So 2013 comes in and out goes 2012! Wow, time flies! So if you have been reasonably following my blog, turns out some things have turned out as predicted and some have not. Corporate run rate has continued as expected whilst some counters recommended have rallied - Like Bajaj Auto, Cipla, HCL, L&T, Adani Ports etc. Some recos have not taken off like Hindalco and Cairn and some have been positive howlers like Crompton!

So how have my investments done in the last year and half? Netted about 35%. Not bad, but market also rallied 25-28% from those levels, so yeah, an alpha of about 6-7%. Partly aided by asset allocation calls and partly by good stocks (Or so I would like to believe!)

What is in store for 2013? Well for one, lets look at the good things

1. Awesome awesome liquidity! - Be it US Fed or ECB or Bank of Japan, everyone had opened their taps in 2012 and it continues. So those flows do find a way in to emerging markets like ours and in fact, 2012 has had more than a fair share of flows for India compared to historical rates (40%+ compared to 25-30%). So yes, good for equities! Also, global risk on means that people are ditching low yield bonds and moving to risk assets - Equities. All global indices have smartly rallied reflecting that. So the central banks have pushed out yields and prodded people to get into risk assets, this theme may continue to play out

2. Government Reforms - So the intent of the incumbent government is clear. Make the right noise, make parliament function and ensure some reforms go through. Hence Retail FDI being passed, Banking Regulations done, Diesel partial de regulation done, SEB reforms...all point to a government now willing to take such steps to reduce deficit and a possible downgrade to junk status for India!

3. Continuing corporate run rate - Companies have been chugging along the growth path largely, barring a few misses here and there. Augurs well for business case as well as keeping valuations around median levels.

Bad parts??
1. Continuing twin deficits - No way we can meet the deficit target set out in last year's budget. Exports not reviving. Crude poses an ugly threat and so do gold imports.
2. Pulling the plug? Some turbulence in global markets would mean that flows can evaporate from EM. Not good news for a high beta market like ours!
3. Private Capex - We need investments in infrastructure to kick off. Without that we would just be running on fumes. Also, more reforms would be needed like GST, Land Acquisition Bill etc. Lets see where this goes. Markets have run up ahead in terms of hopes.

So what does one do in such a case? Stick with quality names till macro emerges clearer. Do not get into the hype n trap of media where they talk up a sector for a month and then dump it! Be slightly ahead of the curve taking a longer term 2-3year call. Clearly would want to prune names in FMCG, Pharma, Auto which have run up steeply in 2012 and have little juice left. Would want to play cyclical stories which have stronger structures and benefit from possible future reform action - Power, Cement, Capital Goods. However, good FMCG Bank Auto names would still merit inclusion.
So ideally good stocks for 2013 could be L&T, ICICI Bank, BoB, SBI, HDFCB as all time fav, Colgate, ITC, NTPC (my fav!), Hindalco (yes I persist!), Cairn, ONGC, Cipla/Lupin. Further pushed out in blue sky 5yr time frame scenario would be slightly riskier bets like Jubilant Food, McNally Bharat, Treehouse Edu and Motherson Sumi. Nestle Adani did well and remain favorites.
What all the aforesaid stocks have in common is a good business model, reasonable industry size and scope and positioning within the industry and stellar BS/Financials. Look for these whenever investing in any stocks. Like I have said before, think about investments as how you would when analysiing a business proposal. GIve thought to future growth, how the company can scale up and manage cash flows and what is the deal (CMP) at. So looking at stocks as businesses than mere scrips would really help analysis and augment your time horizon/outlook. 

Awesome last quarter!

