EQUITY WEDNESDAY

Issue #7

Hello EveryFinions!

When we started publishing Equity Wednesday, we said that this was going to be an experiment. 7-weeks in, our experiment has been a grand success. The results from the survey we rolled out to you a few weeks back were overwhelmingly positive. Our readers love both of our newsletters ♥♥♥

Having said that, we have so many new things in development at EveryFin that those new projects are screaming for some extra love. Consequently, Equity Wednesday is going to take a short break after today so we can attend to those new projects. Don't worry though, it'll be back again in January when the Q3FY21 earnings report season starts. Our Sunday Weekly newsletters will come to you as usual.

IN TODAY'S EDITION

• Q2FY21 results update - FINALE
• That's what they said - Soundbites
• How to profit from the electric vehicle revolution?
• HIGHEST dividend paying stocks
• The secrets to Buffett style investing - 1959

RESULTS UPDATE

We have been looking at the Q2 FY21 financial results and comparing it with how companies performed in the same quarter a year ago.

How to read this graph?

• Horizontal axis represents sales growth year on year in %
• Vertical axis represents profits growth year on year in %.
• The center point at the graph where the 4 different quadrants meet is origin (0%, 0%). By virtue of it, Quadrant A (top right) represents positive sales growth & positive profits growth. Quadrant C represents negative sales growth & negative profits growth and so on.
• The size of the bubble represents market cap. Bigger the bubble, bigger the firm.
• Companies in some industries are highlighted with different colours. 

900+ companies are in our coverage list as of now. Some of them are off the chart, so you won't see them all.

What we took away from the Q2FY21 Results

1. FMCG, ITES, cement producers and pharma businesses (green bubbles) are hands down the winners of Q2FY21 from a financial performance perspective.

   • Large IT giants have moved back into profitable growth territory, albeit the growth numbers are quite small. Niche players in the digital space like Tanla solutions, Route mobile and R systems international have grown spectacularly and we are putting them in our special watchlist.

   • Cement companies have made a massive come back and we think this is because of structural factors including higher utilisation of their factories, lower competition, better price realisation and a general revival in rural demand. We are eager to see what the current quarter has in store for them.

1. • Pharma businesses, especially API and formulations makers, have had a brilliant quarter. Thanks to massive export sales of Hydroxychloroquinin, companies like Laurus Labs have seen their profitability grow significantly. Will this trend continue? Are pharma companies coming out of their slumber? We think so. But one quarter of good performance is hardly enough proof.

   • The Indian consumption story continues, and we remain optimistic. Large FMCG players like HUL are good defensive plays in any environment.

2. Retail, textiles, travel & leisure related businesses (hotel, airlines, theatres and theme parks) and media companies (red bubbles) are NOT winning. While there is hope for some of them, we think COVID-19 has changed consumption pattern so much that some of them aren’t going to see a recovery at all.

3. Green shoots are starting to become visible for (yellow bubbles) consumer durables, automotive and auto-ancillaries, banks and financial services companies. But truth be told, we are not sure if this is just pent up demand from the lock down. GDP growth in Q2FY21 has also been negative and the country is officially in a recession. While the high-frequency indicators are suggesting a gentle easing of the situation, we really need to wait till things get better to provide any commentary for businesses in these industries.

Finally, on the state of the markets – The indices (SENSEX, NIFTY) are extremely overvalued and they are in levels not seen before in the last 20 years. Does it make us nervous? Yes, a little bit. But the key to surviving market consolidation or even a bear market is proper asset allocation and if you have that sorted out, you will be ok.

THAT'S WHAT THEY SAID

Soundbites from last week

• “This year we may be having a current account surplus. We had almost $20-billion current account surplus in Q1” – Chief Economic Advisor KV Subramanian in an interview on Monday this week.

• “We cut back on the long tail that included more than 100 SKUs across brands, which simplified operations… a large part of the cost optimisation programme that we initiated in May-June will accrue in the second half of the fiscal,” Marico’s CEO Pawan Agrawal on how the company is looking to save Rs.150 crores in costs.

• “The Maruti Suzuki Subscribe program comes with a bouquet of benefits like flexible tenure, zero down payment, insurance and complete maintenance, we are aiming to introduce it in 40-60 cities in two to three years.” Shashank Srivastava, Exec. Director at Maruti Suzuki on the company’s ‘subscribe’ program.

