My 2012 forecast of Indian market & Top Ten stock picks

 Wish you all a very happy and wealth generating new year -2012.


2011 will definitely be remembered as one of the  forgettables years  for the Global stock markets as far as investment returns are concerned. While the US markets closed virtually unchanged with respect to 2010 closing level(0.4% down), Europe market closed at 12% down (STOXX Europe 600 index).Indian market was the worst performer among the major markets with Sensex down by 25%. A combination of domestic factors like high inflation and interest rates, slowing indian economy, Govt. policy paralysis,  high fiscal/ current deficit along with global headwinds like Euro debt crisis and US slowdown led to withdrawl of invested funds by FIIs leading to a bear market in India.


The Million Dollar question in all investors mind is "what is in store for 2012?”. It’s always very difficult to predict the short and medium trends in the market. However , taking into consideration all the factors and issues playing in 2011, I would like to put my bet on a positive 2012.


2012 should be a brighter and better year because of couple of reasons. Almost all the bad factors - global and domestic - have been already factored into the prices and hence market should start looking up by end of Q1. Inflation has already started coming down with food and primary articles inflation showing <6%. Interest rate cycle has already peaked with RBI showing signs to cut down the rates in near future. Govt. has started to move on reforms/policy, though the attempts on Retail FDI and Lokpal - didn’t produce positive results. Euro crisis will continue in 2012 with Europe going into a recession, though the immediate threats of sovereign defaults have blown away due to some recent actions and agreements like higher emergency funds for IMF and Europe Financial Stability fund and agreement on better fiscal controls in Europe. US economy is showing its inherent strength lately by bouncing back in the last quarter when it showed 3% growth with respect to 0.9% growth in first half of 2011. The unemployment rate has come down to 8.6%(lowest in last 3 years) and job market as well as housing market is looking up after a long time. The only event the market has not factored is a potential sovereign default in Europe in one of the PIIGS nations. Any market can’t factor such kind of catastrophe event anyway.


One should use these times of fear and uncertainty to invest in staggered manner with every fall in the market in the next few months to build up a long term portfolio of strong businesses at discounted prices. The market prices for most of the blue chip stocks/ businesses are attractive and are available at good  “margin of safety” to their intrinsic values. The sensex companies are available at an average of forward PE of 13 to 2012 earnings estimates and forward PE(Price Earning multiple) of 11 to 2013 earnings estimates. The average forward PE historically has been 16 for Indian market in last 2 decades. Unless we don’t have any catastrophical events in 2012, we should see sensex reaching levels of >20,000 by end of 2012, assuming forward PE of 15(>30% returns on the current levels). These investments should be made only with a horizon of  atleast 3 years so that we will get handsome returns of >20-30% annualized.

Next big question is which stocks to invest in 2012?

 I would stick to the same list of stocks which I had advocated in my last blog “Time to invest and build long term portfolio”. I  would recommend these stocks/ businesses( using my "Hi-Five principles/framework mentioned in one of my prior blogs)  in the high potential sectors of Banking & Finance, Infrastructure, Power, Energy and Agriculture/ rural plays.

Banking and Finance space - This has faced the brunt of market reaction and fear recently and hence have some solid buying opportunities.  With RBI indicating the end of interest rate cycle, Banking and finance sector will be the first to start rising. Bank of Baroda and Axis Bank are very attractively placed now.  Consistent performers with > 20% ROE and >25% growth rate in last 5 years with very attractive prices/ PEs. The NPA(net performing asset ratio) is <1%

 Infrastructure space -  L&T and IDFC - Solid and consistent performers with very attractive prices/ PEs. These businesses are the best proxies to India infrastructure story with solid growth track record and strong balance sheet and excellent revenue visibility of >2-3 years(L&T has order book of > 3 years of current revenue; > $25 Billion order book size.


Capital equipments/ Power space - BHEL and REC(Rural Electric Corporations) . Very strong performers with consistent growth track records(>20% CAGR) and >20% ROE . BHEL has strong balance sheet(almost debt free) and big order book( equal to almost 4 times current year revenue).  REC is very strong player in power finance and has monopoly in rural power programs . You could also consider Power Grid which has huge expansion plans with virtual monopoly in transmission sector


Energy space - GAIL and Reliance Industries . GAIL has huge pipeline expansion plans with strong performance and balance sheet . Virtual monopoly on gas transmission. Entering into profitable city gas distribution in a big way.  Reliance has been an underperformer for some time which makes it attractive as all the negatives have already factored in the price(<750) and it has huge cash surplus of $13 Billion which could be deployed productively.


Agriculture & rural space -   This sector is looking up due to big govt. planned expenditure on rural and irrigation space as well as potentially high growth rates in rural and agricultural economy. Jain Irrigation and Coromandel International are very strong businesses with attractive prices and long term growth potentials. While Jain irrigation is the market leader in micro-irrigation , Coromandel is the market leader in complex fertilizers and special nutrients. Both have shown high ROE as well as EPS growth rates of >25% for the last 5 years with manageable debts. Both of them  have corrected to attractive levels in recent times.


