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    Bet on the virtuous Pandavas to prosper in these trying times


    Firms with less leverage, good governance, ability to raise capital, cut costs with the precision of a surgeon‘s knife, and those which can innovate to adapt in current situation will not only survive but also prosper.

    Nilesh Shah

    MD, Kotak AMC

    Shah has over 25 years of experience in capital markets. He has managed funds across equity, fixed income securities and real estate. He has studied at the Institute of Chartered Accountants of India. Shah has also co-authored a book - 'A Direct Take'. His dream is to go backpacking with his better half some day.

    In the epic battle of Mahabharata, the virtuous Pandavas survived and prospered while vicious Kauravas lost everything. Leverage, cost structure, governance, access to capital and adaptiveness determine virtuosity of a business.

    Firms with less leverage, good governance, ability to raise capital, cut costs with the precision of a surgeon‘s knife, and those which can innovate to adapt in current situation will not only survive but also prosper. Our economic recovery will be a function of top-down factors like fiscal and monetary stimulus as well as bottom-up entrepreneurial efforts.

    Active Covid cases are coming down despite normalisation of economic activities. A vaccine breakthrough seems to be on the horizon. Lower import of oil, gold and Chinese goods has made India a current account-surplus economy. Forex reserves are about to exceed out forex debt. Global firms are opening their purses for direct as well as portfolio investment. Agriculture reforms will materially benefit large rural population. Labour reforms and production-linked incentive schemes are steps in the right direction to make India a manufacturing hub, though a lot more needs to be done on the ground.

    September quarter earnings are by and large ahead of Street expectations. Margins have expanded across sectors due to deep cost cuts. In sectors like auto and consumer durables, volumes are ahead of expectations.

    Many attribute it to pent-up demand. Demand has recovered due to steps taken in the past. However, it needs to be sustained in future with further measures.

    The monetary policy remains accommodative, but credit transmission needs to improve further. Policy rates are at lifetime low levels, but the cost of borrowing needs to be lowered in below AA-rated borrowers. Fiscal stimulus has supported growth at the bottom of pyramid, but sectors like travel, tourism, hotel, retail, aviation and infrastructure require more support. The path of fiscal prudence is important, but needs to be achieved by raising non-tax resources like proceeds from strategic divestment and monetization of assets, unlocking of capital stuck in gold lying in tijoris etc. Ease of doing business has improved, but the rule of law needs to be improved.

    Despite good intentions, commercial disputes are getting addressed like the never-ending trial of the 1992 security scam, rather than the quick, everyone-wins solution of Satyam. Our laws are being made for the lowest common denominator as crooks escape without adequate punishment. This increases the cost of compliance for the rest.

    Investment can’t pick up sustainably unless investors get to experience the rule of law. Big has become bigger in these challenging times, but eventually small and medium-sized firms need to become competitive and prosper.

    The stock market has responded enthusiastically to such developments with the largecap indices trading a just below pre-Covid highs. Flows and improving fundamentals have pulled the market to its current level. Undoubtedly, we are not out of the woods. Factors like the ongoing second wave of Covid infections in the US and Europe and the US election outcome will impact our markets, albeit on a temporary basis.

    The stock market will continue to be on a long-term growth trajectory. Global capital in an era of abundant liquidity and ultra-low interest rates will chase returns (US junk bonds are trading at life-time low yields). For many investors, growth or innovation will be a proxy for return.

    There is money-making opportunity for the disciplined stock picker. On one side, defensive stocks from FMCG, pharma and technology are trading at high valuations, while on the other side, PSUs and PSBs are trading at lifetime low valuations. On one hand, big is becoming bigger, while on the other hand, the market is valuing David far better than the Goliath. Future is becoming uncertain due to massive disruption, but it is the most exciting time for the disruptor. Within a sector, there is a wide range of returns as the winners get rewarded disproportionately. There is plenty of information and news, but it is difficult to determine the facts.

    At the cost of going wrong, few trends are worth capturing from money making point of view:-

    • Sustainable long-term growth is visible in sectors where India is becoming part of the global supply chain. Sectors like contract manufacturing, chemicals are at a take-off stage like the IT sector was at the beginning of the century albeit with high valuations.
    • Firms on the wrong side of ESG investment will get de-rated. Their profits will get low valuation irrespective of growth.
    • Challenger/disruptor will get high valuations despite capital burn. Firms doing disintermediation will get rewarded disproportionately.
    • Sectors like banking and insurance, where PSUs dominate, will provide long-term growth opportunities to private firms.

    Investors can make money in this market with lots of discipline and a bit of luck. Portfolios having virtuous companies like the Pandavas will outperform portfolios with vicious companies like the Kauravas.

    We believe that our partners can deliver value to investors in the current market through a three-pronged strategy. One, they can communicate the past market experience to develop long-term investment perspective. Secondly, we will have to help investors ignore the rumours doing the rounds on WhatsApp and social media with facts and samples of opportunities. Thirdly, we need to convince investors of the need to maintain and increase SIP/STP at lower market levels. This way, the investor won’t exit at relatively low returns and would allow the market the time to generate a better investing experience in times ahead.

    (Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of
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    5 Comments on this Story

    gauravnavyug5 days ago
    The virtuous wins at the end it may take time, patience but at the end the shrewd, cunning and corrupt loose everything. There are examples of corrupt prospering but loosing everything at the end. Kaurava's had the support of Gandhari, Dhrithrashtra and other's who were as corrupt and moral less at kaurava's but at the end. Today we have similar situations in many cases. There are those who claim to be virtuous but deep inside them they are the most corrupt ones.
    Suresh Kamath11 days ago
    Yes whenever in CRISIS invoke the ALMIGHTY and HE would deliver seems to be the MAIN ISSUE and recall of DIVINE Guidance is for all to take RECOURSE and hope the BEST will be Delivered.Happy Festivities and a New Year with Great Prosperity for ALL
    rc rana11 days ago
    Writer has put the situation in right perspective and investor should take clue from the facts brought out in the article to invest in the market. Good article and very nice advice.
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