A Brief summary of the Micro/Small/Midcap Carnage


(Dinesh Sairam) #402

I completely agree that sudden changes in economics policy will prompt stocks to react–but this is much like how stocks will react to a rumor that there’s an investigation on the CEO of a company (Just an example). And just like the rumor, macro adjustments are better to be ignored in the large scheme of things.

Let’s not forget what Peter Lynch said: “I spend about 15 minutes every year on economic analysis”.

And Risk Premiums are anything but fixed (And no, one cannot ignore local yields and look at the yields of some other country instead), especially in a developing market like India. Here’s the historical Risk Premia for India. The Indian G-Sec’s spread over the US yield (Supposedly the most risk-free rate in the world) accounts for the additional risk and is therefore, locally risk-free.

I simply posit that the value of a stock is always related to how much you can earn elsewhere. In a country of 0% interest rates, I would be extremely happy to earn just 2% on my investments, but that wouldn’t make the underlying stock more risky or less risky. That’s a function of the underlying business itself-- which I’ve attempted to explain in my last post.

Here’s a neat blog post on how stocks tend to correct on the initial news of a rate hike, but actually go on to increase considerably during the rate hike cycle itself (This is in relation to the US markets):


(Bheeshma Sanghani, PhD) #403

This is an informative article. Thanks for sharing. As the article suggests, rising interest can be good for stocks only if the prevailing interest rate rise from really low levels indicating economic recovery which is a good thing.

However If the interest rate passes its normalised level and continues to rise it certainly impacts equity prices.

I think for a brief period in recent times interest rates in India were 6% while the economy was growing at 7-8% , clearly this was not tenable and equity markets were pricing stocks at the normalized interest level so until interest rate normalized increases had no impact. But now, I think we must have exceeded that level and hence the impact is more pronounced.

Best
Bheeshma


(KalyanKool) #405

Hello Everyone,

I’m a novice investor and been investing since 2 years. I have read about the bloodbath in 2008 but I really want to understand from someone who has experienced it. Below are my questions. Would be grateful if someone can answer this at least on a high level

  1. What was the bloodbath like in 2008?

  2. What was the extent the stocks fell and what were the factors that led to it?

  3. Was it the worst fall in Indian markets history?

  4. How long did it last, I mean what time it took for markets to recover completely from such a carnage?

  5. And how does it compare to the current fall?

Thanks in advance!


(Naveen George) #406

Hi Phreakv6,

That is very true. I was wondering just the same. I have been investing and bought mainly in 2011, 2013, 2014 and the prices we saw since then have been crazy in a relative sense.

Only problem is that the high conviction names are still expensive (Eg: Page, Avenue Supermarts, Syngene, Hatsun, Thyrocare, Bajaj Finance, Gruh Finance, HDFC AMC, HDFC Bank, HDFC Life, Cholamandalam, Emami Ltd). Buying above companies still don’t give enough MOS in my evaluation.

What does give some MOS is something like a Yes Bank, Federal Bank, Skipper, Capital First, IDFC Bank etc. But they are medium conviction Ideas.

So it’s a wait and watch game for me now.

I wonder which are the micro/Small caps you have identified.


#407

What about the paper stocks in this carnage? Anyone tracking the fundamentals there still?


(JOSE ABRAHAM) #408

This correction looks really scary. This do not look like a bull market correction. Though I do not know TA, this seems the end of our six year bull market. We may be heading for one-two year long bear market. I may be wrong. But watching market since 2001, this seems very likely.


(Devaki Nandan Tripathy) #409

On first look, fundamentals seem to stay intact in the turmoil. Yesterday visited a paper distributor and as per him, prices are still rising and there is scarcity on the ground, which is a bullish sign.

On a side note, have seen many time the market fall after RBI rate hike. But this is the first time, saw the market fall because RBI did not hike the rates… :grin:


(Shailesh) #410

I have seen two blood bath 2000 and 2008 … These can be brutal

Lets take favourite sector of 2008 which was infra and Real estate … Unitech was profiled by MOSL as one of big wealth creator in their wealth creation studies …
It fell from Rs 516 to Rs 28 in one year … and today it is @ Rs 2 .

Same happened with lot of infra companies , some of which have filed for bankruptcy . Typically in such bloodbath 70 % + of stocks in favourite sector disappear and never reach their old valuation , 20% ++ stocks linger and give below FD returns and < 10% of stocks do really well . Also often new leaders emerge in that sector …

Worst fall in Indian history is very difficult to say as Indian market history is not well documented . But couple of Big shocks were in 1970s ( emergency and nationalisation ) , 1990s ( when India had to pledge its gold with bank of england) . Today relatively we are better placed …

Current market has just started falling … it may take up till Mar / may 2018 to stablised . So if you have money to invest ( say X ) divide it by 100 … and invest that amount X/100 daily in market till May 2019 .


(phreak) #411

It looks to me like RBI has decided to leave the Rupee to find its own level. I sort of agree with that. Why give an easy exit to the FIIs? A rate hike would have propped the rupee and would have helped the FIIs exit better. What has happened I think is that the holding of rates signalled RBIs intention to not bother with the rupee but solely with inflation which according to them is within control. This obviously will spook the FIIs who will try to exit quickly before the Rupee falls further. A bulk of the selling today understandably has come from FIIs who have sold 3370 Cr. I don’t remember seeing such a high number for a day before (or for a week).

I think the biggest winner in all this is IT - Rupee falling further is good news for them. Rate hold is also a good news for them as it will help the interest in equities gravitate towards this sector so I think multiple things are working in favour of IT at this point.

Since I made the mistake of discussing macros, let me balance it with some micro.

