ValuePickr Forum

Market Meltdown, the Virus, and our Actionables

You are right on the supply demand side and on the global pricing! But it is only a opportunity for the Indian Govt to fill in the gap of fiscal deficit. Every non-BJP state have complains about GST Dues to be settled! The huge disinvestments plans are not able to fill the coffers, so I doubt too that this will have such a huge effect considering the huge list of policies that are cash strapped already…on top one expects the Govt to announce more measure for the relief of industry at-least MSMEs otherwise millions of jobs will be lost! So it is just a boon in disguise but not answer to the cash crunch

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I have a different take on Pharma sector. I believe that with rise of protectionism (" BUY AMERICAN" slogans, anger among American public, there is a good chance that they will insist on local pharma manufacturing. The options that Indian manufacturers will have:

  1. Setup additional capacities to cater to local manufacturing
  2. Exit the US pharma market altogether

So, I would stick to stocks with domestic focus to avoid this uncertainty

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Here are my 2 cents-

I think there is a lot of recency bias factored into some of the comments above. For example, if one believes infrastructure and real estate sector has high probability of going down because of migration of labour and less spending of govt. etc. then I fail to see how same person can consider a company like asian paints as a safer bet ? Same way, if one believes financials will be hit severely because many people will find loan repayment to be a challenge, then I fail to see how same person can consider fmcg sector as a safer bet ? A lot of growth in consumption sector has occured because of rise in disposable income of people. Essentials, obviously will always be consumed, but less disposable income would mean less consumption than before, right ?

What I believe is there are many possibilities right now depending upon how India deals with Covid-19. There are 2 scenarios-

Scenario 1- The lockdown is lifted after 14th april. In this case, like Phreak suggested I don’t see too much of change in the overall economic landscape, especially for the long term. I believe there will a minor impact on NBFCs and other financials, but even these sectors and the rest of economy will get back, atleast to pre Covid-19 days. However, export oriented companies could be impacted depending upon what they export and to which countries. For example, it seems EU and US have a hard time ahead and are going to be more severely affected by the crisis.

Scenario 2- The lockdown is extended for another 1 month (or 2 in the worst case). In this case, there will be severe structural changes and I am afraid the economy will be hit very hard. Because of less disposable income, we will see de-growth in most of the sectors be it fmcg, fmeg, automobiles, entertainment, travel and leisure etc. Not to mention the lofty valuations of some of these companies, some people who are still buying these are in for a rude shock if scenario 2 does play out.

So how best to play in either of the scenarios ? Atleast, for pharmaceuticals, I think there is a clear consensus. Fmcg products, even though will be impacted if scenario 2 plays out but they will still be in good demand. Fmcg companies however, their high valuations demand growth, so they are ruled out from my point of view. However there can be a lot of proxy plays. One clear cut example is the chemical sector companies. Here are my reasons-

  1. Most of the products of these chemical companies are directly used in fmcg, pharma, food and agro-chem sector. Speciality chemicals were projected to grow at 12% anyways by FICCI.
  2. Undervaluation.
  3. Lesser imports from China.
  4. Lastly, the recent fall in crude oil prices are a big positive for these companies.

Disc.- 20% of my porfolio as of now is in chemicals. I am looking for more hidden gems in this space though.

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As more people return to farming and the impending shortage of food and shortage of labour for ancillary industries, will companies that make pesticides and fertilisers outperform in the short to medium run
Companies that come to mind are upl, pi industries, Bharat rasayan ?
There might be more

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3 posts were split to a new topic: Actionables 2.0: Rational Action/Knowing yourself better

A post was merged into an existing topic: Actionables 2.0: Perennial Favourites

Please dont ignore the fact that he is talking to a set of investors who might outsource their capital allocation problems and that he runs a PMS.

I feel the time spent looking inwards now would serve us well to revisit and chalk our own deployment strategy so that,

  1. We may learn more about ourselves and our assessment of risk
  2. Have a plan in place to generate a CAGR on our portfolio with a drawdown akin to our risk basis point 1.

Im reading this board keenly to help us do exactly that during these times as we can learn vicariously from the experience of learned members here.

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A post was merged into an existing topic: Actionables 2.0: Perennial Favourites

@Donald bhai, I think it is easier for a single person to do this kind of second order thinking in his particular field or in his life. Honestly, I can’t imagine the next level impacts of migrant labor taking time to come back and start working on infra projects.

I’m trying to put some trends which I think can play out based on “my” lifestyle and “my” profession. I put “my” in quotes as everyone should realize that this is a highly-biased post and that trend may not actually move the needle for businesses. Will cater to this bias and impact in further posts based on how discussions evolve. If everyone from different professions come up such trend list, we can aggregate and draw some conclusions.

