SENSEX stocks of 2020.

classic350_right-side_blue_600x463_motorcycleIndia is the world’s best economy today. Following its robust journey that is going to come up in the next 5 years, there is going to be a dramatic shift in the whole economy and with it even the economic barometer of India, the SENSEX. The SENSEX will also undergo change by replacing some of its constituents. Those stocks that will take a space in the future index will be the stars of the markets in the next 5 years.

What if we can identify them and be invested in them?

The growth those companies will have is going to be tremendous and the potential for profits will be equivalent. The expected stocks that can move in to the SENSEX, the list is big with some new not yet listed companies too. Though for the new ones we may not have a direction, for those that are existing, and if identified and invested, can give great gains.

Some of the company’s whose are likely to move in are: NESCAFE

EICHER Motors (Royal Enfield Bullets)

Page Industries (Jockey and Speedo brand products)

TITAN (Watches and Jewelry)

NESTLE and the likes.

Companies that have premiumisation as their focus are likely to shine bright. So, look for premium products in the market and the companies that produce them and be invested in them, chances are you will end up having a goldmine.

jockey-logoAt present our portfolio contains the first 2 names and we have been holding them for quite a long period, in these years that we have owned these businesses, they have showed continuous growth in their sales as well as profits. If they continue the same for the next 5 years, we will still have them. While, there is no guarantee that it will be so.

In the last year, there were some companies that made it big on their growth and become the darlings of the market. Some of the best ones are

Ashok Leyland, Britannia., HPCL, Baja Finance, Ramco Cements, Maruti, TCS, Ultratech Cements, PVR & Kotak Mahindra.

And there are a next set of business that are showing signs of reaching for the best. They are Canfin Homes, TCI, Tata Motors, Orient Cement, Persistent, Heritage Food and BHEL.

These were the names that have come up in the ET500 listing.

Among the above names we are invested in about 7 businesses, while we have doubts on some like BHEL, TCI etc., while if they qualify our parameters in the future we will definitely look at adding them in our portfolio.

By being invested in the best performing companies, our portfolio is managing to grow the best. Last year we had an Alpha of 63% against the NSE 500 Index, This year in the first half, so far we are at 28% Alpha against the NSE 500.

We will continue to grow in the same manner adhering to the best practices and innovative thoughts.

Alembic is strong, Lupin is weak, and we got it right.

alembic_600The 2nd quarter results for both ALEMBIC PHARMA and LUPIN show a very different picture. ALEMBIC PHARMA had a 83% sales growth and 273% profit growth. While LUPIN had only about 2% growth on sales and a negative growth of above 35% on its profits.

Both these companies were in our investment portfolio a couple of months back. Lupin moved out following the slowdown of its results in March 2015. It was the time the stock made a steep rally to 2100 levels and took a beating after some news in the media that they are facing challenges in the US markets. We made a small profit of 20+% on our investment which was on hold for a couple of months since September 2014.

lupin_pharma600On the other hand ALEMBIC PHARMA has been a steady performer and we continue to hold this investment which was picked up in the early 2014 at around 200 a share. This investment has so far given us about 200% profits, not very big when compared to stocks that have made more than 500% in a year like CEAT  & EVEREADY. While it has been a good investment for the portfolio.

Post our exit in LUPIN, the price of its stock kept moving higher giving us a sticky situation as to, whether we missed a rally in a good stock, because media reports were favouring LUPIN on its performance. We struck to our discipline of not holding an investment if the company is not growing. Now, we don’t have any regrets, in fact we are happy, our system ensures that we are invested in the best businesses across making the BEST POSSIBLE PROFITS to our investors.

Pharma Sector is the strongest in the current markets and among them the Midcaps are the leaders today. Our exposure to Pharma sector is considerably growing too.

Dollar comes back to India.

Dollar comes back.22.10.15In August 2015, when markets crashed post China Crisis, FII money fled out of our markets. Though it did not cause much damage to the retail investors, because the losses were mostly in the large cap stocks while our retail investment was mostly in the Midcap space.

FII money went out of our country for a reason. The expectation that FED will reduce interest rates in the US made the FII’s pull out from the Emerging Markets to park the investments in their countries in order to reduce risk.

