Of Infosys, Shriram Transport and 20-30% corrections
(May 22, 2015)
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In this issue:
» Get ready to invest in start ups
» Any change in India's status on corruption?
» The road ahead for power stocks
» ...and more!
Technically speaking, the bull market that started post May 2014 election results has yet not phased out. The benchmark BSE-Sensex is still up by 15% YoY despite the correction in recent weeks. And investor sentiments continue to remain buoyant despite the muted earnings performance for the past fiscal. But the spectacle of sharp correction in stock prices of select companies is what is giving investors the goose bumps. In fact if you search for stocks that have corrected between 10%-30% over the past month alone, you will get about two dozen names. And mind you not all of these are poor businesses with low profits. On the contrary some very respected names have found themselves in this sorry reckoning.
Given the short memory of stock market anomalies and Mr Market's histrionics, allow me to recall some instances of unforeseen correction in Infosys' stock price over the past decade and more.
Infosys had announced its full year ending March 2003 results in April 2003. The company had recorded 39% and 19% growth in sales and net profit respectively. Now you would imagine that these were pretty good growth numbers, right? But the stock crashed by 37% over the next two days! This was not the only instance where a bluechip like Infosys showed a very sharp correction in stock price in response to results. This happened again in 2013. The stock nosedived 22% in response to FY13 results and lower earnings guidance.
So for anyone with the faintest notion that a bluechip cannot be called a bluechip if the stock corrects in double digits, the history of Infosys' stock price is like an Investing 101 on how not to get carried away by market reactions.
Software majors starting with Infosys, were the blue eyed boys of the market since early 2000s. What endeared them to investors and more importantly analysts was that their quarterly results were very predictable. The managements themselves gave out quarterly and yearly earnings guidance. And the cherry on the cake was that more often than not they outperformed the guidance. The market was therefore pretty used to seeing the stock price move higher every time the result was announced. The March quarter of 2003 departed from this trend for the first time. And the panic stricken investors chose to dump a perfectly solid bluechip for temporary muted earnings expectations.
The thing is that market reactions are in response to market expectations. Since the short term valuations of stocks are hardly attuned to long term fundamentals, any significant gap in deliveries versus expectations leads markets to react sharply. And even bluechips are not insulated from such reactions.
More recently, stocks like Shriram Transport Finance and few others have also witnessed double digit correction within days. In many cases the corrections have been backed by investors' unwillingness to award abnormally high valuations to the stocks. However, in others the shock of underperforming market expectations and possibility of a prolonged recovery in earnings growth has unnerved investors.
The good thing is that being a long term value investor, such opportunities allow you to gauge your risks carefully and invest in solid businesses at the most attractive valuations.
Ironically, 10-20% up move in stock prices within days hardly attracts enough attention or raises enough doubts in the minds of investors. For they are way too happy to worry. But a similar move on the downside manages to shake confidence.
As value investors both greed and fear should be on your watch list as without them you will hardly be able to take advantage of market anomalies.
What do you do to not get carried away by the market's sharp reaction to company performance versus expectations? Let us know your comments or share your views in the Equitymaster Club.
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Yet another factor that has been the biggest menace to Indian economy and investors is the rampant corruption, not just in the government, but also in India Inc. No wonder anti corruption brigade by Anna Hazare assumed the dimensions of a national revolution. In fact, corruption was one of the major issues that toppled the reigning Governments at the centre and in a lot of states in the recent elections. But has that salvaged India's image. The statistics do not suggest so.
Of the 3800 employees surveyed in India, Europe, West Asia and Africa in the quarter ended ended March 2015, 80% agree that corruption in India is widespread. As per an article in Livemint, the results of survey of 38 countries rank India as the sixth most corrupt country.
On a broader level, one of the main reasons why India has not been able to tap its tremendous potential is corruption. All the key sectors - banking, mining, power are struggling with this issue. There is no dearth of cases of corporate frauds that just seem to be increasing despite the evolving regulations. Crony capitalism is the term that is often associated with the businesses that seem to be flourishing. What is ironical is that people have become so used to it that they believe that sticking to anti corruption and anti bribery policies is likely to harm their competitiveness. With such a set of statistics and mass perception, it is going to be difficult for India to take the leap from set of emerging economies to the league of developed nations. Unless the new Government tackles this issue, drives like 'Make in India' are likely to sound like shallow talk. In fact, we would be lucky if we could retain entrepreneurial talent within the country.
Can India ever deal with the corruption crisis?
Note: The chart shows results of a survey of 3,800 employees in India, Europe,
W. Asia and Africa in quarter ended March 2015..
Talking about entrepreneurial talent, the startup environment in India is expected to get even more competitive with some of them being allowed to access domestic capital markets. And SEBI has a big role to play in this.
Alternative investment industry comprising mostly of hedge funds, private equity, commodities, real estate etc is quite naive in India at present. Hence, having a regulatory framework before the asset class evolves is a good idea. Even start ups which until now were mostly resorting to foreign markets to raise money will benefit by being a part of the new regulatory net.
Regulations would enable these start ups to raise money from capital markets in India which is difficult currently. The final norms and other formalities pertaining to the new law are likely to be completed by the end of this month after incorporating suggestions from public. SEBI has also set up an internal panel headed by Narayana Murthy to advise on regulatory framework for investing in startups. Once the new law comes into force the primary market dynamics in India are set to change as raising money from capital markets would get easier and also transparent.
The power sector continues to reel in a mess. On one side, the focus has been on resolving the fuel supply constraints; on the other, more problems are propping up. These include the policy hiccups (which led to virtually no bids for some of the major recent projects), lack of investment in generation projects, no reforms, mess in the distribution space (which continues to clock in annual losses of as much as Rs 700 bn), and issues with the transmission infrastructure, amongst others. A glance at the trend of the price to book value multiples over the past many years (of the major power companies) gives a good indication about the sector's preference from the investing community's point of view. With valuations hovering around their multi-year lows, the downsides do however seem protected. However investors willing to bet on the sector would be better off sticking to companies with strong balance sheets and proven track records.
After opening flat, the Indian stock markets climbed above the dotted line by mid-morning. At the time of writing, the BSE-Sensex was trading higher by about 134 points or 0.5%. All sectoral indices except the banking and metal indices were trading in the green with IT and pharma stocks being the top gainers. The midcap and smallcap indices were almost flat. Most Asian indices closed in the green. European markets too have opened on a mixed note.
"It just seems logical that sticking to investing in only a small number of companies that you understand well, rather than moving down the list to your thirtieth or fiftieth favorite pick, would create a much greater potential to earn above-average investment returns." - Joel Greenblatt
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|This edition of The 5 Minute WrapUp is authored by Tanushree Banerjee.
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