It pays to stay invested in the long run…

The myth is equity investing is risky business. Find below a chart to show how it makes sense to stay invested in stocks in the long run. Holding stocks for a year or so may give negative returns but if held for more than 5 years returns have always been positive. (Even in 2008 when the markets crashed). So equity investments are not that risky if held for more than 5 years. If we have a good portfolio of stocks timing doesn’t matter, if held for more than 10 years expect double digit returns. To top it all the chart below only shows index returns & stock portfolios outperforming the index will give higher returns. Please note that returns calculated are only on the principle and not dividend, if included returns will be higher.

SENSEX Returns over the last 19 years
Returns (%)
Date SENSEX 1 3 5 7 10 12 15
Year Years Years Years Years Years Years
27-Nov-98 2782              
26-Nov-99 4705 69.13            
27-Nov-00 3969 -15.64            
27-Nov-01 3288 -17.17 5.72          
27-Nov-02 3174 -3.45 -12.3          
27-Nov-03 4989 57.18 7.92 12.39        
25-Nov-04 6035 20.97 22.44 5.11        
26-Nov-05 8889 47.29 40.95 17.5 18.05      
27-Nov-06 13774 54.95 40.28 33.18 16.58      
27-Nov-07 19128 38.87 46.89 43.22 25.19      
26-Nov-08 9027 -52.81 0.51 12.59 15.52 12.49    
27-Nov-09 16632 84.25 6.49 22.48 26.7 13.46    
26-Nov-10 19137 15.06 0.02 16.57 21.17 17.04 17.43  
25-Nov-11 15695 -17.98 20.25 2.65 14.63 16.92 10.56  
27-Nov-12 18842 20.05 4.25 -0.3 11.33 19.5 13.86  
27-Nov-13 20420 8.38 2.19 17.74 5.79 15.13 16.44 14.21
28-Nov-14 28694 40.52 22.28 11.52 5.96 16.87 20.14 12.81
30-Nov-15 26145 -8.88 11.54 6.44 16.41 11.39 14.80 13.39
30-Nov-16 26652 1.94 9.28 11.17 6.97 6.82 13.18 14.97
29-Nov-17 33602 26.08 5.40 12.27 8.37 5.80 11.72 17.04
No of Rolling Returns 19 17 15 13 10 8 5
Negative Returns 6 1 1 0 0 0 0

Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 9 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata.He also manages a portfolio on the online platform Kristal. Find link to the strategy named ‘The Tortoise’

Charging up the Electric Vehicle story…

Battery is the most important component of an Electric Vehicle (EV). The EV era would force a paradigm shift and the fortunes can change dramatically depending on how well they adapt to the new reality.

The EV battery should have the following five capabilities: 1. High energy density – the weight of the battery should not weigh over the performance hence lithium scores over others as it has high energy density 2. Design of the battery should be such that it gives maximum range per charge 3. How fast the battery charges 4.How long the batteries can be used before being replaced 5. The cost at which all the above features come in.

The biggest challenge for the battery manufacturers in India is the sourcing of raw material. Lithium is the key raw material for the batteries to be used in EVs. Most of the reserves for lithium are concentrated in South America (~70%). Chile’s Atacama Salt Flat is home to the world’s largest lithium carbonate reserves. Global demand for lithium carbonate is projected to more than triple from 188,000MT in 2016 to 611,000MT by 2035 as per reports. Private entities like the battery manufacturer along with the government need to do strategic investments in these mines for sourcing lithium. As the interest in lithium keeps going up, there would be more exploration to find fresh deposits. Lithium could become the “white gold” for the industry in future. Cobalt is another mineral resource often used in lithium-ion chemistry that could come under strain as EV demand grows.

The choice of a battery design and the chemistry depends on the vehicle type for which the battery is being made for. The industry as of now is getting itself ready with various technologies to provide the optimum source of power to an EV and reduce the price difference between an EV and an internal combustion engine (ICE) vehicle. There are also debates going on regarding the optimal format for charging infrastructure. Discussions revolving around swapping of batteries vs charging station are still on. Each of these methods has its own merit.

Currently the Central Electrochemical Research Institute (CERI) in Tamil Nadu is working on lithium-ion manufacturing in India and has targeted a capacity of 100 units/day. Bharat Heavy Electricals Ltd (BHEL) has entered into a MOU with the Indian Space and Research Organization (ISRO) to develop lithium-ion batteries & Suzuki announced a $184 mn investment for a factory with partners Toshiba Corp. and Denso Corp. in April 2017. How the two leading battery manufacturers in India, Exide Industries Ltd & Amara Raja Batteries Ltd adapt & scale up technologies also needs to be seen.

Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 9 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata.He also manages a portfolio on the online platform Kristal. Find link to the strategy named ‘The Tortoise’

Creating a new normal…

The Indian markets have been scaling new highs with NIFTY remaining above 10,000 for over a month. The current rally in Indian market is fuelled by strong liquidity from domestic investors. As strong inflows continue into domestic mutual funds reforms initiated by the Modi-led government reaffirm the faith of foreign investors ( as evident from a rating upgrade from Moody’s) in the India growth story which could well stay for another 7 years.

Domestic mutual funds continue to attract flows from investors with assets under management (AUM) of the industry increasing by Rs.51,148 cr in October to touch a new high of Rs.21.41 lakh cr. As per data from the Association of Mutual funds of India (AMFI), equity-oriented mutual funds (including arbitrage funds), balanced funds and equity linked savings scheme (ELSS) funds saw net inflows of Rs. 21,900 cr in October. In September, these funds saw inflows of Rs.27,077 cr. For the first seven months of the current financial year, cumulative inflows into these funds have tripled to Rs.1.51 lakh cr as compared to Rs.46,840 cr in the same period of the previous year.

Foreign institutional investors (FIIs) who took a break from buying Indian shares in August and September are returning after recent government announcements such as the Rs.2.11 lakh cr PSU bank recapitalization plan. Over October and November so far, FIIs have invested a net of $1.9 bn in Indian equities. US-based Moody’s on 17th November upgraded India’s sovereign credit rating by a notch to ‘Baa2’ with a stable outlook citing improved growth prospects driven by economic and institutional reforms. This is expected to further boost FII investments into India. For the year to date, they are buyers to the tune of $7.4 bn.

September quarter results for most companies have already been declared & results have largely been in line with expectations. After its muted performance in the June quarter due to the transition to GST, India Inc is getting back on track going by the September quarter results. Post GST implementation GDP growth numbers, IIP & PMI index have all taken a hit, how they recover over the next few months will also be closely monitored. With real estate and gold giving subdued returns, investors have been looking at equities as an investment avenue. Thus in spite of the markets reaching all-time highs & rich valuations, strong cash inflows into the equity markets should continue for some time.

The markets seem to be consolidating above the 10000 NIFTY mark. Corporate performance & economic data which comes in H2FY18 will be critical. Last year post de-monetization Q3 & Q4 numbers for most companies & the economy were impacted. Thus the general expectation is that H2FY18 numbers should be significantly better y-o-y. Any correction in quality stocks is a good opportunity for investors to enter or re-enter the stock markets at lower prices if they had missed out previously. Given that the markets are at all-time highs one needs to tread with caution at current levels. For long term investors one should keep accumulating on dips as the markets are braced for significantly higher levels over the next couple of years.

Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 9 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata.He also manages a portfolio on the online platform Kristal. Find link to the strategy named ‘The Tortoise’

IPO bidding rules to maximize chances of allotment

Primary markets have been hyper-active over the last year & the pace has only picked up over the last couple of months. There has been 30 IPOs since last Diwali garnering over Rs.45,000 cr of which Rs.14,000 cr was raised in October 2017 & we have another ~Rs.20,000 cr worth IPO lined up in the first 10 days of November. Six stocks Avenue Supermarts, Shankara Building Products, Salasar Techno Engineering, CDSL, Apex Frozen Foods and Sheela Foam delivered multi bagger returns.

IPO investment is a good source of earning to the retail investor if selected properly. One check everyone can do is to look up the grey market premium on offer in the IPO. This information is readily available online. But even after due consideration of fundamentals and valuation of any IPO and subsequent subscribing, it is not necessary that one get share allotment. Thus, merely subscribing to any public issue does not guarantee for share allotment especially when the IPO is over-subscribed multiple times. To enhance the possibility of share allotment one should keep in mind the following things.

The chances of rejection are high in case if the applications are incomplete or filled with some error. So it is always better to fill the application form with due care. The application must be complete in every sense and no column is to be left blank.  Since January 2016, SEBI has made ASBA (Application Supported by Blocked Amount) mandatory for subscribing any IPO. Under this method, the money is blocked in the account linked to the application & the amount is withdrawn only in case of allotment. One simple process I follow to negate mistakes is to fill up the online ASBA form available on the BSE website. If you are careful filling up the form for the first time, on all subsequent occasions the data such as bank account number & DP a/c details can be recovered & updated thus chances of making a mistake are minimal.

Retail investors can tick the cut-off option which indicates their willingness to subscribe to shares at any price discovered within the price band. The cutoff price is at upper band in case the IPO is over subscribed.