July-12	-0.43	-0.9	0.52
August-12	-2.70	0.6	(3.27)
September-12	5.03	8.5	(3.43)
October-12	0.16	-1.5	1.62
Novemb-12	6.16	4.6	1.54

The above are returns generated versus markets and the last column is outperformance. So you can see that OCtober and November have been pretty decent months for the portfolio. So what made it run? Unlike popular expectation that high beta has made big money in this recent stock market rally, my portfolio shows the opposite. Max alpha gainers were Power Grid (a beta of 0.5 or 0.6) with 25%+ alpha, Titan Industries with same alpha (later exited stock once it reached our fair value near 300), Cipla, Nestle etc. Only Ashok Leyland was a notable alpha pick.

So what does this denote? For the longer run, what matters is company fundamentals and business model. After all, beta is a mere co relation statistic bit, nothing to denote fundamentals. Companies who have been efficient capital allocators, have wide moats, superior return on capital employed and stellar management have gained in the last one year and more. Cipla, Nestle, Titan, HDFC, HDFC Bank, M&M are all examples of quality which has held in good stead during trying times. Moral of the story? Hold on to quality. BTW, V Guard continues to go great guns and investors would do well to hold on to the stock even though it has quadrupled from sub 100 to 400 levels. Seems to be another TTK in the making!

Quality Rules!!

The benefits of Quality 

The perfect examples of quality are HDFC & HDFC Bank. Boring businesses, rock solid. In a environment where other banks including private banks are struggling in terms of growing book and maintaining asset quality, these guys are doing both. Especially HDFC Bank, growing advances and deposits at a rapid 20% clip since forever, negligible GNPA and absent NNPA, adequate provisioning, best in class NIMs of 4% plus, these guys are amazing. In the portfolio too, understandably, they have performed well. I took in HDFC in mid Feb this year when markets were at 5500 levels, markets have delivered a YTD return absolute of minus 6% (today close Nifty 5197) whilst the stock is flat, which means I have an alpha of 6%!! Similarly, HDFC bank invested in end Feb 12 when mkts were 5400 odd levels, YTD return of markets -4% whilst the stock has given return of 13%, which in itself is awesome for a 5 month period. Alpha generation is a staggering 17% for less than half a year! Stellar. Wish my portfolio was jus these two stocks! Ah well, if wishes were horses, I would have the world’s largest stable!

In other things, though markets look boring at this juncture, the stage is being formed for upward trajectory. At least I do not see things worsening. Look at recent macro numbers – IIP good, Inflation not so bad and softening, trade deficit narrowing, Rupee strengthening and oil under check. Valuations are reasonably decent. Investors would do a favor to themselves by building a sensible and quality portfolio right now. Bulls ahoy! Happy Investing…

Portfolio performance

OK! End of the month and lets see how portfolio has fared. Please remember this is an absolute return portfolio but still benchmarking it to give a sense of performance.

June was the worst performance in the last 9 months relatively, and fifth best in absolute terms. To put things in perspective, absolute return wise here is how they stack up –

October-11	7.5
November-11	(0.1)
December-11	(4.9)
January-12	0.1
February-12	6.6
March-12	1.9
April-12	0.9
May-12	(6.4)
June-12	0.4

So that’s 6 out of 9ms of positive outperformance and positive portfolio value since inception. So from an absolute return point – 67% hit ratio. Not bad. Relatively? Lets see

October-11	(2.4)
November-11	9.1
December-11	(0.6)
January-12	(12.3)
February-12	3.0
March-12	3.6
April-12	1.8
May-12	(0.2)
June-12	(6.8)

So uhm strike rate here a more humble 4 out of 9 – 40%. Various reasons for this –

1.       This is not an index linked portfolio

2.       Since its not index linked and its absolute INVESTMENT return portfolio, might not make sense to compare returns in such a short while

However I have given these numbers to get things in perspective about markets. Performance in June was twisted because your high beta generic names ran in the last 1 week because of various flimsy reasons – like Manmohanji raising Animal Spirits and what not!

Absolute deep value stocks like TTK Prestige, Gateway Distriparks,  Jain Irrigation (waiting for brickbats!), Treehouse Edu, Eros International have underperformed. Star of the show till date has been Power grid, consistent is not the word! Honourable mention for suitable absolute returns from TCS, LT, Dabur, HUL, ICICI and earlier BoB, ONGC, NTPC, Cipla.

