Having read this Chart/Map/Check-list, I believe out of the 6 small/mid caps that I am tracking, and getting closer each week, I believe one of them might pique your interest as it meets many of the check boxes.
If this is what it takes, then I guess I am ready for the gig. I have updated my “About Us”. @Donald
Grateful for a quick chat with Mr D this morning. Our consistent efforts seem to be paying off. He is slowly responding to my pleas about VP Audience, desperately in need of guidance form Veteran Investors.
Q: Mr D, We are all bachhas in this completely new situation. Most of us were caught unawares. What would be your advise to VP Members?
A: Baccha toh abhi hum sab hai. This situation has no parallels from my investing journey. We must acknowledge WE DON’T KNOW.
Q: Some of my Technicals-Aware experienced friends at VP, are calling out for a massive correction in the Offing, and not shy of providing levels as low as 6500 for the Nifty in steps. I have maintained the argument that Levels are meaningless in this situation - that it will correct badly (swaggers-off, most senior Members are belatedly coming round to that view), perhaps much more from here, should be a good enough decision-input?
A: Markets - What level it could fall to, when should I start buying etc. type of worries, are best left for those who deal with such things! Apne liye toh, we don’t know is the correct response. Current lockdown by all indications (we are hearing) may be there till end Apr/End May. Now if someone starts buying TODAY with that in view - is a terribly optimistic view and not the correct response (though he may well be proved right). At the moment we can hope to be back to normal by Jun-July timeframes, when it will be summer months for the Northern Hemisphere. [One could follow Bill Gates TED Talk] | How we must respond to Coronavirus Pandemic]. That’s an assumption that can perhaps be made on how things stand today.
If we see where Markets are today NIFTY PE ~20, P/B ~2.5x, Div Yield 1.76 levels and compare it to 2008 Market lows, probably only on P/B we are close, have lot of ground to give up to reach P/E levels of 11-12 (when statistically it has been seen to be typical buy levels, post secular crash), even Div Yield was around 2.5x perhaps.
While we might think that Market has already fallen a lot, Effect of Lockdown is not yet priced in. So we could be far from the bottom, yes; that’s a good enough conservative conclusion. Responses should be similarly conservative, you don’t get any extra points for being aggressive in such a scenario.
We watch carefully, and keep tweaking understanding/projections, as clarity emerges progressively.
Q: With that out of the way, supposing one has created adequate ammunition, how should one prepare to take advantage of better & better opportunities?
A: So let’s say there will be a general secular downtrend right, each stock will find its own bottom, gradually - dependent on its sector-specific/ macro issues / and its own micro issues, and Management responses to the same, getting clearer with time.
So we should forget about market levels. What we CAN do is relook closely at business we know well. Make adjustments to projections on both Topline & Bottomline. Basically adjust for Growth rates, and Interest rates. Supposing, we were factoring in a 20% growth rate earlier, surely at least for a year we have to factor in lower growth and adjust progressively, as clarity emerges.
Q: So what would be conservative projections in your book? Factoring in only 6 months Sales, at a lower rate or say taking only a Qtr of earning into reckoning - does that take care of most problems?
A: One can do that. But a better way would be to go sector by sector, and company by company, that we know well and understand and try to run a simulation in our minds on sector specific issues that are likely to emerge, that there will be probably some Re-starting costs associated, that some sectors are likely to be more effected, and some less. Basically, go line item by line item on BS, On Costs, to re-assess better.
Q: Can you help us with some examples?
A: It’s obvious that Pharma and those businesses that fall under ambit of Essential Services are likely least impacted, right.
We could think about businesses that are dependent more on Government Spending and sport large Order Books. Those Order Books will now look like Fiction, isn’t it? Where is the Money? Their receivables will go up on existing orders, and new orders will get deferred. One might find some PSUs with huge 10000Cr+ Defence Orderbooks good businesses on most fronts, protected margins and available cheap, but effect of this?
We could think about Businesses that are dependent on Migrant Labour. It may be a long time before Migrant Labour finds it safe and remunerative to return? So Infra, Construction, RE - we could think about the severity of effect on their businesses. Some of these RE, and Infra plays may look cheap now - but thats based on last years earnings. Next year earnings would look very different isn’t it? So there is scope for much further fall there?
Q: Thank You, that was really useful and illuminating. It’s getting me excited that there can be a method-to-this-madness too.
A: You guys are good at this. I am sure you will take things forward from here. Look forward to learnings back from VP, and use in my frameworks.
