Firstly, thank you so much for all your questions. We have taken the top 12 questions from investors and tried to answer them in the best possible way. Please read our disclaimer before investing.
Also, for questions that did not make it to the list, don’t worry, we will answer them personally to you shortly.
Here you go!
Is it a good time to invest in high dividend yield stocks like SJVN, Vedanta, IOCL etc?
Given the sharp correction in stock prices, the dividend yield has turned very attractive for these stocks. However, one must note that dividend yield is calculated by dividing Dividend per share declared in last FY or trailing twelve months by the current market price. Therefore, it is not compulsory that the company would pay the same dividend in this financial year or next FY. And the fact that the stock price has corrected sharply is because the market is expecting a sharp decline in earnings growth. Hence, lower earnings would lead to lower dividends.
The prudent approach would be to shortlist companies that usually pay healthy dividends, and select stock on the basis of their fundamentals because most of the high dividend-paying companies are in a cyclical business and have decent to high amount of debt on their balance sheet. So, when the economic cycle is going through a downturn which is the case currently, there are chances that these companies would not be profitable and may not be able to service their debt. Therefore, select only those stocks that have the ability to wither the storm.
For SJVN, the company’s fundamentals are good with low debt/equity. Further, the financial performance and dividend payment are consistent. In terms of business outlook, the financial performance would be impacted in the near term given the lockdown, but we expect gradual rebound as and when the lockdown is lifted. We have a positive view, but an investor should not expect runaway returns from the stock and invest in a gradual manner given the current volatility.
What is your view on ITC?
We have received a number of queries on ITC. Here is our outlook on the same.
ITC has been a gross underperformer since the last 5 years, underperforming benchmark indices. There are a number of concerns that have led to the underperformance. It has been one of the most inexpensive stocks in the FMCG space given its size. However, increased adoption of the ESG norms worldwide has led the FIIs to reduce the holding in the stock from 20% in FY16 to ~15% currently. Although the FMCG business margin have seen marked improvement, increased competitive intensity in the core cigarette business has slowed growth.
Going forward, the near term outlook continues to remain bleak given the lockdown. Further, shortfall in revenue for the government would lead to increase in cess on cigarettes. Therefore, the stock could continue to underperform in the near term. For long term, we expect gradual recovery in business volumes, therefore one can continue to hold but allocate only minimal portion of your portfolio.
Can I invest in TCS for 10 years?
TCS financial performance has been healthy over the past several years. Since it garners majority of its revenue from developed geographies like Europe and US, the economic state of these countries do have a bearing on company’ performance. The pandemic has halted economic activity worldwide, therefore near-term underperformance cannot be ruled out, however currency depreciation if it continues will limit the downside on the stock. One can accumulate the stock but do it in a staggered manner.
What will be good sector and value stocks to invest in these times?
Pharma Pharma and Pharma. This is the only sector which we believe could outperform in times like these given its defensive nature. There are other sectors as well like FMCG and Telecom that has the potential to outperform in times like these but Pharma remains a clear winner.
Coming to value stocks, in times like these there is value in almost every stock that has corrected, however one must focus on companies whose growth will not get impacted or atleast get least impacted during such times.
Will the markets fall again?
To give the answer in one word, yes. Globally, governments and central banks across the world have taken several steps to reduce the economic impact of coronavirus. The Indian government has been quite proactive in announcing the lockdown given the state of our healthcare infrastructure. However, in a developing economy like India where millions of workers depend on daily wages to survive, the impact on the economy would be far higher than expected. Although both the centre and state governments are doing their bit by ensuring food and shelter for the migrant workers, we believe things would take longer than expected to normalize as despite the lockdown the number of cases continues to surge. In our view, this will force the government to extend the lockdown even further, or in parts.
Therefore, the longer the lockdown continues; the stimulus package would also have to increase proportionately, which means government will have to borrow more and spend to get the economy back on track. Considering the current scenario wherein our fiscal deficit is already higher (if you consider off-balance sheet financing), borrowing more puts us at a higher risk of inflation. Nonetheless, in the current situation, it’s imperative for any government to think about the present needs than focus on future possibilities. Hence, to ascertain when the economy recover will would depend on how fast are we able to control the spread of virus, which we believe could take another 4-5 months to get it completely under control.
