October 2014

 HAPPY DIWALI

INDIAN ELEPHANT IS FINALLY READY FOR A LONG HAUL …. IS IT ? ? ?

We are living in an exciting era in INDIA. I had never ever thought that one individual can cause such a dramatic change  in country as big as INDIA. The whole country is vibrant as our beloved Prime Minister Shri Narendra Modi has encompassed the life of every Indian over last 8/9 months -   first with his whirlwind blitzkrieg as a prime ministerial candidate and later as a Prime Minister of a single party government with absolute majority in  lower house of parliament.

His charisma and enthusiasm is such that he stamps his authority on every nook and corner of the government machinery. He has shown abundant energy in last 10/15 days in campaigning for Maharashtra and Haryana state elections WITHOUT HAMPERING ROUTINE  PMO WORK.

His charm is such that World Bank / IMF as well as major investment bankers around the world have already upgraded India with next 5 year outlook and rating agencies like S&P / MOODY / FITCH  will be soon vying to accord INVESTMENT GRADE rating.

The idiom “FORTUNE FAVORS THE BRAVE”  also seems to be coming true. In the last 6 weeks, we have seen a huge dramatic  fall in commodity prices – be it crude or base metals  or precious metals -  because of which suddenly the monsters like CAD / Fiscal Deficit / Exchange Rate etc have become manageable challenges which were looking rather insurmountable when the Finance Minister presented his budget in early July.

IN SHORT, WE NEVER HAD SUCH GREAT MACRO CLUES IN LAST 7/8 YEARS ATLEAST.

After the longish prelude, let us now turn to our main topic –  MARKETS

The Universal truth about markets is THAT ONLY LESS THAN 10 % OF THE TIME IT IS FAIRLY PRICED. Rest of the time either it is overpriced or underpriced depending on the prevailing sentiment. I feel currently we are far ahead of fundamentals but still below the EUPHORIC stage.

Our  so called experts or analysts  cannot afford to be realistic because of their  association  with an AMC or a Brokerage or a Business Channel. ONE HAS TO TOE THE OFFICIAL LINE. Hence, they will go out of the way to justify the existing price level for a particular stock or index as a favorable multiplier of expected earnings – at times even 2 or 3 years ahead. It is nothing but juggling the numbers on EXCEL sheets and they can even go to projecting C class  items like  LABOUR COSTS or WORKING CAPITAL requirements  3 years or 10/12 quarters ahead.  ALAS …. IF RUNNING THE BUSINESS WAS THAT EASY  ! ! !

If you ask even the chairman or owner of any multibillion dollar conglomerate to comment about those EBIT or PAT projections – 2/3 YEARS AHEAD, he will be reluctant to own them since most businesses simply do not have that kind of visibility. Another important point is that  if the CEO accepts those figures, these will come back to haunt him  3 years down the line  while the analyst will simply get away saying  “IT WAS A PROJECTION”.

So the moot point is to take all that you hear on channels or see in electronic media like newsletters etc. with a pinch of salt and  MAKE YOUR OWN CALCULATIONS IF YOU HAVE ANY DOMAIN EXPERTISE.

INDIAN ECONOMY is often compared with a  SLEEPING ELEPHANT. In the eighties and the nineties our economy  grew at  2 to 4 % annual rate which was world over branded as  HINDU RATE OF GROWTH. It is only in the late nineties we were able to break 4 % threshold  which itself was considered as a super normal achievement by those governments. Only in the new millennium, we could get above 5 % and sustained above that consistently for next 10/11 years till we slipped below 5 % last year.

We could average even 8 % during 3/4 years from 2005 to 2008/09. We were jubilant and celebrated that achievement and many even started taking that growth rate AS A GIVEN.

Only during last two years, a realization is dawning that average 8 % was achieved  simply because the politicians / the babus and some industrialists nexus did loot the exchequer  of  the scarce and precious  national resources for next to nothing. Naturally these industries and sectors did show some spectacular growth rates both in revenues and profits. Same thing was happening in awarding several infrastructure  projects ( EPC / PPP / BOT )  like airports / roads / ports / power plants where the winning bidders were given not only most favorable terms but were even allowed to change the same after 2/3 years to suit the bidders convenience. Some bankers were also hand in glove while advancing the loans without proper project scrutiny or adequate mortgage agreements as a safeguard.

All these skeletons started falling out since 2011/12 and the government that time got completely paralysed as every single babu was paranoid to take any decision. Result was that all infrastructure projects stalled and the fresh investments in any sector came to a grinding halt. There  were no takers for bank credit while banks continued to sit on big deposit piles to lend to no one but to stash it with RBI.

