India Equities – Where from here? Bengaluru

Contributed by: Bhrigu Shree

 

The Indian equity markets have been touching historic high level in recent months yet have also exhibited unprecedented volatility. Much of the volatility has been attributed to the bleak economic outlook in India, decreasing economic growth, waning investor confidence, policy paralysis, increasing current account and fiscal deficit etc. Such a high volatility has made it difficult for investors to gauge movement of the market, raising many questions in their minds: What does the future hold for the market? How to correctly interpret the market? To get a better perspective on these fronts, Bengaluru Chapter of the Indian Association of Investment Professionals (IAIP) organised a speaker session by Amit Khurana, Director Research, Dolat Capital, on the September 18, 2013. It was well received by the members. 

Amit introduced the topic with a comprehensive overview of various factors that impact the behavior of the market today. He explained how the broad level market returns were not depicting the full information about the market and how unbundling the broad level returns can help gain greater understanding of returns. Given the unprecedented variation in return across and within the sectors, stock selection is a better strategy to drive the portfolio returns. A good stock should be able to fulfill the various criteria such as good quality, visibility and valuation. Lack of any one factor should raise a red flag and should make an investor averse to such stocks. Other points which were discussed are mentioned below:

  • It has become difficult to interpret various indicators – e.g. Have interest rates topped or bottom out? Has the growth rate bottomed out? Growth rate of the Indian economy is expected to fall below the 6.0 percent level for two consecutive years for the first time over the last decade.
  • Inconsistent inflation numbers between food (greater than 10.0 percent) and manufactured products (1.0-2.0 percent).
  • The Reserve Bank of India is juggling between the need to promote growth and keep the inflation low considering that the market is not depicting a consistent picture.

Market Indicators

Amit talked about the various indicators, historic ranges and their current values, emphasizing how the indicators are failing to give a clear picture of where the  markets is standing at present, whether  cheap/ expensive or if the market has truly reached its low point:

Indicators

Low

High

Current

Price to Earnings Ratio

10.0

20.0

12.0

Price to Book Ratio

1.5

3.0

2.0

EV/EBITDA* Ratio

4.0

10.0

6.0

*Enterprise value to earnings before interest, tax, depreciation and amortization (EV/EBITDA)

Amit noted that these observations make it difficult to get a clear picture at broad level, strengthening the argument in favor of unbundling to stock level.

The Ball starts moving

With the government realizing the effects of fundamental structural challenges faced by the Indian economy, recent monsoon session of the Parliament saw some overdue reforms being taken up. Bills such as Pension Bill, Companies Bill, and Land acquisition Bill were passed which have enhanced confidence in the market, helping channelize savings and hence giving a boost to the market sentiments.

However, Amit opined that we have a long way to go to be successful in driving the market. A few immediate steps would include:

  • Government needs to take steps to address poor investment growth
  • Current-account deficit needs to be kept under the predetermined limits
  • Subsidies needs to be brought under control

Amit made sure to answer each and every question which came up during a lively interaction with participants. The topic as imagined had captured everyone’s attention and a lively discussion ensued. The meeting concluded with a networking opportunity over dinner.

Photo Courtesy: Ahimanyu Laxman



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