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06 Aug 2020 by Jigna Shah
Newsletter - Creating Wealth From Equity During Times Of Crisis - Research & Ranking

This story talks about how investors can create sustainable wealth from equity by embracing a blend of Prudent Stock Selection and Patience.

‘Views’ in my view (pun intended), is quite an interesting term. For me, it implies two things:

  • One is how you view things or interpret data and,
  • Second is, how you view others views. Basically, how you let news, information, data influence you.

The second one is pretty interesting. Let me tell you why. For that, let’s take a look at the forecasts in April/May 2020 and forecasts now for earnings and GDP growth.

 

Forecasts for FY21

Nifty EPS

GDP growth

April / May 2020

-20%

7-9% degrowth

Now (Aug 2020)

-5 to -10% (on account of resilience shown by corporates in Q1FY21 in cutting fixed costs and market factoring the worst in April and May).

Less than 5% degrowth for FY21 (based on global agencies like IMF). Expect GDP to rise by 8% for FY22.

 

 

Why I am talking about this? Two reasons why this mattters for creating wealth from equity:

  • News and data would flow in continuously. While obviously, I am trying to imply recovery in the Indian economy, the fundamentals of a company and a country should never be overlooked while reading such data.
  • Many investors got scared with these views, without understanding much about the historical patterns of crisis situations. Every crisis or market correction presented exceptional opportunity to investors to create wealth. I will talk more about the opportunities during crisis in the later section of the story.

But before that, let’s look at the months gone by. If you look at the uncertain months of March and April especially, the downs got many investors run away from the markets, while many investors latched on this opportunity to buy quality stocks at attractive valuations. For those who did not jump in the bandwagon, later regretted for having missed the golden opportunity. And why not, Sensex climbed approx. 45% (as on 31st July 2020) since the lows in March.

But as they say opportunities come time and again. And as a value investor, the focus should not be on the past, but rather on the future and the opportunities during the times of crisis. For this, let’s take a quick look at the facts, which indicate that such times should not be missed. Rather, one should invest during such times.

Interesting positives to look at:

  • Reduced volatility and positive momentum: Post kneejerk reaction in March’20, where volatility was at its peak at 82, India VIX settled to 23-25 in just approx. 4 months.
  • Fall in debt-GDP ratio: As per the report by Motilal Oswal, despite a fall in GDP growth rate, the debt-to-GDP ratio fell to 80.6% in FY20, from 83.1% in FY19. This is again a positive sign as many companies that have deleveraged themselves, will again borrow more, spur credit growth and revive economy.
  • Simulation of 2002-03: While many relate this situation to the Global Financial Crisis of 2008, the economic numbers say otherwise. The GDP growth rate, market cap to GDP ratio, interest rates pattern and overall sentiments during FY2002-03 mirrors to that of FY2019-20. And, we all know the bull run that lasted from 2003-2007. Let’s look at a few of the similarities:
  1. Lowest interest rates, around 4%
  2. Subdued bank credit growth, hovering around 5.8%
  3. Market cap to GDP ratio, hovering around 65-75%
  4. Corporate profitability to GDP hovering around 2.8
  • The power of solid fundamentals: If you look at the Nifty 500 index, 114 stocks have generated returns from 10% to 150% from YTD, while Nifty 500 is down by 7.8% since 1st Jan’20. This clearly shows that quality businesses, even if they correct, they are the first ones to rebound and deliver impressive returns for their investors.
  • Revival in auto sales: Sales of Maruti Suzuki India Ltd. and Hero MotoCorp Ltd. in July 2020 returned to levels seen a year ago. Maruti registers a sale of over a lakh in July, which is 88.2% rise over June. This encouraging number is coupled with strong demand from the rural areas, suggesting revival in auto sector may come much before than expected.
  • Recovery in PMI Manufacturing Index: India manufacturing PMI up from 27.4 in April to 47.2 in June and 46 in July, growth of 68% in just 3 months.
  • Opportunities during every fall: In the past three decades, there have been atleast 4 cases where Indian indices dropped by more than 15% in 6 months. All the downturns were followed by periods of decent returns.
  • Savings for India: India imports 80-85% of crude If you look, the prices of brent crude oil have dropped from $61.30 in Dec 2019 to $44 a barrel in August 2020. This is a massive saving for India, as low prices would mean reduced pressure on fiscal balance. Every dollar per barrel drop in brent crude reduces India’s import bill by $1.5 bn p.a. or Rs. 105-115 bn (at the current exchange rate of 75). Thus, a drop from approx. $60-62 to $42-44 now will lead to savings of over $16 - $24 bn. This amounts to 0.8+% of FY2020 GDP.
  • Rising retail participation: Even during the difficult situation like pandemic, the retail investors pumped in more money in the stock market. As per CNBC report, the retail participation in the cash market stood at Rs. 18,936 crores during Q1FY20. Now, this number has surged to Rs. 33,731 crores in Q1FY21, a jump of over 78% since Q1FY20.
  • FII buying resuming: FIIs, net buyers in May, June and July after heavy selling in March and April. In May and June 2020 combine, FII net purchase in cash segment was approx. Rs. 22,000 crores compared to negative Rs. 71,000 crores in March and April 2020.
  • Revival in GST collections: While many were expecting revival in GST by Oct-Dec, the recovery came much earlier than expected. July GST at Rs. 87,422 crore, June GST at Rs. 90,917 cr vs avg. of Rs. 100,000 cr per month pre-Covid. This reflects revival in GST collections as compared to Rs. 32,294 cr in Apr and Rs. 62,009 cr in May.
  • New demat account openings: As per the data released by Economic Times, about 12 lakh new investors opened demat accounts with the Central Depository Services (CSDL) in March and April alone. The reasons for this spurt can be attributed to ease of digital account opening and attractive valuations post market crash.
  • Strong preference for direct equities. While the number of new demat accounts recorded a strong growth, the SIPs in mutual funds increased marginally. This indicates that retail investors prefer direct equities as compared to managed funds while investing in equity markets.

