Positive phase of Markets: New strategies required?

Investing Strategies
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This question has been with me for almost a month now - when we are at aninflectionpoint in ValuePickr journey as well as for India Economy.

Adverse Market conditions )- We have ridden this phase of adverse market conditions from 2010-2013 remarkably well - infact astonishingly well. None of us would have imagined we would end up with such performance numbers.

All credit is due to the Guru’s who gave us the directions when we started out - to seek businesses that seemed to have a sustainable niche - and go hammer & tongs at establishing that this will indeed be sustainable for next 2-3 years, why or why not. Credit is also due to the tremendous (some would say unforeseen) zeal shown by so many in the free-wheeling collaborative spirit and the in-depth investing research style ValuepIckr is known for today.

In a nut shell this was it - we got excited if we could identify an x-factor in the business, with sustainabilty/entry barriers so strong that no one with bigger financial and other resources would be able to dislodge them in forseeable 2-3 years ahead. Once invested, continue to hold till the business is capable of growing at 25% CAGR AND the stock performance is also capable of providing 25% CAGR returns from here (Valuations are reasonable and not overstretched to rule the latter out).

Last 3-4 years of adverse market conditions - showed us Quality was pursued - and rewarded handsomely in small and micro-cap businesses - capable of going/going to the next Level.

Benign to Positive market conditions: Beginning 2014 we have been seeing benign to positive market conditions emerging. We have started seeing action in hitherto neglected/battered down sections of the economy - Financials and Infrastructure started showing signs of interest back again, after a big gap.

We at ValuePickr will continue to do what has served us well over last 4 years, for sure. But I wasn’t sure we had all the directions we needed at this stage and some strategies/broad themes if you like for this next phase of market whenever it is upon us.

It was TIME for me to seek more inputs from market veterans and fellow-learners again. Had some good discussions. Trying to capture this back again at this thread - to spur our thinking, and carry forward some of the concrete inputs received, as possible.

This is what emerged - My takeaways captured, as below

Purists are skeptical (as expected) - and don’t want us to deviate - why do something different - when you are seeing success with what you are doing - quest for business quality among emerging businesses. I reassured them the Focus will remain on what we do best - quest for quality emerging business; that current quest is on expanding our horizons and bringing in more refinements in our investment thinking as Investors and Capital Allocators too.

Market cycles are a given. The Fund Managers are pretty much practical about it and had fruitful discussions with 2 of them. Also had involved discussions with a cycles-only player - one who follows very long term cycles - in global markets and in India.

One thing is clear - that the last 2005-2007 cycle/ride in Infra/CG/Power is very very unlikely to repeat. It never does that that same cycle repeats in the immediately following boom cycle as the last.

The real economy is sending those signals. The inflation differential (between US and India), the growth accruing in US, the higher interest rate cycle there - may make it very difficult to contain inflation on a sustained basis in India. Cutting down on Interest Rates is not happening anytime soon …and if that does not happen - Infra or capex-led cycle taking over as the predominant theme is far away - probably.

What looks likely at the moment to get stronger in such an environment is - the Export led themes - IT, Soft commodities, agro-chemicals, sugar, cotton etc. Last time IT theme played out was post 1998-2000. The inflation differential US/India was at exactly similar levels at today’s- the experts opine - and Rupee had to nosedive. It might again - notwithstanding whatever happens on the elections front - the real economy data isn’t changing. Last time in 1998-2000 along with IT, Media stocks had also flared up. So these folks are paying attention to selective IT and Media stocks (Pharma cycle has been on for long).

Interestingly what was also cited - look what is happening in the real world. Look at the Whatsapp acquisiotion! Look at Our own FLipkart or Myntra valuations. Look at a Yatra.com citing valuations of 2500 Cr. Remember the IndiaWorld valuation of 500 Cr (khoj.com and a few other sites) back in 1999-2000. Deja Vu?

