Market musings 3.0

It’s been a while that I’ve posted something so first of all let me wish all of you a very happy and prosperous new year. Indices are doing their bit, falling for a few days while rising on the rest. As famously attributed to JP Morgan when asked what he thought the market would do, he replied – it’ll fluctuate.

So here I’m musing about a few themes which I believe are interesting. The first one is the capital market stocks- brokers, exchanges, asset managers, etc. These are fantastic businesses and have been around as listed entities only recently. Of the three, asset managers across the globe are known to be excellent compounders with out of the world margins and excellent cash to PAT ratios. Similarly, most big brokers in India have PAT margins over 30%, excellent ROE etc and what not. The same goes for exchange businesses. So what’s stopping them from performing? Well, to be honest, Nobody knows. What I truly believe is that just the way the biggest wealth creation in the last decade and half happened in the private sector banks when the ICICI and HDFCs of the world became $30-50-100 Billion market cap companies, similar stories are going to be played out in this sector. They’re trading for excellent valuations and we might make a lot of money going forward.

Tata Motors might be closer to its turnaround, finally. JLR is generating free cash, domestic PV numbers are through the roof and the EV market is growing at a fast clip. Like I always believe, a loss making company which gets back in the black is the perfect multi-bagger opportunity. It will do over 3.2 lakh crore revenue this year. Just imagine! With break even numbers going down, if it can sustain its decent show, it’ll go from making loss of 5000 crores to net profit of 10-20 thousand crores in no time. And that will make it trading at hardly 10-15 times earnings. If it can sustain its domestic momentum and can hit the targeted 60-80k cars a month, we might be looking at a potential triple from current levels, if not more.

And this is regarding the overall trend going forward. The quantitative tightening is here to stay. Funding stupid business models with cheap debt is dead. The businesses which can generate sufficient cash with high dividend yield are certainly coming back in flavor. So value is not just PSU banks and ONGC. It is also a Hero Moto throwing 4% yield, an ITC still trading at 4.5% yield and the entire IT pack which returns all the cash. The FMCG is a pack wherein thanks to non-performance, yields in cases like colgate and lever are pretty decent. We tend to treat dividends with contempt but am sure in an era where FD is paying 7-8%, stocks with attractive yields will find favor.I’ve also added an IT stock which trades at pretty high yield and has excellent return ratios.

So where do I think the market is headed? Up and above. The severe time-wise correction in the US especially is tiring down and the Nasdaq refuses to break below 10500 levels while the Dow has held 32k pretty tightly. All it needs is a stable US market for us to break above the recent highs as the myth of FII selling has been nullified through retail SIP alone. At the current rate, SIP will add close to $20 Billion a year and some more. Add to that the NPS monthly contribution which has a ‘no-sell’ mandate for at least 2035-40 and you have close to 200000 crores annually which just has to buy at every level.

An interesting area where nobody seems to be looking is the FMCG basket where some stocks which used to trade at obscene levels are cooling down, like the ones I mentioned. Similarly, the old two wheeler stocks are currently not loved at all. I believe that you must look at pockets where no one seems to even care. Everyone wants to find the new crafted single malt but sometimes all you need is the good old wine in the old bottle!