Q: One last question before we let you go for now. There is this school of thought that some businesses are well positioned to take advantage of the health crisis, like say a Poly Medicure, or Hospitals? Any comments?
A: Yes. Some of these businesses are robust. And well placed today. They haven’t corrected much.
But you guys are focused on generating much bigger Alpha. The real opportunity is probably not in the discovered names, they are in those small businesses with business models which will face a year of hardships, but post that there is enough robustness and scale-up opportunities with good managements at helm.
I would say typical VP-style will be in play once again, once the Lockdown Lift-up settles down. That’s the time you guys will probably be again out on the field, meeting folks in different sectors, gathering scuttlebutt, figuring out the next set of winners!
Hitesh bhai…Put another way, this means wait for certainty. But low prices always come when there’s a lot of uncertainty about the future which means low prices won’t be available when there’s a little bit of certainty.
Does this statement mean one should wait a few more days and then invest or buy some stocks on the way down?
More from Mr D this morning.
Some Back to Basics principles!
Be humble. You may be wrong.
Be kind. You may be remembered.
Be forgiving. You may feel lighter.
Be trustworthy. You may see further.
Be generous. You may receive more.
Be curious. You may stay teachable.
Be hard working. You may be luckier.
Be yourself. You will be happier.
~Vala Afshar
Must watch
Indeed, this is a good watch, and worth pondering on, especially for the die-hard optimists.
Import / Export dependency - Important given uncertainty as to when things may normalize and each country may have their own timelines
Essential vs luxury
Luxury items may face both supply and demand side disruption as purchases get postponed, funding gets tougher and limited availability may increase costs as well.
Disc: Accumulating HDFC AMC. Sold Thyrocare last week.
Mr D’s interview has found resonance with so many folks probably because
a) it reinforces, largely the common direction suggested by Senior Members with data points as to why there is much more scope to fall further - i) Lockdown NOT priced in, ii) Statistically NOT yet as cheap as previous secular lows, but more importantly (to my mind)
b) it provides important 2nd order clues/constructs for thinking deeper about industry sectors and businesses - i)Government Funding ii) Migrant Labour
Lets think more and come up with more 2nd order “Constructs” to deliberate/ponder upon for Sectors/Businesses dependency
We should attempt adding one 2nd-order construct every 2 days (NOT the first order constructs like high debt, asset light, export/import, else Mr D will think we are all linear first-order thinking folks. Time to pull up our socks and go hard at solving another important puzzle - which will have disproportionate rewards.
Where are our real thinkers? Those good at connecting the dots? Come on Guys/Gals - the incentives are very high. Lets get cracking - and focus our brilliant minds to constructive “2nd order construct” finding efforts 
Migrant Labour is cited as one of the main causes
Will add more as and when can come up with something.
Here are a few things I can think of
| Effect/Outcome | Sector/Companies |
|---|---|
| Disruptions for schools/colleges from education technology | Edtech companies |
| Near distance video calls becoming the norm and replacing voice calls | Telecom |
| Contactless delivery/transport using bots/drones | Tata Elxsi ? |
| Fitness bands/watches evolving into surveillance devices that can authenticate an individual, track him or her and monitor vitals | ? |
| Privacy advocates giving up in favour of larger benefits arising from accessible healthcare data | NH, Apollo |
| Changes to the FDA drug approval process - more in the sense of optimising and fast-tracking the overall approval/inspection process | Pharma formulation companies |
| Prescreening of international travellers might become mandatory and diagnostics laboratories might position themselves to offer this service using technology and superior customer experience | Thyrocare, Dr Lal’s |
| Governments can link compliance and surveillance with subsidies and welfare spending | SFB’s/MFI’s |
Thanks for making an excellent effort. There are some new thoughts here. And you have tried to link up Business/Sector impacts which is good to ponder on.
My personal take on 2nd order constructs is different. These constructs will likely primarily help point us on what to AVOID, where there is likely to be a large immediate & severe fallout - like Mr D mentioned about Infra, Retail, Construction, Real Estate that are migrant labour heavy. Or Govt money/order dependent Businesses. Expanding on these constructs, and expanding on this list of Sectors to avoid is very important. Getting a good fix here will save us much work time and lead us to where to concentrate for potential big winners - again that are not so obvious e.g. other than Pharma.
If you closely look - Govt money dependency, and migrant labor dependency - are not obvious connects. @basumallick how do you see RITES in this context - Significantly impacted/Insignificant Impact
But telecommuting, or video communication, video-learning are still pretty obvious connects.