If you go back and check the macro situation then and now, there are many many uncanny similarities!!

Some of these made eminent (anecdotal, if you will) sense to me. Want us to get started and do some serious thinking and work on those fronts.**Small and midcap IT is interesting, especially as there is undervaluation at play. **What else?

Meanwhile I will try and get Abhishek Basumallick to step in and guide us on pre-selecting small & midcap IT candidates. He has enormous exposure and understanding of the Industry. He is familiar with most of the names we can throw up at ValuePickr like Accelya, RS software, Mindtree or others. He is also one of the few people I know who has made serious money from his IT picks over last few years - eClerx as an example and a few more.

Think he should be the best person to give us some direction/energy for some work in IT space. Anyone experienced in Media businesses? Why is a SUN TV not exciting at this digital-inflection point (ignoring the political objections for the moment?

What else? Over to you all.

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Right now the ones that really look good are Tata Elxsi, Persistent Systems (high risk bet) and ZenSar purely from a valuation perspective. From a IT services play, TCS remains the best although it is fully discovered mega-large cap.

Tata Elxsi seems to be at the verge of multiple triggers. Ramadorai is the new Chairman. He is perhaps the not so well known in the popular media, but is the key architect of where TCS is today - a true visionary. If you see the turnaround in business results over the last few quarters in Tata Elxsi, it shows his imprint somewhere. This is a long term, turnaround story.

In other areas RS Software is a name I am hearing too much, but I am not sure how the payments thing is going to pan out in the long term. The future may see a lot of disruption with mobile payments coming in. Need to understand how the prospects will be in that case. Though the short term does look good. Management track record does not inspire confidence about ability to scale the business.

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IT will be just one of the many theme, that will get immensely valued in future (or already valued crazily currently). These are the macro-supported theme which are going to get benefited in next bull run.

1). Pharma/Chemical/Agro-chem : If one listen NaMo’s earlier speeches (in and around SRCC speech), when it used to be much more development oriented, and less of politics, he used to give example for economic history of South Korea, and how it unfolded. If one listen his speeches, one can easily conclude that export led job creation will be the cornerstone of his economic policy, which is nothing but a carbon-copy of south asian tiger.

And if you see, which are the sector where we have an advantage over the rest of the world (other than IT of course), and have shown capability, than it has to be chemistry and allied filed. With stringent environmental restriction in china, increased environmental concern in europe, and past solid experience of India, Indian chemical industry is for a big big macro push in future. So chemical/agro-chem/pharma-api is a sector to play for next bull run

USA, which is the largest pharma market in the world, and is over-burdened with medicare cost and huge budgetary deficit, cant sustain its crazily over-priced healthcare in long run, especially when its dominance in world is slowly receeding with emergence of multiple power center. So generics, cost-effective medicare is the way to go for them, and guess who are going to be benefited the most again :slight_smile:

2). Domestic/Consumption/middle class themed play : With the tail-end of economic woo, and starting of a new economic cycle post 16th may, indian middle class is going to grow at a much rapid pace. Add to this NaMo’s vision for creating 100 of cities, giving electricity to each and every house hold, clean sanitation, water, clean ganga, river interlinking. These gives rise to bunch of theme, which should get benefited majorly

a. Psuedo-housing play : Like Astral/Cera/Kajaria/Somany/Symphony/Repco/GRUH/asian paints/pidilite. The advantage of these cos wrt pure housing company is that housing cos are over-leveraged, and with high inflation, interest rate are not going to go down rapidly.

b. Psuedo-power play : Like PTC financial, which will finance the 24x7 electricity projects

c. Misc play : Like Va Tech Wabag, which will clean river like ganga, Other tourism themed play (do we have any decent listed player here), etc

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Good thoughts Subash on broad at themes at play. Yes Agrichem and Chemicals manufacturing and get a big boost it is possible - but that comes with huge environment costs. China’s norms have got stricter because things there have come to a very bad pass. India will still have some leeway. But the environmental lobby and more so the bogey raisers could create serious hurdles for what could have been India’s gain.

