MyValueResearch

Great Hopes : 2009

What is the difference between a person who starts taking bath if he accidentally falls into a river and a person who says that “O” is the last letter in Zero, instead of the first letter in Opportunity…well, a great difference. The former is Optimist and the latter one is Pessimist.

The terrible 2008 has gone and once we bid adieu to the previous year, the coming of New Year holds a bag of new hopes, ambitions and challenges.

Right now when trading volumes have collapsed and investor visits have reduced, it is difficult to raise new money. Although the probability of the Bull Run is relatively less and market is more towards sideways rather than an upside but history reveals that stock markets always test the previous low before a new bull market gets under way. Let us look at the factors, which foresee 2009 as a year of “Great Hopes”:

First of all, the upcoming elections will bring new government (or existing government again) with new economic reforms. So, chances of meaningful decision-making and policy action are bright. In the first-year of governance, hopefully, Government with a slow GDP and global recessionary pressures, will take some measures like reducing subsidies or divestment, which can be a positive catalyst.

Secondly, in 2008, commodity prices saw typical parabolic moves, especially in oil. It is expected that the three factors will drive the commodity market- Demand because as soon the global recovery starts, the demand will outpace supply, the US Dollar, which is artificially up as European currencies are down and as the dollar depreciate, commodity will accelerate and Money Supply, because of the interest rate cut.

Thirdly, In March 2009, as soon the RIL and Cairn oil and gas fields start functioning; it will give self-reliance to Indian Oil Industry, irrespective of international oil prices. By 2010-2011, Oil imports will obviously drop, which will help in improving balance of payments and lowering the subsidies. Moreover, both will earn large revenues to the GoI through taxes and profit oil.

Fourthly, the market indicators! Today, Market is trading at 10x-9.4x P/E of FY09 earnings and Sensex is trading in the range of 10-30 times since 1991. I keep my high expectation as market is offering very lucrative buying levels and investors will do buying, as stocks would not be really expensive. Moreover, with the historical lows of 2-2.4, today, Book Value of Sensex is around 2.3 and whenever the P/BV ratio had floated around 2, it had been witnessed a strong pullback. Beside this, mathematically, we would also have had an 18-month correction by mid 2009, enough time for corporate India to catch its earnings base.

Fifthly, The downfall since January 2008 has changed the weightage of the prominent stocks in Nifty. Low Beta stocks like Pharmaceutical and FMCG, which have made Nifty less volatile, now, have replaced the interest rate sensitive stocks like Banking and Auto. Lesser the beta, lesser will be the volatility in prices and thus it will be reasonably safer to invest in these stocks.

The last but not the least, Mr. Obama’s comments on H1B visa and outsourcing would not affect Indian IT and BPO sectors because outsourcing is done to benefit US and improve the corporate profit so the shareholders can be happy. Moreover, the US government’s role is limited in US businesses so it will not affect the US business here. To stay in business, US IT companies are shipping jobs overseas to cut costs and remain competitive. Mr. Obama has placed a vision for “reforming the US healthcare system in a way that protects the quality of care while making it affordable and accessible to all” which is likely to promote increased use of generics in Government-funded programmes and should boost Indian generic drugs, which accounts for one fifth of the global production. Mr Obama will also allow for the reimportation of drugs, which would provide Indian manufacturers with greatly expanded access to the profitable US market. In addition to this, there is no pathway for regulatory approval for biogenerics in the US, Obama’s vision will benefit Indian companies like Biocon and Dr Reddy’s who are already in Biosimilars.
The current slowdown in India is more of a cyclical slowdown, which is not a fundamental breakdown and somewhat it is necessary to remind people of cyclicality, overheated growth plans and risk management. Markets are leading indicators of economy. There are strong possibilities of the RBI easing the interest rates that can lead the economy and earnings bottoming out.

Now the questions arises will Corporate India seize the moment? History has seen the fact that adverse times of economic turmoil have been an “opportunity” to the companies to move into position of a leader from a laggard position. Like in the year 1998-99 when cement industry was going through the rough phase, at that time India’s fifth-largest cement selling co. Gujarat Ambuja acquired the sick Modi Cement Ltd, taking advantage of the target’s low valuation. Today, Ambuja Cements is India’s second largest cement company. So calculated financial risks can be opportunity to your business.

Although, one cannot rule out a further downside risk to earnings, still I see large potential in some sectors:

Banking: With the strong banking regulatory system, RBI has already outlined the roadmap for foreign players to grow with “a two-track and gradualist approach” where the first track is for consolidation of public and private banks and the second track is for the “gradual enhancement of the presence of foreign banks in a synchronised manner”. In the light of a sharp decline in yields of government securities to 6 per cent by March 2009, banking sector, especially state-run banks are promising.

Power: With a target to electrify 1,20,000 villages in the current Five Year Plan (2007-12), i.e. ‘electricity for all’ by the year 2012, Government is providing 90 percent subsidy for electricity distribution infrastructure and 100 per cent subsidy for providing power connections to the rural household. Moreover, the government is likely to open up the nuclear sector for private players once it completes bilateral civil nuclear cooperation pacts.

Communication: India’s current mobile telephone penetration rate is just about 20 percent. Market liberalisation policies, tremendous growth in India’s rural and semi-urban areas and forthcoming services such as 3G and WiMax are likely to offer ‘great potential’ for the growth of telecom companies in India.

Consumer Goods: Consumption growth typically shows steady patterns as compared to investment growth in slowdown and there is a huge consumption growth in India. Moreover, it is not an interest rate sensitive industry.

Pharmaceuticals: Consumer spending on healthcare is increasingly on the rise in India. India offers a combination of low-cost and world-class quality drugs, which makes India as the global hub for contract research and manufacturing services. India is second (after China) most attractive destination for clinical trials.

To conclude, it is quite right to say that, for long-term investors, this may be a golden opening to 2009 as Indian growth story is likely to continue for the next few decades. I think, it is just a bear phase for Indian market, within a long-term bull run. India has a healthy capital market and infrastructure backed by a strong structural liquidity and just need global stability, better relative valuations and a good election result to ensure significant policy actions.

Happy Investing!!