Firstly, I work in a Softwar-ish Engineering role and so below is list of trends which can materialize from WFH culture introduced in IT companies.

Two factors playing out for WFH culture to gain momentum:

  1. Software companies right now don’t have a choice but to explore this option during current times. This will force them sharpen their WFH tools and companies might see that real ROI of WFH models is much better than estimated ROI
  2. Companies are going through tough times and want to preserve money. Given they are anyways sharpening their WFH tools and able to continue business using them, they might as well save money by avoiding to commercial real estate costs (For eg: Look from the eyes of a startup which is struggling for funding due to current external environment)

To bring in some practicality, WFH momentum will not materialize in A* / A category IT companies offices like Google / Microsoft / Amazon but I think this will be more of a trend in IT companies from low-end to middle-end.

Second order trends due to WFH momentum on various industries “assuming” WFH momentum will actually happen =>

Food:

People eat food from office cafeteria while working from office, but eat home cooked food / order online while working from home. Kitchen tools helping people to cook food easily, ready to cook foods might see some tailwinds. One can look out for Kitchen appliances companies to check if they come up with some innovative products. Office food catering companies might face some trouble. This would also increase sales in urban grocery stores.

Example Businesses with headwinds: Elior Catering
Example Businesses with tailwinds: Zomato, Swiggy, Tasty Bite, Marico, HUL, Big Basket

Electronics:

Spending 8 hrs in front of laptop sitting on Sofa / Bed is bound to cause permanent damage to backbone. Some of my friends already bought office chairs, desktop tables, monitors, spike guards. We might not see incremental demand as this is just replacing office demand with home demand. But one thing which stands out is Consumer AC. I’d prefer an AC in my room if I am to WFH till the time I can see.

Example Businesses with tailwinds: Voltas, Symphony

Entertainment:

I end up opening YouTube.com, Dominion.games while working from home while that is not the case when in office. Digital screen’s share of time will increase a lot and will be tailwinds for Digital Ads and Digital entertainment like OTTs.

I also think this will create a tailwind for exhibition companies like PVR (contrary to what most people are concluding). Working from home from Monday to Friday will make you feel like going out on weekends. You end up watching a movie in theatre, eating out with your friends.

Example Businesses with tailwinds: Google, Zee Entertainment, PVR, Inox Leisure, Wonderla

Personal / Skin Care:

You don’t use same amount of Hair oils / Serums, Face creams / Gels, bla bla bla while working from home. I haven’t used those stuff since last couple of days and don’t see myself using them in near future too. Just a simple bath and hand wash / face wash, full stop.

Example Businesses with headwinds: Marico, HUL

Shopping:

In last two weeks, only clothes I’ve been using are shorts / pyjamas / random T-shirts. All the good casual wear clothes / formal clothes / shoes are just sitting in the wardrobe. Likely to stay that way if WFH momentum stays. People will end up buying more Athleisure and avoid buying too many premium-ish clothes.

Example Businesses with headwinds: Aditya Birla Fashion, Arvind Fashions, Relaxo, Bata
Example Businesses with tailwinds: Page Industries, Lux Industries

Auto:

WFH momentum would lead to less usage of cars and that can lead to fall / lower growth in sales.

Real Estate:

Fall in commercial real estate demand due to WFH momentum is more or less derived by everyone. Real Estate developers might shift their focus onto Residential real estate projects. They might offer apartments which have dedicated space / setup for WFH. One can watch-out for such builders if WFH momentum actually plays out.

Pharmaceuticals:

People don’t get to spend time in the sunlight as there is no travelling to and from office and we might see a spike in Vitamin D deficiencies. Already see some discussions about possible increase in births after nine months due to current lockdown. May be there are some pharma companies focussed in these areas.

I want to re-iterate that I have just listed the trends and businesses impacted due to that. It may or may not move the needle for the company and trend materialization may not necessarily increase free cash flow for the company and may not give abnormal returns. We can take those company specific discussions to their respective threads.

Discl: I have mentioned example businesses for most of my observations but I request everyone to analyze if they will actually move the needle before investing. I may / may not have investments in the companies mentioned above. Please consult your investment advisor and do your due diligence before investing.

