As a growth-oriented investor in Indian equities, we face a set of unique situations currently:
- On one hand India is widely expected to be one of the fastest growing countries globally in the next 2-3 years. On the other hand the reported earnings of India Inc has been de-growing in the last half of 2015.
Reported inflation numbers have come down drastically (the latest reported WPI print was negative). (Source: Govt. of India, Ministry of Commerce). However, the interest rate trajectory is yet to nose-dive.
- Meanwhile the index and prices of most stocks continue to march upwards. In the absence of any earnings growth acceleration, this implies that valuations for many stocks are sky-rocketing. This leads to the obvious question- “ is this yet another hope rally”?
Given this environment, how do we position ourselves as investors and how do we manage the over-valuation risk?
I believe that there are a few factors which we as investors are leveraging on to manage our portfolios in this market environment:
- While earnings growth has not happened yet, we believe that the factors leading to growth acceleration are falling in place as we speak- lower crude prices, coal reforms being actioned, mending fiscal, policy front seeing long awaited movement etc. Hence, this is a case of postponement of earnings only- they should eventually come.
- The rate cycle has begun its downward trajectory- and this is likely to build-up as the year progresses.
- We continue to focus on high Quality stocks irrespective of the broader markets. These are essentially businesses which have extremely strong economic moats which means that the Longevity of quality and growth is pretty high. And these are the parameters (QGLP) on which we keep re-evaluating our stocks to test whether current valuations are appropriate, and act accordingly.
- Also, we keep looking out for ideas which fit the bill on our evaluation framework. The Indian packaged food market is growing at robust 15%+ compounded rate, within which the $6Bn Biscuits market is very well positioned to premiumize aggressively. Within this, we have been on the lookout for (a) an extremely strong management team which is emphasizing on profitably enhancement and growth, (b) a well entrenched food brand in India, which is finally being utilized and (c) benign outlook for raw material inflation which should aid margins. And all this available at a PER in line with the consumer sector for a sector beating RoE as well as earnings growth expectation.
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