So when does this turn? Well many mid caps have been taken with a 3-5 year perspective so would not comment now. For larger caps, I am very comfortable holding all of them at this juncture, a tad worried with BHEL and I know it will go nowhere for a while, but weightage wise that is minimal
Comments welcome! 

Extrapolating Economic Events to Equity Markets

The last 4 years have been unforgiving for equity investors. Markets have not been able to scale the peaks set in Dec 2007. So, typically, when we talk of equity markets giving superior inflation adjusted returns (15% as per long term average return of Sensex/Nifty), we give a time horizon of 2-3 years at least which classifies as a long term investment. So what has gone wrong? More importantly, will we ever get meaningful returns out of equity markets? Let us put a few things in perspective here. Every decade, we have a bull cycle and a bear cycle. Equity returns are non linear and hence deliver returns erratically. For instance, in the decade of 1990 to 2000, markets returned point to point 44% CAGR (fuelled by economic liberalisation) and in the Decade 2000 till date (actually 13years), markets have delivered a more humble 18% CAGR return (still best in class returns comfortably beating inflation). However, there have been very dry periods in between. Had the investor pulled out just before the rally in 2005/06? He would have lost money for the decade. The point I am making here is what is important for equity investors is not “timing” the markets but “time in” the markets.

Let us shed some light on the recent few years. 2004 onwards we had a bull market fuelled by a booming global economy which lasted nearly five years. Mar 06 onwards Inflation was the biggest issue for us and hence to prevent over heating RBI tightened rates from Mar 06 to Mar 08 from 6.5% to 9% and then when things were under control, cut from 9% to 4.75%. Again, to prevent overheating of the economy, from Mar 10 till Oct 11 RBI hiked key rates 13 times (4.75% to 8.5%). However, inflation has barely been managed.

Inflation’s unique issue recently has been that it started out as a supply side phenomenon and mutated into a demand side issue as well. What are we looking at going ahead? We will be having wage inflation for next 2 decades. 64% of WPI is manufacturing inflation so raw material effect will be rather pronounced. Food prices rose recently mainly in proteins n veggies not cereals. But food inflation will also be elevated above normal levels. For a growth economy like India, we have to learn to live with the new normal of elevated inflation for some time till we mature as an economy.

For now, commodity prices softening should help India as a whole since we are net importers but rupee effect is neutralizing all that. Rupee’s weakness understandably stems from the state of our economy and not necessarily from increasing trade deficit. So what has happened is in the last 2-3 years, corporates have been hit by twin evils of higher RM costs (thanks to massive global monetary easing) and Interest costs (RBI rate hikes & liquidity deficit).

Historic multiplier for GDP to corporate growth is 2-2.2x, so with an 8% growth, companies grew 12-15% barring 2009. Even now, with sub 7% growth they should grow 12-14%. This effectively means, barring a black swan scenario, in 4-5 years markets should double. Market multiples are driven by GDP growth and debt yields, both factors have caused de rating recently. An uptick in either could potentially better our equity gains going ahead.

So how do we get there? The approach has to change from the past, which was essentially fuelling the deficit and growth coming from consumption. Now, it should be more policy driven which would revive the extant private capex, thus creating a virtuous cycle and easing pressure on rupee and fiscal deficit. Pruning of government expenses like subsidies is a must. Regulatory road blocks which need immediate sorting would be the fuel issue for power plants, FDI in retail and aviation, implementation of GST and more astute pricing of diesel and LPG.  

