Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Stay focused on long term fundamentals - Views on News from Equitymaster
  • E-MAIL
  • A  A  A
  • Jun 10, 2004

    Stay focused on long term fundamentals

    Markets have lost around 15% in the last one month and one of the most important factors is the unexpected result of the Indian general elections. Other factors were rise in crude prices and an expected rise in US interest rates both of which have led to the weakness in other global markets. Keeping this as the background, we conducted a poll asking our audience the question "In your view, which sector is likely to get more adversely affected from the change in government?"

    The opinion poll results are shown below and indicate that a substantially large majority of the audience feels that the banking sector is the biggest loser post the change in the central government. The power sector according to our audience is the second most likely to be affected by the change in government. The rest of the votes have gone to the energy sector. To an extent the audience is justified to name these three sectors as likely to be the most affected, however only to an extent. The banking power and energy stocks are still dependent on the government policies, however one needs to ascertain the strength of this dependence.

    In a power deficient country like India (peak shortage stands at around 13%), the earlier government had introduced fundamental reforms measures in the Indian power sector. To name a few, privatization of State Electricity Boards (SEBs), securitisation of the power dues, stopping free supply of power to farmers were among the major ones. As a result, the power sector turned out to become one of the favorite sectors for investment in last one year, thus stocks gained substantially based on the expected future potential of the sector.

    But with the change of government, investors have lost confidence in the continuation of power reforms, as the allies of the new government are demanding review of some of the sections of the Electricity Act 2003 (like privatization of SEBs, continuation of free power to farmers), which if initiated may delay the inevitable reforms process of the sector. Apart from reforms in the sector, a fundamental issue to be addressed at this point is that irrespective of the government at the center, until new capacities are set up, India will remain a power deficient country. While Indian companies are going forward with their proposed capacity addition, it will take a while before these capacities come on line and by then the demand supply gap may have increased.

    Hence reforms, both to ensure profitability of the power generators and further investments in the sector are sorely needed at this point of time and any delay in the same will only affect the overall growth of economy. Remember, electricity is one of the prime movers of economic growth for any country. While the prospects of the overall sector are still blurred, individual companies may still continue to outperform over the long-term. Hence the investment in the sector needs to be selective and long-term in nature.

    Power (% loss) Banking (% loss) Energy (% loss)
    Tata Power -38.7% BOB -33.3% HPCL -33.4%
    Neyveli Lignite -32.0% IDBI Bank -26.7% BPCL -31.0%
    Reliance Energy -29.4% SBI -26.3% IOC -25.5%

    * Period between 6th May to June 9th

    Over the last three years banking stocks have had a strong run on the stock markets. This was due to the improving fundamentals of the sector, mainly due to portfolio gains, Securitisation Act and the government's intention to carry out further reforms in the sector. The government had gone to the extent of proposing a further increase in the FDI limit in the sector and the reduction in the government holding in PSU banks to 33%. However, the new government has raised doubts over the disinvestment, voting rights and FDI liberalisation in the sector. This has led to significant amount of weakness in the sector.

    However we would still like to maintain our view that the core business fundamentals of the sector have not changed. Though consolidation in the sector may be delayed, business growth in terms of credit growth is expected to pick up. Most banks with better technology and improved asset quality are in a better position to cater to the new credit demand growth. We believe that the market participants overreacted toward bank stocks post the change in the government at the center. There are still banks with strong fundamentals that are looking attractive from a valuations perspective. Thus here again the investment rationale must be selective and long-term.

    Energy majors like HPCL and BPCL gained substantially on the bourses as the previous government decided to push ahead with the divestment of these companies. Supported by improving bottomlines, refinery and oil exploration stocks rose further due their cheap relative valuations as compared to international peers. With the change in government, the issue of divestment has been put on standby mode. Also, there can be some change in the profitability of energy companies, unless the government decides to hike the domestic oil product prices. Refinery companies on the other hand are likely to benefit, as their margins are dependent on crude prices, so higher the crude prices, higher the refinery margins. Thus the impact on the sector has been mixed, however the prospects of the sector within a growing economy are still strong. The benefits of the same, however will accrue only over the long-term.

    The message is clear, do not expect phenomenal gains like that seen in 2003. Also it pays to be invested in fundamentally strong companies, as in case of such surprises these are the stocks that will help the investor to tide over difficult times.



    Equitymaster requests your view! Post a comment on "Stay focused on long term fundamentals". Click here!


    More Views on News

    How to Ride Alongside India's Best Fund Managers (The 5 Minute Wrapup)

    Jun 10, 2017

    Forty Indian investing gurus, as worthy of imitation as the legendary Peter Lynch, can help you get rich in the stock market.

    Dear PM Modi, India is Already Land of Self-Employed, and It Ain't Working (Vivek Kaul's Diary)

    Aug 21, 2017

    Most Indians who cannot find jobs, look at becoming self-employed.

    The Key Factor Pushing Gold Up These Days (Outside View)

    Aug 21, 2017

    PersonalFN explains the chief factor pushing gold prices up of late.

    How Unique Are the Companies You Invest In? (The 5 Minute Wrapup)

    Aug 21, 2017

    One of the hallmarks of successful investing is to look out for companies that have a unique and enduring moat.

    You've Heard of Timeless Books... Ever Heard of Timeless Stocks? (The 5 Minute Wrapup)

    Aug 19, 2017

    Ever heard of Lindy Effect? Find out how you can use it to pick timeless stocks.

    More Views on News

    Most Popular

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    The Most Profitable Investment in the History of the World(Vivek Kaul's Diary)

    Aug 8, 2017

    'Yes, it looks like a bubble. And, yes, it's like buying a lottery ticket. But there's something happening that has never happened before. It's an evolutionary leap in money itself.'

    Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

    Aug 8, 2017

    Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    Bitcoin Continues Stellar Rise(Chart Of The Day)

    Aug 10, 2017

    Bitcoin hits an all-time high, is there more upside left?

    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms


    Aug 21, 2017 (Close)