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A post was merged into an existing topic: Actionables 2.0: Rational Action/Knowing yourself better

2 posts were merged into an existing topic: Actionables 2.0: Scuttlebutt on Farming/Migrant Labour/Economic Activity

I am not sure if i can share this care ratings report which studied impact on 12 industries.
Industry-wise impact of Covid19 Mar2020.pdf (697.7 KB)

For the next few quarters what i see:

  1. People buying more essentials advantage both short and long term for some FMCGs, retailers online and offline and long term cultural change where people try to keep stock of things for a month than say a week now
  2. Temporary dip in consumer durables due to drop in income levels but over 2-3 years normalcy returns?
  3. Advanatage telecom short and long term
  4. Advantage hospital & diagnostics short & long term?
  5. Advantage life and health insurers long term.? Short may be some bad hits. Premium prices will go up long term
  6. Mfis, hfcs, cv financing short term hits. Long term unknown. Disruptive models are always on the horizon
  7. Auto & anc- big hits short term. Long term have to see if more manufacturing moves from away from china.
  8. pharma and chem-difficult to assess how many will move away from china(applies for all manufacturing). CDMO, CRAMS might be better bets?
  9. Hotels, real estate, movies, wonderlas etc- no quick respite?
  10. OTT, music streaming etc- looks like an advantage ?
  11. AMCs- people now become more savings oriented and since fixed returns are low and real estate is still unaffordable. May be some financializations. Some gold. Looks like a long term advantage?
  12. Infra spending uncertain. Cements and others short term hit. Long term unknown?
  13. Paints, tiles, sanitary wares, plywoods, boards, laminates and home renovations- short term pain. Long term?

I would like add, that I am being told that a lot of SiPs are not going to be made in the coming few months. That is a huge hit for the overall market, directly and indirectly. Further reducing support if the market starts to fall.

As a result AMCs might be worse off coming quarters. However, a good time to lap-up the good stocks.

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Copy-Pasting as-is-basis received on WA
To be taken with a pinch of salt. No one can vouch for authenticity.

Summary with call with xx part of Economic Advisory to PMO (fwd)

  • Deliberately not doing one big package approach - we don’t completely understand the size of the issue and will go about it in a step by step feedback based approach.

  • Went with a lockdown was premature and couldve been planned better but not taking the plunge wouldve cost more like in the US

  • Regulatory deadlines around march 31st. Cleared those

  • Ensured the very poor are taken care of. Every large database was utilised to provide some baseline stuff for the poor. We know this wont eradicate poverty but trying our best.

  • Then came liquidity infusion through RBI

  • Have lot of monetary space and will use it. Most at 0 % interest rates but not the case with us. Can do more monetary easing if required.

  • Do we have fiscal space? Have less fiscal than monetary space - will continue to roll this out.

He said : Doing the call with industry to get your feedback - understand asking for one thing will mean asking us not to spend elsewhere

  • Last night did a very major reform - finance ministry and rbi have agreed to open up significant portion of our borrowing to nri investors - step to join global bond indices - and we do this in rupees not USD. Will structurally lower cost of capital in the country.

  • Govt taking economic situation seriously and understand fully the difficulty. Danger of cascading defaults we are filly aware off.

  • Govt should pay dues asap - IT refund, gst refund etc. Agree totally have already asked.

  • Bigger issue at state govts. No excuse to not doing it. Stamp duty etc reduction is a state subject

  • Have to see if we prolong lockout or not. Issue of sequencing of opening up needs to be thought through also. Need granular and objective on ground information on availability of essentials etc. Top offices want an understanding of what is running out etc and looking industry to help triangulate the data better.

Key takeaway:::
Medium to long term - potential god send for india. Have managed to limit community transmission. We may well survive this better than people think - major geopolitical realignment because of this is expected. China has behaved badly incl. managing WHO. Short term china will supply but mid term we have to market india to the next level. Real game is cataclysmic event. This will change the world. China s rise related to fall of Berlin wall. After second world war rebuilding of japan and germany led to their growth. Do not underestimate geopolitical realignment. If we survive this well we can present ourselves as a serious player. Think how we can restructure global supply chain. On the other side of this life will still be there - will not be return to normal - and have to have courage to take advtg of it. Small issues we will resolve but focus has to move to winning the big battle. Have to start thinking like a global power.

India s diplomatic clout will increase dramatically. !!

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Donald Sir,
I think there may be few businesses which may be relatively immune to current lockdown. For example power transmission business (POWERGRID, Adani transmission)… these are businesses where once you complete the project, you don’t need much… no raw materials are required and you keep on getting your revenue irrespective of demand due to regulated business model… even the manpower requirements are minimal after the completion of construction, till some transmission lines trip…
Disclosure: no position in the above mentioned names… this should not be taken as investment advice…

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12 posts were split to a new topic: Macros 2.0: Economy-Markets-Cycles, and Actionables?

article discusses about the industries impacted…

Not sure where to post…

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