With another down day, markets have erased all gains since August 2021 and are hardly up 5-6% for the past one year period. The relentless move on the up has shown equally powerful one on the way down. Let’s see where we were and are and how things can go from here:
The broader market is down close to 15% since October high. However, multitude of stocks, including both the fancy( Dixon, Indiamart, IEX), quality( Ultratech, HDFC group, Divis) and what I call the Saurabh Mukherjee ones( Dr Lal labs, Alkyl Amines etc) are down 25-40% in some cases. The pain is worse in some of the junk stocks which went up with the wind. People extremely bullish on India are now predicting a protracted bear run for the foreseeable future.
What negatives are we seeing around us? Russia- Ukraine is on top of the list. This has led to extremely sharp move on the upside in commodities which were already experiencing a super cycle since the bottom of April 2020. Most commodities are either at decadal or lifetime highs. This has stoked fears of higher inflation and low margins for corporates. The low interest rate regime may finally be coming to an end.
Also, there is relentless FII selling for the past one year or so. YTD in the current FY2022, FII have sold close to 2.5l crore worth of Indian equity. So are we done for good? Is the India story over and we sell everything and go home!
Let’s put some facts on the table. India’s merchandise exports have hit all time high and are track to cross $400 B this FY. Even with so much selling, Rupee has hardly budged from 75 levels thereabouts. And, with everything which could have gone wrong having gone wrong, we are down 13% on nifty, sensex and nifty 500 while mid and small cap is down just under 20%. However, if you take the mother ship in US, Dow is down similarly and Nasdaq had hit the 20% down mark last week. So it’s not that India has fallen more than everyone else and only we paid the price.
Coming to some sectors and stocks. Today marked a day when the quality pack( HUL, Nestle, Britannia, Asian Paints etc) were top losers. Since IL&FS crisis, this was a pack which went up come what may and everything else underperformed significantly. Only when Reliance doubled after Jio deals, it regained the highest weight in Nifty, which it had given up for HDFC Bank. And, ITC is actually up for the week. This I believe signifies stock rotation which was long overdue.
This bunch of supposedly highest quality stock has been trading at extremely high valuations, be it PE or PB vs the rest of the market and a narrative was set up that valuations doesn’t matter for this group. Another bunch of stocks traded at obscene valuations ( Dr Lal Path, Jubilant foods, speciality chemicals etc) were justified on similar lines. This excess is now being corrected. When did you last see HDFC group,HUL, Britannia hitting 52 week lows in a market hardly down 10%. More significantly, this group’s returns over a two and a half year period( from Corporate tax cut time in September 2019) is either flat or negative against a market which is still up 35-40% after this fall. So leaders of the bull run have changed and we are in for a massive time corrections in this pack.
Today might also signifies beginning of the end of ITC’s miseries. It was India’s best performing stock since inception of Sensex in 1980 until 2014. However, like many stocks do, it has gone into a massive price and time correction for almost 8 years. And I believe it’s time is here and now. A cash minting machine making almost 15000 crores profits every year with zero debt and 6% dividend yield can’t trade at 18 times earnings.
In my earlier post ( https://zerotomillion.business.blog/2021/11/07/all-money-is-equal/), I made a point that all companies with similar earnings should trade at similar valuations, factoring in for +- 10-15% for sector tailwinds or governance premiums. Let’s put this test for ITC:
Let’s add the trailing 9m earnings of Britannia(1138cr) , Asian Paints( 2188cr), Pidilite(945 cr), Nestle(1758cr), Titan( 1671cr),Dabur( 1448cr), Marico(998cr). It comes to 10146 crores. Now let’s add the combined market cap of all companies. Britannia- 81k crore, Asian Paints- 262k crore, Pidilite- 115k crore, Nestle- 167k crore, Titan- 216k crore, Dabur- 95k crore and Marico- 65k crore. Thus, a combined market capitalisation of over 10l crore.
Let’s take ITC. It has a 9m trailing earnings of 11225 crores and a market cap of 2.77l crore. This just doesn’t add up. It has more profits than all these biggies combined and a market cap of just one fourth of them. So the bet is clear as to which way the wind is blowing.
Now if we do the maths again, ICICI Securities has a trailing 9m earnings of 1042 crores and today a market capitalisation of just 20k crore. This also doesn’t add up.
We have seen similar times in the market when great quality companies have undergone massive time corrections. It happened with Microsoft between 2001-13,. Reliance between 2008-14, HUL between 2001-07 and many more. I believe the time to lap up on ITC is now and here as it has done it’s 9y of penance as it is still trading at 2013 prices. Further, I’ve no reason to believe that a company with ICICI securities kind of earnings, return ratios and growth rate is available at 15x earnings. I’m betting it’s not a $3B company but will eventually become something like a $25-30B company in years to come.
Now let’s come back to the broader markets. All bull runs have sharp, brutal and multiple corrections. This is the nature of the game. The reasons can be anything and we have seen a lot of things for which markets have taken a breather. Remember 2018? When in the name of LTCG, markets fell 10-15% and we thought the world was over? In2016, Demonetisation had almost 15-20% drop, 2013 it was taper tantrum.
Either you believe that it’s going to be WW III and the world is coming to an end or it will pass. Like I said, don’t bet against survival of human race and don’t bet against India. You wanted a dip, this is the bloody dip. This can be dip, dip,dipper but eventually it will go up. Have you heard the story- If only I had bought Eicher motors in 2002 or Infosys in 1995, I’d have been a millionaire. It’s your turn to make those stories real.
This too shall pass!
O
Life is all about Compounding! 