Let’s be honest, the current market is brutal. The past six odd months have seen the major indices regaining some of their lost glory but the portfolios are either down 10-20% or have done nothing in this period. Market moves up for two days and you take a sigh of relief that oh, the worst is over but it falls down equally and sometimes more over the next few days and the cycle repeats, endlessly. The brutality isn’t in the fall but the constant loss of notional gains, all over again.
This is typical of sideways markets. We witnessed a good bear market in the first quarter of the year when everything was down 30-40% and the indices also fell close to 15-20% but it also recovered large parts of the fall by June. Now when every bad news has been either relegated to the history books or has been tackled successful and a plethora of good news has flown in, it is only logical to expect a sharp meaningful recovery on the upside. GST cut, RBI rate cuts, GDP growth, everything has failed to take portfolios to fresh highs.
So now what are we seeing here?
It’s often said that the stock market requires patience to make money. Well, this is exactly what’s wearing thin here and I am no exception. You have analysed stocks in detail, you make entry and keep adding on dips and even on the way up; the numbers are great every quarter, the businesses are growing but the price is down 25% and doesn’t move. On a monthly basis, the portfolio doesn’t do anything but goes down 2-3% and bleeds you to a slow death and doesn’t matter what you do- buy more on dips, hold on the way up or sell at modest gains or book loss, everything turns out to be wrong. So, as we end this year and prepare for a fresh start, let’s try to analyse what the market looks like to us:
1. Metals– There has been a tremendous rally of late in all sorts of metals, led by Gold and Silver and thus you see the likes of Vedanta, Hind Zinc, NALCO etc making fresh highs every day. We have clearly not participated in this run for a couple of reasons. One, the idea of being able to buy them when they are beginning to go up and ride all the way is beyond our capabilities. We see no ability to forecast global demands of metals, precious or otherwise because we realise the complexity of the supply-chain. A lot of people who come on TV and talk these stocks up are doing nothing but chasing momentum, backing the up with the recent article in Financial Times authored by an analyst with one year of work experience. What I mean by this is that nobody really has a full understanding of the entire chain- geopolitics included. And those who do are also forming their opinions based on what they are reading in newspapers and will find it hard to locate Israel or Kuwait on a map. So, we accept our ignorance and do not swing for arrogance.
The second reason we do not own metals is because we believe that when the cycles turn and they eventually do, the correction is not severe but devastating. A few years ago, NALCO was available for 20 Rs, having corrected from its 2009 peak of about 230! So, it took NALCO 16 years to take out its earlier peak. This time, the peak may be even higher but I assume, based on history that once it runs out of steam, we will see it trade below sub 50 levels and that’s exactly the time to own it in bulk. If you are reading this blog for the first time, try to read my 2021 blogs when I was selling NALCO at around 90-100Rs, having bought a lot of it during Covid. Regarding Vedanta and Hind Zinc, I have my opinions on the way the promoter runs the business, bleeding the company of every penny of cash and borrowing at such insane levels in international markets that I fear for the company’s solvency. Be careful when the company’s earnings are in INR and its borrowings are in USD/ GBP as when the music stops, you are not even caught naked, you are found dead.
2. The New Age companies– As a consumer, I am all in for the quick commerce delivery companies but the speed at which they are bleeding cash is scary. Today’s newspaper reported that Swiggy has burnt all the cash it raised through its IPO last November and is now trying to raise 10000 crores through QIP. I was flabbergasted to see a stock going up, I think it was Zomato or Swiggy when it raised some mammoth QIP. Let me illustrate it for you. If a company raises money through issuance of more shares, which is what a QIP is, the total number of shares increases. If it earlier had 1000 shares and now it has 1100 shares, the total market cap remains the same, your shares are now worth 1000/1100 of what they were before the fund raise. This is called equity dilution. And if a company is diluting equity repeatedly, it’s killing its shareholders by diluting the value of their shares and by increasing the supply of shares outstanding which normally leads to a downward spiral in prices. So, when a lot of people get excited that oh Yes Bank will be 200 Rs again, I quietly point out to the massive dilution which has happened in the past 5 years through issuance of shares to raise cash.
Now a bank raising a QIP at least is making some profits to show. These new age ones are burning everything they have raised to chase growth and are very soon left with little cash on the books and will come back again to markets with an even bigger QIP. See what happened to Ola when the promoter sold 3-4% of the company at 80% below the lifetime highs!
Regarding talks of these companies turning profitable, I have only facts to offer. Zomato is making some 50-100 cr PAT a quarter, that too after some funny accounting on ESOP. Assuming it to be true as it is, it’s trading at 1000x PE! Even if it makes a 1000 crore PAT in five years and is trading at 100x PE, the stock price should be 100Rs, down 66% from current 300 odd. And this my friends is a very benign scenario. And it’s only one Zomato. There are multiple such companies listed currently.
