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What is there on your radar today: FII selling, market reversal or that sudden selling which has come back in NBFCs?
The first thing we need to look at is the trend that started in March of aggressive FII sales, which was pretty much not an India phenomenon, but across the region. That at least ebbed in April, which helped the nice 30% kind of a pullback rally. The other factor that has not been discussed much about April market was that domestic institutions actually saw a net outflow of roughly about $200 million. In last three-and-a-half years, only in about four or five months have DIIs been net sellers in a month. This can be partly explained by the fact that we have had the Franklin episode, and there was some liquidity crunch as well, because people wanted to keep some powder dry to build a nest as it became apparent that conditions are going be a strong and difficult going forward. We need to keep a watch on how things play out in the immediate future, say in May, June. I do not know whether we have got the data for April in terms of liquid flows. The SIP number will also be important. That is what is happening on the flow side, which is also a reflection of the investor psyche. We have also seen a lot of new accounts opening in terms of demat so that is a positive sign.
On the corporate side, all the headlines are clearly telling you that belt tightening is going to be the norm at least for two quarters. Cost is going to be the key factor, and revenues will take a hit in the April-June quarter going by the auto numbers for April. Clearly, the revenue line is going to bear the brunt, and that is why FY21 EPS estimates on the Nifty will have been done a good deal. The market is now wanting to discount FY22, and I think that is really quite an opaque glass at this point. Because you have got the vaccine news, and that could mean the revival would be sooner than expected. But I think things will probably get worse before they get better.
Desperate times call for desperate measures, but this is almost like a distress sale wherein you are not going to easily find takers and the price is screaming of a distress?
What we need to read here is the government’s resolve to shore up revenues is extremely strong, and they are sensitive to the fact that revenues will be hit. Hence, we need to look at anything that can earn some receipts. Having said that, the investor preference or disposition towards equity buying even in a good brands like Axis Bank and ITC would be low at this point, marred by the more recent or short-term expectation. Axis Bank numbers were operationally pretty decent, but despite that I do not think the stock has performed. You will also be looking at what is likely to happen if this revenue pressure across the economy continues with the lockdown continuing for some more time. Then you would probably see a next round of NPAs hitting the banks. That is the main fear here. As for ITC, it’s very clear that discretionary spend is going to come under a crunch because right now incomes will be hit, you will be having job losses. Plus, there is this risk of Covid cases going up sharply and us having a second wave of case if people don’t adhere to the social distancing norms; that is a big risk.
So today if you ask me will there be interest? Yes, for long-term investors these are great franchises and you are getting them at such great prices. If you are willing to live with the short-term pain over the next two-three quarters, then these are very good entry prices. But the question is if I buy today, am I likely to see a 15-20% haircut in the immediate short term from my current investment? Yes, that is very much a probability. So that is the conundrum investors are facing right now. Because unfortunately, the short-term scenario is so murky that one does not know if I be able to buy more at 20% cheaper in a few days. That is clearly is the challenge.
We were discussing yesterday that consumer stocks are now trading at a premium to their five-year averages. Will this trend continue, or consumer stocks would now actually lead the market decline, because Asian Paints has started cracking, ITC has already cracked, HUL is also looking toppish?
Investors can clearly make out that discretionary spends will be under immense pressure, maybe not just for the next quarter or so, but it will probably be a long-drawn phenomenon. Because the income capability and earnings reversion to mean will take some time and valuations in the sector across the board are very steep. What is likely to happen is, the moment you see some signs of recovery, people will probably maintain allocation to FMCG, but the moment you see certain signs of recovery and there is some cyclical bounce, the flow is likely to shift massively out of this sector. Because in the best case, these stocks were bought for a 10-12% kind of earnings growth. So a 60 multiple is clearly not justified by any stretch of imagination. It was very clearly a defensive play, where these franchises would continue to give good RoEs, RoCs, but this is where a large part of the embedded return is already seated. So if I was to take money off from the market, there are the first things I would have said.
Because typically no investor sells at a loss in any stock. So this is where you are likely to see selling in the first week. Plus on the fundamental side, there is clearly pressure on incomes and, hence, I do not think discretionary spends are going to come back in a long time. Today we have to also bear in mind that the government is trying to offer some sort of a cushion to the lowest strata of society, where they will look for basic needs. This is all pretty much an urban-centric phenomenon. I would also look out for what is happening to the rabi crop output. In case that crop season goes well, there will be some money. Quite honestly, the companies themselves do not know how the growth will pan out over the next two quarters. In case the revenue outlook gets murky, it will be very difficult to sustain these valuations.
Tell me a bit about your portfolio position. Are you sitting on cash? What are your top holdings? Why are you owning those stocks and what are you planning to buy on a decline?
Right now one has to just patiently wait this out. I suggest hold cash, because at this point a bird in the hand is worth two in the bush. Yes, liquidity is not a problem. Liquidity is there in ample quantity. But I do not know how many businesses will survive these two months kind of an impact on revenue line. If you look at the way things are, two-months kind of impact on yearly revenue is basically 20%. How many businesses used to make Ebitda margins of more than 20% in India? If you work that out, you will realise a lot of the pain is likely to be felt until and unless you provide those businesses enough liquidity just to survive the cycle. I am not saying growth will not come back, it will. But it may happen in FY22, nobody knows. The problem is I need to first survive the next two quarters. Unfortunately given the risk aversion, if money is not being lent out, if a good businesses has not been given money at the wrong time, it will definitely become a bad business. Those are important factors. There is no investment case right now. In case you hold cash and you look at places where the margin of safety is fairly high — for example asset-backed businesses, which most probably are the PSUs today — than the fall from intrinsic value is very large. Now they will probably start trading at 10-12% dividend yields. So I think stay out of anything that is expensive, because typically when a market goes into this kind of a bearish zone, high PE just does not cut any slack with investors.
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