All these players are dominant or big players in their sectors with consistent growth and profit performance, robust business models, well managed companies by competent management teams & strong balance sheets with sustainable competitive advantages in their areas. And they are available at great prices now with respect to their intrinsic value or historic PE, providing a great "margin of safety" for the value investors.

Wish you a very happy New Year again  and Happy investing,

Cheers

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Time to invest and build long term portfolio

This is uncertain but interesting times when the markets and Rupee are touching new lows . Fear is the all  pervasive emotion hitting all the market parcticipants with investors and traders triping over each other to sell their assets . In these uncertain times , what should be our investing strategy? Should be stay away from the markets are should be stay put? Should we be buying or selling? Should we be aggressive or passive? Should we time the market? Could the market go down further?


Its these times, when a short sighted and a manic-depressive Mr.Market(as Benjamin Graham would call it) would over-react and hammer the prices down , creating great buying opportunities for long term value investors. My answer is positively inclined towards staying put and investing in the market in installments with every fall .There is no need to panic as the market has factored and discounted almost all the negatives- both domestic as well as international. It has factored in high inflation , high interest rates and domestic growth slow down on domestic front . It has also factored in US slow down , European recession,orderly and managed default for Greece etc. Only thing it has not discounted is disorderly default of Greece or any other PIIGS country or collapse of Euro . It can never disccount or factor that kind of catastrophe ever.


 Yes, the market could go down further. It may probably go down by 10% further . But that probablity should never deter a long term investor as they never try to time the market . They have a horizon of atleast 3 to 5 years when they invest in solid businesses and look at medium and long term trends rather than short term trends . By the way,nobody has been able to predict or time the short term market variations with perfection till now including the biggest of investors and traders . If somebody claims to have a great vision, technology or tool to time the market in short term , he would be rolling in money instead of  lecturing on electronic media or earning his money out of advises.


One should use these times  of fear and uncertainty to invest in installments with every fall in the market to build up one's long term portfolio of strong businesses at discounted prices. The sensex is available at an attractive forward PE of 13-14 with respect to  FY12 earnings and forward PE of 12 with respect to FY13 earnings which is at a good discount to the historic mean for foward PE of 16.


So , which are the businesses one should invest in now ? Should we go for Top down approach or bottoms up approach? Well , this is the time for bottoms up " fishing" strategy using my "Hi-Five" framework I had talked about earlier ...


The "Hi-Five principles/framework" provides the following Five criteria/filter for picking up a solid business/company

- Proxy to the Indian economy growth story or strong co-relation with Indian economy growth
-  Excellent long term growth potential and durable competitive advantage ("sustainable economic moat"  as Warren would call it)
- Honest & competent management - transparent ,shareholder friendly
- Strong financial track record -stable profitability,high ROE & low debt
- Available at attractive prices with good "margin of safety


Few of the stocks I am investing now and would recommend using the above mentioned principles are the following in different sectors.


Banking and Finance space - This has faced the burnt of market reaction and fear recently and hence have some solid buying opportunities like Axis Bank and Bank of Baroda.  Consistent performers with > 20% ROE and >25% growth rate in last 5 years with very attractive prices/ PEs

 Infrastructure space -  L&T and IDFC - Solid and consistent performers with verry attractive prices/ PEs


Capital equipments/ Power space - BHEL and REC(Rural Electric Corporations) . Very strong performers with consistent growth track records(>20% CAGR) and >20% ROE . BHEL has strong balance sheet(almost debt free) and big order book( equal to almost 4 times current year revenue).  REC is very strong player in power finance and has monopoly in rural power programs . You could also consider Power Grid which has huge expansion plans with virtual monopoly in transmission sector


Energy space - GAIL and Reliance Industries . GAIL has huge pipiline expansion plans with strong performance and balance sheet . Virtual monopoly on gas transmission. Entering into profitable city gas distribution in a big way.  Reliance has been an underperformer for some time which makes it attractive as all the negatives have already factored in the price(<800) and it has huge cash surplus of $13 Billion which could be deployed productively.


Agriculture & rural space -  Jain Irrigation and Coromandel International are very strong businesses with attractive prices and long term growth potentials .


All these players are dominant or big players in their sectors with consistent growth and profit performance , well managed companies with strong balance sheets with sustainable competitive advantages in their areas. And they are available at great prices now with respect to their instrincic value or historic PE, providing a great "margin of safety" for the value investors .


Hopefully , you will find this article interesting and useful as I have come out with the best 10 options I would invest in today's market with a long term horizon of 3-5 years. These options should be giving us atleast 20% annualized returns over a long term.