Recently, Ramdeo Aggarwal is hyping lens kart massively. That man, on record has hyped Zomato on listing, abused it when it fell to 40Rs and again hyped it when it went up to 300. Not everybody who cite Warren Buffett are its true disciples! Make your own decisions when you invest as the share prices can go anywhere but once you taste blood in such companies, you can never think straight.
3. Capital Market Companies– We own them happily and for one simple reason. Any structural growth sector does not fade out in 2-3 years. When IT sector opened up, it created multiple companies doing annual sales of multiple of Billions of Dollars. At this point, the largest listed Capital market company is ICICI AMC with annual sales of 4900 crore. HDFC AMC is at around 3900 cr while BSE is at 3700 cr annual revenue. Let’s put this in perspective. The annual sale of HDFC AMC is at around 500th rank of all Indian listed companies by sale while BSE would be at around 550. There are at least 220 listed companies with sales between 5000 & 12000 cr annually and none of them include a single capital market player. The largest unlisted such company NSE does 18000 crores annually, which is less than at least 155 companies in India.
So, what I am trying to convey is the immense runway available for these companies before they are even close to a normal 10-15% sales growth phase. Even if they do 4x their annual sales, they would still be below 200 companies in India then! Also, when a sector come of age, the leader generally finds it included in NIFTY and Sensex. See, Zomato, HAL, etc. At current market cap, these companies are yet to be classified fully as large caps and need to at least double before they knock on the doors of top indices. Also, as the decadal leaders, I am confident of at least one mind boggling rally left in these stocks which will possibly culminate around the time NSE gets listed and gets included in Sensex, which to my mind will take around 18 months odd. Timing may vary but the outcome may still be what we are hopeful for. Fingers crossed!
4. INVITS– With the new SEBI guidelines, government push to make INVITS affordable, invits are a very good investments to make as a cash-plus instrument. There are a few publicly listed and many privately listed INVITS. The privately listed ones like Energy Infra, etc have huge yields up to 17-19% and a lot of my friends wanted my comments on them. So, a privately listed INVIT is traceable on a stock exchange but has a minimum ticket size of 25000 units. So, you can’t buy 10/100 or even 10000 units. Further, the liquidity is extremely low. Thus, neither can you get in nor get out when you want and thanks to the low liquidity, if there is a panic, the 100rs unit can trade at 80rs in three trades. On the other hand, the publicly listed INVITS offer extremely good liquidity plus very good yields (10-12%) which will most likely go down as more interest emerge from larger public. Recently, in PGINVIT, a foreign investor sold 10% of the total shares in one bloc and the stock hardly fell 3% at the day’s end. Imagine this with Akzo Nobel block deal when similar size deal led to a 20% price cut for the stock. Thus, liquidity is not a problem for a normal guy trying to buy 5-10l worth of shares. Also, I believe that as invits become more popular, they will yield somewhere in FD rate + 2-3% range due to excessive demand and not FD+5-7% currently. That the drop in yield will most likely be due to a rise in price from current levels and not due to drop of dividend pay-out is my bet.
5. Gems and Jewellery– Tanishq announced yesterday that it’s foraying in Lab Grown Diamond (LGD) space with its Beyon stores. This is a massive development for some of us who track a few stocks in this sector. If Tanishq, the king of genuine diamond jewellery is sensing a demand of LGD, then the demand and acceptability of such gems is likely to explode in Indian markets. Thus, a company supplying 66% of global certificates will only be making money hand over fist in years to come and a 1000 cr sales can easily become 4000 cr sales in 3-4 years, who knows!
6. Is AI in a bubble– The entire media narrative is that AI is in a bubble and NASDAQ is likely to crash big time soon and then India will be a huge beneficiary of such event. In my opinion, this argument is utter nonsense. A bubble is not made when there are articles after articles and brokerage reports predicting a crash. It is made when everybody who was bearish turns a believer and there are global voices telling you to buy because the price is only going to go up and it does 2-3-5% every day. The people who made money get phenomenally rich and you feel stupid. So, in my view, the closest we are to a bubble isn’t in AI but in Gold and Silver. The amount of money chasing them is insane and everything which will be good is already in the price. One bad news and the crash will be so bad that those paying 2.15 lakh for a kilo of silver won’t touch it at 75000!
As we end this year, I believe we can agree that we know so little about so many things and do not know anything about everything else. We have the humility to accept our ignorance and also the confidence that we will not relent in our pursuit of knowledge, ever. Happy New Year!
Life is all about Compounding! 