Watch Out for These Stocks Leading the Next Bull Cycle

Jan 10, 2017

In this issue:
» Mr Jaitley's comments on demonetisation are hardly surprising
» Will IPOs be rewarding in 2017?
» Market roundup
» ...and more!

00:00 Chart of the Day

Richa Agarwal, Research analyst

Last weekend, I watched an interesting movie - Her.

Its genre is difficult to define. It could be a romantic drama, realistic, or science fiction...depending on the viewer's perception.

Here is a brief summary.

A lonely writer develops an unconventional relationship with an artificially intelligent operating system (a female voice on his computer). The bond deepens over a few months...until the writer panics when the voice is briefly unavailable and goes offline. His world falls apart as he further realises 'she' has been talking to thousands of other users. For him, a personal relationship has been violated.

This may come across as exaggerated science fiction... But it has roots in reality (think of Siri). Technology is taking over, and how!

I was reminded of the movie as I read a headline in today's paper: Humanoid robot Ira to be deployed at HDFC Bank branch soon.

While I don't know the exact tasks Ira will perform, 'she' is likely to act largely as a receptionist and will be able to move around in the branch. If the response is good, more humanoids could be deployed across the bank's branches. The banks that were designing their advertisements around customer service may need to come up with better ideas...

For those who thought the threat of job loss due to robots and technology would be limited to the manufacturing sector, this is a reality check.

The technological advance certainly deserves our appreciation. Yet, it brings along with it a significant threat - that a huge chunk of the population will be rendered jobless an insufficiently skilled.

Machines are not only replacing humans, but outperforming them, even at tasks as intricate and critical as surgery or driving cars. In the battle of man versus machine, the latter is taking ever more casualties by the day. Man doesn't seem to stand a chance.

As per the United Nations, two-thirds of jobs in developing countries are at risk due to automation. As per the World Bank, 42.6% of jobs in India can be automated (adjusted for wage rates and the slower pace of tech adoption). Others suggest an additional 26.4% could be automated.

The underemployment that will result will not be an isolated phenomenon. It will impact consumption and demand and drive economic disparity. Worse, it could trigger socio-economic unrest.

The irony is that even here; India seems to be stuck in a losing game vis-a-vis global peers. The following chart presents a comparison regarding installation of industrial robots. So while India is gloating over its edge over China when it comes to low-cost labour, China is in a different league altogether when it comes to automation. In fact, India is lagging way behind compared to other developing economies.

India Lags Far Behind in the Race for Machines

With these developments (not to mention the infrastructure and logistics deficit), 'Make in India' does not look like an attainable dream.

As analysts, we are not sure how these issues can be sorted. But that's okay because our job is to spot businesses that can withstand such defining trends...and to stay clear of businesses that are not nimble and vigilant enough to keep pace.

History is replete with examples of businesses (Kodak) that once ruled the corporate world, but went extinct as they failed to anticipate the future and keep pace with technology. And then there are business that use the very same technological shifts to take giant leaps ahead of the existing behemoths.

I would like to take this opportunity to discuss one such business that we believe has the potential to offer good returns over the next two-three years.

A few months ago, the Hidden Treasure team recommended a small-cap company taking full advantage of robotics. And I must say that it is not just keeping pace, but setting new trends when it comes to using technology to stay way ahead of the curve.

Steered by passionate, technocrat promoters, this company has built a durable competitive edge that is difficult to replicate. Over the years, it has been known for being 'the only' and 'the first' company in a lot of aspects. But the promoters have no intention to rest on past laurels. Something the Chairman said during the meeting - 'You don't get a second chance to make a solid first impression...' - has been permanently etched in my memory.

The stock is already up 55% since our recommendation. But the buying opportunity is still there as the business has a huge runway ahead.

That said, the stock is just 6% short of our maximum buy price... The opportunity to make the most of this investment opportunity may not last long.

Meantime, please share your views on the biggest threats to 'Make in India' and existing businesses in the wake of technological shifts. As an investor, how do you plan to take advantage of the advances in technology and robotics? Let us know your comments or share your views in the Equitymaster Club.

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Visit a restaurant and ask the chef if he ever makes bad food.

Visit a saloon and ask the hair dresser if there are times when he gives lousy haircuts.

Ask a taxi driver if he thinks he is good, average or poor at the wheel.

In almost all cases, you're never going to get the real answer. It is human nature to see oneself with rose-tinted selectively pick evidence to support one's poor decisions. So, when we read about Finance Minister Arun Jaitley dismissing economic slowdown caused by demonetisation, we were not at all surprised.

Now, if you look at the tax collection numbers, it is clear that there is a clear drop in the growth numbers after the note ban came into effect.

Let's take a look at some numbers...