Happy reading and investing.


cheers
Amar

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Would Greece default? Consequences for others including India

   Its incredible and wierd to think that a tiny economy like Greece with $310 Billion GDP(<0.5% of world GDP) could threaten to engulf and freeze the world financial markets with the prospect of Greek default on soverign debt payments. The experts are predicting that the damaging impact of such an event could be more catastrophic than Lehman bankruptcy due to the contagion effect it will unleash on european banks and PIGS nations like Italy and Spain.

Why is the prospect of Greece default such a big nightmare when we had bigger economies like ASEAN nations and Arzentina going the default way earlier and recovering strongly?

The answer lies in few factors like world economy and financial markets becoming much more integrated than ever before and Greece being an intergral part of the European Union with one single currency.

The financial markets have never been more integrated and coupled because of seamless flow of information, hot funds(hedge & FII) and cross country investments. A sneeze in US markets leads to pneumonia in European and emerging markets and Vice-versa. Whenever there is a big negative event , these floating funds and investments become risk averse and flow back to so called "safe heavens" like USD($) and Gold. This in turn leads to havoc for all the asset classes and markets , especially equity markets.

European union is a wierd amalagamation of nations which has achieved currency and monetary union with no poltical and fiscal union. The nations are practically free to persue their fiscal plans with high budget deficits and debts without much restrictions from the European Union or ECB. Consequently many nations(Primarily the PIIGS - Portugal, Ireland, Italy, Greece and Spain) spent their way to prosperity for many decades till they landed up in the current situation. All these expenditure was funded through sovereign debt issue which was readily lapped up by European banks. For example , Greece debt of about $400 Billion is being held by Greek banks, French and German banks. Hence if Greece defaults , all these banks will have to writedown their Greek govt bonds and would not be able to borrow using the bonds as collateral. Also,there could be an attack on Italy and Spain sovereign bonds(by short sellers) leading to sudden increase in yeilds for these bonds to the level of junk bonds. All these events could lead to meltdown of Euro financial markets which in turn would lead to meltdown of world financial markets.

Thirdly , Since Greece shares the same currency as other Euro nations , it is not free to devalue its currency to emerge out of this situation strongly like ASEAN nations and Arzentina . Neither  it can exit from EU so easily to launch its own currency.

So , whats the solution?

Greece Default is an inevitable event due to hopeless situation in Greece - economic depression, high unemeployment, lower tax collection, high labor rates and non-competitive economy.

Disorderly Greece default is not a feasible solution as it will lead to the above mentioned catastrophic situation of Euro zone meltdown . The only solution is a managed and or orderly default. EU leaders like Germany and France are trying their best to find a way for orderly default , e.g. debt restructuring of Greece debt when banks/lenders may have to write off half the Greek debt of $400 Billion, recapitalizing the Euro banks so that they could withstand the partial writedown of Greece as well as other PIIGS nations debts.

The time is running out on Europe and next 3-4 weeks are very crucial for reaching a conclusion on the blueprint of orderly default and start executing the same. EU leaders like Merkel and Sarkozy(Gernan and French leaders) have pledged to come out with a blue-print on Euro banks re-capitalization in next 3 weeks today. However , this may solve the Euro banking crisis but is not going to be the silver bullet for solving Greece and other PIIGS sovereign debt crisis. That could be done only through Greek debt restructuring and making the Greek economy competitive through rationalization of Euro currency exchange rates and Greek labor costs or through orderly exit of Greece from EU. Similar steps along with reigning in fiscal deficits and spends needs to happen in other PIIGS nations too.

Whats the implications for other emerging markets like India and retail investors like us ?

These are very uncertain times for the equity markets all over the world including India , especially October and November. Its impossible to predict the market moves in next 4-6 weeks. It could go either ways sharply depending upon how the Euro leaders behave and execute their plans.

Indian economy is also getting saddled with new problems , apart from inflation and high interest rates like collapse of new capital investments, Industrial production(measured by IIP)slowing down ,downgrades of earning estimates for leading blue chip sensex companies and policy/ reform paralysis at the central govt level.  However , these are short term hiccups with silver lining already appearing in the dark clouds like inflation predicted to go down with better monsoon and commodity price cotrrections as well as Govt. planning to come out with reforms/policies in winter sessions. Long term India growth story with 14-15% nominal growth rates(7-8% real growth rates) in the next few decades is still very much intact.

Value investment gurus like Graham and Warren say that the time of uncertainties are the best times to invest in equities. This is an opportunity to buy fundamentally solid businesses with sustainable competive advantage with competent management as most of the quality stocks are available at attractive prices. Fundamentally solid companies like BHEL , REC(Rural Electric corporation), Bank of Baroda, Axis Bank, L&T, GAIL and Jain Irrigation are trading at near 52 weeks lows at an excellent discount to their intrinsic long term values . Invest with 3-5 years horizon to get handsome gains.

In short term(next 3-4 months), market could  get worse (due to unfolding global events in Europe) before it gets better .Hence , keep some funds(15-20%) in cash or other liquid investments over the next few months so that you could buy selective stocks at every dip, using those funds .  Invest with 3-5 years horizon as the prices are attractive which will ensure good "margin of safety

Happy reading and Investing.

