It is a good time to book profits on the investments made through March to June which are yielding a handsome return. It's better to keep cash for a rainy day. Correction is overdue, however, timing it would be difficult," said Ambareesh Baliga, an Independent Market Expert, in an interview to Moneycontrol's Sunil Shankar Matkar.
Edited excerpt:
Q: Some experts say first half of FY21 is going to be bad in terms earnings and economic growth. Your thoughts? Also, are we in a bull phase?
We have witnessed a global liquidity driven rally despite COVID-19 numbers shooting up in various geographies especially US, Brazil, India and a few other countries are facing a second wave. Developed markets had liquidity flows due to monetary policies and stimulus packages whereas India seems to be having liquidity flows from retail. Many have been sitting at home with nothing much to do. This has resulted in nearly 26 lakh demat accounts being opened at CDSL and I assume another 10 lakh at NSDL. So we have nearly 36 lakh new investors in the last 4 months. Most of them would be short term traders having tasted "beginners luck" since the markets have steadily gained around 40 percent from the low point. And it's normal investor psychology to pour in more funds when you are in profits and the cycle turns into virtuous one until the crack.
The ground level reality is starkly different than the sentiment in the markets. Most of the businesses are struggling either with working capital, labour or supply chain issues and to top it, many regions have gone into second lockdown, increasing their woes. Quarter 1 is going to be a wash out which the markets have anyways discounted. However, in the latter half of the results season, when earnings are published along with cautious management commentary, it could trigger a sell off. As of now it seems even Quarter 2 would be slower than earlier envisaged due to the increasing COVID-19 numbers and the resultant restrictions. Now ICRA expects the real GDP for India to contract 9.5 percent against 5 percent earlier.
Another reason for funds flowing into the markets is that none of the other asset classes are performing except Gold. Earlier safe money was parked in rated debt instruments via Mutual Funds which have suddenly turned risky in the last 2 years. The latest Mutual Fund data exhibits redemption pressure, but those funds seem to be finding their way into the markets due to the lure of quick money. Overall it is a mini-bubble building up. So it's time to be cautious.
Q: Given the rally across equity segments so far and challenges going ahead, where would you invest your incremental money now, will it be in midcaps, expensive stocks, largecaps or something else, and why?
As far as equity is concerned, I would prefer to wait it out. It is a good time to book profits on those investments made through March to June which are yielding a handsome return. It's better to keep cash for a rainy day. As mentioned earlier, the correction is overdue, however, timing it would be difficult. Largecaps are safe but for the portfolio to outperform it requires a few midcaps too. And I would invest in those midcaps where I am confident of the corporate governance of the management, a growth sector with comparatively low debt, predictable cash flows and a decent past track record.
Q: Which seem more resilient in terms of growth during the lockdown?
India continues to be a consumption economy, but discretionary consumption could take a hit due to the extended COVID-19 pandemic. However, lower value discretionary spends could see a huge uptick due to months of restriction. We have already seen a huge demand pull for FMCG products like snacks and ready-to-eat. The demand for 2-wheeler has improved sharply due to need for personal transportation and social distancing. Telecom sector has been the big gainer in terms of additional demand due to data consumption. Additionally I expect infrastructure sector to pick up as that's one sector which can initiate demand increase and employment across various sectors, thus would be a priority for the Government.
Q: India Ratings believes that there could be additional around Rs 1.6 lakh crore of debt turning delinquent between FY21 and FY22 which is over and above the Rs 2.54 lakh crore anticipated prior to the onset of pandemic, taking the cumulative quantum to Rs 4.21 lakh crore. But look at the rally in banking and financials in last one month and from March lows. What is driving this rally?
Financials too had majorly cracked in March 2020 during the initial outbreak of the pandemic but recovered quickly as the regulators and government took proactive steps to improve liquidity and tweaked the reporting standards to provide enough time to cushion the strain on the system. However, it simply means delay in the reporting of bad news. With moratorium ending on August 31st, we would know the real situation in the next few months. Till then 'trend is a friend' and that seems positive.
Q: Rossari Biotech has dared to launch its IPO in current market and economic environment, which was unexpected. Do you think more IPOs will come in rest of the year?
There is a time gap between secondary markets beginning to do well and launch of IPOs since regulatory process still takes time. Rossari was to have been launched just before the pandemic stuck India in March and they fortunately withdrew, thus have been able to launch again at an opportune time. Since the markets are overheated, I don't think there could be too many such issues before the correction sets in, though CAMs, Happiest Minds, ESAF Small Finance Bank, UTI AMC and Burger King are those which have immediate plans.
Q: Ganesh (35 years) and Ramesh (35 years) are having Rs 10 lakh each and want to make their own balanced portfolio. What should asset allocation be like? Assuming Ganesh is aggressive investor and Ramesh is conservative investor.
