SENSEX goes Partying, Mid & Small Caps left behind

January 2018 has brought a lot of good news like the IMF reports suggesting good GDP growth numbers, PM giving the keynote at Davos, world looking at India as their investment destination and along with that some very interesting movements in the market. Broad indices like SENSEX & NIFTY going higher and higher while the mid & small caps are going down.

Due to SEBI’s decision to re-organize Mutual Fund portfolios, to have one scheme per category and Large Cap schemes should have a prescribed percentage of large cap stocks in their portfolio. Until now, funds used to have good amount of mid and small cap exposure which helped them achieve better returns against the benchmarks. Now, that has got changed and hence, the shuffle of selling mid and small caps to add large cap stocks to the portfolios.

First instance of the regulator’s over interference on the financial assets has begun to show up. Mutual Funds are now forced to buy more of something that is not good in quality, the reason why they shunned them. Because of buy orders in huge quantities that have created artificial demand, prices are going up and with them the broad indices too are reaching for higher highs. Once the buying is over, markets will begin to react.

The huge flow of retail money, which has come into the markets after seeing big growth and with belief that the economic activity is really strong to continue the growth momentum, is going to get a big surprise. All the belief’s and the environment are perfect without any change. The only concern now is the regulator who in the thought of bringing more transparency is creating more challenges to the market participants.

This over indulgence will create underperformance and deplete the quality as well as the belief of the retail investors, who have put in a lot of investments into the mutual funds expecting returns that were made in the last year. When the retail investors experience poor performance, they will begin to withdraw their investments which will create pressure on the fund managers to liquidate, to meet redemption pressures. Which will again force them to sell mid and small cap stocks which have been the performers and further bring down the overall performance of the schemes.

In India, many a times, it is the regulations that are causing bigger challenges and bring down businesses. Later, the blame goes to the operators.

 

IMF Forecast taking SENSEX to 36000

This video talks about:- IMF forecast on India’s GDP growth for 2018 and 2019 which took the SENSEX and NIFTY to their new high of 36000 and 11000 respectively. A new high and how it is beneficial to the investor. India’s visibility in the Davos, World Economic Forum meeting where our Prime Minister Mr.Narendra Modi opened the meet with his keynote speech. India’s development in the last 20 years.

SENSEX At A New High With 35000 Points

The SENSEX reached 35000 points on 17th Jan 2018 after the Government announced that it is cutting the additional borrowing planned to 20K crores from 50K crores as tax collections improved. There were two positives in this news, and the bulls partied to take the SENSEX past another new peak.

When borrowing is less, it brings down the deficit in the fiscal expenditure and gives us the signal that the economy is getting stronger. Along with this, the second good news is that tax collections improved.

We have had budget deficits since time immemorial, and most of the time, the shortfall is made good by selling public sector companies. In FY18, we planned to sell 72K crore, and for FY19, the disinvestment target is set at 90K crores. If we keep selling like this and spending the money to meet the shortfall in the budget, at some time the sources will be exhausted. When that happens, from where can the Government get money to meet expenses?

Will we reduce expenses?

Like it is said for individuals, “live within your means.” We are a growing nation and have a lot of development that needs to be looked into pretty soon. Tax paying should become a solemn responsibility of the citizens, not just as a legally regulated mechanism but also as a cultural norm. The idea that we can piggyback on taxes paid by some citizens is wrong and contributes nothing to the economy in the long run.

Thus, when tax collection improves, it is a sign that income is coming from a source which need not be paid back like borrowings or that one need not part with some asset like selling PSUs. If the collection has improved because of people becoming more responsible towards the nation building, it is an excellent sign of progress.

Instead, if it was forced on the people, we should appreciate the government for having thought differently to get something different from people who are hell bent on not paying taxes.

If people become responsible, nothing can be a better change than that because the whole nation can go through a phenomenal growth phase which will benefit every citizen. Today, our tax paying population is only 1.97%. This means that even if we take out children along with retired people at 50% of our population & unemployed people at 20% of the population, nearly 28% of earning people in our country is not paying tax. But they are enjoying all the benefits like roads, power, buses, railways, parks and all other public services.

In a way, it can be said that the 1.97% is feeding these irresponsible citizens. The greater irony is that these non-payers justify their actions and boast about paying taxes but are first in line to complain about the lack of civic amenities. Can less than 2% of the population ever pay enough tax to feed the rest of the people? In reality, tax evasion is akin to begging and living at the mercy of the elite 1.97% population.

As the tiny percentage of taxpayers slowly begins to grow, either through their willingness or government force and the balance tilts the other way, people themselves can self-police and bring the evaders to task. This condition is soon to happen in India.

IMF Forecast taking SENSEX to 36000

MF forecast on India’s GDP growth for 2018 and 2019 which took the SENSEX and NIFTY to their new high of 36000 and 11000 respectively. A new high and how it is beneficial to the investor. India’s visibility in the Davos, World Economic Forum meeting where our Prime Minister Mr.Narendra Modi opened the meet with his keynote speech. India’s development in the last 20 years.

2% Population Takes Care Of Our Whole Nation

A country like India is poised to become the next superpower. We are a rapidly developing nation because of our readiness to adapt and grow under any and all circumstance. While there is a more significant transformation happening to become a developed nation soon, revenues from tax receipts are severely low, almost appalling.

Only 1.97% of our population are taxpayers. Even if we take out children along with retired people as 50% of our population and unemployed people as another 20% of the population, more than 28% of earning community in our country is not paying tax.

However, this does not stop them from enjoying civic amenities like roads, power, buses, railways, parks and all other public services.

When we see a dug up road that takes a long time to patch up, we see the apathy of an irresponsible bunch of citizens who have the time to complain but not so much to bring their earnings into the system. The tax obtained from even just half of these individuals can help shape the nation’s growth, but these people lack the long-term vision required to understand that a better nation cannot be achieved by building walls around ourselves.

In a way, it can be said that the 1.97% of the responsible population is feeding these irresponsible citizens. As the tiny percentage of taxpayers slowly begins to grow, either through their willingness or government force, the balance will tilt the other way; people themselves will self-police and bring the evaders to task. That said, force measures can yield results only for some time, and people always find a way to evade tax no matter what norms are put into place. What is needed is a change in moral conduct, much like the Japanese who value their time immensely. To see this difference, we must educate our children and set the right examples for them to emulate. Remember, evading tax is a lot like living on the alms provided by responsible citizens, and no one wants to be a rich beggar.

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.

Taking close to a 3% hit due to high beta holdings

Today our portfolio takes a near 3% hit where the benchmarks SENSEX lost only 0.20%. Some of our high profile holdings like Phillips carbon, HEG, GNFC have been reason for this meltdown. GNFC an indefinite closure of its Dahej plant due to gas leak, the stock tumbles 10%.

This stock was in the sell for us this week, while the trigger got far away due to a big spike the stock had yesterday, which reduces the impact for us from this stock. TDI, one of the primary products of the company which became a high demand product following shut down of global facilities due to similar leaks, gave GNFC the edge to earn big profits. Now, the same issue has come to them too.

As we got the stock in our portfolio in October 2016 at 215 levels, we have made more than 100% gains in this investment and all of it is tax free. Our system was able to identify a company that got benefitted due to global issues and when it came across similar problems, the system is getting us out, after a good profit on the investment.

Similarly, Phillips Carbon, HEG, Graphite etc which has lost big time today, were the big gainers in the last 2 weeks, that has enabled us to have very big out performance against the index. Now, they are giving back. Having high beta stocks in the portfolio will require to face high volatility too, while over a longer period due to prudent management, the performance numbers will be good.

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.