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Stocks to Buy When Bullets Fly

Dec 26, 2016

In this issue:
» Notebandi hits us hard...But NOT this privileged group
» Foreign debt and currency volatility amid demonetisation make India Inc vulnerable
» ...and more

00:00 Chart of the Day

Kunal Thanvi, Research analyst

I stay with my cousins. We are all chartered accountants working in different areas. Our dinner discussions are damn boring...

But insightful!

On 8 November 2016, we all had different opinions about demonetisation. As an analyst, my views always concern the economic impact. My cousins bring more social and behavioural concerns to the table.

Now, I have met a number of companies since demonetisation, and I've written about the worst-hit sectors, i.e. auto and microfinance.

The way I see it, the short-term will be painful, but India's manifold growth story is just beginning.

However, last week at dinner, my cousins caught me up with an important question concerning de-monetisation. Here's how it went...

Me: It may have failed to curb black money. But it will be a drive towards digital India. My professor says history will not remember it as a monumental mistake but a leap frog to digital India.

Cousin: It may look good in books. But many villages in India are unbanked and have no internet connectivity.

Me: You are right. But history will see this as an inflection point.

I clearly take a longer-term view, but my cousin's point is valid: Is India ready for this transition?

Consider this:

  • Only 15% of India's one billion wireless subscribers have a broadband connection
  • Around six lakh villages do not have adequate mobile or internet connectivity
  • India has only around 15.1 lakh point of sales machines

These are disturbing points that stand in way of India's digitisation.

What to make of this?

I always keep things simple. Yes, the challenges are many...

For example, the demand for debit and credit cards, point of sale systems, e-wallets, etc exceeds current supply. According to the RBI, between October 2013 and December 2015, ATMs increased 43% and point of sale machines increased 28%. These growth rates look impressive...only because we started with so few. For April 15- December 15, share of debit card transactions at point of sales machines accounted for just 12% and 6% in terms of value and volumes, respectively.

But the good news is that, even though demonetisation will disrupt a number of sectors, it's a great opportunity for the players who will build this infrastructure.

  • When there's a war going on, don't buy the companies that are doing fighting; buy the companies that sell bullets. - Peter Lynch

Demonetisation is war. Sectors like microfinance and real-estate are leading the fight. And they will bleed in the short term. The biggest opportunity, however, is for players who will make India a cashless economy.

One such opportunity in the point of sale systems. As per an SBI report, India needs at least twenty lakh point of sale systems for this transition to happen.

Demonetisation Unravels Huge Opportunity for Point of Sale Systems


Imports and unorganised players dominate the market. Global players include Radiant and Micros.

But ever since demonetisation was announced, the analysts at Equitymaster have been deciphering the winners and losers across sectors. And finally, my Hidden Treasure team has spotted one listed player in this space...

The company, promoted by a reputed corporate, is already a leader in the point of sale systems market. And in the last two years, it has almost doubled revenues and profits. Of course, we'll have to meet the management before we can recommend it. So do stay tuned...

Meantime, if you're looking for something actionable, we still love Junior Bluechips. These are small caps with five crucial bluechip-like properties. They're three of our highest-conviction stock picks, and we believe they'll do well in the long term, irrespective of demonetisation.

03:00

'Make in India', 'Swachha Bharat Abhiyan', and now 'Notebandi'...

Mr Modi has earned a reputation for introducing some big bang reforms.

While the effectiveness of each is yet to be seen, one thing that people like about all these is the intent. Take the case of demonetisation. The common man, despite all the troubles, is ready to stand in a queue without complaints to make his contribution to a noble cause - cleaner economy.

However, just like charity, this 'swachhta abhiyan' needs to begin at home.

We are talking about the funding of political parties, the use of cash and lack of transparency.

It's no secret that political parties are a kind of black hole to black money. Much of these donations to political parties, being below the limit of Rs 20,000, happen in cash and remain unaccountable (one must note that political parties are currently not required to publicly disclose contributions of up to Rs 20,000).

So while you and I need to show an identity proof while depositing our old Rs 500 and Rs 1,000 notes into a bank account, political parties can continue to receive donations of up to Rs 20,000 in cash. And they need not declare who gave those donations.

Not to mention that almost three fourths of the cash donations are by corporates, making 1,866 political parties a perfect breeding ground for crony capitalism.

Will Mr Modi close the loophole allowing political parties to launder black money?

We are not so sure. After all, there is a huge conflict of interest here.

But then why leave this to political parties when there is a scope that we as citizens of India can put an end to this discrimination and anomaly.

My colleague Vivek Kaul is on a mission to get us EQUAL RIGHTS.

Vivek has initiated a petition to the President of India to request him to set things right.

Thousands have already signed the petition.

He needs 25,000 signatures before 6th of January to kick this off. Already, over 5,000 people have signed.

In case you haven't, it's time to do your bit now.

Sign the petition, and become an agent of change.

03:45

Just when India Inc. is dealing with the blow of demonetisation, another challenge has sprung up.

Trump's victory, followed by interest rate hike by Fed has resulted in capital outflow. The rupee is under downward pressure.