Was busy in multiple activities today.
Will devote 3-4 hours tomoorow on this quest. Its very important in my scheme of things to do this stuff better - at least try to get better at this - connecting the dots - not so obvious exercise. Will require some serious thinking.
Meanwhile please continue to keep commenting with ideas. This is active brainstorming. We do not start by precluding. All thinking-hat efforts are most welcome. I will try and share my frank responses, and I could be entirely wrong.
With MSME meltdown,getting WC from NBFCs will not be so easy in future, in that case, sectors where % of Unorganized is still very high, those sectors will see value migration…or see consolidation…eg Shoes/Textiles…huge disruptions
Some additions:
Some first thoughts on second order effects on VC funded companies
A) We Work
B) One Web
C) Oyo- who has given minimum guarantee to most of the hotels it has partnered in India.
Slowing down investments by Softbank and others
https://www.cnbc.com/2020/03/23/softbank-strategy-shifts-from-long-term-domination-to-survival.html
Faster than expected price rationalisation of product and services in B2C businesses dependent on funding (Possibly Zomato, Swiggy, Uber, Ola).
Impact on white collar job market - Some of these companies are aggressive hirers for B school passouts.
Impact on unskilled and semi skilled job market- Incentives rationalisation of drivers, reduction in demand of delivery personnel.
One has to think further on the direct and indirect impact on Listed Indian companies, for eg: We work is a major tenant of Nesco, Companies like Quess Corp are dependent on contractual jobs created by many of these companies.
My take on this medical crisis affecting global markets:
Issue - Rapid global spread of super-infectious new strain of virus i.e. Covid-19 without any known medical cure
How bad is coronavirus?
Action by India - Preventive lock down of entire country leading to shut down of real economy
What can happen from hereon for India? Any of the below
Government extends the lockdown beyond 15 April to 30 April / 15 May - Med Probability This outcome is anybody’s guess and I don’t have a convincing argument yet why this will happen. Also I have an investment perspective on markets and not a trading perspective, a further 15 - 30 day lockdown will not materially impact long term winning businesses
No further lockdown post 15 April except international travel due to steep decline in rise of new cases and > 90% recovered - Low/Med Probability because India’s low testing appears to be the main reason behind relatively low number of cases
Vaccine cure for coronavirus in around 15 April - Low Probability generally takes 1-2 years
From 15 April - Government gradually opens up parts of the country especially rural hinterland basis current understanding of spread in state to state - Med / High probability
Given the migrant labourer crisis and India’s average per capita income - I sincerely doubt the government would be able to mandate a lock down of the entire country for much longer than 1-2 months as there would be a severe strain on the financials of the government/states and how effectively can the PDS system be implemented to the last mile will remain a challenge and worry. A couple of months on, it will soon become a fight for survival of the poor on a daily basis just relying on the Govt support whose finances will be in shambles. Hence, continued lockdown of the country beyond April 30 seems quite improbable. Even if lockdown is removed from 30 April, a further 15 - 30 day lockdown does not materially impact long term winning businesses
As per my reasoning above I expect the below 2 things:
Educated Guess and Market Prediction: If the global markets were not so co-related i.e. India would stop dancing to the tunes of US markets, I’d be very confident of 7500 being very close to the bottom as I see the lock-down being removed by end of April. However, since the correlation is so high - both India’s lock-down removal and how the US coronavirus plays out play an equally important role in how much lower markets will go from here. Also markets seem to have priced in quite a lot of uncertainty already given the steep declines of 8-10% on daily basis have not been seen in the past week. Given all of this - I expect 7500 to be within 10% of the bottom unless there appears much more dramatic bad news which the markets have not factored in.
Now if the above were to play out, how can we take advantage from this market crash? I’ve tried to categorise the different sectors based on the expected length of disruption caused by Covid-19 pandemic:
Limited/Temporary Short-Term Disruption businesses - FMCG, Consumer Discretionary, Pharma, IT, Chemicals, Insurance, AMC, Media - look for zero debt companies, demonstrated 1.5-2x GDP growth with track record of high return on capital employed (>25-30%) and market leaders in their industry/business - , etc. Some of these businesses are also the least affected by this pandemic and should consolidate more market share if some of the smaller players get wiped out in this crisis. Doesn’t matter large / mid / small cap - if you’re invested in businesses with these characteristics - you’d have already observed that they fall in-line / less than the market irrespective of the market capitalisation.
