These are interesting and puzzling times when it comes to investing in India equities. Indian indexes (NIFTY and Sensex) are trading at expensive rates at 21-22 times forward earnings (FY18 estimated earnings). This is at 25-30 percent premium to historical average forward PEs(16 times forward earnings). However Price to book value multiple is trading at 2.7 times (less than historical average of 3.1 times the book value). Since the price multiples are in an expensive range, 2018 is going to be a year of bottom up stock picker as market/index is not going to show the same growth as 2017.

While the price to earnings multiple is trading at an expensive range, we also need to see other factors before we take the final call on the market, like potential to grow in future and price to Book value. Potential to grow is showing definite green shoots when it comes to recent quarter (Q2)earnings and revenue growth figures. Second quarter earnings showed a 7% growth(operating and net profit YOY figures) . This was a big change to the last quarter earnings growth numbers(-8% in Q1 YOY ). This was in line with the street expectations with no major disappointments.

We also need to sit back and take a long term & big picture view . The Indian economy has been in a rapid growth track since last 9-10 years(except a few brief slowdowns)since the world wide Financial recession in 2008. This has attracted a steady Foreign institutional investment every year since then as Indian market/economy has shown a steady secular growth trend. Indian economy is well positioned to become a 5 trillion economy in next 6 years(by 2023) and hence we have significant wealth creation opportunities to multiply our wealth provided we invest our money in the right opportunities and businesses/ stocks . We need to defocus ourselves from the short-term hiccups and irritants and take a long term and big picture perspective. Short term events like Gujarat state elections and US fed news can have short term knee jerk reactions but the market will always follow the fundamentals factors in the long term.

There are many green shoots which are appearing on the Indian horizon which bodes well for the Indian economy and markets for the medium and long term. The reforms like banking recapitalization of 2.1 lakh crore, massive capex infusion plan into road infrastructure of > 4 lakh crore(Bharatmala project) , implementation of GST and demonetization, Insolvency code have given significant signals about Government willingness to carry out bold reforms . These reforms as well as the improvement of “Ease of doing business” rankings for India in the world bank report by 30 ranks(from 130 to 100) has brightened the investing outlook towards India among the global and domestic investors and also led to a upgrade in the sovereign credit ratings by Credit rating agencies(Moody) . $3 Billion inflow in November to Indian equities by FIIs(Foreign Institutional investors)is a hallmark of their renewed confidence and shows their positive commitment to Indian economy after few months of selling spree. My view of future foreign flows is optimistic and positive as FIIs will continue to view India as one of fastest growing economies where decent returns could be made in next 10-15 years. Additionally, Domestic retail as well as institutional investors have been steadily pouring money(2 to 3 billion dollars per month) in a steady manner since a year as other investment alternatives(real estate and gold) have not been giving attractive returns like equities.

So, what are the sectors which could yield some good bottoms-up opportunities? Some of the sectors I like are consumer focussed Niche NBFCs(Non banking Financial companies) like Housing and consumer Finance companies(as government is pushing affordable housing in a big way) , private banks with good NPA and growth track records, discretionary consumption sectors like Auto and consumer durables(because of consumption and rural sectors picking up), Infrastructure sectors (since the government is launching big ticket infra projects like Bharat-mala and sagar-mala projects). Apart from these sectors , there are some value play sectors like IT and pharma which have corrected significantly due to some temporary headwinds and would need some stock based research to pick few specific companies which will turn around and show significant returns in medium term.

So , lets apply some basic screens to come out with some of the top opportunities in these sectors . Some of the criteria I took were consistent Return on equity(ROE) for last 5 years, consistent and high sales and profit growth for last 3 to 5 years, decent valuation parameters like PE/ G ratios and PE/ROE ratios, strong balance sheet parameters low Debt/equity ratios. Finally I took market capitalization of > 4000 crores to ensure that we go for only blue chip and large mid cap companies to reduce the risks which comes with small caps exposure. These businesses have been selected as they are high quality businesses with good margin of safety, decent valuations and management teams

I have selected 12 businesses using these quantitative criteria and applying few subjective criteria like business knowledge and comfort levels with the management and corporate governance/ transparency principles. They are Housing & Finance companies like India Bulls Housing Finance and Dewan Housing Finance, Private Banks like Yes Bank & DCB bank, NBFCs like Bajaj Finance and Chola Mandalam Investment & Finance, IT and pharma companies like HCL technology , Aurobindo Pharma and Ajanta pharma, Infrastructure companies like Power Grid and IRB infrastructure and Auto companies like Maruti Suzuki.

Blog media updated


Pl click on the Blog media file (above) to get the table having relevant data for all the selected businesses/stocks.

Most of these companies have been in my earlier lists like 2017 model portfolio published in Jan 2017 (8 out of 12 businesses have been repeated) and the list published in the last blog in Sep 2017(7 out of 10 businesses in the list have repeated this time). This is important as we should focus in a stable portfolio with low turnover of stocks.

Hopefully , you will find this blog interesting and productive in selecting the right businesses for long term with high margin of safety. Happy investing