So basically fiscal deficit, which government’s estimate will be 5.1% of GDP in FY13 (assuming present Rs95tn GDP growing at 8%) has to come down. My own sense is as things stand, fiscal deficit would be 5.9% of GDP, similar levels of FY12 (Rs6tn deficit on FY13 GDP of Rs101tn). So what can save us? For one, things under government control - non plan expenses. Major portion of which is subsidies, largely untouched in the budget. GOI assumes it will be Rs1.7tn in FY13, i.e. 1.7% of GDP. This has upside risks if oil under recoveries stay where they are. With total under recoveries of Rs1.1tn, where government may bear Rs0.7tn, it will be an uphill task. Fuel price hikes, reduction of subsidy (fuel, food, fertilizer) will help assail the gap.

The government is also assuming that it will undertake divestments in PSUs to the tune of Rs30bn in FY13 (aggressive in my opinion, given current market conditions). It s also assuming auction of excess spectrum and re auction of 2G to garner Rs580bn. This could be achievable if things go as per plan. Spreading tax receipts across various heads means that the GOI could garner its intended target of Rs459bn.

What is disturbing is most of the deficit will be fuelled by government borrowing which is crowding out private capex. The latter is essential for sustaining growth. Growth rates have reduced from double digits to low single digits. Addressing regulatory bottlenecks would help at this juncture more than monetary measures. We have not had serious capacity expansion in the last 4-5 years and many companies in various sectors are running at near peak capacities. This capex cycle would set the ball rolling on generating growth.

Money in equity markets is made when valuations are inexpensive. So when conviction is high and macros are good, we will not get good valuations. Key is to believe that these issues will be resolved in a reasonable time frame.  The issues enumerated above can potentially ease out in the next 2 years assuming oil prices are benign, policy measures are underway and private capex picks up.

Market multiples are attractive. We are presently trading at 12xFY13E, which is lower than our 14x median PER and the range has been 10x to 24x. Also M Cap to GDP ratio is 0.6x (India GDP $1.73tn, Nifty Mkt Cap $1tn). Historically this ratio has ranged between 0.25x to 1.1x and averaged 0.93x. So from a valuation stand point, we seem pretty well placed.

Tactically one can play rupee deficit themes in the short term through exporters like Pharma (Cipla), Auto (Bajaj), IT (HCL) , upstream oil (Cairn) and Metals (Hindalco). Medium term one can start nibbling in beta plays which are beaten down – capital goods (L&T, Crompton), private banks (ICICI Bank) and auto (Maruti, Bajaj).  Long term almost all sector leaders look attractive.

Cities I have lived in. Part II

So there is the concluding part of my Cities post....

Chennai

A negative image crops up to many people’s mind once they hear about this city. That image may be all about idlis, humidity, lungis, coconut oil and depressed old people. Well this city does have that, but its not just about all that!

I stayed in Chennai for a brief period of 17 months. I must say the city slowly grew on me. Perhaps it was the fact that my office was 7 mins drive from my residence (mind you a full 10mins in the evening on the way back!). Perhaps it was the fact that I loved my job when working there and the office atmosphere was conducive. Perhaps it was the fact that I was staying in the ex CM’s area Gopalapuram, which is awesomely posh. Anyways, things I liked about Chennai

1.       Good roads, uniformly good roads. Be it RK Salai, Beach Road, ECR, Anna Salai. All damn good! And devoid of speed breakers (are you listening Bangalore?)

2.       Proximity to locations I loved – Bangalore was 5hrs drive away, connected by an excellent 4 laned NH all the way (thank you Mr Vajpayee!), part of the Golden Quadrilateral. Pondicherry was connected by the scenic ECR and a mere 2.5hrs away. We had lot of other places like Tiger Caves with a pristine beach about an hour away and so on

3.       Food – Yes! Even Chennai has good food! Be it those uber soft idlis at Murugan Idli Kadai or Neer Dosa at Sarvana Bhavan. I loved that and the non veg south Indian food at Karaikudi. The malls also had decent Arabic fare and other Northie stuff. Honourable mention for Rayar Mess &

4.       Reasonable power and water supply

5.       Well networked buses and roads

6.       Lots of lovely parks. Had one near our house to walk in with a pond in the middle filled with ducks. AH BLISS!

7.       Beaches – Marina Beach & Elliots Beach. Former for walks and latter for chilling.

8.       Localities – Amazingly calm areas in Poes Garden, old Mylapore, Srinagar Colony, Beasant Nagar, Adyar, Gopalapuram, R A Puram.