When FED postponed the decision to reduce rates, by which time most of the money had moved out. The only possibility was for the money to come back and India was the most favourable destination. On 15th September in our article “Mid Cap stocks are stronger than their large cap peers.” We had written that, all that is going to happen is positive for India. FII money will soon come back, it became a reality.

In the first 20 days in the month of October, India has received 4675 Crores from FII’s. As this money is reaching here our SENSEX has made a near 4% gain in the same period.

Somehow, FII’s made some wrong decisions, while they are pretty fast to take responsibility and change. Now, their investments are in the Midcap space. The advantage here is that, this segment is already low on liquidity and pretty strong. With the additional flow of capital, wanting to buy more in this space will increase demand far higher than supply and that will result it very high valuation for the stocks.

One of the Mid Cap stocks, Britannia has in fact given more than 10% profits in the last one month alone. Some stocks like KEI, DEEP Industries, ITD Cementation etc., are having good runs in the market.

In our portfolio that already has investments in these stocks; we have added exposure and have been gains. We look forward to have a small correction in the markets, post which, our market is going to have a big rally in prices.

How to be a winner in stock investing?

I had written an article on who is smart, the FII’s or the DII’s (https://bravisatempletree.com/mid-cap-stocks-are-stronger-than-their-large-cap-peers/) a couple of months back. I did not expect that so soon we will get back to square one. In one of the recent data on how the investments have been happening post China crisis, it was sad to note that again our retail investors have caught the tiger by its tail.

HerdMentality Holdings.19.10.15

The public participation had helped the DII’s to have larger exposure into the Mid Cap space which was the performing segment in the current bull rally. FII’s got their fingers burnt with their large cap exposure. Now, the retail data that comes out shows a sad story. FII’s were smart again, they learnt from their mistakes, changed fast. While our retail investors are still in the same swirl.

To be successful in stock market investment one has to be invested in companies that are big growth stories, both fundamentally and technically. The list of stocks that the FII’s have bought as per September data shows that they have placed themselves perfectly in those companies that have strong price patterns. Whereas, our retail investors have made perfectly wrong decisions by buying into stocks like Amtek Auto and Aban Offshore. These are companies that the FII’s have discarded from their portfolio.

Why people have bought into these stocks?

When we experience something good, we invariably want to experience it again. While doing so we naturally get carried away and take the experience in face value. Same thing happens in stock investing, when we see the price of a stock at a particular price and decide to buy into the stock, while it keeps rising not giving us an opportunity to buy, then one day suddenly it corrects and drops to some extent from its high. For us, it is a cheap stock and we load it into our portfolio. Little do we realize that the stock price has fallen for a reason?

For example, AMTEK AUTO is down because it has defaulted on its debt, a very big 15000 Crore debt default is staring large at them, it is also brought sleepless nights to fund managers in JP Morgan who have large exposure in this company’s debt. Similarly Aban Offshore is down because of crude price drop, will it regain its glory, is not known for now. When such impulsive investments are made, it is obvious that these investments will either stay flat or drop further. And when it drops, we tend to add more to our holding in the thought of averaging our losses without realising that, when we add investments into an already losing investment, we immediately add to our losses.

Over a period our investment will end up in a loss and what we talk about our experience to the outside world is that the stock market is GAMBLING.

Some of the exits from the retail segment like KEI and DEEP Industries too are wrong, these are stocks that have good potential for growth.

Be invested into good stocks, your investments will naturally be profitable. If the investment crosses 5 years, you’re down side risk is absolutely zero. And the profits will be the highest.

6 out of 11 top earners in our portfolio

11 earningBoosters

The second quarter results are likely to be subdued and will impact the markets in the coming weeks as results get announced. The list published in ET on 9th October 2015 shows some companies that have the potential to outperform the current quarter on the growth front. Among the 11 companies that are listed above, our portfolio have 6 of them.

As we can see in the list of expected top performers, the highest concentration is from the Pharma sector followed by the NBFC sector. In our portfolio too, we have increased exposure towards Pharma and NBFC segments a couple of months back & this happened as a dynamic process.

