G.CHOKKALINGAM, Equinomics
Research
& Advisory
An opportunity for
smart investors to exit the stocks of inefficient firms & those with
unethical managements
The Indian equity
markets are on a new high. In the US, the S & P 500 Index has almost
doubled since March 2009 & risen above 2,000 (on August 25, 2014) for the
first time.
Dotcom bubble..
In the domestic
markets, investors are worried whether a dotcom-like bubble is building up in
the US, which can trigger a correction.
Since 2008, Indian
equity indices have been correlated to Dow Jones and the S&P 500 to the
extent of 0.85. Hence the fear.
 |
Mr. G.CHOKKALINGAM, Equinomics
Research & Advisory
|
In India, the journey
to the record peaks has been accompanied by several intermediate 10 per cent
corrections.
This indicates that
some profit-taking has already been incorporated in this journey. The Sensex quoting
at about 14 times the FY2016 earning also gives some valuation comfort.
Better macros..!
Other macro
indicators are in favour – the rain shortfall is down to 18% as of August 24,
2014. The area sown under various crops has improved to 9.35 crore hectares —
down just 4.8% from 97.58 hectares sown last year.
The price fall in the
“twin oils” - crude and palm - which form a major part of our import bill, is a
major positive.
Crude oil is down
nearly 15% from the recent peak, while palm oil prices have tumbled to $ 633
per tonne for the first time in more than 5 years.
More than 2000
companies have posted collectively over a 30% year-on-year (YoY) growth in net
profits in June quarter. Indicators like Index of Industrial Production (IIP)
are showing growth of more than 3% in the current fiscal compared to near
stagnation last year.
But, one source of
potential risk to markets is the foreign portfolio investors’ (FPIs) booking
profit. FPIs bought $ 220 cr of Indian bonds in August, taking this year’s
total inflows to $1,650 cr.
However, in case
there is any small stress from the FPIs in terms of withdrawal, LIC of India is
in a position to infuse over $ 800 cr into the equity markets as it has stated
it would invest about Rs. 50,000 crore in the equities in FY 2015. But, a huge
outflow by the FPIs looks less probable in the near future.
All this suggests
that when FY2017 earnings are incorporated by the analysts in April 2015, the
markets could register another 20% upside.
Sensex cross 31000 by
end of 2015..!
Hence, while the
overall index return could be capped around 5% for the period ending December
2014, in the next 18 months, it could give us another 20% return - that is, the
Sensex is likely to cross 31000 by end of 2015.
However, there are 2
areas of concern in the short term. First, the Indian markets could see some
volatility from October 2014 - March 2015 due to complete phase out of the US
quantitative easing & interest rate
hike.
Also, the fact that
India has to repay about $ 17,400 Cr of external debt by March 31, 2015, would
create some pressure on the markets and the rupee.
Mid-cap stocks..!
Secondly, there are
“bold” investors who are chasing the mid-cap stocks without any care about the
valuations.
Several mid-cap
stocks, which are known to change name and post robust results during the bull
run, are back.
Some of the mid-cap
pharma stocks — with turnover of less than ₹1,000 crore — are quoting at 30 to
40 PEs, costlier than Dr Reddy’s Lab and Sun Pharma.
Some mid-sized companies,
after posting losses in June quarter, are moving up considerably. “Better the
return, poorer the fundamentals!” is the new norm for about half the small-cap
stocks.
Expected volatility
in the markets during the second half could lead to a burst in the bubble being
built in the small-cap stocks (with less than ₹500 crore market cap). Smart
investors could use the opportunity in the markets now to correct the past
mistakes — by shedding the stocks of inefficient firms and unethical
managements.
Hence, investors can
remain invested in the Indian equities without losing comfort on the quality of
management and valuations. Also stay on cash, if possible, up to 5% to 10% of
your portfolio.
In case the bubble
bursts, this cash can be deployed in good value stocks. The upside to the
overall market is limited till March 2015. This, however, offers good scope for
some individual stocks in the small-cap category, which still remain
attractive.
About the author..
The writer is founder
and managing director, Equinomics Research & Advisory.
G.Chokkalingam
Founder & Managing Director
Equinomics Research & Advisory Pvt Ltd
18- 3/A, Ekta CHS, Shiv Dham Complex
(Opp to Oberoi Mall)
Filmcity Road, Malad (East)
Mumbai - 400 097
Ph: +91 22 2849 2942,
E- mail: chokka.g@equinomics.in
Equinomics Research & Advisory Private limited (Equinomics) is a SEBI registered Investment Advisor.
(Original source The Hindu Businessline)
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