Optimism amidst Gloom – Opportunities for Value Investment

The Capital market is always choppy and wavy, like the high seas. That is the nature of the beast. There is no moment of rest. Each trough spreads its share of gloom, negativity and suicides and each crust bring with it euphoria, splurges and binges. We have seen many across centuries; Tulip Mania of Amsterdam 1637, South Sea Bubble 1720, Wall Street Crash 1929 and again in 1987, Harshad Metha driven boom in India 1992, South East Asian melt down in 1997, internet boom and bust around the world of 2000 and now the mayhem in world financial market.

I was looking at an article that I had written in 2003, when the sentiments were down after the tech bust, 9/11 Iraq war, Enron, Worldcom and Arthur Anderson scams. The BSE Sensex was around 3000. Paul Krugman’s observation in Fortune in September 1998 that ‘never in the course of economic events-not even the early years of economic depression- has so large part of the world economy experienced so devastating a fall from grace” looked relevant in 1998, 2003 and even today.

My article was an expression of my optimism that what goes down will come back. Since then we have gone up and now come down again. The Sensex in the region of 9,000 – 10,000. At this stage I feel it is relevant to feel optimistic again. I wanted to pen my thoughts about it and I realized that I don’t need to write a new article again. Just a few edits of my old article. And that is what I have done. For the sake of convenience, continuity and a bit of wry humor, I have retained the original parts in (bracketed small font) that I have edited out and marked the additions in italics. This is how it goes.

With (war clouds looming large) the world of financial markets having experienced a worldwide melt down, the world of investment seems to be in a state of limbo. Adding to this woe has been a spate of poor corporate performance (in developed) around the world, few high profile bankruptcies and accounting scams which have literally pulled the rug from under the leg. All in all the general perception seems to be in hoarding money in cash or near cash equivalent or park in yellow metal.

Let us take a look at it from a different perspective. I believe that this is the time for investors who are looking for value opportunities. A time to pick up shares at real good value. To get some good returns in medium term you don’t have to be even adventurous in terms of investing in speculative and high risk ventures. Just look for few well established and well performing conventional companies. The chance of disappointment is really low. What gives me this confidence? The same reason the prices are down today; the uncertainty around us. It has been always seen that at times of uncertainty the investor looks for a high risk premium and it translates to a lower price for stock. This means that the investor is willing to pay a relatively lower price, compared to times when the uncertainty is low, to buy a piece of the same company. Today we are surrounded by innumerable of factors of uncertainty, which leads to depressed prices.

There is certainly a very high probability that at least some sources of this uncertainty will get sorted out in the near future. This means that general level of depression will certainly pass and this has to convert to better valuations. We have seen this in all markets at all times. Look at what happened after the Gulf war in the US market. The markets have produced above-average gains following U.S. involvement in the World Wars, the Korean War, Vietnam and the Gulf War.

From the general let me venture in to specifics. Let us look at what can be one of the winning markets for the coming year. One of the winners definitely will be the Indian Market. The factors in favor are just too many.

Indian economy in general has been on a high gear. With a GDP growth of around (5%) 6.5% in 2009 compared to an average of about (2%) 3% for the world as a whole India has been one of the fastest growing economies in the recent past. Even the projections for the coming couple of years seem to be in the same direction.

Corporate Sector in India has been performing outstandingly till last year. The current year has witnessed the aftershocks of the worldwide melt down. (When the general results from the corporate sector around the world has been filled with more bad news than good, Indian corporates have been showing a different color.) Indian companies in the earlier era of protected markets had significant inefficiencies inherent in them. Now that they have been exposed to global competition, they have tightened their belts and released significant gains. (During half year ended in September 2002 the net profit of the Indian corporate increased by more than 50%. In the third quarter ended in December 2002, the results of the major 679 companies which released their results shows that the sales has increased by 70% and net profit has increased by 15%.) CMIE expects aggregate profit after tax (PAT) of listed Indian corporates to rise by 77.3 per cent in 2009-10.The detailed analysis by CMIE is given at the bottom of this article

The foreign exchange reserves have been growing at a quicker pace. For the first time after 1978 the year 2002 showed a surplus in the current account. With more than $ 290 (72) billion in foreign exchange in September 2008 Indian government has now allowed Indian citizens to buy and own foreign assets out of their rupee earnings in India.