In 2014 our portfolio had more exposure into Auto Ancillary companies, as months passed the stock price movement of these stocks began to slow down, showing signs of tiredness. About 2 weeks before the Volkswagen issue came to light, almost all of our Auto segment exposure began to take exit. When Volkswagen issue got reported and the market collapsed, where most of the ancillary companies having presence in Germany took a big hit, out portfolio sustained lower damage. Just about that time the₹15000 Crores,  Amtek Auto default got reported, which shook the debt Mutual Fund market where JP Morgan fund had big exposure and they had to split the fund and bring controls on redemption. There are many PSU Banks which are likely to take a hit from this default.

Following our exits, the overall exposure in stocks got reduced to 75% of the capital, thus protecting the portfolio from the negative bias the markets had prior to RBI policy announcement reducing interest rates.

RBI decision came as a surprise, which Raguram Rajan has made us accustomed to since September 2013. Markets began to rally; mostly short covering, took the market to higher ups, while the strength seems to be waning now as the expectations from result season is tepid. Following results announcement, if there is going to be any weakness; our portfolio has got fairly protected due to our lower exposure and having investments into companies that are likely to give out good results. While the market began to gain strength, a couple of new stocks like BEML, Deep Industries, India Bulls housing have got added to our portfolio.

As the result season unfolds, there would be more clarity about which companies have greater strength in performance and those companies will automatically get added to our portfolio, from where, we will be prepared for our next big journey in the market rally. Being invested into the best businesses gives great confidence about the performance. In the last 3 years since we have been tracking the portfolio performance, we have achieved 68.50% gains, whereas in the same period the SENSEX has grown 38%. We have managed to achieve twice the return provided by the benchmark.

 

Coffee day IPO. Subscribe or not…

1320676429957Coffee Day IPO that is opening for subscription on 14th October 2015 to raise 1150 Crores from the markets. The offer is at a fixed band of 316-328. Coffee Day will become a new kind of business to get listed in the markets, should the retail investors go for this investment?

Some of the statistics that can help us decide on, whether to investment or not.

  1. This company is not a single business entity. It is a group that consists of Financial Services, Logistics, IT-ITES business, Hospitality and also combined with the investments in Mind Tree.

First suspicion arises here, only businesses that have core competency have more value among mature investors. This model is                              confusion. Why all these entities have been merged?

  1. Apart from promoter ownership of 92.74% in the company the other major shareholders are KKR & Nandan Nilekani. KKR being the shareholder is good, as this company is known for some good selection of investments, while all the choice they make may or may not be correct. Nilekani being invested is not a surprise.
  2. The company has 1472 outlets across 209 cities having a market share of 46% of the Indian market. There are plans to open 45 new stores each year for the next 3 years. Something we have to note is that, the number of stores that are being closed down for various reasons is about 25 in the last 3 years and it expected to increase to 40, which means that the growth is going to be negligible. And so many franchisees moving out of the business will create a negative publicity to the company and hinder growth.
  3. Is the business making profit?

FY15, loss is ₹77 Crores. In FY14, the loss was ₹21.40 Crores. Phenomenal increase of losses is not good. In the nine month period last              fiscal, the company had losses of ₹75.20 Crores which in the last quarter got increased while it was lesser loss.

Why should someone invest in a loss making company? Well versed investors will not.

4.         The company has a total net debt of ₹2863.83 Crores, of this ₹500 Cr is going to be cleared after IPO. To service this debt alone the                        company has to make a minimum of ₹350 crores profit per annum. Even if the company manages to have a 25% Operating Profit                          Margin like the IT companies, which is a distant possibility, the company’s sales should be ₹1400 Crores which looks like a distant                    dream, at least for the immediate future. Still the Profit will be zero or negative.

Given a choice, we will never think of owning this business. So, how will this issue sail through? The public obviously and some institutional investors like Mutual Fund houses who take to the fancy of owning this business. The decision will just be on the basis of the visibility the company has through its outlets.

This issue will kick start the IPO losses in the current bull market. IN case the stock performs well in spite of all these issues, never get in, lured by the stock performance in the markets. All the hype will also be due to the brand presence craze, if it is.

Please be advised that, a company that is making losses from its business will not be able to command good stock price over a longer period. It will very soon adjust to the actual valuation of the company, which will be the fair valuation. The valuation the company has made for the purpose of IPO will vanish into thin air very soon.

Similar would be the case in future when a number of startup’s will hit the market in a couple of years, where the hungry or greedy investors, those that are pumping in money to the startups today will take exit from their investments. If the public gets lured, they are struck for a life time, losing their hard earned savings.