• “Last year, we had clocked almost 2x the growth rate of the industry… and then Covid struck. It has been challenging as discretionary spends have been worst affected. First quarter sales were very small, but as the months are passing, our recovery rates have been improving” – Manish Gupta, COO at Titan Company in an interview this week.

TREND WATCHING (1/2)

How to profit from the Electric Vehicle revolution

The global mobility revolution just begun, but it is going to change the way people travel. The UK this week laid out plans to ban sale of new petrol and diesel cars from 2030. Norway is doing it from 2025! This transformation is a great opportunity for companies that are already in this space, spearheading the revolution or supporting it. That perhaps explains why Tesla’s stock price has gone up by 6 times since the beginning of this year.

As an astute equity investor, you are probably asking – “Where could we invest to benefit from this?” Here is our view.

Within India, the opportunities are a bit limited.

• Hero Motocorp’s investment in Ather Energy, an electric two-wheeler manufacturer, makes it one of the candidates. But unlike Tesla, much of Hero’s revenue is from fossil fuel powered vehicles.
• KPT Industries, a manufacturer of electric power tools, has forayed into electric 3-wheelers. But they are too small and consequently too risky to invest in at the moment.
• Investing in engineering services providers working in this domain, like ASM Technologies, KPIT etc. could be another way to get exposure. But once again, this isn’t their core business.
• Investing in one of the two main automotive battery manufacturers in India is yet another option. Exide industries for example has formed a JV with a Swiss energy storage solutions provider Leclanche to build lithium-ion batteries

Looking outside India, there are so many different listed automotive companies. Chinese giants like NIO, BYD and Geely are at the forefront. One could invest in these companies. But bear in mind, automobile businesses are one of the worst to be in. Valuation guru Aswath Damodaran swears by it.

The other way, and perhaps our most preferred way to get exposure, is to invest in manufacturers of battery systems, suppliers of raw materials or in the commodities involved directly. Lithium and Cobalt are two key ingredients that go into the production of batteries. And companies that are involved in mining & processing them will see a major uptick in demand. Over a mile long copper wire is used in manufacturing a single electric car and that will mean that demand for the metal will also increase. For global investors Lithium and Battery tech ETF (LIT) traded in NYSE offers a simple and straight forward way to get exposure to this industry.

TREND WATCHING (2/2)

HIGHEST Dividend Paying Stocks

Disclaimer: This is not investment advice. Please consult with your financial planner before investing in any of the stocks discussed in this post.

Holding stocks that pay high dividends can add a source of income to your stock portfolio. The key to shortlisting high dividend yield stocks is to make sure that they are good businesses, earning profits consistently without the need to invest a lot of money back into the business. This is what makes their dividends sustainable.

But always keep in mind, investing in these stocks is NOT the same as investing in fixed deposits. Stock market investments carry risks. Just because a particular stock pays high dividends, it does not automatically become a good business. And if it indeed is not a good business, paying dividends will become unsustainable for it. And sooner or later it will have to stop paying. Worse still, stock prices of such companies will come down eventually leading to loss of capital. The key message is, do your research before you pick one!

This list is intended to get you started in your search for high dividend-paying companies.

CORPORATE ANNOUNCEMENTS THIS WEEK

• Garware technical fibres announced this week that the board is considering buy-back of its shares.

• The RBI’s proposal to raise the cap on promoters’ stake in private banks from 15% to 26% has come as a blessing to some banks. Stocks of Ujivan, IDFC and IndusInd banks witnessed significant gains on Monday’s trade.

• Shares in small finance bank Equitas were locked in upper circuit (20%) this week following RBI’s decision to lift restrictions imposed on it last year.

• Praj industries signed a MoU with the Ministry of Petroleum and Natural Gas for multiple compressed bio-gas units this week. The stock price was up by 5%.

THE SECRETS TO BUFFETT STYLE INVESTING - LETTER 3

Annual letter to limited partners – 1959 – Warren E. Buffett

In the year 1959, the Dow-Jones industrial average (DJIA) was up 16.4%. With dividends factored in, the total return from the market in was about 20%. In spite of this, some of the largest fund houses like Tri-Continental Corp., and Massachusetts Investors Trust struggled to beat the gains recorded by DJIA. But not Warren Buffett. Take a look at the gains the Buffett partnerships recorded in 1959 and the two years before that.

1959 RETURNS

What did he do differently? What ideas can we borrow from his exceptional performance that year? Read more to find out.

From the writer in me, to the reader in you ♥

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