Things I did not like

1. 1.       Humidity! Worst place in the world…will sweat in 3 nano seconds without the AC. I kid you not!
2. 2.       Language barrier – even though I can understand tamil and speak a smattering. It does get irritating at times especially when you want to express yourself
3. 3.       Not as cosmo as other cities so can be claustrophobic at times.

Namma Bengalooru!

Back to my birthplace after ages. Perhaps 2 decades. Things have changed. Earlier this place used to be green, cool and we could cycle all the way from RT Nagar to Sadashivnagar for our swimming sessions. Now there is an evil Mekhri Intersection (Still called Mekhri circle but a circle no more) in between with tons of traffic. Our calm area is now bustling with buses, 2 wheelers, autos, aliens and what not.

However there are still things I like about Bangalore –

1. 1.       Weather – bearable in summers (even tho its getting to be a tad hot!), cold during winter without the biting cold of the North and pleasant during monsoons/spring. Even during summer we get a spell of good weather when it rains a bit. Difference between Bombay/Chennai rains and Bangalore is that when it rains here it actually gets pretty cold
2. 2.       Food! – yes the typical sheekaaan and phalaan! (Seekh n Phaal). Apart from that the REAL dosa joints (not wannabe white tasteless ones produced by our neighbours!) like Vidhyarthi Bhavan, CTR, MTR etc. Good non veg from oldies like Imperial and Empire.
3. 3.       Getaways – Lot of scenic getaways from Bangalore though they tend to get crowded – Mysore, Ooty, Nandi Hills, tekking spots
4. 4.       Relatives and Friends. Chilled out people. More cosmo than any other city except Bombay.

Bad Stuff

• 1.       ROADS! Augh! Worse than Tier II and III cities and towns. These are craters with some tar in between…..damn it pisses me off. The screw ups in BBMP are soo busy emptying our coffers they are bankrupt to build good roads! And speed breakers every 2cms apart! WHY WHY WHY? 90% of them are illegal and the asswipes do nothing about it! Not a single…I repeat…not a single good road in Bangalore…it sucks man! The dimbulbs have even put speed breakers on a highway! (Bangalore Mysore). Dunno how many cars have been damaged that way…and its ironic that the road tax in Bangalore is amongst the highest in India. What are we paying for?
• 2.       Power Cuts and Water Issues – In a city full of lakes, water scarcity is sooo bad its almost funny. We can not call ourselves a metro unless you solve these things! Sucketh to the coreth!
• 3.       Policing – One of the most lackadaisical forces in the country. SC comes out with a rule on having lighter tints for cars, the jokers here altogether ban it! Why? Coz they are too lazy to check for the right tint with their light meters. And the list goes on…I guess a lot to do with it is the current government, where there has been no governance since the last 1-2 years with them busy infighting or trying not to be docked by the CBI.

Cities I have lived in. Part I

All my previous posts have been related to the equity markets. Boring for some, though fascinating for me. So now let me talk about INDIAN cities and how they have their own charm. I have had the fortune to live in four “metro” type cities in India. Loved every bit of it! Let’s start in Chronological Order (by dates) –

1.       Hyderabad – Very earthy charm. I stayed in this city for 3 years – completed my MBA here. Stayed in Banjara Hills – one of the poshest areas in the city so maybe I will be biased. What I liked about Hyderabad -   

a.       Very earthy charm, has the nawabi feel to the entire city

b.      Lovely roads, very few potholes, clean streets devoid of speed breakers mostly. Decent traffic, though bad drivers all across esp auto wallahs, but I guess that is universal eh?