What is the outlook on midcap and smallcap stocks going forward?
It is unlikely that mid and small cap stocks would outperform until things the economy shows signs of recovery. As and when the economy recovers, we should see mid and smallcap stocks to outperform as the growth outlook would improve and it is needless to say that the offer much better value at this point in time.
What is your view on new emerging sectors in India like Life Insurance, General Insurance, AMCs, and Multiplex?
That’s a great question, from a long term perspective (4-5 years), we are ultra bullish on these sectors given the under penetration that these product/services have in India. At present, there are only 1-2 listed players in each sector and therefore this is a good opportunity as the prices have seen reasonable correction as the near term growth is likely to get impacted for each sector.
General and Life Insurance – Near term demand for insurance would be impacted due to unaffordability. The investment portfolio is also likely to take a hit due to sharp fall in equity indices. In the medium to long term, the pandemic has reinstated the fact the world is uncertain, therefore the greater the uncertainty, the higher the need for insurance.
AMCs – Near term impact is substantial given the sharp fall in equity AUMs. One good thing is redemption pressure is not to be seen as yet. For long term, given the under penetration and increase in shift towards financial savings is a big growth driver.
Multiplexes – Near term impact is huge due to lockdown, business could take a while to recover even if lockdown ends. However, the industry itself is turning into a duopoly and both players have strong balance sheet to survive this stressful period.
Can you give next 3 month guidance with respect to the steel pipe industry in India?
Up until the pandemic, the steel pipe industry in India was in a sweet spot and poised for higher growth led by higher government spending in infrastructure. However, with lockdown in place the sector financial performance would practically be washout for April-June. Further, the global steel prices have also collapsed, therefore the realizations would be lower. For 3 months, the view is negative, however if one has 1-2 year view, we maintain our positive stance as construction activities would improve gradually and we should see increased spending by the government to support rural economy. Therefore, one can invest in company’s having low debt and better product mix in this space but please note that the industry itself is highly cyclical so know when to exit.
Has the market fallen enough to invest now? Or should we wait?
One thing is certain that nobody can predict the bottom, therefore instead of catching the bottom, the prudent approach would be to invest in a staggered manner so that you don’t miss the opportunity. For e.g if one wants to invest 1 lakh, start with 20,000 wait for a month and see where the markets are and invest accordingly.
What stocks to Buy in this market?
It largely depends on what your investment horizon is, If its one year then invest in Pharma and FMCG stocks, they are likely to do well. However if one has 2-3 year view stocks from Banking, Auto, IT, Capital Goods, Cement are also good investment opportunity.
Largecaps – Britannia Industries, Reliance Industries, ICICI Bank, HDFC Bank, Maruti, Cipla, TCS and Bharti Airtel
Midcaps – Havells, Dabur, HDFC Life Insurance, ICICI General, Gujarat Gas, Whirlpool of India.
Invest in a staggered manner!
Any idea when companies would declare their Q4 results?
Considering the extension of the on-going lockdown, there is definitely going to be a delay in announcement of results for most companies. SEBI has given companies 45 more days to file results for quarter ending March 2020 in the wake of the on-going pandemic. One can keep a track of corporate announcement on BSE website.
How to make good use of dynamic asset allocation to achieve better returns?
Dynamic asset allocation is extremely important for investors as it protects you from the downside risks. So how does it work?
There are three asset classes namely Gold, Debt and Equity. Equity is the riskiest of them all followed by debt and then equity. Dynamic allocation is basically changing weights amongst these three asset classes in periodic intervals depending upon which one is overpriced. For equity, one can look at Nifty P/E and derive whether its overpriced, for debt, yields is an important parameter. For Gold, there is no exact parameter, however whenever there are signs of risk increasing in the system that is when gold starts to perform. We will cover this topic in-depth in our forthcoming article.
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