence, our investments moved to those quality assets and now, when the whole market is weak, our portfolio is even more safe as we have moved off from equity exposure to a fair extent, thus keeping the capital protected in times of turbulence.

Our portfolio is 30% in Equity and 70% in short term debt, making the capital safe when the markets are weak.