Archive for the ‘Market View’ Category

Investment Ideas from Mega Trends in India

Wednesday, July 26th, 2017

Investment Ideas from Mega Trends in India

By Himanshu Khandelwal


Stock markets in India have been soaring as the economy enters a prolonged period of political and economic stability. At elevated valuations, near term returns seem uncertain but investors should focus on riding the Mega trends.


India’s per capita income has grown by 300% in rupee terms in the last decade creating an aspirational consumer of goods and services. This coupled with government policies have kick-started Mega trends that will drive India’s growth story over the next decade creating massive investment opportunities.


#1 Formalization of the economy: Unorganized sector accounts for nearly 75% of trade and 90% of employment in India. With initiatives like GST, the tax arbitrage available to the smaller traders will slowly erode increasing addressable market for the organized companies. Opportunities for established players in the consumer, healthcare, textiles, jewellery is immense.


Organized Hospital and Diagnostic companies control only 10% of overall market which is growing at mid-teens every year. With only 3-4 large players in the country, they are expected to catapult 5-6x in the next decade.


Dr. Lal Pathlabs is the second largest pathology service provider growing at an impressive 27% revenue growth in the last five years, 11% above the industry growth. It generates a healthy cash flow and has seen a PE contraction recently to 30x against 45x historically providing a good entry point to long term investors.


#2: Housing Boom: Low cost housing is the focus area of the government and the best way to play this is through housing finance companies (HFC). Mortgage to GDP is less than 10% in India versus an Asian average of 20%. Owning a house is still a dream for most Indians, hence most of home buyers are end users resulting this sector delivering the best risk-adjusted returns. Consider this, HDFC, a blue chip industry leader has delivered a compounded annual return of 23% in USD terms for the last 15 years.


Recently, my favourite has been Canfin Homes, the fastest growing mid-size HFC focused on lending to salaried class first time home owners. Canfin’s USD 2 billon balance sheet has grown its loan book by 30% annually and stock price at 100% (USD terms) every year in the last five years with a NPA of just 0.2%!


#3 Physical to Financial Savings: Demonetization may not have achieved much on black money, but it did put money to work! Banks received USD 230 billion of new deposits and a major portion of the same has stayed in the banks. Falling currency holdings and low deposit rates are pushing more savings into capital markets chasing better returns. Household savings percentage in mutual funds and equity markets have increased fourfold since 2011. This is another mega trend which will re-shape the financial services industry.


The direct plays on this theme would be capital market oriented companies like IIFL holdings, and Edelweiss which have been doing well. Since their model is more cyclical in the long run, I prefer a pure play on this theme, the recently listed Central Depository Services Limited (CDSL).


CDSL is the only listed play on the depository services which is a duopoly market in India. It is been growing at an impressive 23% in the last three years with expanding margins of 54%. Its annuity revenues with operating leverage make it a cash generating machine. The stock trades at 35x earning, but expect it to be lapped up by institutional investors on every correction.


For those who feel markets are at the top, you risk missing the bus. India has one of the highest real rates since 2002 which provides room for last few rate cuts by RBI. The spread between the 10 year paper and nifty earning yields at just 60 bps, one of the lowest levels in history. This is the reason valuations of Indian equities shall remain high compared to previous years and other emerging market peers.


The elevated PE levels or the recent IPO boom may signal revival of animal spirits in the economy or an over exuberant market. Historically, bull markets in India have never peaked with interest rates bottoming out, rather this happens mostly at the initial phase of a bull cycle.


“We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten.” This Bill Gates quote is apt for investors who focus too much on the short term noise and miss the Mega trends.



British equities and recession in the sceptered isle!

Monday, June 27th, 2016

By Matein Khalid


David Cameron, Wall Street’s elite, Mutti Merkel, Obama, the Eurocrats of Brussels, the great and the good of the City and the IMF’s Lady Christine all got it so horribly wrong. I slept Thursday night with sterling at 1.50 on New York and awoke to see it trade at 1.34 on Friday, a 30 year low before the Plaza Accords. Britain has voted to leave the EU and Scotland’s Chief Minister has asked for a new referendum. The next domino to fall could well be Mrs. Merkel, Mother of Europe now that Cameron has committed political hara-kiri. There is now other way to gloss over the fact that, alas, all bets are off in global markets. I never thought I would live to see the day Nigel Farage sounded Churchillian, though with a hint of Lord Haw Haw’s sinister sneer. But I did.


Brexit will have a chilling impact on capex, growth, jobs in England (UK for how long?). Recession is certain if the Bank of England does not stimulate the money markets with a £80 – 100 billion gilt purchases. Morgan Stanley plans to move 2000 employees to Dublin (great) and Frankfurt (awful). This is the tip of the iceberg. Property prices from office towers in the City to cozy pied-à-terre in Belgravia, Mayfair, South Ken and Chelsea will plunge. Battersea’s offplan leveraged Ponzi scheme on the Thames? A 80% price fall in 2017-18.


I see no reason to buy sterling now as the Old Lady of Threadneedle Street has no choice but to resort (lender of the last resort!) to money printing if the recession deepens. It is also dangerous to bottom fish in British equities as profit forecasts will darken this autumn. Bookie stocks in London deserve to be shorted or even delisted for providing such lousy pole forecasts. They should stick to Kim and Kanye or Premier League WFG chav stories. It makes sense to position for second round geopolitical and financial shocks as Article 50 is invoked and the Tories begin another civil war now that Cameron has deprived them from the pleasure of a Thatcher/Heath style regicide.


UK economic growth will take a hit as the Foreign Office and Downing Street rearrange international economic relations. My friends on London currency desks tell me that the Swiss central bank intervened to stem the franc’s safe haven spike. I have loved gold and gold miners, (up 90%) since 2015. Cash is king, queen and grand vizier to me as I see asset prices slammed by contagion.


UK equities will benefit from the pound’s fall only when it bottoms – too bad they do not give us an electric shock in the derrière when this happens. Yet can the Bank of England really kick start the UK economy with rate cuts alone amid such protracted geopolitical and financial market volatility? No. Recession is certain.


UK bank shares, UK property firms and German machinery exporters are obvious shorts in this milieu. The pound is in free fall and can well fall to 1.25, lovely for UK exporters (Diageo, Unilever, Burberry, Victrex) while a disaster for banks and property, the reason Lloyds, RBS, Barratt, British Land and Persimmon are down 20%. The shock to the UK economy is far too traumatic.


All my friend, mostly fund managers and merchant bankers in the City, voted Remain. However, the cabbies I took in Chester and York (went to see Roman and Plantagenet ruins!) were informly Leave, as was my favorite pukka sahib Brit. CIO friend at a major Omani bank in Muscat.


Gold outperformed every other Brexit strategy hedges I know, with its 7% stellar move. I would not commit capital now as there is major blood on a Street far too complacent about Remain. We saw a 25% hit in Japanese equities but the Bank of Japan cannot risk 95 yen and the death rattle of Abenomics. This means massive intervention in the yen money market in Marounuchi, an argument to buy the Nikkei index fund (symbol EWJ). Expect to hear the Federal Open Mouth Committee (FOMC) jawbone markets in high decibel count as the terrified hoofbeats of the Wall Street herds trigger panic in the court of Mama Yellen. The capitulation trade? Deutsche Bank, UBS, Credit Suisse and, yes, Barclays Bank PLC!