ValuePickr Forum

Election Punts: If we get a strong government in 6 months

Hi Donald,

I appreciate your view point that we must be flexible and open rather than clinging to a particular approach. But in the same breath, I would like to add that if one is investing with long term horizon in mind with an objective of generating above average returns, the odds have to be in favour of investors to achieve this objective. In my opinion, for long term above average returns, quality of management is absolutely critical unless one is buying the business at extremely cheap valuation. Alternatively, there should be some triggers in place which can change the business environment significantly.

If I understand correctly, our hypothesis is that post election if the strong government comes to power, there will be such triggers in place which will change the business environment significantly. Even if we assume that there is strong and decisive government in place (Which itself is a big assumption) there are some distinct possibilites

)- Even if there is a strong and decisive government at the centre, there may not be any short term solution to long standing issues in some of these sectors (power, oil & gas etc) as many of these problems emanate from structural/regulatory factors and will require stakeholder consultation/regulatory approvals/legislative changes etc

-Alternatively,the government may take steps which actually removes the monopoly in sectors where there is inherent inefficiency built in by the monopolistic behaviour of PSUs thus exposing PSU to competitive environment. If this happen, the whole paradigm for comapnies like Coal India, PGCIL, EIL (to some extent) will change and companies will be exposed to unchartered territory and historical performance/record will hardly have any relevance

So given these number of "if"s involved in the equation,isn’t premature to make an investment decision just because the company is a PSU and there may be a change in government in the next election? Doesn’t it more resemble to trading than “bottoms up” approach? Won’t it be more prudent to wait till actual policy/approach of the new government is known and then make investment decision? Even though, you may sacrifice some upside, but won’t you minimize the loss of capital? Moreover, if we are expecting to buy into highly undervalued PSUs where structural change will make them very attractive, even after paying slightly higher price, investor will still be able to make good money.

So on the lighter side, I personally feel, that to ride different stock differently,things have to be different in the first place! Especially when we know that we are partnering with a management that does not have shareholder value creation as the top priority!

I would like to qualify here that my views are based more from longer term investing perspective and I have no clue about trading in the market/timing the market. Hence, it may be entirely possible that I am missing the larger point!

Best Regards

Dhwanil Desai

** But time. ** too.Personally Bankin

Dhwanil

I think the point of investing in NTPC is not to go for phenomenal returns. I compared the situation of buying NTPC stock to buying a tax free bond from NTPC itself.

NTPC is a completely regulated entity. If you see, the Return on Net worth is a constant 17% over several years. It would be, because the returns are fixed by tariff order. The whole point of the exercise was that if you invested in NTPC at 125, then you would give a dividend yield of 5% or so, increasing steadily, and then an increase of Net Worth and Book value by 7% or so annually.

Who buys tax free bonds? Those individuals who wish to have a fixed return with minimal risk. Instead, buy NTPC stock instead (at 145 the same economics are not so attractive as they were at 125). The only reason why the company would not give you around 13% tax free annualised over 10-15 years is if it could not deploy the entire increase in net worth into regulated power stations every year. That is unlikely with NTPC, since it has visibility of projects all the way till 2030.

And there is the wild card that many of NTPC projects will be completely depreciated and will be debt free within 25 years of commissioning. Many projects of this sort will come up over the next 5-10 years. Of course, the CERC will have to take this fact into consideration. But certainly, profitability of NTPC will increase as a result.

However, the only reason to invest in NTPC at 125 was as an alternative fixed return instrument. Not for eking out incremental returns.

Dhwanil - I have only one thing to add. Do not paint every PSU/every sector with same brush. Analyse the performance data and they will tell you otherwise.There are contrarian opportunities in this market, for sure. I have learnt not to invest for the very long term. Even my best bets, I invest in only with a horizon of 2-3 years first - and evaluate every year/or at any change in business dynamics - if I can hold for another 2-3 years.

If you do not like PSUs so be it, but try and play the contrarian - there are private opportunities too in Infrastructure, CG and Banks that have been laggards.

The idea of this thread is to spur us into investigating and coming back with specific opportunities - and opportunities that we should be happy to hold for 2-3 years.

That kind of horizon should be good enough for most investors. Lets give theories some respite. Let’s get on to practicals.

Hi Samir,

I appreciate your view point and investment thesis and in the context that you have presented, it surely does make sense.

Hope you take the points/counter points/ discussion in the right spirit. No offences meant!