Most inputs from you seem pre-ordinated on Modi forming a government with enough majority to be able to have his way.

That is premature to pre-suppose. We could also have a situation with very thin balance in favour of Modi-BJP.At the time of our discussion 3 weeks back - It was better to thus focus on themes - which have to work - no matter what the government formation is.

Good part is we will know either way very soon.

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Donald,

One thing missed in my last post is the terrible burden of “Jayanti Tax”, which would have stopped countless projects. Getting rid of that will have enormous macro push.

I think there is another very low probability of unstable third front case, in which case defensive will rule the street; How less you lose in pf will be determined by how much pharma/high-quality business you have in your pf in short/medium term :stuck_out_tongue:

Another alternative of NaMo’s needing support of Amma/Mamata/Naveen will be neutral, and rumor to be believed, NaMo/BJP will seek re-election in such scenario very soon. This will be a less volatile situation than the former.

In any case, global macro is well-suited for indian chemical/agrochem/pharma is of no doubt. Weak govt will favor export themed stock. Emergence of middle class as a theme is undeniable, election results only will determine the speed of the emergence.

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I happened to read Morgan Stanley report titled âThe Next Indiaâ. Report focus on Indiaâs journey towards 5 trillion $$ economy and sectors that would be support its growth over next 10 years. Highlights are inline with previous posts by Donald, Subash.

Highlights

According to brokerage Top 3 sectors to focus is Consumption, Investment and Exports.

  1. Consumption:

Brokerage thinks share of consumption in GDP will decline over next 10 years but real Growth will remain strong and size will increase 2.7X by FY2025 ( as seen in China). MS also feels per capita income bracket will move up from current 1000-1500USD to 3000-4000$ over next 10 years and this should change the consumption mix.

Within consumption, sectors that will benefit from rising per capita income will be consumer discretionary, such as leisure & recreation, hotels & catering, household goods and services, and health goods & medical services. And some sectors such as financial services and housing will first benefit as per capita income improves.

According to them Sectors such as food & non-alcoholic beverages, and insurance will lose its share in the process.

  1. Investment:

Brokerage feels size of investment would triple by FY2025. sector had dipped significantly in past 4-5 years and sector will now re-emerge as key growth driver. Significant deficit in infra investment will led to urgency to focus on investment. Liquidity super cycle will also aid investment growth.

  1. Exports:

India is currently one of the domestically oriented economies within Asia region. They feel India will gain market share in exports of goods and services and will become second only to china by 2025. MS sees exports growing 3X its size over next 10 years. Growing talent pool, demographic support will lead to export growth.

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My 2 cent on this topic is:

Case 1: NAMO comes to form the Govt

Case 2: Contrary to case 1 so market will remain stock specific story

Now coming to case 1. If this story pen out well then good governacewill ensue,policy paralysis will disappear and overall optimism will attract the FIIs in a drove.Following would be the effect:

Ph 1: In the backdrop of all this inflation to ease, i guess interest rates would first start to go down in tiny steps. This will lift the all interest rates sensitive sectors like Bank & NBFC.Beneficiary would betier-2/3 pvt banks will rise faster as they will lend heavily w/o much risk analysis and their bottomline starts showing growth.More lending, more profit will be the equation.

Ph 2:Lower interest rates give rise to liquidity. It will lift tier 2 sectors like AUTO first. NBFC will get kicker too.

Ph 3: Loose liquidity will eventually lift the engineering sector followed by all ill capex sensitive stocks. In 3rd round, AUTO Ancillaries will start catching attention.

Ph 4: Overall lift in economic scene will generate more domestic jobs or make current jobs safer. This will increase the spending power on the Indian. This will drive HFC, Retail & FMCG Consumption theme in the last.

