Any monkey could have performed well where everything was going up as they were trading cheap and low. If your returns have come because of skill, you will still find opportunity but if it is pure luck and if you want to be lucky a second time, the casino would be a better choice than the stock market.” This is not the rant of a sore investor who has been stranded on the sideline by the blistering run up that has been underway for a year now in the Indian stock market. Instead, these words belong to the usually calm and serene sounding Nilesh Shah, chief executive of Axis Capital. When a veteran like Shah feels that the going in 2014 has been way too easy, it must surely have some element of truth in it. And the numbers bear that out to a great degree. Those who have invested in an index ETF over the past three to 15 months are sitting on 11% to 50% return. Even those who got in late in May 2014 are now sitting on a 25% return.
Though, every sector has seen a jump in valuation, the relative sector laggards pop up if one compares the present index levels to the highs reached during the frenzy of 2008 (see: Leaders and laggards). While the consumption and defensive sectors have left the highs of the 2008 euphoria in the dust and many a skeptic has been buried under the current market momentum, the BSE capital goods and metals indices have some way to go before they register new highs. When the financing environment gets better, it is the beaten-down sectors that bounce back the most as during the trough, investors price it for bankruptcy. Surprisingly, the bounce has not been that evident in the power and infra space as seen in their tepid performance over the past six months. Though the BSE power index is up 25% for the year, most of that gain has come in the pre-Modi run-up.
As for healthcare, midcap pharma companies have gained as the US market opened up after President Obama pushed through the Affordable Care Act. “Over the years many products have gone off-patent and these companies prepared well to tap these opportunities, which were largely restricted to larger players. Midcaps have learned the process of approval and companies such as Torrent today have the largest number of US FDA approved plants in the country,” says Siddhant Khandekar, pharma analyst, ICICI Securities. Consequently, the valuation gap between large cap and midcap pharma companies has reduced because of higher earnings visibility and improvement in margins.
For now, revenue growth in the infra sector continues to be below 5% due to execution issues and the order-book is about 2.4 times sales compared with 3 times in FY11. Then, despite lower commodity prices, operating margins are hovering at 7-8%, half of that during the peak. However, analysts believe that once the capex environment improves, we could see some multi-baggers from this space. While there is some amount of wariness about heavily indebted infra companies, Saurabh Mukherjea, chief executive, institutional equities, Ambit Capital is bullish on light industrial manufacturing companies. “In India, manufacturing accounts for merely 25% of GDP. But with the government’s renewed focus on manufacturing, even if we grow at 5%, we will be an Asian tiger. Companies like Triveni Engineering, PI Industries, Wabco and Balkrishna Industries could be among the beneficiaries,” he says. Already, Balkrishna along with other tyre companies like Ceat and Apollo have been lifted by a fall in the price of its prime raw material, rubber. “Most of the outperformance we have seen is because of the lower rubber prices which have straight away expanded their margins on a low base. Also, replacement demand has picked up as a result of double-digit growth in auto sales in 2010 and 2011,” reveals Prateek Kumar, analyst, Religare Capital Markets.
After a string of such multi-baggers in 2014, India has now acquired the status of a must-invest emerging market and is getting its fair share of attention. “Managers of diversified global emerging markets equity funds have lifted their India allocation to a record high of 11.49%,” points out Cameron Brandt, director of research at EPFR, which tracks global money flow across markets and asset classes (see: The Modi effect). This return cycle plays its own role in pulling in fresh money. While it is facile to term it as a Ponzi scheme, the fact of the matter is foreign flows are needed to keep the momentum going. So far, we have not been let down. “Year-to-date, the bulk of the money has come from ETFs. Since the start of the third quarter of 2014, however, the split has been 60-40 between ETFs and long-only mutual funds. So the longer term money is beginning to move in,” assures Brandt.
If you run through the financial data in the listing table on pages 60-65, you will notice that there has not been a runaway improvement in financial performance for most outperformers. But that is the nature of the beast. Indeed, looking backwards, everyone can be a multimillionaire but markets are clearly about looking forward. Brandt is unsure about what could upset the gravy train. “Aside from the usual geopolitical risks – spike in oil prices, increased tensions with Pakistan or China, I would say the biggest risk is more emerging markets starting to get their economic policy houses in order. Given investors’ marked preference for diversified exposure, a shift to more orthodox policies in Brazil and some successful reforms in Indonesia would likely attract some of the money currently flowing to India to these markets,” he posits.
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