In that vein, I really like the current valuation for Sasken. Last 10Y FCF is about 1000 Cr. They have a cash of about 500 Cr in the BS. At a market cap of 1350 Cr, it looks to be a safe bet. If you remove the cash, it is trading at a P/E of 9. It is trading at a P/B of about 2 and has zero debt. Management has given some lofty targets for 2022 but there is some ways to go although they do appear very honest and shareholder friendly (looking and dividend and buyback history). I think about 60-70% of revenue is from US/EU which should benefit from the rupee depreciation.

Risks are that it could fall further to 700-750 if the current meltdown continues but the valuation appears attractive to me and is probably one of the few quality IT stocks that’s available at cheap valuations. A reason for the cheapness could be that they are not a typical IT services company and haven’t shown blazing growth in the past. Another risk is that its a very illiquid stock - which is an advantage if you have the patience. Yet another risk is the technicals where it has broken 200 DMA on a closing basis today.

Disc: I had Sasken in the portfolio earlier and have added further today.


(sincyvarghese) #412

IT is a good space to be in. But then Sasken with so much cash is giving out only 20% as dividend. What the heck are they doing accumulating cash? I don’t know how to deal with such managements but I will stay away from managements who want to accumulate cash. Cash is best in the hands of the shareholder. My personal view only.


(J2EE Professional) #413

its not like that… fact remains that harder and faster the correction equally sharp is the following rally…i’ll just give you a couple of examples from 2001 (since you are watching since 2001)… jan 2004 …5 months and 40% correction on index…may 2006… 40% correction… 2 months… (yup two months)2008 i dont need to tell you :wink: …we also had 2 other 30% corrections in the recent past but not including it as the pace was cool and spread over a few months… all i would say is that if one is in good companies… one need not panic… if you had hedge…not harm is liquidating30% hedge here and adding… one should keep eyes and ears open and analyze all info sanely…if one does that then even a FD investor would find great value in markets today…e.g even in OMCs… yes… i mean it sir.


(Devaki Nandan Tripathy) #414

Monetary Policy Committee has a very specific mandate. Manage inflation and inflation expectations with interest rate. RBI has chosen to stick with that - a very courageous move. It was not the mandate of MPC to fulfill the wishes of certain market participants. Now that both inflation and inflation expectations are heading lower, it would be counter productive on part of RBI to hike rates just because market demands it.

Not only IT, any sector that is export oriented (esp. USD denominated exports) will stand to gain. In the last nine months, INR has depreciated almost 16% against USD. So almost all high end exports (like pharma, IT, specialty chemicals) or exports where India has a country specific edge (like tea and spices) will stand to gain; where as, the benefit would not be as prominent in commodity exports like metals, textiles etc as the currency of our competing countries have depreciated too. Q3 FY19 results may be subdued as positions may be hedged; but Q4FY19 results will be above expectations. Another sector that stands to gain will be Indian producers who compete with imports in domestic market (like paper).

It may hurt some egos (mostly, BJP supporters who see strong currency as a sign of strength) to see the currency depreciated; but ultimately, Indian exports on the long run can remain competitive by either raising productivity or by depreciating currency. As such we don’t have high hopes of productivity improvement, so no other option left except to depreciate the currency.


(s) #415

Please start a thread on Sasken…may be some scuttlebut can be initiated. These companies who are in the background undiscoveref are too good to be true.


(gautham1) #416

Hi Guys,
No doubt the market was overvalued and its still doesn’t look cheap. But this sudden fall is interesting. Not a single dead cat bounce either. Nifty has fallen 12.28% from the peak. (During demonetization it fell 11.73% from the then peak) . In the internet, i see people attributing to various things. 1. NBFC crisis. (But then even other stocks got hit) . 2. Panic selling by retail /margin calls ( But this is too small to make any impact 3. Macro (But its not that it turned bad suddenly) . So i dont think its because of these reasons. Could there be something else going on which we dont know?. I want to hear the views from the experts here. (Other than the overvaluation and macro)


(s) #417

Market is valuation to the base and than run of sentiments…Sentiment is negative. Outflow outstrips inflow …imbalance is reflecting in stock market. Absolute value will still hold even if it dips it will bounce once reflected and endorsed by results. Fundamentally India is a yo yo market. If you are long term market player. …nibble in else wait for the right stock rigjt price. Every market fall is a cleansing act to remove dirt from the system with requlators upping their ante hope it give a more ambitious and clean market till the next rise of the titan


(vipin111) #418

Have seen the Bloodbath of 1992,2000,2008 and now. The common factor is the excesses/scams created in the 8-10 year bull cycles.Excesses don’t just get washed away by sudden corrections only but take time. This is a 10 year old bull market and the way it has fallen my worry is that this might take us to much lower levels than anticipated by many. ILFS,now it seems is our Lehman moment. Coming elections and now Govt not interested in Governance but giving out doles for next 8-9 months is a problem.


(Krishnendu) #419

I used to follow this couple of year ago this was always have been a good business to have but never proven out to be a good stock to hold. Most of their services were given to Nokia and customer concentration was there biggest risk and that is why it has never got the actual valuation it deserved. Though I haven’t followed then in last couple of years . Has that risk now been changed ? Also as a sector the IT & ITES is having a very little room to grow unless it is operating in some Niche area like Tata Elxsi.


(Prashant Negi) #420

Article on present market scenario by capitalmind


(narenarora) #421

Sentiments…they don’t spare the most seasoned investors.


#422

Completely agree that something is rotten in our financial system or in the global market. I will start buying when stalwarts show 50% correction or stabilise at any level. I have seen the fall of 2008 when my PF was down 75% from top but I also saw days when it used to double every six months whenever the recovery started. Only thing is to find out sustainability of earnings and buy at right price. NObody knows the bottom for sure.