These companies will most likely lead market revival

Aug 29, 2011

In this issue:
» Perils of a falling Rupee
» Business confidence in India sinks
» No plans for QE-III
» Will FMCG sector face a slowdown?
» ...and more!

-------------------------------- Could the BSE Sensex Crash Another 50% from here? --------------------------------

This is dead serious...

The stock markets are in a tizzy... and we all have our worst case scenarios.

But if this event were to turn out, all of us would have been horribly wrong.

Yes, dear reader, we are talking of a chance that the Sensex could crash another 50% from here.

Is this really possible? What could trigger such an event? View this video right now for the answer...


The Indian stock markets have corrected by over 20% since the beginning of this year. This has raised a major question as to when would the markets revive? Well, the answer to this question would be to time the markets, which is a mountain of a task. Instead it would be better to look at which companies would lead this revival. That way an investor can pick the right stocks and bear the fruit on market revival.

So which companies are these? Typically these companies would have 3 main qualities. These are strong balance sheets, low valuations and resilient business models.

Strong balance sheets would mean little or no debt. With zero or negligible debt, such companies would not get burdened by higher interest at times the rates are headed upwards. Moreover, these companies also benefit as they can easily take on some debt to fund expansion plans when internal accruals slow down. A cash reserve can help companies meet the regular operating expenses without having to worry about the impact of slowdown.

But again, the slowdown in internal accruals should be very short lived. It should not a long term case. So here comes the need for having a resilient business model. These are the companies which typically have some form of pricing power either through their innovative business practices or innovative goods/services. Such companies are able to survive a downturn when it occurs.

And finally, once one identifies such a company, it is important to look at the valuations. Paying a lower price can help maximize long term gains. So combine the three together and Voila! You have a fundamentally sound investment at cheap valuations. And if it is a blue-chip then the chances are that this company would lead the market revival.

Do you think companies with low debt and resilient business models can lead market revival? Share your comments with us or post your views on our Facebook page.

 Chart of the day
The launch of 3G services in India has led many mobile subscribers scrambling for a new phone. Most people opt for a smartphone. Wikipedia defines a smartphone as a phone that combines the feature of a personal digital assistant (PDA) and a mobile phone. Since the demand for smartphones has gone up, it would be interesting to find out who holds the market leadership position in this segment. Well the crown for this goes to none other than Apple. With its innovate iPhones, the company has displaced Samsung to become the global market leader (as at the end of June 2011).

Data source: Gartner
*Makers of Blackberry

Can getting wet dissuade one from going to swim? It is only the risk of drowning that counts here. Getting wet is but a side effect! We believe that the claims made by foreign investors of losing appetite for Indian stocks due to currency risks are as ridiculous. The Indian rupee has lost around 5% against the greenback (US dollar) since the RBI raised interest rates in July 2011. The same may have shaved off a few percentages against the returns that foreign investors made on Indian stocks. But that certainly can be no reason for them to lose appetite of Indian companies. Very few corporate in emerging markets offer the kind of solid fundamentals and attractive long term valuations that India Inc. currently does. Against the high risk of debt contagion in the West and abysmal growth rates, the returns here are more than alluring. Even after adjusting currency risks, Indian stocks are but irresistible for foreign investors. Hence we believe that all the complaints about lack of currency convertibility are but crocodile tears.

The Economic Times has informed us of a business survey done by FICCI India. It highlights how business confidence has plunged to a two year low in India. This news cannot be taken lightly we believe. One would certainly ask why. After all, surveys like the current one come dime a dozen and hardly have any impact at all. The reason we think this news is important is because it relates to an important term called as 'animal spirits'. Popularized by John Maynard Keynes, it is related to consumer or business confidence. And once this confidence comes down, like it has happened in the US recently, then no matter how much stimulus you undertake, economic growth becomes difficult to come by. And this is exactly what the industry body, FICCI seems to have highlighted. "The flagging of business confidence in India should be a matter of concern for policymakers as falling confidence levels of India Inc can take a toll on investments and other business plans and which could undermine our economic growth," FICCI is believed to have said. We hope that the government is paying heed.

QE-III or no QE-III? Well, that was the question on most people's minds when Ben Bernanke stepped onto the podium at Jackson Hole on Friday. However, all he talked about was that the US Fed has a number of tools to help rescue the US economy. Inflation in the US is now almost 2% higher than what it was before QE-II (quantitative easing round 2) came in last year. Thus, risking a further increase in inflation doesn't seem to be on the cards for now.

Irrespective, no QE-III is actually good for emerging markets, especially India. India is a big importer of oil, and the country will benefit if commodity prices see a sell-off. Inflation may thus move to more manageable levels. And the Reserve Bank of 0f India (RBI) may not need to undertake further rate hikes. Plus, even the budget deficit may look in better shape, if oil prices fall further. Thus, no more quantitative easing is definitely good news for India Inc.

The much talked about and slightly over bought story of rural retailing has started showing signs of slowdown. For the first time in last 3 years, rural markets especially for FMCG (Fast Moving Consumer Goods) products witnessed lower growth as compared to their urban counterparts. With inflation reaching intolerable levels, rural population seems to have downgraded its consumption. This defies the trend seen over the last couple of years. This was mainly visible in categories like shampoo, hair-oil and toothpaste. The reason for this is that prices of most of these goods have increased by almost 5% to 25% in the past year. As a result, consumers have either 'downtraded' to cheaper products or to smaller packs. Unfortunately, with inflation still remaining high, the chances of prices coming down are slim. As a result, there seems to be little hope for FMCG companies that are focused on rural markets to drive growth. All they can do is to pray that the good monsoons would bring down the inflation levels. Because unless inflation comes under control, consumption would continue to get hit. And the FMCG sector would look at bleaker times at least in the short term.

Meanwhile, the Indian stock markets seemed headed towards a strong recovery after closing last week in the red. At the time of writing, the benchmark BSE Sensex was trading up by 453 points (2.9%). The stocks in the technology and banking goods space are leading the pack of gainers. All major Asian indices closed in the green today with Korea and Taiwan leading the gains. However, markets in China have closed in the red. Europe has also opened the day on a positive note.

 Today's investing mantra
"If you have trouble imagining a 20% loss in stock markets, you shouldn't be in stocks." - John Bogle

Today's Premium Edition.

Recent Articles

All Good Things Come to an End... April 8, 2020
Why your favourite e-letter won't reach you every week day.
A Safe Stock to Lockdown Now April 2, 2020
The market crashc has made strong, established brands attractive. Here's a stock to make the most of this opportunity...
One Stock that is All Charged Up for the Post Coronavirus Rebound April 1, 2020
A stock with strong moat is currently trading near 5-year lows.
Sorry Warren Buffett, I'm Following This Man Instead of You in 2020 March 30, 2020
This man warned of an impending market correction while everyone else was celebrating the renewed optimism in early 2020...

Equitymaster requests your view! Post a comment on "These companies will most likely lead market revival". Click here!

2 Responses to "These companies will most likely lead market revival"


Aug 29, 2011

don't you think QE3 will appreciate rupee (may be around 42 levels) and hence, more beneficial for importers.



Aug 29, 2011

Whether sensex reaches 21000 as predicted before maech 2011

Equitymaster requests your view! Post a comment on "These companies will most likely lead market revival". Click here!