Cheers
Amar

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Developed world at the cusp of recession - Implications for Indian markets

  The first world consisting of developed nations  - US and west Europe - are at the cusp of recession again . This time not due to recklessness and greed of private sector (mortgage companies and investment banks) but due to profligacy and extravagence of the goverments. Unthinkables like developed and rich nation governments teethering at the edge of bankrupties are happening these days. These are interesting times for everybody as these changes herald the beginning of the new pecking order when the economic power of the developed world is waning and that of new emerging economies is surging.

As we speak , Greek govt. could be at the edge of default again just after a year of being bailed out by European Union. The yield of 2 year Greek govt. bonds shot up to a new peak of 57% as Euro-zone threatened to stop the next installment of emergency loans this month if Greece doesn't meet the conditions set for these loans. Next 2 months-Sep and October- would be critical for survival of Greece. Any Greek default could have have a snowballing or contagion impact on other european nations at similar brink of debt crisis like Spain and Italy.  Lately Italy, one of the G-7 nations has surprised the market by its debt woes as it struggles to service its $3 Trillion debt(>150% of GDP).Even France would be hit very badly as the leading French banks like BNP Paribas and Societie Generale have huge exposure to Greek bonds and Greek banks.  All these nations including Greece are too big to fail because of the contagion effect. The future of Euro and European Union is at a big risk with a good chance of weaker southern european economies like Greece, spain, Portugal and Italy shown the door on Euro.

US has its own set of economic woes which is not showing any signs of abating. S&P recently cut its debt ratings to AA+ from AAA which led to a market shock. The enonomic growth in the last quarter(Q2 of 2011) was almost zero at 0.3% and payroll/ employment generation in August was almost nil . Some of  leading economic indicators like ISM's(Institute of Supply Management)manufacturing and production index showed that these sectors were is at the edge of contracting. Conference board's Consumer confidence index has plummeted to the lowest level after April 2009 levels which is bad for a consumtion driven nation. Obama proposed a spirited $450 billion job creation plan.However,the impact of the same would not be seen till mid 2012

These two risks - slowing US economy and Euro zone debt crisis are the two biggest ones which could lead to world economy going into a double dip recession again.

Whats the implication for Indian economy and Indian market?
Well, its short term pain and long term gain. Lets understand how?

Indian economy is unfortunately not isolated from the shock impacts of the potential recession or debt crisis of the developed world . Its primarily because of two reasons . 15% of India GDP is still tied up to exports- IT, Textiles, Gems and jewellary etc. Secondly , FIIs who have become the biggest players in the stock market become jittery and risk averse when we have any world crisis and start shifting their funds into safe havens like dollar or Gold. This could lead to short term shocks in Indian markets when market could go further down.

However, in medium and long term(within 6 to 9 months), Indian markets should show a robust rise again as no other economy(except China) is showing such a steady growth of 8% in these conditions too. Good news about India is that inflation should come down by Nov-Dec due to food prices coming down after a good monsoon and commodity/ oil prices coming down due to global slowdown. Govt seems to be awakening from Policy and reform paralysis as its is trying to shove a few key economic bills through the monsoon session. The interest rate increase cycle has almost come to end with RBI not set to increase the interest rates by more than 0.25% this year. Most of the domestic bad news of inflation and interest rates have already been baked in the current stock prices. All these good news coupled with the fact that there are not too many options(fast and steadily growing economies like India)will pull back the FIIs towards India in medium and long term.

Whats does it mean for Indian retail investors??

In short term(next 3-4 months), market is definitely going to get worse (due to unfolding global events in Europe) before it gets better .Hence , keep some funds(10-20%) in cash or other liquid investments like Gold ETFs  over the next few months so that you could buy selective stocks at every dip, using those funds . Investing 10% of your portfolio into Gold ETFs(exchange Trading Funds) which are mutual funds tracking to the price of gold and very liquid, would be a wise idea as Gold is considered as safe haven in times of uncertainty and hence shows steady appreciation.

In medium and long run , we should continue to be very bullish about Indian economy and Indian stock markets. This is an opportunity to buy fundamentally strong businesses with sustainable competive advantage with competent management as most of the quality stocks are available at attractive prices. Buy in installments at every dip over the next few months .Invest with 3-5 years horizon as the prices are attractive which will ensure good "margin of safety".

Reminding again what  Warren said " Be greedy when everybody is fearful and be fearful when everybody is greedy". Be selectively greedy over the next few months.

Happy investing

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Beginning of the end of American Economic Hegemony - implications for us in India

We are witnessing very interesting and extraordinary times these days when two of the un-thinkable and the un-imagined events happened . Both the events announced  the "Beginning of the End" of American Economic hegemony

 The first event was related to US debt ceiling crisis which brought US Govt.to the brink of default recently on August 2. Just hours before the deadline of potential default , the congress finally put its stamp on increasing the US Govt. debt ceiling from $14.3 Trillion by $2.1 Trillion. However, the damage to the US system credibility was already done due to the inability of the lawmakers and the poltical parties to rise above their narrow electoral interests and think bigger.