This IPO should have come into our market a little later, it is unfortunate that it is hitting the market, even before the other startup’s are even thinking of getting in. Whatever happens is for good.

Do not get lured and get struck. There are a number pf businesses which are having very good prospects, invest in them and grow your wealth. Later if Coffee Day becomes profitable, then we can think of investing in it. For now, let it work its way to profitability.

-Views expressed are of the author & may not coincide with industry views. Investment decisions shall not be made based on the writeup.

In a young investors mind……

One good question on Quora that interested me and for which I wrote a lengthy answer, it can be helpful to many small investors who think Mutual funds are not good investment assets.

Venkat Chitteti

Hi Deiva Ramesh, Today you answer my question 25 years IT employee from middle class family investment. One of my friend suggest me this, Kotak Mahindra Bank (3 in one) Savings Account cum Trading Account. It has a good research team. Every month save some amount from your salary and deposit in Kotak Mahindra Bank. Slowly buy 4 SBI shares every month. Later if you get a promotion you can start investing in Mindtree and ITC. L&T is also a good stock. Do not invest in Mutual Funds.

Answer

Deiva Ramesh

Mr. Venkat,

At first, thank you very much for your compliments.

Why do we invest, any investment for that matter?

To grow our money right?

We go to stocks assuming that we will be able to grow it much faster and know that there is a little higher risk involved to attain this goal.

Now comes the quantification of the risk. How much risk you are willing to take?

At the most about 10% of your capital or a little stretched up to 15%. Assume that you have invested 25k on a slow process and you find your investment value is 20k, will you still have the same enthusiasm to put the next month’s investment into the same stocks?

I doubt.

Mind will naturally check to see other alternatives, probably another stock or maybe even other asset class. Once a person reaches this stage, his tracking of the previous investments will fade and over a period, it will be junk investments.

And in case of employed people, no one can guarantee that they can give the same attention to the events in their life as they give at any particular period.

Again even this is pretty much natural for any human being.

After a certain period, you will lose interest and the investment will be losing more due to loss of time value.

One can just not park money into something without knowing how it will be 6 months down the line, a year from now etc., if there is no clarity, he will end up losing the investment.

I have a client of mine; he is emotionally connected to investing in L&T and SBI. For the past 8 months, he has been buying both these stocks; L&T from it was 1850, now it is 1450. SBI from 280 and now it is 240.

Of all the stocks why these two?

On the back of the mind, there is a thought, these are pretty good companies, even if India has to collapse, these companies won/t collapse.

He used to regularly put 10K each month, now he has slowed down.

Having investment in few companies is more higher risk, and in today’s context there are retail investors coming to the markets to buy large cap stocks, just because they feel that the valuation is pretty low than what they had seen just a few months ago.

For some companies that have good fundamental strength it is true, they are available cheap now. While it is not the same for many front line companies.

Anticipation & caution as markets go volatile.

lower-interest-ratesAfter the August sell off post China Crisis, September began with a consolidation while our PM met with the Industry leaders, bankers and economist to get ideas on managing the prevailing global turbulence. He had requested the industry captains to increase their risk and step up investments. The industry leaders used this opportunity to ask for policy actions that will improve the ease of doing business and the need for the interest to be reduced at the earliest.

This action brought strength into the markets which got supported by the European and Asian markets showing recovery along with some strength in the Indian Currency. Following which Government approved several reforms including the allowing of telecom companies to sell radio waves, added as a booster to hold support for the strength in the markets. The European markets charged further following the rise in exports and imports in Germany.

However there was still a lot of caution in the markets as investors were anxious on the outcome of the US Federal Reserve policy, which turned to be subtle as the cut was postponed. There is expectation that the strong fundamentals of India will provide enough protection from the global developments.

Then came, the sudden news of Volkswagen cheating the US markets with a fake emission report which shook the automobile stocks worldwide, Volkswagen lost 48% of its stock value in 2 days, which also impacted many of the prominent Indian companies having big presence in the European markets like Motherson Sumi, Bharat Forge, Bosch etc.,

The reports that the inflation went down to 3.66% and the Wholesale Price Index being negative at -4.95%, was a good stimulus to the markets and then followed the surprise from the RBI with a 0.50% interest rate cut, after which markets went into rally mode.