Though sectors like Pharma&IT will remain insulated and driven by their earning growth only.

Lets hope for the best, as Big Bull has today told that its a start of “Mother of all bull run”. I can only say Amen!

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We need to play the semi urbanisation theme…Read up the BCG Report - The Tiger Roars.

India is depicting a geographical shift. The things to watch out would be requirements of Tier 2 and 3 cities, which inlcudes Housing Finance, Sanitation, Water, Basic Infra, Good Medical Facilities etc

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is…

)–Hi Donald

The mess in financials(especially psu banks) and core sectors lost much needed attention/reforms asap, due to elections and political parties unprecedented campaign…

We have the best gift from the previous government --RBI Governor :-)… Hope the new one gives him a free hand…

Coming to themes may be we have to look at

1.Sectors which are getting organised

2.The sectors which will get a boost due to new government’s push

3). Companies prepared to capitalize due to 2nd point

4). Export themes

( Product -Doubt India can rule the world by coming up with a product on the lines of Apple/Google etc till we embrace/celebrate failure, get our education system right/accessible to all and stop forcing our kids towards safe career options)

5). Lastly our foreign policy w.r.t Japan, France, Germany etc n the opportunities arising due to our renewed foreign policy push if any…

Regards

mallikarjun

( I am yet to shortlist the companies:-p… Any hints will be helpful )

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Guess we have to wait (4 to 6 months or more) for concrete signs to emerge and even give time to the new government to set/walk a decisive path… If not as Manish has pointed out it will be company specific/coupled with help from macros…

Regards

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If rally happens then as all are hoping, it will lift beaten down stocks from Infra, PSU etc but with in its due course. Lift needs eventually a support from liquidity which comes after interest rates ease.

But contrary to general perception, expensive stocks will get more expensive as long as they meet below criteria:

  1. Good mgmt

  2. Strong financials - low/nill debt, high RoE, RoCE, Scalability aka low MCAP

3)High div payout ratio

But yes, its tru that quantum of rise for beaten down sector would far overshadow the stocks from above category. One needs to take the bet accordingly. For example in Banking space, tier-2/3 banks will grow faster than seasoned one HDFC Bank. This is the trend i am guessing and trying to ride on the tide with time.

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I would like to think of Modi phenomena as a short term trigger and not allow it to dictate my picks for the long term.

Ultimately the inherent strength of the nation, economy and businesses is what will drive the picks or flavors of the future too (like it always does). These picks obviously willhave a smooth rideas and whenprovided lubricationin terms of policy reforms. Any government is expected to do that and provide a condusive environment to build on the strengths of the country and the economy, but Modi’s government will be in a better position to do that 'coz of the majority that it will come with and also 'coz of the strong figure that Modi cuts in BJP (assuming BJP led NDA gets comfortable majority).

Coming to themes for the next 4-5 years, below are my views:

  1. Mid/Small Cap IT )- I agree that midcap/smallcap IT is something that should be looked at. I am no expert on IT but within IT space, Infrastructure Mgmt. Services and Proxy Consumption(not sure if this is the right word)/New generation (Engineering design,Consumer solutions)IT services will be something to look outfor. Infrastructure Mgmt. Services would be one of the major drivers for the clients to reduce their costs. By Proxy Consumption/New GenerationIT services I meansomething like Tata Elxsi (Is into graphics and animation for movies, Design services, Solutions for Automobiles, Consumer Electronics, Media/Broadcastindustries, and much more on the advanced technology front which differentiates it from the normal annuity type business model that normally Indian IT operates into 'coz of cost advantage) as mentioned by Abhishek above. Something like Tata Elxsi is a very long term play for beyond 2-3 years as well. (But I don’t understand what is a way to evaluate a small cap IT company. Say something like ASM Technology which is below 100 Crs. of Mkt Cap. I am also not sure if one should look for such small companies in IT space. People like Abhishek Basumallick and other seniors can comment on this may be).

