The Sensex has not remained the same in the one year that the government implemented demonetisation and GST. Banks have cut their interest rates, businesses posted dim outlook, but not the domestic indices.
Surprisingly, equities, notably the Sensex have notched 20% gains in one year. The Sensex has moved from 26304.63 (17th November 2016) to 33,033.56, up by 6728.93 points or nearly 20%. For retail investors it does mean a great value, but people like Jimeet Modi arent surprised.
While the man who shares Jimeet's last name opts for contrarian economics, Jimeet suggests that investors should think of divesting from the markets. He reveals a formula for investing in a conversation with Sify.com's Sairaj Iyer.
Here are excerpts from the interaction.
Is this the right time for investment in the capital markets with most indices and scrips peaking at all-time highs?
This is not the time to invest, but ideal time to divest. Nifty is trading at 22 times FY19 earnings which is 35% Premium to its 10 year average of 16.5, IPO's are raining and sucking away the liquidity from the system. FPIs have sold heavily in the past three months. Government's disinvestment quota is still pending which would further suck away another Rs. 50,000 crores. These are euphoric times and investors need to stay away and increase their cash levels and book profits.
What is your take on investing in the IPOs. How much can rookie investors gain from these avenues?
Investors should abstain from investing at high valuations as there seems to be little margin of safety available to the investors at the current juncture. The frenzied activity in the IPO market is pointing towards changing times and bears are getting ready to pounce. Huge line up of IPOs one or two every week, is similar to the period of August –September 1994, February – march 2000 and November – December 2007. There were massive IPO's lined up to suck away the liquidity from the secondary market and subsequently the markets had tanked inspite of good underlying fundamentals. Current scenario seems no different.
You have had experience auditing with names like Deloitte India, Reliance, Cadbury, DSP Merill Lynch. What do you suggest, should investors focus on while staring at balance sheets? Are there any key numbers that can suggest a company's future in a matter of 30 seconds?
There are no short cuts in investing, just like there are in successful marriages. Proper due diligence is required before an investment bet. There are few thumb rules while looking at the financial statements.
The company should generate enough free cash flows, return on equity should be few percent points higher than risk free rate of returns, as a general rule debt equity ratio should be much lower than 1, the company should be registering sales growth in line with the industry at a minimum, but higher the better. Margins should be superior than other peers in the industry.
The addressable opportunity the company is catering should be huge and the business should be scalable. These are few of the important ingredients that must be looked into before venturing into investing.
We live in an era of unabashed advice. How do investors steer clear away from the hordes of advice and actually end up investing in the right scrips?
Investors firstly need to get their basics right, Not every information is worth giving attention to or taking an action, the flow of information is from every direction and they need to create a filter around it and filter can only be created when they have their basics right as explained above. Once such filters are build and then scanning every information through such filter will help them Identify growth oriented companies, addressing scalable markets having efficiency and decent track records.
There was talk on de-stocking resulting from GST hit sectors such as Auto and Pharma. But then most auto-giants like Bajaj, Maruti, actually fared well. Pharma was tipping in the south, but then there was a good buying momentum in September. Was GST really an issue?
At an aggregate level GST was not an issue for listed companies, however some companies did have challenges in terms of getting properly their distributions and supply chain networks aligned. In true sense GST did not have impact on the results in Q2 per-se. Auto sector could be facing a demand slow down or for that matter it could be GST restocking issues as the growth in number of vehicles sold has almost halved in October, whatever may it be, but certainly clarity will emerge in a month's time, so let's keep the figures crossed. Pharma companies profitability is flattening out, which earlier was falling like ninepins to that extent there is a respite. USFDA clearances are coming, and manufacturing facilities are also being cleared selectively. Tide is turning and therefore the sector will act as defensive play when the market in general will start correcting. In fact the correction has already started as early as the first week of November.
With the murmur around tax reforms in US going, how are scrips from Tech going to be hampered?
It is too early to comment on the impact on the Indian Services Industry, the Services Industry whose major chunk of business comes from USA is in a transformational phase because of the change in US visa policies but the Indian Services sector will adapt easily as they will find solutions to counter the paradigm shift e.g. recruiting more of local people for the jobs, this may reduce the margins but in long run it will generate more business as Dollar is expected to appreciate because of Funds Flowing back to U.S due to lower taxes for conducting businesses in the US itself.
You started investing at the age of 14, what was more difficult back then? Convincing parents that pocket money will go to investing or finding the right scrip to trade on? And what were your profits back then like?
Back then finding the right kind of script was a harder job. No one taught what to buy, when to buy, how to evaluate the businesses, how much diversification is health etc. I have learned the hard way by occasionally losing the money, but in return always learned the important lessons. Profits were not much but the learnings were priceless. Those initial learnings a decade ago helped me a lot in building my long term portfolio of solid companies having the ability to deliver superior returns.