|»5 Minute Wrap Up by Equitymaster|
On This Day - 4 APRIL 2011
Which companies to invest in?
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The head of Morgan Stanley Investments has tried to answer precisely this question in his recent interview to a leading daily. As per Mr. Nandra, investors need to look at those sectors that would do well in the scenario of demand revival from the West. In other words, he advises investors to invest in those sectors that rely more on global demand to drive growth. As per Mr. Nandra, the Indian domestic consumption growth story remains intact. However, due to the high inflation as well as higher interest rates, it would be better for investors to balance domestic consumption with global demand. As a result, he advises investors to look at sectors like IT, pharma as well as the specific companies that are major players on the global stage.
With due respect to Mr Nandra, we believe that there will always be something or the other that will keep happening in the world. Today, it is the expectation of a revival in the west, tomorrow it could be something else. But this should not call for changing one's investment patterns we believe. What matters according to us, is the long term view. In the long term, we are quite confident that India will keep growing faster than the western economies. Furthermore, there are companies in India which will continue to flourish in the western markets, irrespective of whether those economies will revive or not. Thus, the key here is to buy into those companies when they are available cheap and come equipped with some sort of competitive advantage. All the rest is noise according to us.
Let's hear what Mark Mobius of Templeton Asset Management has to say about this. According to him, the sell-off in the recent few months was mainly a profit-booking exercise. He opines that investors have realized that they cannot afford to ignore a growing market like India. Because in the long run, emerging economies are bound to outperform developed economies by a wide margin. The fact that the legendary investor Warren Buffett has finally "arrived" in India underlines this point. Investors are also beginning to realize that the US dollar and Treasuries are no safe haven any more. They have to invest elsewhere to escape the US government engineered value-erosion.
We quite agree with Mr Mobius. There is no denying that there are some grave short to medium term inflationary concerns. But the long term Indian growth story remains very much intact.
These are by no means impressive stats. And it isn't that we are not doing anything about it. Certainly, private sector participation is on the rise and there has also been a rapid growth in debt financing. However, all is not well on the cash generation front, an area that has the potential to make or break the future of the power sector in India. The daily goes on to add how speedily the sector's financials are deteriorating. Especially the state level utilities where losses doubled to a whopping Rs 523 bn in FY09.
Given this sorry state of affairs, there remains a big question mark over debt servicing ability of upcoming power projects. Thus, in order for the sector to grow, something has to be done to curb the mounting losses and pretty fast at that. For if investors get the whiff that the whole sector's financial viability is risk, there could be some serious repercussions.
Desperate times call for desperate measures. Sensing the pressure on realty firms to repay debt, execute projects, and considering the scare liquidity scenario currently, investors are looking to reap benefits. They would need higher returns, commensurate with the excess risk they are undertaking. PE investors are looking at returns on investment (ROI) of close to 30% from 20% previously. NBFCs are also lending at a 14-19% ROI. Most of the demand for cash from realty players is coming in from metros like Delhi, Mumbai and Bangalore. It looks like these developers priced themselves out of the market and aren't finding many takers for their projects. What we would prefer is if developers focused on more projects for affordable housing. These will always see significant demand, no matter what.
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