Indian Markets

[Investor Memo] Wise to Optimise Expectations & Review Asset Allocation

Posted by | Indian Markets, Investing Framework | No Comments

In April 2022, we published an important subscriber memo titled ‘Wise to Optimise Expectations & Review Asset Allocation’ While the two pillars of the bull market: Liquidity & Growth are slowing, Export is the bright spot. Following are some edited excerpts from the same. After crashing in March 2020, markets have been on steroids ever since, which implies the ongoing bull market is now two years old. The last six months though have been tepid for markets, but thanks to some outliers in our portfolio like Usha Martin & Gujarat Ambuja among others, the portfolio has continued to show outperformance even during this tepid phase. Extra-ordinary periods like this are generally followed by some pullback or a decent time correction (sideways market). Accordingly, instead of extrapolating this into the future …

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Tenets of Commodity Investing – Framework, Experience & Learnings

Posted by | Indian Markets, Industries, Investing Framework, Stocks | No Comments

In this post regarding investing in commodity businesses, I cover the following: Natural vs Processed Commodities, 10-pointer framework/takeaways based on our experience, How our stock-picking has evolved and current commodity positions in the portfolio.  We broadly divide the commodity universe into two categories – first is Natural Commodities (/Resources); these are nature’s gift to mankind. All one needs to do is just extract these and sell to the customers. Some examples of natural commodities include minerals like iron ore, coal, oil & gas, limestone, agricultural produce like tea leaves, green coffee, cotton, wood etc. Iron ore mining companies like NMDC or Sandur Manganese typically own their mines or have them on long-term lease. To dig out the iron ore, they hire mining operators and pay them on output basis (per …

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Is Real Estate the next Pharma?

Posted by | Business Models, Indian Markets, Industries, Scuttlebutt | One Comment

A few years ago I had made a thematic presentation ‘India’s Consolidation Wave’ at Flame Investment Lab, Pune. The basic idea was to demonstrate using actual data from multiple industries that how some of the better-run companies were consistently growing faster than the industry and hence winning market share from their smaller/weaker/inefficient counterparts. At that time, I highlighted some of the key enablers supporting this trend – brand, distribution, and economies of scale. Later when Demonetization happened in 2016 and GST got rolled out in 2017, the ‘Unorganized to Organized’ became a hot theme and many investors expected unorganized (smaller firms) to shut overnight while organized guys (listed companies) to grow multi-fold. Naturally, these investors and analysts were bound to get disappointed. While I also mentioned GST, in my presentation, as an …

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Memo: Let’s Brace for P&L Accidents But Not Overestimate Impact on Intrinsic Values

Posted by | Indian Markets, Investing wisdom, Stocks | No Comments

(Following is a copy of Memo shared with subscribers of SA’s Model Portfolio) Starting this earning season i.e. of Q4FY20 (& beyond), we would hear a lot of exceptional items in the form of loss of revenue and profits due to lockdown, increased operating expenses, changes in the way businesses operate, etc. For some businesses like Wonderla Holidays, the impact of lockdown is extreme – All its parks are closed and revenue will be zero until they reopen, while a significant cost base is fixed in nature (salaries & maintenance) so the company will report losses for this period. On the other extreme, there are a few businesses in our portfolio from agro-chem/pharma sectors for whom it is literally life as usual. In reality, most of the businesses will lie somewhere in the …

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Financial & Mental Preparedness For What Lies Ahead

Posted by | Food for thought, Indian Markets, Memo | One Comment

The global economy has locked down and experiencing unprecedented uncertainty & volatility. Accordingly, it is ideal for everyone to ensure we are mentally and financially prepared to face what lies ahead over the next few months. Feel like exiting equity? Some of us could be thinking it feels like the end-of-the-world so better to cash out whatever is left. Pick up any book on the history of markets, read the experiences of veterans and invariably every crash feels the same, however, humankind has its own way of making a come back and we always do. Think about it this way, if things indeed go that bad, what purpose would this money serve anyways? However, if things get back to normal, we could witness the mother of all bull markets like the world saw …