Most importantly SEBI allows maximum 5 applications to any IPO from a single bank account to a retail investor. Also, a retail investor can bid for shares worth a maximum of Rs.2 lakhs in any IPO. It is always advisable to subscribe in minimum lot size but the number of application should be on higher side. Thus you can bid one lot each in the name of every family member in their DP account instead of bidding multiple lots in your name. This increases the chances of getting a higher allotment.  There is the draw of lots for allotment to retail investors in case any issue is subscribed multiple times. And the lucky investors get a bid of minimum one lot.

Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 9 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata.He also manages a portfolio on the online platform Kristal. Find link to the strategy named ‘The Tortoise’

SAMVAT 2074 … Festivities continue for markets

The Year in retrospect…
  • SAMVAT 2073 was a good year for the markets at it touched all-time highs & NIFTY was higher by ~18 % y-o-y crossing the 10k mark for the first time.
  • Markets were largely driven by domestic liquidity due to strong monthly inflows into equity mutual funds. Net inflows into equity MF in last 12 months were to the tune of Rs.1,15,000 cr.
  • FII inflows largely remained subdued with net inflows of Rs.5000 cr in the last 12 months.
  • The government on 8th November 2016 de-monetized all Rs.500 & Rs.1000 denomination notes & introduced new Rs.2000 & Rs.500 denomination notes.
  • GST was finally implemented from 1st July 2017. This is likely to boost the economy going ahead though there has been some slowdown initially.
  • Monsoons have been marginally below (5% below normal as per IMD) normal & what impact it has needs to be seen.
  • On the macro front WPI & CPI are at comfortable levels below the RBI guidance of 4%. IIP remained low, an ongoing concern.
  • Indian foreign exchange reserves crossed the $400 bn mark to touch a high of $402,246 bn as on 22nd September as per RBI, the highest ever that India’s central bank has amassed.
  • Departing from the tradition of presenting the Union Budget on the last working day of February, the budget was presented on 1st February. This was done so that the legislative approval for annual spending plans and tax proposals could be completed before the beginning of the new financial year on 1st April. The Cabinet also did away with the practice of having a separate Railway Budget, merging it with the Union Budget.
  • There has been 30 IPOs since last Diwali garnering over Rs.45,000 cr of which Rs.14,000 cr was raised this month only. Six stocks Avenue Supermarts, Shankara Building Products, Salasar Techno Engineering, CDSL, Apex Frozen Foods and Sheela Foam delivered multi bagger returns.
  • Interest rates over the last year have largely been stable with a downward bias as there was only one Repo rate cut of 25bps (from 6.25% to 6% currently) in the last 12 months. Bank interest rates though have been reduced by a larger margin due to excess liquidity in banks post demonetization & lower credit off take.
The Year ahead…
  • Going ahead in SAMVAT 2074 geo-political tension between North Korea & USA lingers.
  • Gold prices have been inching up due to geo-political tensions. Global crude oil (Brent) prices are expected to be range bound between $50-$60 through the year. Other commodities such as copper & steel are expected to inch up with a positive bias through the year.
  • The Indian banking system continues to be burdened by high NPAs, but we believe that we have seen the worst of it & with new measures like the Insolvency & Bankruptcy Code, improved profitability, economic growth & latest corporate restructuring, things should gradually improve.
  • Post GST implementation GDP growth numbers, IIP & PMI index have all taken a hit, how they recover in H2FY18 will be closely monitored. With low bank fixed deposit rates, subdued real estate market (with high transaction cost) and stagnating gold prices, equities seems to be the most viable domestic investment avenue for investors. Thus in spite of the markets reaching all-time highs & rich valuations, strong cash inflows into the equity markets should continue for some time.
  • Markets are currently at all-time highs largely driven by liquidity rather than macro-economic data or corporate performance. Valuations are on the higher side (SENSEX PE – 24X, NIFTY PE- 26X) and to an extent unjustified by past performance. Thus company performance & economic data which comes in over the next few months will be critical. Last year post de-monetization Q3 & Q4 numbers for most companies & the economy were impacted. Thus H2FY18 numbers should be significantly better y-o-y. Any correction in quality stocks is a good opportunity for investors to enter or re-enter the stock markets at lower prices if they had missed out previously. Given that the markets are at all-time highs one needs to tread with caution at current levels. For long term investors one should keep accumulating on dips as the markets are braced for significantly higher levels over the next couple of years. 

Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 9 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata.He also manages a portfolio on the online platform Kristal. Find link to the strategy named ‘The Tortoise’

CDSL- Growing retail depository

Central Depository Services Ltd (CDSL) is one of the two depositories operating in India, which facilitate the holding of securities in electronic form and enable securities to be processed by book entry. It was originally promoted by BSE, which subsequently divested part of its stake to leading banks as its sponsors.
The Indian depositories market is shared by two players i.e. CDSL and NSDL promoted by BSE and NSE. The business is highly regulated with entry barriers in place, and hence, the market is likely to remain duopoly in nature. With little threat of new entrants coming in the incremental business is to be shared by both CDSL & NSDL and this makes the business model quite interesting.
The IPO of CDSL was the most subscribed in over a decade. The IPO was subscribed more than 170 times the number of shares on offer. CDSL has wide source of revenues, 35% from the annual issuer charges (which is recurring in nature) and 21% from transactions having some correlation with volumes in the markets. Another 13% comes from online data charges. As the capital markets remain buoyant, there has been an increasing trend of new listings, and thus, CDSL has generated 11% of its revenues from the IPO/ Corporate action charges. Hence, broadly speaking, the revenue base of CDSL is quite diversified.

 

 

Nearly 2.4 mn new demat accounts were opened in 2016, the highest since 2008, when 3 mn accounts were opened. According to the red herring prospectus of CDSL, new demat accounts grew at an annualized rate of 28% and 14% respectively for CDSL and NSDL between 2011-12 and 2015-16.
Retail investors have played a key role in providing incremental liquidity to the market for the long-term, and the retail holding in the BSE 500 companies has usually increased as and when a new firm has listed on the bourses. Retail investors’ holding went up to 7.83% in the quarter ending June 2017 from 7.66% in the previous quarter. The participation from the tier two and tier three cities has increased considerably in the past few months.
Retail investors are participating directly in the equity market through initial public offerings (IPOs) in larger numbers than in previous years. The average retail subscription in IPOs during the first six months of the current financial year was 11 times their allocated quota, much higher than in the past three fiscals when it was less than five times. Retail investors have been applying in IPOs through multiple accounts for bagging the shares of the companies where the grey market premium has been more than 20%. After the market regulator removed the allocation of IPO shares on a pro-rata basis, the chances of bagging minimum share allotment increased, as retail investors stand to benefit even after bagging half of the total shares they have applied for.

 

 
Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 9 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata.He also manages a portfolio on the online platform Kristal. Find link to the strategy named ‘The Tortoise’

What is driving liquidity in the markets?

The current rally in Indian market is fuelled by strong liquidity from domestic investors. With low bank fixed deposit rates, subdued real estate market (with high transaction cost) and stagnating gold prices, equities seems to be the most viable domestic investment avenue for investors. Thus in spite of the markets reaching all-time highs & rich valuations there is very strong cash inflows into the equity markets.
One observation is that domestic institutions have been flushed with funds ever since demonetization was announced and even till date the latest rally in equity markets is purely driven by excess liquidity. It may be a mere co-incidence but it could also be possible that the notes that were previously hoarded in homes & not in circulation is flowing into the equity markets after being deposited into banks.
Let us look at the different investment avenues in order of risk expected returns:

 

Product
Tenure
Returns
Notes
Liquid funds, ultra short term funds
Less than 1 year
6.5-6.7%
Safe. Liquidity with some extra return over normal savings a/c. Taxable returns.
Bank FD
1-5 years
6.7-7.2%
Safe & fixed returns. Marginally extra returns with liquidity but fully taxable other than 5 year FD.
Gold
3 years+
6-8%
Returns not guaranteed. Moves in contrary to equities & does well in times of global distress.
Debt funds
1-5 years
7.5-8.0%
Safe but returns may fluctuate. LTCG indexation if held more than 3 years.
PPF, SCSS, EPF, PMVVY etc
7.8-8.65%
7.8-8.65%
Safe & fixed returns. Extra returns but illiquid. Mostly long term government savings schemes.
Hybrid funds
1-5 years
9-11%
Marginally risky. Extra returns due to mix of equity & debt in the portfolio.
Real Estates
3 years+
10-15%
Risky, returns may fluctuate. Illiquid long term investment. Transaction cost of buying & selling is very high (12-15%) & lengthy. LTCG indexation after 3 years holding
Equities
3 years+
14-16%
Risky, returns may fluctuate. Capital appreciation, Liquidity. To achieve high priority long term goals. Tax free after 1 year.
The objectives above are in the order of priorities as well as return which means the liquid fund should be looked for first as liquidity then return, similarly while investing into equity one should keep the capital appreciation as top priority even if it offers liquidity that automatically sets condition for long term investing.
One should look at post tax real return i.e. (Real Return= Return-tax-inflation). Thus for each of the asset classes they should atleast beat inflation post tax to be viable. With inflation currently at ~3-4 all the above assets may be generating positive returns but bank FDs would be giving you the least post tax returns amongst all. (Assuming liquid funds are invested in for 3-6 months to take care of short term liquidity & not an attractive investment avenue).

Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 9 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata.He also manages a portfolio on the online platform Kristal. Find link to the strategy named ‘The Tortoise’