Ganesh, an aggressive investor, should have about 60 percent invested in equities and 40 percent in other asset classes which would include debt and gold. We don't have the liberty to look at various AIFs, REITs, Real Estate etc due to the constraint of capital. Of the 60 percent invested in equity, 60 percent should in largecap/bluechips and 40 percent in midcaps which could either direct or via mutual funds. He should invest about 5 percent to 10 percent in gold and balance 20 percent to 25 percent in Debt Mutual Funds with portfolio in AAA debt/Govt Bonds while keeping 10 percent of his funds in Bank Fixed Deposits, Post Office as well as Blue Chip Corporate Fixed Deposits.
For Ramesh, I would reduce the equity investment to 40 percent with 80 percent of that in largecap/blue chips and 20 percent in midcaps. Gold would be 10 percent and 25 percent in debt mutual funds with portfolio in AAA debt/Govt Bonds while keeping 25 percent of his funds in Bank Fixed Deposits (5 percent), Post Office Schemes (10 percent) as well as Blue Chip Corporate Fixed Deposits (10 percent).
Q: What are your top five stock ideas for the next one year?
NBCC is a PSU which into EPC and PMC (Project Management Contract) with an order book of Rs 70,000 crore. Currently they have Rs 13,000 crore is under execution but once labour returns and completely deployed - it should rise to about Rs 33,000 crore. They are preferred contractors for government projects though there is a tendering process.
A big positive was settlement of Amrapali Project where construction has now resumed and getting green clearance for their projects in Delhi which were stuck due to environmental issues. In fact they have been sold Rs 525 crore worth of units in the Delhi project in May 2020 which is a feat in itself. The next trigger would be to take over of JP Infra which will give them 2,000 acres of land for development.
The stock had cracked from levels of over Rs 80 2 years back due to uncertainties regarding various projects which were stuck in the regulatory conundrum but now have got most of the clearances, thus it could be the beginning of a fresh move.
Himatsingka Seide operates amongst the largest capacities in the world for producing premium upholstery fabrics, drapery fabrics, bed linen products. They inaugurated their greenfield project in terry towels in October 2019 marking their foray into bath linen.
As a turnaround story it became a multibagger during 2015-2018 moving from around Rs 40 to a peak of around Rs 400, with matching performance of EBITDA growth CAGR of 23 percent in 5 years till FY19. However Q4 FY20 proved to be a disaster - with exceptional write offs Rs 58 crore due to Italy Operations restructuring, inventory write down etc. I expect it to be back on track since both their manufacturing facilities were back in production in April & May (though currently the unit at Doddaballapur has been temporarily shut due to lockdown in that area).
The management has confirmed that order books are nearly 75 percent of pre-COVID numbers and production in operating unit is back to near normal. Himatsingka has a strong brand portfolio through owned and licensed brands contributing 75-80 percent of its revenue.
Though North America concentration of 80 percent of the topline is a risk but the management confirms that none of the major customers are at default risk. It could be among the major beneficiaries of customers moving away from China and the Rupee depreciation is favourable. Overall a good long term pick.
Emami is into natural skin care and healthcare products with brands like Boroplus, Zandu range, KeshKing, Fair & Handsome etc. Last year Emami had suffered lower revenue growth due to a long winter - but this year, a mild winter and long summer should help volume growth though at a slower pace due to COVID-19 pandemic. Their direct reach in the market is up more than 50 percent in last 3 years with nearly 10 lakh outlets.
One of the pain points has been group debt and pledge of promoters shares. With the sale of Emami Cement this issue too is resolved. COVID-19 has brought back in focus health and immunity.
Emami has immunity building products under Zandu brand which should do very well, whereas Rural economy is the least affected and is expected to bounce back well due to normal monsoons which is good for Emami Products. This could be a good immunity stock for the portfolio.
Jyothy Labs is a leading brand in home and personal care segments including fabric care, household insecticides, personal care and dishwashing with strong brands like Ujala, Henko, Maxo, Margo, Exo, Pril, etc. It operates through 26 manufacturing facilities across 22 locations and has more than 5,000 stockists across the country. It has been a consistent performer with sizeable presence in South India.
COVID-19 pandemic has put focus on Hygiene and Cleanliness. Pre-COVID - Fabric care segment witnessed strong 23.3 percent growth in Henko. Personal care segment grew 13.3 percent. Exo & Pril, have a strong footing in south India with around 30 percent market share whereas North India is an opportunity. Ujala market share is 80 percent - a clear leader. Overall, the Hygiene & Cleanliness theme will play out in this pandemic as well as post that which along with a rural consumption growth would make Jyothy Labs an attractive pick.
TVS Motor is an interesting stock as COVID-19 has put the focus on personal transportation thus improving the prospects of 2-wheeler in the Auto sector which is already getting a fillip from the rural economy. Sales improved 3.4 times in June 2020 compared to May 2020 - ahead of competition just behind Hero Motocorp. TVS have been improving margins since last two years due to sustained cost reduction efforts and the management is confident of improving it further in the coming years as well.
In Q4FY20, realisations increased substantially around 13 percent YoY to Rs 55,000 due to higher proportion of BS6 sales as well as focus on exports. Exports to Africa which has been its major market has been dependent on oil prices - And now with oil prices having bounced back well from the lows - Africa exports should look better. Though FY21 could be a period of recovery, we should see major growth in FY22, thus could be sought after stock.
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