Last few weeks has been a bloodbath in dalal street when the market due to combination of global and internal factors got spooked and hammered all the stocks down . Suddenly the market’s honeymoon period with Modi govt is over and the patience is running out fast, though the govt has been making the right noises and has been around for one year only, which is a short period to turnaround a slow elephant like India with a democratic setup.

First shock for investors came when the Modi govt. sent a retrospective MAT Tax notice to FIIs which soured the foreign investors sentiments. Govt. made it worse by initially defending it bravely and then tried to soothe the sentiments when the damage was already done. Then came the massive IPOs in China in May when Chinese companies collected >$ 35 Billion in a week, what Indian companies couldn’t do in last 10 years. Chinese markets suddenly became hot for FIIs money as Chinese market has gone up by 140% in last 1 year against a moderate growth in Sensex/nifty. This obviously led to fickle FIIs withdrawing from emerging market countries like India and pouring into relatively hot China. Then came the monsoon scare when Indian met dept. suddenly lowered the monsoon forecast to 88% of the average. To top it all , our RBI governor did some double talking and confused the markets . While he reduced the Repo interest rate by 0.25%, he increased the inflation outlook to 6% by end of 2015 and indicated long pause in the risk free interest rates. On the background, we also have global factors like prospect of US Fed increasing Fed rate by end of 2015 and failing negotiations with Greece which can lead to Greek bankruptcy and exit from Europe.

The corporate earnings results for last quarter(Q4 of FY2015) has been one of the worst in recent quarters which disappointed those investors who had bet on economy turnaround in 1 year of the new govt. as if it had a magic wand. As per the latest quarterly results, (after removing Oil & gas sector companies from the sample), the revenue went up by 3.4% (YOY) while the profits went down by 7.6% YOY( data source: equitymaster.com)
All these factors came together to spook the market since last 6 odd weeks and sour the sentiments in a big way and have ended the honeymoon with Modi for the time being. Though we understand seriousness of some of these factors, let’s analyze each of them to gauge their long term impact on structural India story and also try to see few things which market is not seeing.

The hotness of Chinese market is short lived as it’s not backed up by strong fundamentals and growth outlook of an economy which is already slowing. It’s clearly in a bubble territory (over-valued) with 140% index growth in last 12 months with PE already at 25 while Indian Sensex PE is at 19. The Chinese IPO burst is already over. Indian market growth is on the other hand backed up by strong fundamentals and growth outlook and is not over-valued (sitting at 1 year forward of 15.5 lower than 10 year average of 16).
The Monsoon scare is overblown. The private forecasters (Like Sky met) who have shown more accurateness in last 5 years have predicted 102% of long term average. The monsoon has already arrived and is making good progress and has brought cheers to farmers now. The chances of better distribution of monsoon and adequate food stocks this time will anyway reduce the negative impact of monsoons. Market has definitely read the RBI governor statements wrongly. He never ruled out any more rate hike completely. He talked about considering the rate hikes based on monsoon impact and consequent food inflation which means that if monsoon turns out to be better or the food inflation doesn’t spike because of strong govt. actions/ controls, he could still do more rate reductions.

US Fed rate hike is already priced into the market so many times and its anyway not going to create any long term impact on Indian story or markets though it may have some short term outflow of funds. Greek exit is again not going to make any long term impact like Lehman crisis as Europe has prepared well to ring fence Greek debts and avoid any snow balling impact.

As far as corporate earnings results are concerned, the market and investors are disappointed. They were expecting too much from the govt. too soon and expecting economy and corporate earnings to turnaround too soon. It doesn’t happen in a huge democracy like India which is used to incremental reforms/execution and not revolutionary/ transformation changes. However, as long term investors, its important for us to have a contrarian thinking and see what the markets are not seeing. I can clearly see some green shoots pointing to gradual turnaround.