c.       FOOD! Amazing food – Biryani, Tala Gosht, Patthar Gosht, Khubani ka meetha, Haleem, mini pans, mirchi, osmani biscuits, sweet irani tea…I could go on and on

d.      Lingo – I looove hydrabadi bataan! They have an idyllic twang to it which is infectious….aye haye….aisa kaisa!

e.      Hospitality – Hyderabadis are extremely good hosts! They may be fake at times but no denying their hospitality and mehmaan nawazi. Thumbs up for that!

f.        Places – Film City, Necklace Road, outskirt locations all pretty foor

Things I did not like

g.       Weather – extremely dry and hot during summers. But then, that’s God’s wish right? Nothing poor hyderabadis can do

2.       Mumbai – The city of dreams, maximum city! I stayed here for 7 long years, perhaps my longest stint at any place. Work beckoned me here and how I loved it! Stayed in all parts right from New Bombay (Nerul) to tony Napean Sea Road (Nr Malabar Hills) to Middle class Dadar (w). Bombay (I prefer to call it that!) is a mini country – you have a mini Tamil Nadu in Chembur/Matunga, mini Punjab in Sion Kholiwada…you get the gist! Things I liked

a.       Extremely professional people, no time waste, no hang ups unlike Delhi wallahs!

b.      Best policing in India – the traffic cops towed my vehicle thrice and fined me upteen times. Nowhere else in India have I ever been caught! Ever! Forget being caught for “smaller” offences like crossing the white line at the signal or changing lanes at the last moment, hats off to Mumbai Traffic Police!

c.       Best traffic and lane discipline – relatively, India’s most sensible drivers reside in Mumbai. They follow their lanes and do not break in between. Makes a world of a difference while driving

d.      Best infrastructure – Amazing roads, no power cuts, no water shortage (atleast where I stayed). Gotta hand it to BMC!

e.      Things to do – you never run out of options. Juhu Beach, Marine Drive, Worli Sea Face, Joggers Park, nearby destinations like Lonavla, Mahabaleshwar, Mandwa, Alibaug.

f.        FOOD! The best variety in India! Any region food you get it all here. Even Kashmiri and NE Cuisine! Best I liked were Sarvi Kebabs in Nagpada, Soup & Salad buffet at Jazz, Marine Drive, Biryani at Jaffer Bhai’s Delhi Durbar, Raan at Persian Durbar, Vada Pav near Kirti College, Bhutta at Marine drive in the rain, Golden Thaali, Sabudana Wada n Kothimiri Wadi at Prakash in Dadar…Kheema Pav at Olympia…Berry Pulav at Brittania…sigh…the list can go on and on but that’s a separate entry

g.       Best mass transit system – the trains are damn efficient and take you anywhere with minimum fuss, if you can bear hundreds of bodies pressed against you! Very efficient service and 99% on time, local trains are a boon for the insane travel distances in Bombay

h.      Energy – full of life, always on. The City never sleeps. And everyone from the taxi wallah to the nukkad ka chai wallah is very astute and smart. Knows how to keep a customer happy.

i.         Lot of culture – Walk by Fort on a Sunday (its less crowded then!) or Colaba, you will feel the old world charm! And imagine staying in the same city where Sachin, Shah Rukh and Ambanis stay!

Bad things

a.       Traffic – Despite the lane discipline and the good roads, it’s a pain to drive long distances in Bombay. Never ending traffic and long distances contribute to road rage

b.      Disturbances – I will be politically incorrect here. Lot of Marathi versus the world fights and everyone takes up a cudgel. Be it MNS or Shiv Sena, causes lot of irritation. I was in the midst of the Local Train blasts and the attack on Taj & Hilton (our office is right next door). Lot of mental pressure then

c.       Rains – Crazy rains throw life out of gear especially if you are an office goer. Endure mindless traffic jams, flooded roads or jammed trains. Not good!

d.      Real Estate – Unaffordable. Enough said. One MAIN reason for me to look for a much higher pay if I work there again to maintain the same lifestyle in other cities. Either pay up or travel 500hrs a day.