Temporary Short-Term Disruption - Leveraged financials? - Everyone keeps talking about that these are the first businesses to suffer because of their leverage and any problem in the economy is definitely one financial lender’s problem or another. Now, you think…and tell me…can India’s 5 trillion $GDP target be met without a few large financial behemoths emerging from India? We all know the names - and they are now 20-50% off their peak as well. You’d be a brave man if you’re thinking a totally different set of financial leaders will emerge out of nowhere and take India to 5 trillion $ GDP. I don’t know where is the bottom but there sure as hell is a bottom for the HDFC Banks, Kotaks of India and then a very very long way to the top!
Temporary Longer Term Disruption - Travel and Tourism -
Actionables
If you’re looking to invest in 1st category of companies - I think a 35% Nifty correction from the top is a significant one which warrants reasonable sums to be deployed now and henceforth on further 5% correction each. Individual companies may have fallen less or more - we can never guess one day which company might rise / fall by how much.
If you’re looking to invest in leveraged financials - given the high-risk high-beta nature of these companies - this is already a very good opportunity to get into ONLY the market leading Indian private banks and NBFCs at saner valuations.
If you’re looking to invest in sectors severely affected by Travel and Tourism - I think it would be better to follow a wait and watch approach till we get a solution and travel starts picking up around the world.
If you’re looking to invest in this category of companies - take your money and run, run, run!
Some thoughts to add… This crisis would have maximum impact on businesses either hugely dependent on unskilled labor or immovable Machines that needs operation by many skilled/unskilled labor or fulfilling clients/customers discretionary needs (double whammy would be if they fullfill this need with borrowed liability) or have a very tight cashflow/inventory cycle the minutest disruption to which is intolerable.
Now, which ones would come out of crisis… would be those demonstrating leadership, preparedness, flexibility and innovation in those disrupted areas, which are eventually an inherent need of society and are hugely scalable.
Disruptions and Opporutunities in Micro-Lending, and its effect on dependent sectors
In couple of months after the lockdown ends, new clients won’t be added. Ground zero will be touched first. Due EMIs will be sought, and damage assessment will be made.
Low PBv stocks may not make it: Equitas, Indostar and unlisted ones. I am equating low PBV with low “quality” of the underlying business.
Good businesses will face setbacks: pressure from Political parties to bear losses, willful defaults.
It is absolutely clear that lofty valuations will normalize, and may even go into discount. Like in case of Bandhan Bank.
Bajaj Finance was trading at lofty valuation owing to its future growth. Now, in absence of growth prospects for atleast next 2 quarters it appears a P/Bv of 6.20 is unsustainable. However, there is a silver lining, due to this calamity mediocre businesses will lose ground and the sound-ones will cover it when the going gets good.
The online business will be hampered. Micro-Financing, as a facilitator, will be on the back-foot causing the sales to drop. As a result, Consumer Durables like Voltas, Whirpool, Symphony will take a direct hit.
There are reports of MSME businesses being in trouble, a section to which Sarkarri Banks, HDFC Bank and Kotak Bank have sizeable exposures. But again, Sarkari Banks will lose ground and their private counter parts will cover it in good times.
I see many people blindly switching to Pidilite, but I feel due to real estate slump and the stocks lofty valuations a decent fall is on the cards.
Finally, due to de-migration of labour, agriculture might see a spike Because a labour when he goes to his home town, he resorts to agriculture for sustenance.
Orderbooks, specially from government, can be very questionable going forward in the next financial year. Prima facie it looks that the government may not have enough to spend on infra as much as previously planned. However, these things have a life of their own and the government can actually just decide to invest in large scale infra and cut somewhere in a form of Keynisian intervention. So, net net, difficult to say.
If we look forward few qtrs I think temporary staffing is going to rise due to this uncertainty. Many businesses would not like to commit to hire directly and would opt for temporary staff so that in business downcycle and during economic crisis they can fire easily without getting into major trouble.
Temporary staffing is also play on delivery service spiking and more people will be hired for the delivery. Recently due to spike in customers flocking walmart, walmart has hired 150000 more temporary staff.
Also, there are news that many manufacturing business are readying to diversify to other countries including India. Major manufacturing business would like to hike temp staff due to huge labor law issues in India including Union that get blackmailing power in case of business downturn and wage issues.
Two companies which can benefit are Teamlease and Quess Corp. Both are asset light business and generate reasonable ROCE.
Disc - Have no position in any of the stock mentioned above.