The other event happened yesterday(August 6th) when US lost its AAA rating for the first time since 1941 when S&P downgraded the AAA rating to AA+ rating with negative outlook. 2 days earlier , the Chinese credit rating agency(Dagong) had downgraded US rating too. Though this may spook the markets on monday(8th Aug) in short term , the effects would be felt more in the medium and long term when the Treasury yeilds will go up by 60-70 basis points leading to an additional Interest burden of $100 Billion for the US Govt , as per JP Morgan assessment.This is also going to impact the purchases of treasury bonds by countries like China which is the biggest creditor of US. 

Both the events led to abject humiliation of a nation which has been the prime driver of the world ecomomy for many decades and which has treated the world as its own backyard. Russian leader Putin rubbed salt to the wound by calling US a parasite to the world economy who lives beyond its means.

The long term implications of these events could be even more damaging with Dollar losing the status of the world reserve currency . The share of Dollars in world reserve currency has declined to 61% from about 75% few decades ago. These events along with the rising US debt(100% of GDP) will further exacerbate the decline. The only silver lining which will arrest this decline is the absence of any credible currency alternative with Europe and Japan having their own set of issues.

Lastly, the latest GDP data for the first half of 2011 has added to the American woes when US economy growth slid down to <1% which has raised genuine fears of US economy slow down or double dip recession.

Similarly, Eurupe , the other elephant in the room of the world economy has its own share of un-predictable problems in terms of the sovereign debts of economic rougues like Greece, Spain and Italy. If Italy goes berserk , all the surplus money which Europe has also won't be able to help.

What does this mean for emerging markets like India , China, Brazil etc?

Well, there are short term as well as long term implications. In short term (for next some months), this will lead to some pain in the emerging economies as well as markets with US and Europe potentially slowing down or having some soverign debt related shocks. However , in medium and long term , this is going to be good for internally robust and growing economies like India and China as foreign funds(FII) will start coming in droves to economies like India who are the only oasis of ecomomic stability and growth during these troublesome times

Bottomline is that all these events are in line with the credible economic forecasts which I had earlier talked about(in my earlier articles on Indian economy growth story) when in next 30-40 years , India and China will emerge as the dominating economic forces while US and Europe will take secondary roles.

Million dollar question is that what does it mean for retail investors like us in India?

My vote is that keep believing in long term Indian growth story and keep investing in fundamentally strong businesses with quality management teams with a long term perspective.The prices are very attractive for even the best businesses with durable competitive advantages. I had talked about 3 businesses in my earlier articles(PFC, LIC Housing Finance and Bank of Baroda). Now is the time not to dump fundamentally strong stocks like these but to buy more of them at every fall in prices as you reduce your average cost of purchase. I am going to mention one more business/ company today(BHEL) in the next article which is also a very sound value investment.

Medium term - Indian market should start moving positively within next 6 months due to positive domestic factors(till we dont get big economic shocks in the global arena). Inflation should start moderating due to normal monsoon and crude prices have fallen to less than $90. Interest rate rise cycle is nearing its end and we should not see more than 0.25% upward revision for the year. Most of the bad news is already priced in the market(except black swan economic events/ shocks in the Global arena). Policy and reform paralysis of the Govt is showing some signs of activity with the Govt. trying to bring some key economic bills in the monsoon season.

Hence from both medium term and long term , we should see good gains if we are careful in our business selection(using the Hi-Five principles of value investing I mentioned in one of my earlier articles in July) and invest with every fall in prices . Invest with 3-5 years horizon as the prices are attractive which will ensure good "margin of safety".

Last but not the least , Warren said " Be greedy when everybody is fearful and be fearful when everybody is greedy" . Now is the time to be greedy "selectively" and not be fearful

Happy reading and investing

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How to deploy principles of Value investing to pick winner stocks?

In my earlier article on July 10th named "How to take advantage of the biggest growth story of the 21st century-Indian economy”, I had talked about my "Hi-Five principles/framework" of value Investing which I use for picking great businesses (stocks) within Indian economy. This framework has been inspired by the principles followed by Value investment gurus like Warren, Benjamin Graham & Philip Fisher  

                                                

The "Hi-Five principles/framework" provides the following Five criteria/filter for picking up a solid business/company

- Proxy to the Indian economy growth story or strong co-relation with Indian economy growth
-  Excellent long term growth potential and durable competitive advantage ("sustainable economic moat"  as Warren would call it)
- Honest and competent management - transparent and shareholder friendly
- Strong financial track record -stable & high profitability/ROE with low debt
- Available at attractive or atleast fair prices with good "margin of safety"

I  had already provided a few examples(like PFC , LIC Housing Finance and Bank of Baroda) using this framework in the earlier articles in July . Today, I will give provide one more example of successful deployment of this framework to select or validate a great business for value investment. Its BHEL.

