What is in store for us when it comes to the markets? FII money is keeping us afloat and we are at 14000!
2020 was a totally unpredictable year. I was just reading the forecast I had made at the beginning of 2020 and I see almost nothing came true because of Covid. The kind of straight run up move we have seen from March was also totally unpredictable. End of the year, we ended around 14% up, very similar to the previous year when the markets went up by a similar amount.
So overall, market return was still subdued, midcaps obviously did better than the large caps which was something which was unfathomable in March. In March, people would not have thought that the midcap index will end up outperforming the large caps this year. However, that did happen and it did take a lot of people by surprise. Now as we enter 2021, there are several factors at work; one is the huge liquidity gush which is going into risk assets as people find that if you can make 1% or 5% in one day, why should you want to keep your money in the bank?
The huge runup has also been there in cryptocurrencies which has been one of the best outperforming classes followed by technology and green energy companies globally. In the Indian context, we have seen many high quality, new generation companies do well. By the end of the year, we also saw some recovery plays, cyclicals, commodities starting to do well.
Now in the beginning of 2021, valuations are very rich compared to historical valuations and the markets trade at almost 50-60% premium to historical valuations on an expected earnings basis for next year when earnings growth expectations are around 30%. That by itself is aggressive. As I look at the overall market, I would think that market returns should be subdued this year.
It is not that we are going to see a huge return from the overall market however, given the context that interest rates are likely to remain low globally, in India we could still see inflation come back and that will be a tricky thing for the RBI to handle but globally interest rates will remain low and in that context, opportunities of investment will continue to be there and the recovery should continue. Those are the broad contours in which 2021 should play out. Overall if the index gives a double digit return this year, we should be very happy given the valuations. It will all be about broader markets and what kind of stocks you invest in.
Should one take some chips off the table given that some of the pockets are looking a little bit overheated? Do you ride the wave or add more positions within the broader universe?
Five six months back I could buy Asian Paints at Rs 1,750 when the management was sounding bullish but we exited last week after making almost 50% profit. Similarly, a couple of real estate stocks that we got into, have rallied 50-60%. I chose to get in because we expected 15% annual returns from the market but if we managed to make 50-60% in three, four months it is actually extraordinarily good.A lot of retail investors are seeing some speculative stocks move up rapidly every day they think that making 20-30% return is so easy, it is actually not. So that is something you do and then you try to find value.
I will share what we have actually done. On the largecap side, where I still see value is a couple of stocks; one is a Dabur among FMCG stocks. It still trades at valuations which are at a discount to the rest of the space and they are fundamentally doing actually much better than many of the fancied FMCG companies. That stock still has potential to give 15% plus.
The second would be Bharti Airtel where in the last few months, we have actually been gaining market share over Jio and that market share loss has gone away and they are able to get more customers and it still remains undervalued relative to what it can potentially do because we have to remember they also benefit a lot because of lower interest rates and that could be seen in the results over the next one or two quarters.
On the midcap side, two of the recent picks are Ahluwalia Contractors Ltd and TTK Prestige.
Ahluwalia Contractors is into high quality constructions. They suffered due to execution delays this year because of labour availability. Their order book is at a very high level of Rs 8,500 crore plus and it is a very high quality company with almost no debt on the balance sheet. It trades significantly below its potential value and next year it could see record execution. That is one stock which is out of fancy today and which we have picked up.
The second company, TTK Prestige, is from the consumer durable side. It has lagged behind in performance. What I have been trying to do is identify companies that have lagged in performance but have potential to perform going forward.
They have lagged behind because they did not have such high growth which many other companies showed and now the growth is likely to come back and although most durable companies do not trade at very cheap valuations. Relative to the rest of the basket, it is relatively reasonably priced and should do well.
Let us take those points forward okay Bharti has been an underperformer despite digitisation going forward. But Bharti is not a 25-30% return on equity business. In your own words, Bharti always has a constant need to do capex.
The biggest issue with telecom companies is that capex intensity is very high. But 5G is still somewhere down the line and even we have not adapted 4G so well. I feel Bharti is improving market share because at the same amount of capex, if you add more customers then you tend to do better in a high operating leverage business.
There is some improvement in pricing although not to the extent which the management has been projecting. Also, the fall in interest rates benefits leverage companies a lot especially the companies which are fundamentally okay. We were not expecting interest rates to fall that much and that benefit will be seen in their results. I am not sure whether it can be a five-year story but it can at least be a one or two-year story and could outperform the markets reasonably.
Why do you like Dabur? Are you betting on the rural economy?
Dabur is an unappreciated stock because despite the fact they do better in volumes than most of the fancied stocks, they are able to hold their margins and have had success in introducing more products. Now with the entire health regime coming up, people are looking at healthy alternatives and the credible brand names that help portfolios are also doing very well. The winters have been strong and many of their winter products profile will also perform much better than expected if those are absolute play where the company itself will do very well and a relative play where it has not actually moved at all. Many of the stocks like Asian Paints or Page Industries or Jubilant Foodworks over the last four-five months have moved up by 40-50% whereas Dabur has moved up just 10%.