(The external debt situation has also reduced significantly to 21% from a peak of 39% in March 1992. This has resulted in debt service ratio improving from 27% in 1992 to 17% in 2002). As per Ministry of Finance Press Release India’s total external debt stock at end September 2008 stood at US $ 222.61 billion, which is marginally lower than the level of US $ 223.81 billion at end June 2008. The ratio of foreign exchange reserves to total external debt as at end September 2008 stood at a comfortable level of 128.6 per cent.

(Realizing the reversal in the Rs /US$ exchange rate Indian companies are today taking un-hedged US$ denominated loans.)The recent depreciation of the Rs on account some capital flight has given some jitters to such companies. In fact these companies have been lobbying to get teh accounting standards modified so that they will not have to show the marked-to-market losses in their annual report.:-)

Even infrastructure sector has improved in an encouraging fashion. The telecom cost which was one of the most expensive in the world has seen price reduction of more than 50% since the complete decontrol of this segment. Today in spite of recession it is one of the fastest growing segments in India and one of the most attractive by world standards. Roads and Ports are getting significant investment.

With so much to go for India is an excellent bet for investment in medium term. Although I have been in the Industry for a long time I am normally very conservative and very guarded. But I have very little reservation in being bullish on India in the near future.


Corporate India’s PAT to grow by 77.3% in 2009-10 - CMIE clarifies

CMIE expects aggregate profit after tax (PAT) of listed Indian corporates to rise by 77.3 per cent in 2009-10. This robust profit growth projection is based on the expectation of the petroleum products sector returning into profits from the March 2009 quarter. The losses incurred by the petroleum products sector had eaten away more than a third of the aggregate profits made by the rest of the Corporate India during April-December 2008. Benefiting from the fall in the crude oil prices, we expect the petroleum products sector to make net profits of Rs.11,225 crore in 2009-10 as against the net losses of Rs.56,533 crore estimated for 2008-09.

The aforementioned profit figures are exclusive of prior period and extra-ordinary income. CMIE always uses PAT figures exclusive of P&E as it enables meaningful inter-period comparison.

We have excluded Rs.60,967 crore received by the petroleum products companies during April- December 2008 from the government in the form of oil bonds. The oil bonds are not with respect to the sales made during the quarter in which they were received. It is a reimbursement of the loss suffered by the petroleum products companies.

We expect the petroleum products sector to show a major turnaround at the PAT (net of P&E) level in 2009-10. This will have a major bearing on the overall profit performance of Corporate India as the petroleum products sector contributes 25-30 per cent to the aggregate net sales.

Excluding the petroleum products sector, the rest of the Indian corporates (listed on Indian bourses) are expected to report a 22.7 per cent rise in aggregate PAT in 2009-10. The healthy order-book positions of the construction companies and the machinery companies are expected to help them report robust sales growth. Sharp rise in sales, softening of interest rates and fall in commodity prices, particularly metals are expected to help the construction and machinery sectors to report 40- 50 rise in PAT in 2009-10. A gamut of other sectors such as commercial vehicles, wires & cables, tyres & tubes, plastic products and polymers are also expected to benefit from the fall in input (commodity) prices and low interest rates.


Non-financial services such as hotels, health services and LNG storage & distribution are also expected to report over 20 per cent growth in PAT in 2009-10. The hotels sector witnessed a fall in income and PAT in the December 2008 quarter because of the fall in occupancy rate following the terror attack and slowdown in the global market.

We expect the sector to show an improvement in income and PAT growth in 2009-10 backed by improvement in occupancy and hike in room rates. Similarly, the health service sector is also expected to report a healthy growth in profits backed by capacity
additions and higher average revenue per customer. Doubling of capacity by Petronet LNG and the additional transmission volumes of gas from the KG basin of Reliance are expected to help the LNG storage & distribution sector report a healthy income growth in 2009-10. This coupled with the lower raw material prices is expected to help the sector to report a 47.4 per cent rise in PAT in 2009-10.

We expect the profit performance of the banking segment in 2009-10 also to be healthy. The sector is expected to report a 28.3 per cent rise in PAT owing to continuation of healthy over 20 per cent growth in credit, lower operating expenses and lower provisioning levels compared to 2008-09.

Finally, it is not unusual for Corporate India to report very high or very low profit growth. In 2002-03 and 2003-04, PAT had grown by 70.2 and 76.0 per cent, respectively. In 1994-95, PAT had more than doubled (104.2 per cent) in a single year.