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10 reasons why long-term investors shun real estate stocks, and why its time to do the opposite

Posted by | Business Models, Indian Markets, Industries, Investing Framework, MoneyControl Column | No Comments

Whether it is real estate as physical assets or as stocks, there has been a lull for many years now. Will the two always move in tandem? Can real estate stocks do well even without real estate assets picking up? Before that, let’s understand why the real estate business and stocks are so out of favor: It is an extremely asset-heavy business with significant upfront investments needed for buying land and for project development, necessitating the use of borrowed money or settling for a lower return on equity. Further, each project has a long gestation period of 7-10 years. To make economic sense, the project size has to be meaningful, in which case even one or two projects going wrong on location/timing/pricing can push the company behind by a few …

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Only 2.5% of 8,000 Listed Indian Stocks Are Investable; Here’s The List

Posted by | Indian Markets, Investing Framework | 2 Comments

A lot of us have the quest to unearth those high-quality stocks which will create wealth for us, but how do we figure out which are those 15-20-25 stocks worthy of being in our portfolio from over 7,800 stocks listed on the Indian stock exchanges? Looking for the ‘right’ stocks from this vast universe is akin to looking for a needle in a haystack, you often end up wasting too much time with not so satisfactory outcome. As minority investors, it is difficult to conclude with any degree of confidence that a specific company is high-quality, which is often an abused term to just refer to a bunch of stocks which recently outperformed the markets like small-caps in 2017 or large-cap consumer stocks in 2019. But how about we turn the question on its head …

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Corporate Tax-Cut: Implications on Markets, Portfolio & Economy

Posted by | Indian Markets, Issues in India | No Comments

(This is a slightly edited copy of Investor Memo shared with subscribers of Stalwart Advisors’ Model Portfolio) The corporate tax rate (including cess & surcharge) in India has been slashed to 25% from earlier 35% giving a stimulus of Rs 1,45,000 Cr ($20bn). This is a flat rate with no further incentives; companies which are already enjoying some incentives like export-oriented plants or R&D expenditure etc. would have to let go of those benefits if they want to switch to this rate. This is applicable retrospectively with effect from 1st April 2019, so current year’s (FY20’s) profitability for corporate India goes up roughly by Rs 1,45,000 Cr. For companies which were paying full tax at the rate of 35%, their post-tax annual earnings go up by 15% with a commensurate rise in their …

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Nifty at record high: Don’t get carried away; real opportunity lies in these stocks

Posted by | Indian Markets, Investing Framework, Investing wisdom | No Comments

My April’19 Article Written For Financial Express While Nifty is at a lifetime high, the average fall across 3,000 traded stocks is still 40-50% from their 2018 highs. Smaller the market capitalization bigger has been the bashing its stock has taken. Though there is nothing unusual about it – small companies swing wildly in both directions depending upon market sentiment; after all, they are thinly traded with low free-float (non-promoter holding, available for trade) so the rise in volumes can lead to high impact. The onlookers and investors who entered markets recently might have concluded by now that it is so safe to invest in large caps which not only did not fall much in the correction but now when markets are improving they are also participating on the up move. While purely …

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Listed MNCs in India: a good catch, but an opportunity slowly fading

Posted by | Indian Markets, Investing Framework, MoneyControl Column, Stocks | No Comments

My March’19 Column Written For Moneycontrol A basic tenet of long-term investing is to look for high quality listed businesses. This essentially implies 1) they earn returns above the cost of capital (reflected by return on capital employed), and 2) generate strong free cash i.e. they don’t require a lot of capital (fixed assets and/or working capital) to grow revenues and profitability. Those retained earnings can then be utilised either to acquire other companies in the same line of business or diversify. Alternatively, excess capital could be returned to shareholders via dividends or buyback. But have you ever wondered why would a promoter of such a business list his company as it involves diluting a significant chunk of his ownership to minority investors? For instance, why is a business like …

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