Best Regards,

Dhwanil Desai

Sure, Donald. I appreciate your point of evaluating each company separately rather than applying stereotypes to the whole PSU basket.

I have been active on this forum for last couple of years and have learnt and gained immensely from the boarders and senior valuepickrs like you, hitesh and ayush. But lot more needs to be learnt as such! As you many a times put it, it is the “ART” part which only comes from experimenting and applying various styles and creating a feedback loop around various approaches. I have probably just started my journey on this road! This aspect will become increasingly important as I am planning to take up investing as profession and full time activity in near future. So, I need to be more agile, flexible and open to learning new approaches towards investing. It will be great to connect up with you/hitesh/ayush over phone/in person some time to gain more insight to your journey, your experiences and more importantly your guidance.

Best Regards

Dhwanil Desai

Interesting topic and very very vibrant discussions.

The big question here is IF we get a stable govt… First of all I have my doubts about that fact… The Indian electorate has been in the habit of doing the unexpected atleast in the past two general elections… First was Congress winning its first term when everyone was sucked into the India Shining story. Second was Congress surprisingly managing to cross the 200 seat mark when nobody was expecting it to.

This time, looking at market run up, I think the expectation is for a stable govt atleast and that too BJP dominated. Again I feel we may be in for a surprise… There could be a real hot potch result and then ONLY GOD SAVE US.

Putting the theories about results of election on backburner, I think if one were to bet on Modi and his allies forming next Govt at centre, the group to bet would be the Adanis… Adani Enterprise, Adani Ports, even Adani Power could be interesting bets. Even a Torrent Power could be an interesting bet. Narendra Modi’s reforms in power sector in Gujarat are there for everyone to see. He has almost semi privatised the Gujarat electricity board and might do something of a similar nature at Centre PROVIDED HE IS ALLOWED TO DO WHAT HE WANTS TO DO------- coalition politics will restrict his moves.

But this time around as compared to last time’s pre election times, the biggest difference is that index levels are at the highest levels whereas in 2009 markets were just coming out of a sharp correction and there was no hope of any kind of stable govt coming to power.

IF there is a strong govt at centre this time there will be no surprise as I feel most of that is priced… Surprise will be if there is some kind of hung parliament.

personally I would prefer to sit on the fence and watch how things play out… Maybe even increase the cash levels a bit and see how things go… Bcos if things god forbid go wrong, there could be a lot to lose from these kind of index levels.

One Caveat: Please dont take the views expressed too seriously… I have been wrong time and again in guessing macro events and macro moves.:slight_smile: I think we need to do the best we always do… at valuepickr… Find great businesses in their infancy, buy them cheap and ride the journey.

No offence taken, Dhwanil.

Indeed, I am a contrarians sort of guy, who tends to fall in love with my own picks. So I really welcome a contrary view. It keeps me sceptical, which is very necessary for my personality.

Hitesh,

Welcome to the discussion! Interesting theory on Adani’s.

Re: what we do best at ValuePickr

We must try our hand at broad-based investing. Not just remain specialists at picking up great businesses in infancy…which though will perhaps remain our bread-n-butter core competency.

It has been pointed out to me by Seniors - the next level for ValuePickr - is to be able to also make a case for broad themes in play, get better at identifying lead themes early, pay some attention to macros. In my limited experience of now some 8 years in markets, I have seen there are different themes at play at different stages of the market.

Our core-competency alone will not be sufficient for us to ensure big market-beating returns, we need to become more well-rounded investors - that’s a strong inside voice growing louder by the day :-).

Dhwanil,

Sure. Will be good to be in touch. You might be already connected with me at Linked In. If not please do, for access to contact details.

Feel free to call. And when we visit Mumbai next, we can do some Management Q&A together - will be great to do that with someone of your calibre.

-Donald

Hitesh has pointed out all fair topics. His views doesn’t look biased towards any party or towards any situation.

There are following possibilities

  1. BJP comes in power with NDA
  2. Congress comes in power with UPA
  3. Third front comes in power

in case of 3, market sentiment is sure to get bleed. If case 1 or 2 happens but with thin margins then also market will loose its mood. Remember Bajpai NDA for only 13 days :frowning:

Hitesh’s argument to keep sufficient cash is sensible idea. :slight_smile: If negative sentiment build up, then surely cash will be king. If positive sentiment build up, then why to worry for MISSED OPPORTUNITY? We can buy PSUs or Adanis or Jindal or Infra or Metal or Realty or any Xyz Turnarround story anytime post positive result. In this scenario we can accept 10 or 20% lesser profit but there will be hundreds of Turn around stories.