The ambitious goal to have the inflation at 6% by January 2016 looks like an achievable target. The RBI has now started working towards having the inflation at 5% in 2016-17. All these developments will take our economy to levels which we haven’t seen so far in our life.

Even after all these developments FII’s were net sellers while the Mutual Funds kept continuing with their buying spree in the markets. There are fairly high chances that the FII’s will return back and with a higher allocation for India.

In the meantime, Saudi Arabia withdrew about $70 billion from global asset managers to bring down the widening deficit & reduce exposure to volatile economies as their economy is going into a recession. On the other side of the globe Prime Minister Naredra Modi’s bilateral meet with the US president Mr. Barrack Obama concluded on a high note. Among the countries present like Pakistan & China, India became the centre of attraction. Business captains in the US committed to more investments in India which is a very nice development for our economy.

What was done on the portfolio?

There were 5 exits, 2 reduction of exposure, 6 additions and 2 increases in exposure. Our portfolio is going through a dramatic shift. In the first week of September we moved out of MM Forgings and Bharat Forge well before the Volkswagen news hit the markets, thus saving bigger losses. SKS Micro was exited after the company missed the Small Banking license. Schneider and Sun Pharma Advanced Research moved out of our portfolio. We brought down exposure in Cadila and Welcorp by 100 basis points following their ratings coming down on our ranking tables.

MaduraBrandsOn the additions side, we had 0.50 basis points increase in exposure to Aegis Chemicals and Cosmo Films and have added 100 basis points new exposure to Britannia Industries, Himatsingka Seide, JMC Projects, FDC, Aditya Birla Nuvo and Deep Industries.

Auto sector exposure is getting reduced considerably and is getting replaced with companies having good exports revenue and consumer centric businesses. Weakness in the Rupee is an advantage for companies having export revenues.

This festive season, as you shop for your Van Heusen, Louis Philippe, Allen Solly, Peter England and Planet Fashion for your clothing needs, you will be making a small profit to yourself due to your ownership in Aditya Birla.

Britannia has made a packaging change and has gone into a new promotion, its business is growing, and so, the next time you pick a ‘GOOD DAY’ biscuit pack in the store, you will be contributing a small profit to yourself.

We also have exposure in Hindustan Petroleum, every time you fill gas at the HPCL bunk, you make a small profit.

Feels good that our portfolio owns companies that produce most of the daily use products, just our consumption will not have an impact on the profit of the company, while we can take pride that we are using the products of companies that we own, is it not a good feeling?

Eveready hikes battery price.

BatteryAAThe management of Eveready Industries have increased the price of batteries by 5%, to manage costs that have got increased due to the rupee depreciation. This is a very bold decision, though Eveready commands a very big market share in India for Batteries, the price increase can put the competitors at an advantage, mostly the low priced Chinese products that come into India.

In his interview with CNBC, Mr. Amritanshu Khaitan, MD, Eveready Industries reiterated confidence that the competitors will follow soon.

This confidence shows the belief the management has on the business and the added profits this price increase is going to bring will increase the profits and the price of the stock too. In last June Eveready stock was prices at ₹45, when we added the stock to our portfolio. Today after about 15 months, it is at ₹290 after reaching a high of ₹370, so far giving us above 500% profits.

The management is expecting to have their profit margins at 11%, from the 3.83% that the company is having now, it is a fairly big jump and it is going to take the stock to greater heights.

Eveready has entered into LED lights business, where it is competing with many prominent brands. The advantage we found with their product when we shopped for a few lights was that the price is very competitive against the other brands. This will push the sales, which is again an advantage for our investment.

RBI has approved the increase of FII limit to 49% of the company’s equity. The present FII exposure is close to 44%, which gives scope for another 5% increase and to that extent there will be demand for the stock in the market and it is add up to its price rise. Just because foreign investors are having a big stake in the company does not mean that the company is going to be ever growing, there are many instances where some FII investments have gone wrong too. The advantage we have here is that, since the company is showing good strength, FII’s will be willing to take exposure even at a slightly higher level and that will be at our advantage as the stock will move up faster. We will track the performance & stay invested only till the company is growing.

Will `October Effect’ Play Out Again on D-St?