BHEL - Why BHEL??

- Power is the biggest "theme" aligned to Indian growth story
- Power needs investments of $400 Billion in next 6 years(till12th 5 year plan).
- BHEL is the dominant market leader(>50% market share) in power related equipments/capital goods with durable competitive advantage. 
- Its best suited to service the huge requirement of equipments given its expertize,domain knowledge and technology(alliances with global companies).
- Order book is huge at >$30 Billion, gives revenue visibility of 4-5 years 
- Last 5 years business and financial track record has been fantastic with 28% growth in sales, 35% growth in EPS/earnings and 27% ROE . Its almost a zero debt company.
-  The current P/E is 13.5 only due to concerns of power project execution delays and slow down in the orderbook inflows as new projects are getting delayed in this high interest environment .The fears are exaggerated due to heavy orderbook which gives revenue visibility of next 4-5 years. Historically the P/E rates have been >25 & hence the current P/E rate attractive.
- Bottomline is that it satisfies all the Hi-Five criteria and hence is a strong bet

You could invest in this scrip now(trading at < 1750) with a time horizon of  atleast 3-5 years with a target annualized returns of 15-25% over long term, provided there is no terrible market shock. Its a safe and risk free bet with excellent return prospects.

Remember again , Successful investment is not a rocket science . It doesn't require a high IQ or professional expertise. All its requires is the right temperament(long term investing) , sound and common sense driven framework or  principles to pick the right businesses available at right valuations & finally discipline/patience to stick with the decisions, ragardless of short term variations in the market.

These are interesting times in the market with lots of turmoil and fear . However , its a good time to invest in the market on fundamentally strong businesses(buying at every dip or fall in prices) with a long term perspective. Great Businesses like BHEL, PFC,LIC Housing Finance etc are available at very attractive prices, providing a high "margin of safety".

Happy stock picking and investing.

     

       

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How to take advantage of the Biggest growth story of 21st century- Indian economy?

 In my earlier blog, I had talked about Indian economy being the biggest growth story of the 21st century. This is based on how the most reliable global institutions and global banks are forecasting Indian economy to power ahead of US and China economy by 2050(pl refer to the earlier blog on 25th June). As mentioned earlier, Indian economy would grow 4 times by 2020(in a decade),14 times by 2030(20 years) and 20 times by 2040(30 years) and so on. Potentially,you could grow your wealth by same or better muliples by investing in NIFTY/sensex Index based funds.However,if we want to do better than these multiples,we have to do some homework in stock picking.

Remember, dont invest in stocks as peices of paper , invest in businesses underlying them .The key is to identify the sectors and businesses/ companies who are the best proxies of this future Indian economy growth  for decades. Remember that this is a long term story and hence we have to pick the best businesses which has the best chances to grow & survive with Indian economy for atleast 10-20 years.

 Lets identify great businesses with following five criteria :-

- Proxy to the Indian economy growth story or strong co-relation with Indian economy growth

- Excellent long term growth potential and durable competitive advantage ("sustainable economic moat"  as Warren would call it)

- Honest and competent management - transparent and shareholder friendly
- Strong financial track record -stable & high profitability/ROE with low debt

- Available at attractive or atleast fair prices with good "margin of safety"

These would be my "Hi-Five" principles/ framework of value investing in Indian markets. I would like to quote one example to demonstrate how to deploy this framework/principles

PFC(Power Finance Corporation) - Why PFC?

- Power is the biggest "theme" aligned to Indian growth story
- Power needs investments of $400 Billion in next 6 years(12th Five year plan).
- PFC is best suited to service this huge requirement of funding, given its expertize & domain knowledge
- PFC plays a strategic role in all big govt. power development schemes. For example , its the nodal agency for all UMPP(Ultra Mega Power Projects) - each of  4000MW size & $4 Billion of investment.
- New sanctioned loans pipeline is $40 Billion - twice its current loan book size of about $20 Billion .This ensures great revenue growth visibility for next 3-4 years
- Last 5 years business and financial track record has been fantastic with 22% growth in sales, 15% growth in EPS/earnings and 16% ROE with NPA at 0.03%  .
-  The current P/E is just at 8.5 due to concerns on slow loan growth(due to power projects execution delays and clearance delays) and SEB(state electricity Boards) health. The fears are exaggerated due to heavy pipeline of already sanctioned loans and very low NPAs.(Non performing assets)
- Bottomline is that it satisfies all the Hi-Five criteria and hence is a strong bet.

You could invest in this scrip now(trading at < Rs.200) with a time horizon of  atleast 3-5 years with a target annualized returns of 15-25% over long term, provided there is no terrible market shock. Its a safe and risk free bet with excellent return prospects.

