Returns after fall.

September 2020

In history of markets whenever brutal falls had happened as much as 40% or even
more, it had been evident that after the start of recovery of markets, small and
midcap indices have outperformed the large caps by a very large extent. Below is
data.

Time frame Nifty rise % Midcap rise % Small cap rise %

April 09 to Oct 110% 153% 160%
2010
Sept 12 to March 54.5% 69.8% 71.5%
15
June 16 to Jan 18 34% 59% 66%
From 1 May 2020 18.7% 28.3% 40%

Why are markets rising?

As I discussed in our Webinar on rising sectors,

“Market is forward looking earnings growth discounting animal, Economy is

backward looking animal connecting dots backwards.” ____Pritam Deuskar

Money is printed by the US federal bank to support Governance by buying

government bonds and keeping interest rates very low so that economic revival can
be done. US investment firms borrow at a cheap rate and also can invest heavily into
companies all around the world. FII inflow has been highest in India after 2010
crossing 5.4 Billion USD.

In our view, Markets may not necessarily always go in sync with the economy. Also
markets have been smartly distinguishing companies and sectors during pullbacks.
Sectors like pharma, agrochemicals, speciality chemicals, third party manufacturers
or ancillaries for these sectors, online platform companies and market related
securities companies have done much better than banking, auto , capital goods,
heavy machinery , infra or branded consumptions. Sectors like telecom which had
an overhang of AGR issues and boost of ARPU increase are still in stagnation showing
better prospects ahead with 5G opportunities. New edge tech companies will be rising
to solve issues of core companies. Many business models e.g. Auto cars are emerging.
This indeed augurs well for years to come just like electricity did in 1920 where
Dow increased multiple times in a year.

“Challenges will create more opportunities in Life, Business and Markets”

– Pritam Deuskar
Once vaccination starts, by returning to normal, FY 22 year can have earnings
similar to or more than FY20. When fall was happening, fear was of unknown
uncertainty. Now after GDP forecast, treatment procedures, curable data, low death
rate and all facts came out, the World understood that it is controllable though can
damage some quarters of the economy. Unknown devil is known and impact is
getting better tracked and assessed. Interest rates are going to be lower for another
1-1.5 year. Whenever savings account interest or bond yields are low, dividend yield
and earning yields (reverse of PE) of stocks are attractive, markets start recovery.

How will be recovery ahead?

Emerging economies except China like India will be taking more time to return to
normal than USA or developed countries. GDP fall and subsequent rise next year are
going to be faster in the USA and China. Also the time frame when virus hit the
country is different hence damage done to GDP among countries is not the right
comparison. India too is likely to show a good rebound in FY 2022 with 8-9% GDP
growth is expected. Supply side are back in India to 75-80% whereas demand side
are still at 60-65%. Opportunities lie in some sectors and some would be taking time
to settle.

“There is always a bull market going on in some place”_ Vijay Kedia

What Investors should do?

Choose companies that are prone to grow in the next 1-2 years with zero or inverse
relation to corona. Also choose companies that can definitely come back faster when
unlock and reopen happens. Cash rich companies with high ROE are always winners
after crisis provided there are no sectorial headwinds

Avoid FOMO: It is ok that stocks are going up all the time and you will have a left
out feeling. One should focus on a list of good companies that have done better in
terms of operating margins consistently , that have good ROE above cost of capital,
Management of company is focussed on growth and has opportunities to grow their
sales and profits and having good trend can be bought. Choose from sectors having
tailwinds. Individual earning growth of a company contributes 60-70% whereas
sector tailwind contributes 30-40% to a stock price rise in our view.

Choose for 2 years: Some companies rise due to temporary news or announcements
but size of opportunity, actual ground reality and enough catalyst might be scarce.
It is always better to look at top line growth sustainability for 7-10 quarters as this
is where humongous returns are created.

Can there be correction?

Yes. No rallies are all unidirectional. Markets may consolidate in a range for a year
or can correct 5-7% or even 10% from such 11500 levels. However sharp declines or
previous low levels are unlikely unless there is bigger threat appears to humankind.
Despite of that it does not mean that all stocks will correct as much as markets.
There will be some stocks where narrowing of broader base will happen.
Will only big companies survive?

After each crisis every industry consolidates. Cash rich , strong parentage , no or low
debt and high ROE to peers will not only survive the storm but use bad days of other
competition to acquire or take away business from. This has happened in the 1920s,
1950s, 1970s and so on. This is why sticking to leaders in your choice of stocks
matters. Our 5GCPM framework focuses on no1 or no2 players.

We however do not subscribe to the theory of only large becoming larger. It is not
viable alone as 99% population is neither employed by nor survives on business of
only top 15 companies. Rather these companies are definitely dependent on this
population’s earnings and survival which indeed depends on other businesses and
companies. Total employed population is 500 plus million workers and the top 15 in
India listed companies may employ only 25 lac people all together. With railway,
armed forces, post office being the largest ones after which TCS comes. These
employees or small traders or vendors or businesses have income dependency
outside Top15 and they are more important to survive to have sales of paints, sim
cards, apps or building materials or home loans.

In our belief, bear market that started from Jan 2018 for small midcaps has come to
an end and many companies which are extremely good in corporate governance,
management integrity , cash rich balance sheet and great parentage are going to be
picked up as valuations are very attractive and large cap are above 5 yr average
multiples.

Which sectors will do well? Where are opportunities?

Opportunities in research, west partners JVs and anti-china sentiments are creating
a plethora of chances for Indian entrepreneurs for next 5-7 years in chemicals, white
goods, herbicides, injectable, CDMO and custom synthesis and new edge cloud, AI,
IOT and ML. There are sectors like Agrochemicals, Chemicals, vendor
manufacturing, increased import duty segments, import substitution themes. Also
the rise of online businesses with no disturbance in operations or sales of companies
can be looked at.

Data on next page

If we look at companies above 1500 cr market cap which have risen minimum 30%
above Feb high which was sort of highest pre Covid levels there are about 110 such
companies. Below is categorisation.

To see this list visit: blog

Agrochem, 9
Sugar, 3
TV Media, 3

Defence, 3 Pharma, 33
Cable network, 3

FMCG, 6

Auto ancillary, 1

Platform, 5

2 Wheeler, 3
Nbfc digital, 1
Bank, 1
IT, 14 Mining, 1
Tractors, 2
Chemicals, 10
Infra, 2
Telecom, 4 3rd party
financing, 2
manufacturing, 6

Making earnest endeavour,

Pritam Deuskar, Founder, Wealthyvia.com

https://wealthyvia.com