What I have enumerated in last two paragraphs is the exact reason why THE ELEPHANT, ALTHOUGH  NOW AWAKE, IS GOING TO TAKE SOME TIME TO GET INTO FAST, PURPOSEFUL WALKING MODE FROM JAYWALKING.  IT WILL TAKE SOME TIME   - EVEN UPTO 3 YRS – BEFORE ELEPHANT IS READY EVEN TO GALLOP – FORGET RUNNING.

And finally an ELEPHANT is an ELEPHANT …  NOT A CHEETAH.  So it is going to take considerable time to get momentum to reach the top speed. With 1.3 billion + population with so many economic / religious / linguistic cross sections, it is a herculean task to make it run  like a homogeneous mass or a well oiled machine – particularly without resorting to unholy means.

LET US REALISE THIS, KEEP IT AT THE BACK OF OUR MIND WHILE TALKING ABOUT MARKETS IN THE COMING SAMVAT.

Last year - around this time  - we were near a new all time high but no stakeholders had made  any serious money. This year we have hit several new all time highs in the last 6/8 months – virtually every week – and it has resulted into gains for everyone. The 35% odd rise in NIFTY is also associated with more than 50 % increase in midcap index and over 100 % increase in small and microcap index. Many mid cap and small cap stocks have even become five baggers and ten baggers. THIS IS THE EXACT AREAS IN WHICH RETAIL HAD GOT TRAPPED IN 2007/2008. Now they have had a chance to come out of those large losses and these retail investors are now thronging back to brokers / AMCs - spreading cheer everywhere.  However several LONG ONLY FIIs who have brought in dollops of dollars  in last 10/12 years are still having a grudge because  they have not been able to make much money in dollar terms due to sudden depreciation of Indian Rupee in July / August 2013.

Our markets started a rally since 1^st September 2013 …. The day Dr Rajan took charge as RBI governor and absolutely no doubt that he has been exemplary. At no time he has allowed the incumbent government to pressurize him. While this is a major factor for the initial part of the rally,  pl have a look at weekly charts of DOW / S&P / NASDAQ  and you will find that  the major move from NIFTY 6000 to 8180 has coincided with American markets rally which started around first week of February 2014.

Currently, since last 4 weeks, American markets are correcting and may continue to correct for some more time. This is bound to affect our markets as well and NIFTY also may correct to 7400/7500 level from frothy 8180 hit 5 weeks ago.  THIS CORRECTION WILL ALLOW YOU TO BUY SOME HIGH QUALITY LARGE CAP  AND MID CAP STOCKS AT A MUCH BETTER VALUATION THAN INDIVIDUAL PEAKS HIT BY THEM EARLIER. I have been saying this for some time, that a good entry point is as important as a good exit as it accentuates your returns and gives you lesser anxiety if things don’t go right in early part of investment.

NO DOUBT, OUR MACROS HAVE IMPROVED BUT IT IS GOING TO TAKE SOME TIME FOR THAT TO REFLECT IN ANCTUAL PERFORMANCE OF MAJOR CORPORATES. So EPS  for NIFTY is not keeping pace with the way NIFTY has moved and may continue to do so for next 6 to 9 months minimum. This gap will narrow down when NIFTY comes closer or below 7500. 

PLEASE BEAR IN MIND THAT OVER A LONG PERIOD OF TIME, ONE CAN ONLY EXPECT  12 TO 15 % CAGR RETURNS FROM EQUITY WITHOUT TAKING UNDUE RISKS. SO, ONE HAS TO BE PATIENT TO HAVE HEALTHY RETURNS OVER TIME. THERE ARE NO SHORTCUTS.

Last year, around this time, odds were stacked against us but as expected, 2014 loksabha election verdict has brought in MR MODI who has promises to keep to make the most of the opportunity he has got.  Global  economic events have also been favorable and the future of INDIA is pregnant with lots of hope that BJP government will  deliver the desired results.

Last but not the least – I must thank you all for patronizing  my website WWW.SUMAMURA.COM and I hope you have been rewarded in some way. You must have found it much different than other financial websites that you may have seen.

I am giving below a table covering several frontline stocks  / indices  and commodities with annual – 2014/15 -  entry / exit levels , stoploss and targets. 

If you have any doubts you can reach me on 9371002943 or my email id madhavranade1@yahoo.com. I am also available on yahoo messenger with yahoo id  madhavranade1.

WISHING YOU ALL

A VERY HAPPY DIWALI 

& 

A  PROSPEROUS  NEW YEAR

MADHAV RANADE – 15^th  OCTOBER 2014