The timing for India Inc could not be worse. Demonetization has led to cash crunch and demand slowdown. Exports too have been hurt. As suggested in an article in Business Standard, amid the falling sales and profits, foreign debt, including ECBs (external commercial borrowings), stands at 25% of India Inc's net sales. Exports, on the other hand, comprised just 21.1% of net sales in FY 16.

As per the data from Finance Ministry, ECBs due for repayment during FY17 and FY18 stand at US$ 29 billion and US$19.6 billion respectively.

The road ahead for companies with high financial leverage could be bumpy.

Don't get us wrong. We are still hopeful that profit margins for India Inc will witness a mean reversion and the upside could be up to 70%. And that Sensex could follow suit.

But as Tanushree suggests, not all the businesses will witness this rise. There are several moving parts to the rise in corporate earnings such as capacity utilization level, ability to service debt and so on, that one needs to be watchful of.

To make the best of these uncertain times, smart investors indeed need to have some allocation to the safest blue chips that will not only beat short term disruptions, but have the potential to deliver stable and consistent returns through the thick and thin of financial markets.

04:40

After opening the day on a weak note, the Indian share markets have continued to trade in the red. Sectoral indices are trading on a negative note with stocks from the metal sector, realty sector and telecom sector witnessing maximum selling pressure.

The BSE Sensex is trading down 224 points (down 0.9%) and the NSE Nifty is trading down 74 points (down 0.9%). Meanwhile, the BSE Mid Cap index is trading down by 1.3%, while the BSE Small Cap index is trading down 1.4%.

04:55 Today's Investing Mantra

"Predicting rain doesn't count. Building arks does". - Warren Buffett

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

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1 Responses to "Stocks to Buy When Bullets Fly"

Thirumurthy.R

Dec 27, 2016

"Stocks to buy when bullets fly" is good stuff. It catches the overall perspective without any tunnel vision. Dovetailing such a vision with practical stock advisories that demand hard nosed, data based analysis is commendable. Do keep at it.

May Vivek Kaul's tribe increase. May his mission to get us all Equal Rights succeed. I too have signed the Petition to the President along with Vivek. I am absolutely certain that digital activism, like what Vivek is doing, marks a tectonic shift in the dynamics of democracy that will serve India well as she leapfrogs into the digital universe, bypassing several stages of the digital technology. Let us hope a strong, secure, state of the art digital infrastructure evolves soon enough.

Talking about the tectonic shift in democracy, not many people are aware that Indian democracy has a hoary tradition. In fact, a Collector in the then Madras Presidency under the Raj had written to the Queen that Britain could learn from India something about democracy after he witnessed a Gram Sabha at work! Please see the works of Shri Dharampal 1922 - 2006, thinker, scholar, historian and, patriot who redefined Indian understanding of her history in the samanvaya website or at Dharampal.net

The Collector referred to above showed both his open mindedness and the grass roots democracy exemplified by Gram Sabhas then so much alive and kicking all over India. The Sabhas did not depend on dole outs. They made sure all public works were carried out collectively by shram dhan as a way of life. No one was driven to the wall. They ensured a near fool proof system of election wherein only persons of exemplary integrity were elected to the Sabha and they or their kin could never contest after a fixed term. The ballot system was called as "kuda volai murai" (Tamil) - election through a process of writing the names of the eligible persons of high integrity on palm leaf pieces, putting them in a pot and a child picking up the required number of such pieces in the village assembly, witnessed by all. The stone inscriptions in Uthirameroor near Chennai-Kancheepuram stand testimony to this : please see the article Constitution-1000 years ago by T.S. Subramaniam in The Hindu of July 11 2008 updated as on October 10 2016.

It would be naive in the extreme to think of putting the clock back now. Nor does it serve any purpose to get all puffed up about what a great country we once were only to nourish bigotry and chauvinism that are so counterproductive in today's world, though the alt+right syndrome seems to be spreading like the common cold in developed countries. It is another story that in keeping with their track record of maintaining their dominance by any means, SOME in the developed countries are now trying to hunker down and shutter their economies, so to speak. However, the global market place is here to stay, entrepreneurial energy and technology is diffusing across borders and, the advantages of industrial revolution perhaps have reached a plateau in line with the theory of diminishing returns for the developing countries that makes SOME to think they are facing an existential threat, which is not the case at all.

The whole point in articulating all this is that the unbroken Indian social ethos has a strand of strong and genuine democratic spirit that bestows on us a lot of accommodativeness, resilience and a participatory dynamic. It is this that would sit well with the emerging digital activism that can take us far, as mentioned earlier. The one thing we should watch out for more than anything else is that we do not repeat the historical blunder of exclusivist social stratification that put the disadvantaged to so much suffering and deprivation for so long at such enormous social cost that any fool can exploit us at will. If we are thoughtful, an unjust India with digital have-nots may not happen now that biometric devices and systems tailored for them are fast emerging, with local languages getting a free play.

Doesn't hurt, does it, to make a feeble attempt at a broad sweep of history and letting its light shine on the pressing priorities of the day?

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