Excise duty grew 40.9% YoY in October 2016. This slowed down to 31.8% YoY and 31.6% YoY growth in November and December 2016, respectively.

Service tax grew 68.8% YoY in October 2016. This dipped to 13.3% YoY and 12.4% YoY growth in November and December 2016, respectively.

Total tax collection grew 30.5% YoY in October 2016. This declined to 23.1% YoY and 14.2% YoY growth in November and December 2016, respectively.

It's evident. The growth rate in tax collection has taken a hit. Yet Mr Jaitley is unwilling to look at the reality. Here's what he has reportedly said...

  • December 2016 has moved up compared to December 2015 and December 2016 has moved up compared to November 2016.

    All the stories about job losses or businesses suffering losses are anecdotal. The growth figure does not depend on anecdotal basis...Statistics and taxation figures are real. This is the money which has come in.

It's obvious that Mr Jaitley is not going to admit the government made any bad decisions...or that demonetisation had any negative consequence on jobs and businesses. He will say nothing that will cost him his job.

And that's the reason why neither Mr Jaitley nor Mr Modi are answering the simplest questions about demonetisation. In fact, our big-picture editor Vivek Kaul has written a brilliant note about the government's eerie silence on three critical factors relating to demonetisation. It's a highly recommended read.

So, dear reader, be careful who you listen to before formulating your views on the economy and the stock markets.


As an aside, you're invited to discuss...debate...and analyse the burning issues of today with Vivek Kaul and some of our finest minds at the Equitymaster Conference 2017. Mark your calendar for 21 January 2017. More details here.


Coming to stock markets and IPOs...

If you recall, the IPO market witnessed a lot of activity in 2016. About 26 IPOs hit the markets and raised about Rs 265 billion. But when demonetisation was announced in November 2016, it not only led to a correction in the Indian stock markets, but it also had an adverse impact on the primary markets. Many companies postponed their IPO offerings.

Will 2017 see a revival in the IPO market?

The answer seems to be a yes. As per The Economic Times, there is a solid pipeline of IPOs in the offing. Over the next few months, we will see IPOs of Bombay Stock Exchange (BSE), Avenue Supermarts (D-Mart), Housing and Urban Development Corp (Hudco), Aster DM Healthcare, National Stock Exchange, Hinduja Leyland Finance, Continental Warehousing, Central Depository Services Ltd (CDSL), Barbeque Nation and AV Finance, among others. About 14 IPOs worth Rs 80.2 billion have been approved by the Securities and Exchange Board of India (Sebi). Another ten firms have filed their draft red herring prospectuses (DRHP) to raise a total of Rs 150 billion. And another dozen companies are in the last stage of finalising DRHPs.

Will the IPOs in 2017 be as rewarding as the ones in 2016?

The year gone by saw many rewarding IPOs. And even after the market correction post demonetisation, 18 of the 26 IPOs are still trading above their issue price. This trend is certainly going to lure more retail investors to the primary markets. Our suggestion to you would be to tread the IPO market cautiously. At Equitymaster, we evaluate each IPO issue on its own merits...the same way we evaluate a business. And our recommendation to apply or not, is purely based on business fundamentals and valuations, and not on speculation and grey market premiums. And it is this very approach that helped us steer clear of some of the worst IPOs in the Indian markets...including Reliance Power in 2008.


In the meanwhile, the Indian indices have been trading firmly in the green. Barring the realty sector, all major sectoral indices are trading on a positive note with metal, oil & gas, and auto stocks leading the gains. The BSE Sensex is trading higher by 154 points, while the NSE Nifty is trading higher by 43 points. The BSE Mid Cap and BSE Small Cap indices are trading higher by 0.4% and 0.6% respectively.

04:50 Investing mantra

Like Warren, I had a considerable passion to get rich, not because I wanted Ferraris - I wanted the independence. I desperately wanted it. - Charlie Munger

This edition of The 5 Minute WrapUp is authored by Richa Agarwal (Research Analyst).

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1 Responses to "Watch Out for These Stocks Leading the Next Bull Cycle"


Jan 10, 2017

It would be worthwhile for the Equity Master Analysts teams to use their time more fruitfully rather than Modi bashing or Jaitley bashing.Instead of wasting time on such articles it would be better to carry out an impact analysis of their Stocks Recommendations on account of recent events like Brexit or Demonetisation or past world events like dotcom burst or sub prime crisis.The teams can think about some matrix to evaluate the vulnerability of such major events on the stocks and assign a score . This matrix can be added to arrive at the final score of the recommendation. The recommendation should specifically mention about this aspect so that investors are better informed. Although the teams claim that their recommendations are based on fundamentals yet a sharp correction is observed in the values of their recommended stocks. Let's become more professional and stay away from the herd mentality of ill informed propagationists.

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