You have to find another such 8-10 companies/ businesses which can land you in a gold mine in next 10 or more years, available at attractive or atleast fair valuation . I have talked about another 2 companies in my yesterday's blog (9th July)- LIC Housing Finace and Bank of Baroda(pl refer to it). Don't overdiversify by investing in more than 10-12 companies/ stocks if you want to beat the average market returns.

Remember , Successful equity investment is not a rocket science . It doesn't require a high IQ or professional expertise. All its requires is the right temperament(long term investing) , sound and common sense driven framework or  principles to select the right businesses available at right valuations & finally discipline/patience to stick with your decisions, regardless of the short term variations of the market.

Happy stock picking and investing.

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Value Investing - The art of taking advantage of market inefficiencies (with few examples)

 In my earlier blog,I have talked about markets not being so efficient in pricing the intrinsic value(true value) of the businesses/ companies, especially from a long term perspective . Value investing is all about taking advantage of these efficency gaps, whenever they present themselves to us . Lets now talk about why markets are not so efficient many times...

Price volatility in the market is driven by multiple forces:-

1) Fundamentals volatility - Change in information regarding fundamentals of the business or company lead to change in prices
2) Sentimental volatility - Sentiments such as greed and fear play a big role leading to herd mentality among market participants
3) Momentum/ Liquidity volatility - Changes in momentum and liquidity driven by factors like hot FII funds, hedge funds,RBI monetary actions, US Fed actions etc
4) Trader volatility -  Gambling and speculation instincts of traders along with future/options trading lead to more volatility of prices
5) Macro-economic news - Noises/ forecasts  on inflation, interest rate changes, GDP output etc lead to changes in market prices

Markets would have been 100% efficient in capturing intrinsic/true value if the stock prices would been driven by the first force only(fundamentals volatility). However , due to so many complex and muliple forces , markets often become not so efficient in pricing the true value/ instrinsic value of the companies.

One of the big root causes behind these multiple forces which impact market prices is the fact that 90-95% of the market participants(including retail investors, mutual funds, hedge funds, FII etc) are very short term oriented who try to make a fast buck out of every news or event. Big mutual funds and other institutions are in the rat race of beating the competition every month and quarter and hence pay only lip service to tenets of  long term investing or value investing.This short term orientation of market participants make the markets very short sighted and over-reactive to short term  events.

Warren buffet discovered that because 95% of all participants try to beat each other out of the quick buck, markets are very efficient in the short term and hence its impossible to beat the market consistently from a short term perspective. However because of the same short term orientation, markets are not very efficient from a long term perspective - sometimes grossly inefficent. Thats why Benjaman Graham also used to call Market as "manic depressive" who is either too happy or depressed due to short sightedness and over-reactiveness.

Hence the only way to beat the markets consistently is through long term value investing(atleast 3-5 years investing duration or more)so that you can exploit the shortsightedness & long term inefficiencies of the market.

Show me a guy who became a billionare only through short term trading and speculating . But there are many many examples of billionares through long term  value investing - from  people like Warren, Graham, John Templeton to our own Rakesh Jhunjhunwala.

Let me quote some examples of great companies or stocks  in India where market has shown inefficiencies providing mouth watering opportunities  to investors like us to make a killing.

Warren calls such opportunities as " bad news phenomenon" . You basically identify great businesses/ companies and wait for a temporary bad news event either with the specific company or with the specific industry or sector in general.The market over-reacts because of its shortsightedness  as if there is no tomorrow and slams the stock or stocks badly,providing us with glaring opportunities to make money.

Example 1: LIC Housing Finance - This is one of the best examples of the recent past. The company was running at the levels of Rs 270-280 sometime back, when the "cash for loan" scandal hit some of the financial companies including it(CEO got arrested) . Investors over-reacted and hammered the price to 140-150 within few days. Fact of the matter was that the impacted loans was just Rs 1000 cr out of a loan book size of Rs 40,000 cr(2.5%) and those loans too were not bad loans as they had been extended to blue chip companies. Secondly , the event was a temporary blip which could not permanently impact the business of a robust company and brand like LIC. I went ahead and bought tons of the stock with all the cash I had . Today the stock is back at levels of 230-240 within 6-7 months(50% returns ). Even today, the stock could be bought with a horizon of 3-5 years,as its at P/E of 10-11 with a ROE(Return on equity) & earnings growth rate of >20%.Over long term, it should give annualized returns of 15-25%, provided there is no terrible market shock.

Example 2: Bank of Baroda - This bank has been awarded and rated as the Best bank and Best PSU bank many times including 2010. In 2010 , its business grew by 27-28% . Its ROE is at 22%  and net NPA is <0.5%(one of the best financial performance among banks) . Its vision and outlook has been very progressive in terms of substantial investments in HR capabilities, IT and customer service excellence.Yet , its valued at 8-9 P/E , just because markets over-reacted and painted it with the same brush as the entire banking industry because of rising inflation and interest rates.Over long term(atleast  3-5 years or more) should give annualized returns of 15-25%, provided there is no terrible market shock.

