Break-Out India

28 JANUARY 2016

Dear Subscribers of the Equitymaster Agora Reserve and other attendees of the Equitymaster Agora Investment Conference.

At the outset, I wish to thank you for attending what was another eclectic and exciting Equitymaster Conference organised by Rahul Goel and his colleagues.

It is always humbling to see the large turnout and the commitment that all of you have to the path of sensible investing, based on the unbiased and well-researched views that the various teams at Equitymaster have presented to you over the years.

The original 'product' - which Subbu and I helped create at Equitymaster over a decade ago and is now mastered by Tanushree and Rahul Shah - was based on the 'value-style' of investing. Though this remains my personal preferred way of investing (finding relatively large and liquid stocks that are often mis-priced or mis-understood by the market), we recognize that there are many ways to approach the world of investments. There is nothing wrong in having a portfolio of stocks that follow different styles of investing. It is a very individual decision!

Over the years, Equitymaster - based upon discussions with many of you - has introduced new products and alternative ways of investing.
The MicroCap Millionaire, for example, searches for small-cap, less liquid companies that follow a value criteria but have a much higher level of risk associated to it primarily because it is focused on less liquid companies and small companies which have the very difficult challenge of growing amidst the competition.

The Profit Hunter series are trading products, which do not look at valuations at all and are based purely on technical and charts.

However, irrespective of the approach to investing and the 'style' of investing, our commitment to you is that any product or any view from Equitymaster will always be unbiased and honest: the analysts who work on the various ideas will never be influenced by the managements of companies to write good or bad things. Our views will be 'independent' and based on analysis.

We will shave our fair share of incorrect views and 'wrong calls' and we will always strive to improve our 'success rate' but no call can be bought. Not a single word on the web site can be purchased or planted! The original Equitymaster website was launched on April 22, 1996 and - over the past 20 years - we have stayed true to our core: say it as it is. Speak honestly, firmly, and boldly. We exist to serve you.

Modi-fied India or Modified your expectations?

That was the topic of my presentation.

Many of you asked why I was so bearish on India.

As I clarified before the Q&A session in the afternoon, I am not bearish on India: I think India is a great long term story.

This is the most powerful chart to prove that.

Chart 1: GDP real growth rate across 10 governments has been 6.2% p.a. over the past 35 years - 6.5% is a good long term assumption.

Very few economies in the world can have such a strong history of rate of growth in their economy. A growth of 6% per annum in real terms is over 12% per annum in nominal terms (adding back 6% per annum for inflation).
This means that if India's GDP was Rs 100 in 1980, it has now grown to Rs 53,000 - an increase of 53x.

While China has grown its GDP, it has not shown any great returns to those who invested in its stock markets, which are much younger and less developed than the Indian stock markets.
India, on the other hand, has given patient investors a tremendous growth in the same time period.
In 1979, the BSE 30 Index was 100. Now, it is about 24,500. This translates to an average compounded growth rate of about 17% per annum. If you were to add back the dividends received over the years and assume those were reinvested, then the average rate of return would be about 20%!

I am an India bull.
Because I believe that India will grow at this 6% rate of growth in real terms over the next 20 years.

But I do not believe that the governments, politicians, and bureaucrats who run India have the vision, the mental capacity, and the guts to put in place a large number of pre-conditions that will allow us to grow at the higher rates of 8% and 10%. But these sort of optimistic GDP numbers find their way into press statements in every 'bull run'.

So, if you begin to bid up share prices based on what I think is a wrong assumption that India will grow by 8% per annum and the stock market will reach much higher levels, then I disagree with that view.

We were neither believers of the Dream Team nor of the Modi Magic story.
Speeches by governments - whether led by the Congress or the BJP - do not generate the necessary conditions for the higher rate of growth, actions do.

In anticipation of the Modi victory, the brokerage houses, the research analysts and the fund managers got excited.
The researched analysts 'upped' their earnings estimates.

Eventually reality hits us.

Graph 1: Earnings Estimates were wildly off - but who cares!

Over the past few months, the reported earnings and the estimated earnings reflect the reality of companies struggling to show profit growth.
And, when there is low profit growth - and certainly when great expectations are revised to face the bitter truth - the stock market resets its price downwards.

Graph 2: Getting closer to value: historical PER of India expands as historical EPS is adjusted downwards on disappointing results

As the founder of Equitymaster and true to our core value of speaking our mind, I cannot mislead you.