  2. Chemicals (Speciality Chemicals)- This is a very broad space. Again Speciality Chemicals buinesses in this space is something to look for. Hectic MNC M&A activity is an indicator towards this, as many MNCs consider India as outsourcing and manufacturing hub due to obvious cost advantages. India has only 3% share in the fast growing global speciality chemicals biz and its share is expected to double in next 5 yrs. There are few obstacles also in terms of policy and infrastructure bottlenecks that would need to be tackled, but still Speciality Chemicals biz is something to that can be looked at. Proxy consumption stories can be found here as well. For example the fast paced growth of the fragrance industry in the personal care segment aids growth of Speciality Chemical companies manufacturing such chemicals (India has few good global unlisted players in this area like SH Kelkar & Company. Listed one that I know of being a small cap company called Camphor Allied and Products).

  3. Logistics )- If India is going to be a $ 5 trillion economy by 2025 then I find this sector hard to ignore. I also take this as a proxy e-commerce play (as no e-commerce companies listed). Whether e-commerce companies make money in the long term or not but the logistics companies supporting this biz will surely make some money. E-commerce biz of logistics companies is growing at over 100% CAGR although its contribution is still in mid teens of the overall biz of these companies, but this contribution will increase rapidly in times to come. However, e-commerce play would be a very narrow way to look at the logistics space as I said above that if India is to be $ 5 trillion economy then in very basic terms the storage, movement of goods etc would rise manifold. And hence micro plays like GATI, TCI, Gateway Distriparks (I guess only company with cold storage chains) and macro plays like Gujarat Pipavav Ports etc have real opportunity to grow exponentially. Again a lot of hectic PE activity in this space is an indicator of the same. This space requires a lot of capital to grow and newer and smaller players are finding it very difficult to grow and are shutting shops due to lack of capital, which augurs well for companies like above which have established infrastructure on a pan India basis.

  4. Auto-ancillaries )- This is another theme which I find interesting and India seems to be becoming a manufacturing hub towards this. Companies like Mahindra CIE and many other smaller auto-ancillary players are interestingly poisedfor this opportunityin future.

  5. Consumption (Discretionary))- This again looks like a good theme like it always does. I find stories like Wonderla, Talwalkars interesting (Haven’t digged deeper into them as yet though). These seem to be businesses that should benefit and are light on the Capital Expenditure front (require upfront CAPEX with future CAPEX dropping to mid single digits once biz is established) and are capable of generating free cash flows in future).

  6. Deleveraging Theme )- This is generic and applies to companies and various sectors for whom the biz prospects are looking good and at the same time they are looking to deleverage their balance sheets. **I am using the term Deleverage with respect to debt as well as with respect to other businesses that these companies ventured into which are non-profitable. **Companies like Nilkamal, KEC International, Heritage Foods, Brigade Enterprises are the few that I can think at the top of my mind.

These were some ideas that I had.

Looking forward to read more in this thread.

Cheers!!!

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…

** fronts.Small What

Donald,

Since long we have seen large players in IT have outperformed market. The problems with these IT players increase exponentially after reaching one level. However it is not the case with small / mid IT businesses. Niche players (largecap can’t be niche players) may provide better return. for eg. RS Software, Accelya Kale, eClerx, Mindtree, Nucleus Software Exports, Tata Elxsi, Datamatics Global etc.

IT is a fastest changing industry (primary reason why WB ignored it) hence sustaining market position, margins are extremely difficult. **Next IT wave can be expected from Niche Players, IP (intellectual property) creators, product developers, ecommerce etc. **I invite Gurus to comment on this.

Other growth industries worth exploring are Agritech, Media, NBFC, Green Tech.

Kunal

**

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Great discussion as expected. Kudos to Donald’s yet another meaningful thread right on time.

Shall we not also think about growing sectors / stocks, which can sustain valuation after 6 to 12 months ?I mean recent rally is surely expected to chill down.We are already discussing stories for longer duration here but let’s think for a year too.

