Volatile Market? Tap Inefficiencies, Say Experts
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.