I think Risk / Reward ratio is something like - 75% risk and 25% Reward.

Again, in any situation - CASH will be King. Money hai to Honey hai.

Kunal

I agree fully with all your logic about possible outcomes and their impacts… What we can do now is be ready for whatever outcomes… Better keep a buy list handy in case markets go up post election results… If they go down, then there will be great opportunities to pick up our own favorites at lower prices.

**
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And yes cash will be king but deploying it wisely often is difficult. As Lynch says for managements, so it applies to investors… Bladder syndrome… More the cash , more the urge to piss it away…:slight_smile:

Hi All,

thou the topic is about PSU & election punts,

i would like to bring your attention to IDFC ( & other companies in such a position) who could do well regardless which party wins, We still are going to need better infra

my 2 bits

Kunal and market is expecting BJP with Modi at the top… Still have doubts whether its easy as it seems… But the opinion polls of Delhi/Raj/MP suggest BJP racing to top…

180-200 seats is the key for BJP according to me…Then they can dictate terms…** Or else coalition pressure may force BJP for a compromise NDA candidate…**

Congress again forming a gov with lose coalition… Markets may correct but will rally later …

Third front think its not possible… But as hitesh bhai has mentioned Indian electorate is known for surprises…

( Personally feel Congress has some wild cards in its kitty… Congress had won just 7 more seats than BJP in 2004)

Govt. Keeps finding innovative ways to suck cash out of PSU’s.

I think sugar sector is worth a look in the event of a strong government. The whole sector is in such a disarray whereas it holds good potential like direct production of ethanol which can help saving forex. Strong efficient sugar companies like Balrampur Chini Mills, Dalmia Bharat sugar and industries ltd. . They also have healthy balance sheets and in my opinion stand to gain a lot in the event of favourable policies. Whatever bad has to happen in the sector have happened and its a good case for contrarian investment.

You can see trailer of actual “Movie 2014” in this week, specially on Sunday 8th Dec. That will surely give some hint. But in past, I regretted after going for movies by just watching trailer (Bollywood movies).

terms… candidate… ** Congress 2004)

**

I just wanted to explore the possibilities:

Cong+Allies - Cong would need a minimum of 120-130 to even have a shot at forming the govt. Last time, Cong had done well in the South (barring Karnataka) and performance was okayish in UP. This time around, Cong will nearly be wiped out in TN, might win some in AP (depending on how the Telengana move unfolds), will face strong anti-incumbency in Kerala. If Yeddyurappa returns to BJP, might not do that well in Karnataka as well.

Gujarat, Rajasthan, Chattisgarh, MP etc can be ruled out. Congress’ presence is limited in Bihar, Orissa, WB etc.

So unless something drastic happens, I think Congress has negligible scope when it comes to a role in the next govt.

BJP+

BJP will have any chance of forming a govt only when BJP by itself crosses 180+…

At 180+, they will able to get necessary support from 2-3 big allies (potentially BJD/ADMK) and reach close to the half-way mark.

Given the trends, 180+ looks achievable.

BJP is expected to well in Gujarat/Rajasthan/MP/Chattisgarh…Would also do better than 2009 in Maharashtra/UP/Bihar

So a BJP-led govt is a real possibility

Third-Front

If BJP gets less than 180 and Congress does as badly as expected, it would mean regional players winning big. At BJP < 180, Prakash Karat & team will go out of their way to help a ‘secular’ Gov at the center. BJP + Cong at such low numbers would mean BJD,ADMK, SP/BSP, JDU etc winning big. Left will try and put something together

terms… candidate… ** Congress 2004)

**

Adding fuel in Fire

http://economictimes.indiatimes.com/markets/stocks/stocks-in-news/capital-goods-infra-power-stocks-likely-to-benefit-if-narendra-modi-wins/articleshow/26813346.cms

< 180, Prakash Karat & team will go out of their way to help a ‘secular’ Gov at the center. BJP + Cong at such low numbers would mean BJD,ADMK, SP/BSP, JDU etc winning big. Left will try and put something together

Ramsaravana you have got into details/possibilities correctly…

Regarding 3rd front, i don’t think they can form the government on their own… They will fall short…

U.P will be the key…

( Will be happy to be surprised )

I think it is better to invest in Infra proxy stocks likes of Cera,kajaria,Astral,supreme etc…