Mark Twain QuoteWhen there is fear in the mind, everything you look around gives a bigger challenge. The comment Mark Twain had given here shows that very clearly. After weakness in the market since August, post China Crisis and Volkswagen Scandal, now media is searching all possible fear thoughts to intensify the situation.

If there is fear of losing, not only October, every month will be a disaster, one who has such thoughts will end up not having great wealth while his friends and family live a happy life taking  a little extra risk on their investments.

There was an article in Economic Times on 1st October 2015 with the following headline “Will `October Effect’ Play out Again on D-St?”

October FallsInvestors generally tend to become nervous in October because the biggest market falls in 1929, 1987 and 2008 happened during this month

And there is a supporting table showing downward moves in the month of October on the SENSEX.

If October has a historical downward effect, why has it not occurred in all the years? Apart from 1997 to 2000, where there was higher falls in October which was continuous, there is a lot of gap and it does not have any pattern.

1997-2000 was a prolonged bear market for India, and it is because of such a long base formation that we have had the tremendous rally post 2003, which has taken the SENSEX to a 600% gain in the next 15 years.

2008-09 falls was a correction after the phenomenal rise and after 2010; 2011-13 were almost flat years which has helped the next rally that is happening now.

In the years that had weaker October’s, there was reason for this thought to hold good. Markets had on a overall manner gone into tightness following adverse news flows. Prior to every such weakness, the markets have had maniac runs. In 1929, rapid growth in Bank Credit and Loans made people take huge loans and invest into stocks, where actual valuations were far below, collapse was huge. In one year markets lost 90%.

In 1987, on a single day, market dropped 22.60%, this was again because of maniac buyouts and mergers using liquidity created by sale of Junk Bonds by the corporates. People were buying into companies that had literally no assets, all of the price rise was happening due to the rush to buy something that is available and at whatever price it was available at.

More similar to what is happening now in the Startup space. Fortunately, we don’t have any of the almost zero value loss making e commerce businesses listed in our exchanges, while it will soon come up. For now, the start up space is raining funds. Those people who earned fancy salaries in tech companies have loads of cash and are chasing every idea that is coming in the markets, as it is, in just about 2 years, there is some tiredness seen in this space. Whereas, this rush will not end here, it will take away more greedy minds by getting listed in the markets. And that will happen in the next 3-4 years, till then India is safe. The moment you witness junk companies coming out with IPO’s and they getting subscribed multi-times, close your wallet for investing and open your bank account to receive the sale proceeds of your stocks.

Without second thought liquidate all holdings. Wait!, it is still way to go to reach that situation, until then capitalize on the rally, it will for sure be a maniac rally, the difference is that we are just in the beginning, which gives a lot of scope for multiplying your savings.

The 2008 crash, again happened due to excess lending for home sales, financial assets tumbled, some big names like Lehman Brothers, Bear Sterns, AIG, Black Stone vanished into thin air

Will it happen again this time and this october?

No! in FDIAt the macroeconomic level, it is not. At present we are just in the beginning of a bubble, the Startup bubble, it has a long way to go. And with this bubble burst India’s growth story will come to an end. So, the intensity of the crash will be pretty severe, more than what China is facing now. Whereas, before this crash happens, there is a wonderful opportunity available to make profits that can serve us for a couple of generations.

What is happening in our economy now, why are we having weakness?

There was a lot of expectation on the new government to deliver, which has not happened to the extent thought off. While, the ground work is seriously on. Some indications for strength that India has, have been seen in the recent developments.

Capital from the US and other developed economies are showing high interest to invest in India.

This week when Modi visited US along with Li Xinping and Nawaz Shariff, India has got the highest attention. Businessmen across the US have shown great interest to invest in India.

Facts show that India is attracting highest FDI among emerging markets. All of China’s losses have got added to India. When so much money is coming to India, it is obvious that there is going to be some phenomenal activity in our economy.

RBI has surprised with a twice the expected interest rate cut, which will begin to show up in the economy as the banks lower lending rates & industry begins to borrow and grow business. Due to the drop in interest rates, home buying will show an uptick, car sales will go up and many similar growth patterns can be seen.

Post China Currency issue and Volkswagen Scandal; it will take some time to show strength, it may take another 2 months, while the next biggest global growth story is going to be in India.