I may be wrong in my analysis, but I must say things as I see them.

I am waiting for the day when I can tell you that we live in Break-Out India and our GDP will grow at 8% per annum (after deducting inflation) for the next few decades - not by rejigging the way GDP is calculated in a statistical way but by true reforms! 😊

For now, India is stuck at a 6% or 6.5% number (using the old series of GDP data).
But even that is fantastic.
It is a good enough reason to be bullish on India.
And - as the markets slip on nervousness due to lower assumptions - you will be given the opportunity to buy even more stocks at more attractive prices.
The 'value' investor in me waits for those opportunities...and we may be about to be presented with one!

Building Break-out India, brick by brick.

Subbu, Rahul, and I have started to:

  • Increase the transparency of the financial reporting of charities,
  • Help charities become better at their work,
  • Allow you, as an individual, to better evaluate charities before you donate, and
  • Assist companies in fulfilling the CSR mandate of putting aside 2% of their profits for charitable purposes.

Think of as an Equitymaster for the NGO world!!

We believe that NGOs - run by wonderful people who need our support - can help India move closer to a Break Out stage.

A home is built brick by brick.
A country is built one step at a time.
While governments ponder over what they need to do, we must do our bit to help build the solid foundation for that Break-Out India.

I would like you to help us in this endeavor by sending a donation to:
HYNGO Foundation

The money you send will be used to help an NGO of your choice from a list of 5 deserving NGOs selected by the team at HYNGO.

HYNGO Foundation will remit the amount to the NGO selected by the donor.

You may send a cheque or transfer by NEFT to HYNGO Foundation after filling up the online form.

Your donation will give you a 50%/100% tax benefit under Section 80G/35AC.

How much should you donate? Anything that makes you happy!
But may I suggest Rs 500 to Rs 5,000?

Please send your cheque to:

HelpYourNGO Foundation, 16 Jolly Maker Chambers No. 2, Nariman Point, Mumbai 400 021. (Tel: 22041250) and all bank transfer details are on the web site. Here is the link to the donation page giving five options to you: Be a Brick!

Thank you, once again, for being with us on January 23, 2016 and for hearing my long term bullish view on India!

Suggested allocation in Quantum Mutual Funds (after keeping safe money aside)

Quantum Long Term Equity Fund, Quantum Equity Fund of Funds, Quantum ESG India Fund Quantum Gold Fund
Quantum Liquid Fund
Why you
should own
An investment for the future and an opportunity to profit from the long term economic growth in India A hedge against a global financial crisis and an "insurance" for your portfolio Cash in hand for any emergency uses but should get better returns than a savings account in a bank
Suggested allocation 80% in total in both; Maybe 15% in QLTEF and 75% in QEFOF and 10% in Q ESG 20% Keep aside money to meet your expenses for 12 months to 3 years
Disclaimer: Past performance may or may not be sustained in the future. Mutual Fund investments are subject to market risks, fluctuation in NAV's and uncertainty of dividend distributions. Please read offer documents of the relevant schemes carefully before making any investments. Click here for the detailed risk factors and statutory information"
Disclaimer: The Honest Truth is authored by Ajit Dayal. Ajit is Founder of Quantum Advisors Pvt. Ltd. which is the Sponsor of Quantum Asset Management Company Pvt. Ltd – the Investment Manager of the Quantum Mutual Funds. Ajit is also the Founder of Quantum Information Services which owns Equitymaster and PersonalFN. The views mentioned herein are that of the author only and not of Quantum Advisors, Quantum AMC or Equitymaster. The information provided herein is compiled on the basis of publicly available information, internally developed data and other sources believed to be reliable by the author. The information is meant for general reading purpose only and is not meant to serve as a professional guide / investment advice for the readers. Readers are advised to seek independent professional advice and arrive at an informed investment decision before making any investment. Whilst no specific action has been suggested or offered based upon the information provided herein, due care has been taken to endeavour that the facts are correct, accurate and reasonable as on date. None of the Author, Quantum Advisors, Quantum AMC, Equitymaster, their Affiliates or Representative shall be liable for any direct, indirect, special, incidental, consequential, punitive or exemplary losses or damages including lost profits arising in any way on account of any action taken basis the data / information / views provided in The Honest Truth.

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Feb 6, 2016


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