Everyone is grappling with the contradicting news and numbers. Considering the hiccup in momentum, this makes many investors think about the next steps ahead. Our advice would be, take every correction as an opportunity to buy good stocks in a staggered approach.

Way ahead

Let’s take a look at EPS growth – Large company wise for Q1FY21

   

Below expectations

In-line

Above expectations

TCS

HCL Tech

Infosys

L&T

Bajaj Auto

Wipro

Bajaj Finance

MMFS

HDFC Bank

TVS

ICICI Lombard

SBI Cards

HDFC Ltd

ICICI Bank

Havells

United Spirits

Avenue Supermarts

Britannia

Kotak

Dabur

HUL

 

Reliance Industries

ACC

 

 

Ambuja Cement

 

 

Ultratech

 

 

Tech Mahindra

 

 

Marico

 

 

Axis bank

 

Q1 results from large companies (as in the table below) declared so far suggests fewer companies disappointing while a majority of them are either inline or have surprised on the positive.

 

EPS growth - Sector wise for Q1FY21*

 

 

+10 to +30%

 -10% to +10%

 -10% to -30%

 -30% to -50%#

Pharma

Bank

NBFC

Retail

FMCG

Insurance

Cement

Infra

Telecom

IT

Alcohol

Metals

 

Chemicals

 

Paints

 

 

 

Auto

 

 

 

Electricals

 

  • *Trend of one-off quarter which was most impacted due to lockdown and not indicative of whole of FY21.
  • #Segment presents most opportunities as many stocks still beaten down while long term fundamentals are intact

Sectors which contribute a lion’s share of Nifty and Nifty 500 are IT, energy, FMCG, IT/telecom, BFSI. These sectors have either seen earnings decline of less than 10% or have rather grown in Q1. 

Research & Ranking Outlook:

Always remember that the markets are forward-looking, since they discount earnings 1-2 years forward. This makes them the best barometer of the health of an economy. Let’s take the case of Sensex, which hit the lows of 25,981 in March 2020, when the outbreak was under control. Considering today, the cases in India has gone up manifold. However, if you look now, Sensex is up by almost 45% (as on 4th Aug) since the bottom.

Markets always factor in the future. Hence, by Sept 2020, stock market will start discounting FY22 earnings, on which we will have far more focus and clarity for the way ahead.

Talking about the earnings, we believe the earnings jump in FY22 should be anywhere between 25-30% which is possible given the low base of FY20 & FY21, again propelled by the various stimulus programs that are expected to be initiated by the government.

Thus, we believe that even if there is a correction, every crisis or correction should be considered as a buying opportunity to create sustainable wealth for the future.

Important things to keep in mind for any investor who desires to create wealth from equity

Yes, the number of daily cases has increased. The pandemic is expected to continue for some more time. However, while you were waiting for other negative data to flow in, these are the developments that took place between March 2020 to July 2020. These developments can be negative or positive, depending on how you view it.

  • Apple market cap grew from $1.3 tn to $1.9 tn in less than 6 months, an increase of $600 bn (INR 40 lakh crore) in a matter of less than 6 months. Talking about India, Reliance grew from a market cap of Rs. 7 lakh crore to 14 lakh crore.
  • Crude bounced back from $10 to $40 in less than 4 months and Gold prices moved up from 46,000 to 53,000 in the last 3 months.
  • Most of big economies pumped in trillions of dollars into their economy to support demand and the local businesses.
  • 46 start-ups in India got funding between $2,00,000 (INR 1.5 crore) to $10,00,00,000 (INR 750 crore).
  • Indian market cap grew by 45% and most countries showed a similar performance in their indices.
  • Interest rates turned zero / turned more favorable in many countries prompting investors to do more spending and investing.

There are many, many, many more positives that I can keep adding and I am sure going by various other news reports etc. there are many, many, many negatives that can be added to the above list, and this entire debate of whether we have more of positives or more of negatives in the last 4 to 6 months will become endless. Discover the reason why here.

But one thing I can say with certainty: In my 15 years of career, I have come across many investors who showed confidence in the economy, bought quality businesses, hold on to their investments during the time of correction and crisis, and created wealth eventually. However, I haven’t come across investors who tracked all the negatives in the markets / economy, waited for the markets go down, invested exactly at the time when it made a low, and encased just before it was about to get into a correction phase and still managed to create wealth via long term investing. Do you know any such investor?

 

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