Will provide more examples of such Indian stocks soon where we can exploit market's shortsightedness to buy at a substantial " margin of safety" to the intrinsic/ true value of the stocks and then wait for markets to value them correctly. Markets get the valuation right in the long run.

Happy reading

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Biggest growth story of the 21st century - Indian economy

Warren Buffet once said that he owes his remarkable sucess to a luck factor as he was born at the right place(USA) at the right time. The stupendous growth of US economy after world war II for the next 60 years was the biggest growth story of 20th century. Warren and lot of other legendary investors like Benjamin Graham, Philip Fisher, John Templeton were born at the right time in US and rode the US economy growth to create their wealth in billions of dollars.

We , Indians are staring at the same kind of opportunity to create huge wealth by riding the biggest growth story of the 21st century-Indian economy.

Do you know that India is predicted to become the largest economy by 2050? Source: Citibank report and US Govt. report(Robert Blake , Astt secretary of state, US)

Do you know that India is well on its way to surpass US economy by 2042? Source: Goldman Sachs BRIC report. My projections are forcasting that we will surpass by 2035(next 25 years)

Do you know that India would be a $5 Trillion economy by 2020- probably the 3rd largest after overtaking Japan? This is 4 times the current size($1.4 Trillion) in one decade(10 years) Source: Standard Chartered report

Do you know that India would be $20 Trillion economy by 2030? This is about 14 times more than current size in 20 years. This will be about 1.5 times the current size of US economy. Source : Standard Chartered report

Do you know that in 2010 , Indian economy surpassed China to become the fastest growing economy in the world ? Yes, the nominal growth of the Indian economy(in actual Dollar terms) was at 20% , highest in the world. However the real GDP growth was at about 9%(after subtracting inflation rate at 11% from the nominal GDP growth). China's real GDP growth(after subtracting inflation) was at about 10%  as their inflation was much lower at 5-6%

So , keep your seat belts tight while riding this Indian Tiger(economy). If you  wisely ride this stupendous growth opportunity for the next 40 years by investing in the right stocks/businesses and assets , you could create huge wealth for yourself and your coming generations? However, if you casually and unwisely ride by taking undue risks and by being too greedy and impatient ,you are doomed to miss this once in a lifetime opportunity. Remember,Warren didnt make his billions in 10 years. He made it through patience and discipline in >50 years of investing. Often, Time in the market is more important than timing the market.

Principles of Value Investing as taught and applied by great investment gurus like Benjamin Graham, Warren Buffet and Philip Fisher could help you to ride this tiger firmly and wisely without taking any undue risks on the invested capital and still create millions and perhaps billions.

One of the objectives of this blog is to create awareness about this huge opportunity when one can make tons of wealth through value investing in Indian markets for the next 40 years.

All the best for safe and productive riding.

Cheers
Amardeep Mallik
email: amallik@mailcity.com

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How efficient is the Efficient market theory?

Efficient market theory is one of the key theories of modern finance. It challenges the concept of value investing.Widely taught in all Ivy league universities, it says that its impossible to beat markets consistently as markets  are super efficient in capturing all the relevant and latest information and events Therefore no living mortal can achieve better returns than market consistently.

Many of the big investment gurus have scoffed at the efficiency of the market .

Warren buffet once said that "if markets were so efficient as the accadmecians would like us to believe , then I would have been a bum sitting with a tin cup"

Graham once said that "market was a  voting machine in short term and weighing machine in long term". That means markets are unpredictable in short term but eventually prices the value of the assets right in the long term.

He likened market to "manic depressive" guy who had frequent bouts of extreme mood swings  and was  either very ecstatic or depressed on a given day. He called the guy "Mr Market". He taught his numerous disciples that if you get carried away by Mr.Market's wild mood swings , you are doomed as an investor. However , if you learn to exploit his mood swings in a wise manner , you would be a winner. 

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What is "Value Investing"

Value Investing : This is a investment philosophy , conceptualized by Benjamin Graham in 1949 in his book "Intelligent investor" . Benjamin Graham is known as the greatest investment guru of 20th century - mentor to legendary Warren Buffet. Its an investing style which demands investing in assets/stocks available at a price which offers substantial discount or "margin of safety"with respect to intrinsic value.

Margin of safety: This concept has been considered as key cornerstone of value investing by big investors like Graham and Buffet. Margin of safety is the difference between market price and intrinsic value of the asset. The return on investment is directly linked to the margin of safety you deploy.

Intrinsic Value: The actual or true value of a security or asset ,which  may not be equal to its market price or book value.  It is ordinarily calculated by summing the future income/cash flows generated by the asset, and discounting it to the present value.

" Price is what you pay and value is what you get" -  Warren Buffet

Value Investing Rule No.1 : Never loose your capital . Always preserve it.
                        Rule No.2 : Never forget Rule No.1
                        - Warren Buffet

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