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Not a bear market, this is an interruption in bull market: Hiren Ved, Alchemy Capital

Hiren Ved-Alchemy Cap-1200
It looks like a bear market in earnings. It was not a bear market in stock prices but now it looks as if we are in a bear market because people are accepting that earnings have not come through, says Hiren Ved, Director & CIO, Alchemy Capital. Excerpts from an interview with Nikunj Dalmia of ETNOW.

I guess you are the only bull who has decided to talk on this bearish market. I welcome that.
We are all so used to these bull and bear market cycles. You have to take this in your stride.

Is it just a bull market fall or this is a beginning of a bear market?
I believe this is an interruption in the bull market. It looks like a bear market in earnings. It was not a bear market in stock prices but now it looks as if we are in a bear market because finally people are giving up that earnings have not come through. Also we have seen so much of policy level and economic disruption and that I think has caused this earnings recession. Then there were these few events where unnecessarily in budget they put a surcharge on FPIs, increased tax rates when globally tax rates are going down. It does not leave a very good taste for economic participants. They get a feeling why am I working so hard if 50%…

How to deal with selloff & where to find value

Everything has to be taxed.
I do not think anybody is complaining about paying taxes and that money going for the benefit of the entire bottom of the society. Nobody denies that and everybody is happy to do it. But if you want animal spirits to come, you need to cut rates and that is how you will revive investments. When you have these rates, you have a counterproductive cycle where people tend to take their capital offshore and that is not what you want. India is a capital scarce economy and you want capital to flow in. So by putting a surcharge on ultra rich or the super rich as they call it and then putting a tax on FPIs, you basically gave out a wrong message saying that we do not care about your capital and I do not think that was really something that people expected.

Is it the tax which is spooking the market? Is it economy which is spooking the market or is it the slowdown which is spooking the market?
Actually it is the slowdown and then on top of that, it was these tax issues which really spooked people. The tremors of the IL&FS crisis are still being felt. The knock-on effect of IL&FS and then DHFL and then we thought only the corporate deleveraging cycle is playing out but the crisis in the fixed income markets and because of IL&FS and DHFL, now the promoter deleveraging cycle is also playing out. This in a way is good because somewhere, discipline will come in where serious promoters are realising that both leverage at the corporate level and leverage at the personal level need to be managed within limits. Otherwise, you can lose your company.

What is the good news right now? Everybody is talking about only bad news, what is the good news?
The good news is that a large part of the disruption and regulatory changes hopefully are behind us and a base has been built. Simultaneously, we are seeing deleveraging happening and I see a silver lining because today there are some good assets available at distress valuations. So for example, I am not aware whether the Yes Bank QIP has gone through or not…

It has gone through that is what they have informed exchanges.
So if that has gone through, what it tells you is that at a price there is institutional money or there is some money that is stepping in. If the Zee deal has happened, you know that there is some investor that is stepping in. We have now come to a situation where there are certain good assets where capital is willing to come in and take that risk. That is the first indication.

That things have become cheap?
That things have become cheap and somebody is willing to risk money because he believes that at this price his probability of making money, if things go right, is substantial. Otherwise why would people come in and put money? So that is one silver lining that I see that there are buyers for good quality assets and there are some smart money or institutional money, which is willing to step in at some point in the market carnage. We are beginning to see some elements of that begin to happen.

Secondly, in every sector, there is a massive consolidation that is happening like real estate for example. I was talking to somebody in Delhi and they said that other than DLF, there is no developer which is surviving. Now what does that mean? Yes, the real estate market is down but you have taken out suppliers, you have taken out so much of supply from the market and whoever is standing today has a great opportunity to take away market share over the next two-three years.

The last man standing will gain a disproportionate amount of money.
Exactly. What is going to happen is that the opportunity is two fold – one, if you can find quality distressed assets and put money where your risk reward is favourable; and second, you play the last man standing in every sector because that guy has a once in a lifetime opportunity to take market share away from people who are distressed.

We have heard about private banks taking away market share from public sector banks. We have looked at large organised players in consumer or retail sector taking away market share from everybody else and this is playing out in every sector. Who thought that CCD will not be there? Now, Tata Starbucks has a great opportunity to clean up the market. If you look at it, that is where I think this market is giving you an opportunity, that amidst all this gloom and doom either you find good quality assets available at distressed prices and you back some of the leaders who have a great chance to gain over the next couple of years because of the disruption and so many players getting out of this investment.

These are some of the structural changes that are happening. That’s how periodically the weak players get flushed out, strong players survive and become larger. Where do you think the big picture or the earnings trajectory is intact and more than actual business decline, it is a sentiment and liquidity and technicals which are punishing those stocks?
Yes, in every cycle this has repeated every couple of years where weak companies or companies with issues of leverage and governance go through very deep correction cycle. When that happens, there is also a collateral damage because even good companies tend to get smashed, especially in the small and midcap space.

We have all been complaining about how bipolar the market is, that very few companies have driven the Sensex and the Nifty, but the fact is that it is reflective of the economic reality as well. Very few companies have been able to protect and grow earnings. HDFC Bank is still growing earnings at 21%. Bajaj Finance is still growing earnings at 35-40%. Those who are able to grow earnings and where there is scale and governance, that’s where the money has gone. For the rest of the market, you need to see a serious upturn in the economy and that can only come if the wheels of credit start to move again.

It is very good to say there are a few companies which do not need the money to expand because they are free cash flow generating, but that cannot be true of the whole economy. A consumer needs money to consume. Somebody needs money to buy trucks and businesses need working capital. They need capital to expand. If you look at it, the best years of earnings growth and markets have been when both capital markets have done well and credit growth has been fantastic.

That is a dream era, that is not coming back.
Releveraging, not deleveraging but releveraging. Today we have a situation where we have been deleveraging on the debt side as well as the equity markets. In last 12-18 months, people have found it difficult to raise equity capital.

IPOs have dried up.
IPOs have dried up and all of that has happened. But at least in equities, I see a silver lining. Slowly and steadily, buyers are going there for good quality distressed assets and usually the cycle starts from there. It is a few instances of resolution. If we see two, three, four things getting resolved in the markets now, some confidence will come back and ability of people to take a little more risk will come back.

Obviously we have now reached a stage where this so called slowdown which seemed very temporary gathered a snowball effect and now we cannot just leave it and say it will heal on its own. You need very strong intervention and after the budget, whether it is industry associations, whether it is investors, or people, enough messaging has gone out to the government to say hey we need you, if we do not get this oxygen, then we are going to die.

If things do not improve, say by festival season, what could be the downside?
Unfortunately I believe that while we may all wish that demand will bounce back in this festive season, my assessment is, it is going to take a little bit longer for real demand to revive. First we have to stop the de-growth, we have to flat line and then we can think about growth. My view is that it is going to take six-nine months before real growth can pick up.
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