Volatile Mar­ket? Tap In­ef­fi­cien­cies, Say Ex­perts

The Economic Times - - Smart -

timesin­ter­net.in ETMar­kets.com: With Dalal Street swing­ing be­tween highs and lows through­out the first three months of 2016, all bullish pro­jec­tions that most an­a­lysts had made for the year at the be­gin­ning seem to have lost their rel­e­vance. But one thing has been a con­stant since Day 1 — volatil­ity. That may sound scary, but some Street vet­er­ans see an op­por­tu­nity in it. Sar­a­vana Ku­mar, chief in­vest­ment of­fi­cer of LIC No­mura Mu­tual Fund says in­vestors should look to use the choppy mar­ket to in­vest for the long term by fo­cus­ing on the qual­ity of fran­chise, long-term cash­flow gen­er­at­ing abil­ity and the qual­ity of man­age­ment of a busi­ness.

Here are some strate­gies that look good to not just help you me­an­der through the mess but have the po­ten­tial to de­liver great re­wards too.

Stressed Sec­tors: The econ­omy is at the be­gin­ning of a cycli­cal re­cov­ery. Typ­i­cally an­a­lysts (and the mar­ket at large) tend to un­der­es­ti­mate re­bound in earn­ings, cash flow and rev­enues in some of the stressed sec- tors, and con­sen­sus es­ti­mates are of­ten late in cap­tur­ing such a re­cov­ery.

“You will see a lot of com­pa­nies re­port­ing 20-30% profit growth and do­ing very well in the com­ing year,” said Neelka­nth Mishra, In­dia equity strate­gist, Credit Suisse.

In­debted Com­pa­nies: These firms can see im­prove­ment in cash flows and even part-re­pay­ment of debt can lead to sig­nif­i­cant ac­cre­tion of value for in­vestors due to the lever­age ef­fect play­ing out, said Ku m a r of LIC No­mura MF.

As an il­lus­tra­tion, if the cur­rent equity mar­ket value is ₹ 100 and net debt value is ₹ 300, cur­rent EV is ₹ 400 while the cur­rent op­er­at­ing cash flow is as­sumed to be ₹ 30. Due to bet­ter eco­nomic con­di­tions and base ef­fect, if the op­er­at­ing cash flow in­creases to ₹ 60 and if these higher cash flows are used to re­pay debt, the value of equity will in­crease by 30% even as­sum­ing that the EV re­mains con­stant. In most cases,EVof acom­pa­ny­tend­stoap­pre­ci­ate when cash flows im­prove, and debt re­duc­tion leads to a dis­pro­por­tion­ate in­crease in equity value.

Cit­ing spe­cific in­stances, Dipen Sheth of HDFC Se­cu­ri­ties, says it’s time to get more con­struc­tive on firms like ITD Ce­men­ta­tion, KNR and NCC. “I would be much more com­fort­able look­ing at the heal­ing, which has played out, and which is go­ing to play out fur­ther. When was the last time you saw a con­struc­tion com­pany with zero debt equity and less than 40-bp work­ing cap­i­tal cy­cle? If the stock is trad­ing at PE mul­ti­ples of 15x, I do not mind,” he said.

Rate-sen­si­tive Stocks: The econ­omy ex­pe­ri­enced el­e­vated lev­els of in­fla­tion and con­se­quently a pe­riod of height­ened pol­icy rates for well over five years. This high-in­fla­tion pe­riod led to four ma­jor de­vel­op­ments: (a) steadypro­gressto­wards­fis­cal­con­sol­i­da­tion by gov­ern­ment, (b) RBI lay­ing down a firm roadmap tar­get­ing CPI

Dipen Sheth of HDFC Se­cu­ri­ties says get more con­struc­tive on firms like ITD Ce­men­ta­tion, KNR and NCC

in­fla­tion of 5% by March 2017, (c) a sharp­mod­er­a­tioninMSPin­creas­esin the past three years, and (d) the gov­ern­ment ini­ti­at­ing mea­sures to re­duce rates on small sav­ings schemes.

Con­se­quently, the de­cline in in­ter­est rates may be faster than what the mar­ket pro­jec­tions were.

The rate cut by RBI will “cer­tainly ben­e­fit the banking sec­tor. There are some other in­ter­est rate-sen­si­tive sec­tors such as auto and real es­tate, which will ben­e­fit too,” said Di­pan Me­hta, mem­ber BSE and NSE.

Banks: GDP growth for the pre­vi­ous 10 years was 4 times and was well ahead of any 10-year pe­riod since In­de­pen­dence. There has been a mean­ing­ful gov­ern­ment in­ter­ven­tion to im­prove the bar­gain­ing power of lenders vis-à-vis bor­row­ers and prompted di­ves­ture of non-core as­sets by over­lever­aged com­pa­nies. This is what will cre­ate an op­por­tu­nity for in­vestors in the banking space says Ku­mar of LIC No­mura Mu­tual Fund.

Tech-in­no­va­tion Firms: In­vest­ing in some of these com­pa­nies at a rel­a­tively early stage is likely to be very re­ward­ing go­ing for­ward.

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