So which sectors / stocks provide decent appreciation and higher degree of capital protection after 6 to 12 months ?

I should put WB’s quote here -

Only when the tide goes out do you discover who’s been swimming naked.

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POSITIVE PHASE OF MARKETS: NEW STRATEGIES REQUIRED?

Yes

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**

The problem that has always plagued the niche / small IT players has been that they lack deep client relationships. So, where a TCS can go and talk to a CIO of a company, a Accelya or RS will at most get to reach the divisional IT Heads. Plus, unless the product or offering is really differentiated, what I have seen is that larger players wise up to the opportunity and offer similar products / services to the clients. That is one reason, if you recall, standalone Testing services players, all sort of disappeared after the initial few years of great performance. So, the key to look for in small, niche players is what exactly is it that they offer and how easily it can be replicated by the larger players. In India, we really don’t have product based IP led companies. It is more of niche services. And they are fairly easily replicable.

Ecommerce is a completely different business. Its actually more retail than IT. For say Amazon, web is the sales channel. But the bulk of the expenses are in warehousing and distriubution, not IT.

…Next

Kunal

**

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Excellent post to start with…i have following gen points to add.

1). Wabco india in the auto ancillary space looks promising. Technological moat with clean balance sheet good margins and slow but sure drift towards more features in the indian cv industry. Stock price never corrected during the whole 5 year downturn.

2). After the economic revival in few years the business of rating agencies will flourish again. Here i have limited knowledge of why they get more business in a good business env. But its a oligopoly business with only two major players and multiple year chart pattern and finacial results show good days ahead.

Regards

Divyansh

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In my view, the massive mandate delivered to NDA can result in some landmark legislations going through. Some of the areaswhereI foresee govt. action include:

)- PSU bank recapitalization

)- reform of Coal India (?)

)- Roll out of GST (i think the government will defer this, till they have a few more states under rule)

)- Railway reforms (time for more private investment in railways?)

)- Delhi Mumbai Investment Corridor (Now that most of the states that lie in the corridor can be BJP ruled till the end of the year: Rajasthan, Maharashtra, Gujarat, Delhi, Haryana)

However, would love seniors opinion on these. Still not sure on how to play these.

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Hi All,

My first post and apologies for sounding a little pessimistic. However, with this decisive mandate, when everyone is hopeful of a significant turnaround in the way things are likely to function in India over the next few years I would like to focus a little on what could really go wrong and what is the margin of safety that we have currently, while stock prices have been sky rocketing across sectors (barring the so called defensives of IT and Pharma and to a lesser extent consumption). Now, this is more a note of caution that I would like to sound off (and please bear with me for this, while I come from Gujarat and I have seen what difference the person at the helm of India’s affairs can and has made in that state). In my view, I would really be closely watching the following developments:

The most obvious ones would be - i) Cabinet formation; ii) Budget; iii) Macro revival over time…looking at past track record, I doubt if the PM designate would err on the first two points at least, which to my mind solves large part of the problem.

However, if i were to be critical and if there is a place where one would need to be cautious is in the speed with which policy changes can be made, especially in case of changes which need Rajyasabha clearance - and why i say the speed would matter is because, it no longer seems to be a question of ‘whether’ and we seem to have moved to ‘when’ will these changes take effect.

I am sure there will be many more such points that we should all be keeping in mind and would request seniors to throw more light on those.

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India is in category of developing country from last more than 30 years and it is not without reason. Any developing world if new govt come they usually do well for 2 years and after that all sorts of usual problems like corruption etc start. India problem is systematic and relying on single person and hoping for miracle is at best laughable. My guess is market just trying to correct under valuation in many areas and change in govt etc just an excuse for that. Generally rule of law is weak in india and over night under performance of large govt machinery is not likely to change which implement most of rules with ulterior motive.