1) L&T which is the most important barometer of industrial and capital goods demand pickup has shown a 28% YOY increase in its order book (> $40 Billion equal to 2% of India GDP) in FY2015. The new order intake has gone up by about 35% in Q4 of 2015
2) FMCG sector has improved sales by 9% last quarter, despite rural distress and de-growth. Bajaj Finance, market leader in financing consumer durables improved its sales by 33% last quarter. Future retail (Big bazar) went up in sales by 19% and shopper stop by 11%. This shows that urban consumer spending is intact and showing signs of picking up
3) Coal India is the biggest turnaround story. It improved its production by 7-8% last year (from 460 to 493 Million tons which is more than it increased in last 5 years). This year, its trending to go up by another 9-10 percent (perhaps reach 540 Million tons). This will change the coal availability and hence power production drastically. The peak power shortage has come down to record 3.6% already
4) Container corporation – This is another barometer of logistics/ supply chain and trading activity as it’s the market leader in logistics/ container business. Its sales and volumes have gone up by 16 percent last quarter (YOY).
5) Commercial vehicles production/ sales – Ashok Leyland sales picked up by 46% last quarter (YOY) and Tata Motors MCV/HCV (medium and heavy Commercial vehicles) volumes picked up by 17 % in May (YOY). Shri Ram transport finance (biggest financing company, specializing in Commercial vehicles went up on sales by 13 % last quarter. This proves pickup in sales of commercial vehicle which is one of the biggest indicators of turnaround in construction / road projects, mining and economic activities.

These green shoots conclusively prove to me and sane voices in the market who want to see what the market is not seeing beyond its myopic vision and panic driven over-reaction. Besides corporate earnings, none of the other reasons for market adverse reaction and fall are long term and are materially impacting India long term story(FIIs rush to China, US Fed rate hike, MAT issue, monsoon or RBI governor monetary stance/ statements). So, why do we hammer market index by 11 percent and many of the good quality businesses/ stocks by 15-20 percent?

Well , I see a few positives of this short term bear correction in this long term structural multi-year bull market, driven by economic and business turnaround. Firstly, the froth and un-realistic expectations from Modi govt. which led to over-valuations in certain sectors have been removed which is healthy for the market in long term,. Secondly from now onwards, the only triggers for market rise would be ground level improvement in things like corporate earnings driven by economic turnaround and investment cycle pickup as well as execution of key reforms like GST and land bill

Implications for retail customers – Don’t be afraid of market noise. In fact, switch off the TV and market noise and invest in quality businesses which are available at attractive prices, courtesy the correction with a horizon of 3 to 5 years. If you have missed the earlier rally after Modi election, then this is the best opportunity to make up for the miss. Since these corrections are temporary in nature in this secure bull market (whose trend will be up for many years),one should be buying quality businesses at every dip or correction of market or your businesses. The only caution I would give would be not to go for falling knives by buying inferior businesses/ stocks with high leverage/ debt and low returns on capital and negative cash flows

Right now I am buying the best businesses in few predictable sectors like Yes bank , Axis Bank(Private banks space), Dewan Housing, LIC Housing Finance(Housing Finance space), Tata Motors, Apollo tyres(Auto, Auto ancillaries), HCL Tech, Tech Mahindra(IT) and Aurobindo Pharma, Torrent Pharma (Pharma sector) and REC and Bank of Baroda(PSU bank/NBFC but strong track record). All of them are in my 2015 model portfolio, published in this blog site, except Axis bank which was a part of my 2014 model portfolio. All these businesses are quality businesses with strong moats/ niches with a predictable/ stable operating history, good quality management, strong balance sheet and are available at attractive prices because of the correction, well below their intrinsic/ real values, providing a margin of safety and protection of capital in long run.
It’s futile to perfectly time the market. Buy in installments at every dip or correction in your favorite businesses/ stocks and sit tight for many years till you reap the whole benefit of the growth outlook or cycle of your favorite and high conviction quality business

Happy investing

Cheers
Amar