Charlie Munger:
It's
in the nature of stock markets to go way down from time to time. There's no
system to avoid bad markets. You can't do it unless you try to time the market,
which is a seriously dumb thing to do. Conservative investing with steady
savings without expecting miracles is the way to go.
STATE OF AFFAIRS
THE
conditions are similar to start of previous decade. Businesses are slow,
working capital is struck, and companies are facing a very uncertain environment.
Many companies levered and did commit huge capex in 2010-2012 period,
estimating that Indian economy needs more infra/ports/power/roads etc. However
things didn't pick up as expected. Many companies have started facing degrowth.
The
mood today is to keep the purse closed, and save liquidity. Till last year,
many capital goods/machinery advertisements were appearing in national dailies.
Presently, its no more the case. Newspapers are offering huge discounts to
attract advertisements lately.
Car
sales are degrowing first time in last 12 years, power plants are jostling for
coal and gas and to cover cost of fuel, road companies are fighting for right
of way and liquidity constraints - and incumbent bureaucracy is looking forward
to the next government!
Much
of the slowdown seems to be a self-inflicted pain. Government's inability to
plan, foresee and take actions led to incongruous conditions. The Govt had nearly a decade to push forward reforms like power pricing, subsidies,
oil and gas, distribution and transmission reforms, coal availability reforms,
land reforms, labor reforms, etc. However it decide to suck its thumb and take it easy.
Recent
times have seen Govt pulling up its socks. Few reforms have been initiated like
State electricity boards reforms, taking decision on passing the international coal prices, taking decision
on passage of gas prices to the customer, frequent price changes in case of
petrol – which were mostly unanticipated and landmark decision. Few others are in pipeline, like change in
premium charges from the road builders, etc.
The pace is too little, too slow. The govt is also acting cautiously
especially after the corruption scams which have erupted in last few
months.
As
IDFC chairman mentions, policy making has to fasten up, upto
the aggression of entrepreneurs. With the global problems, India could have and
can still do well if govt actions are quicker.
MARKETS
The
dichotomy in the Indian markets is crazy. The optimism in good quality
businesses and the pessimism in businesses facing poor environment is stretched
to extremes.
Other
markets like US, Europe, Japs have been too benevolent in last few years –funded
excessively by the central banks. A comparison of US market, and various
sections of Indian businesses, show the widening gap. Here, few top companies
and sectors like fmcg, consumables, etc continue to sell at 30-40x. Rest 90% of
market constituting the manufacturing economy is multi year low.
We
had favorable environment for past few years – monsoons were successively good,
Govt had enough ammunition to boost the economy with stimulus, rural employment
schemes, and loan waivers. It boosted confidence of industrial sector too, and
they went in for capacity additions and expansions. Today, conditions are not
very conducive Govt is constrained with its own finances. Banks are saddled
with NPAs. Macros, foreign liquidity, etc is turning unfavorable.
As
liquidity is chasing only few stocks, things get turbulent with an eye blink. Domestically, Titan, Infosys, Wockhardt, IGL, etc – the much loved, admired
and good quality companies – saw crashes as much as 50% in a matter of few
days, with the change in environment/regulations. Internationally, actions from
the Chinese central bank / Bernanke – shook India and other markets badly
lately. In past fortnight, the bond
trading in India was halted to cool down the market. With the expected rise of
yields in US and elsewhere, capital outflows may turn turbulent from India, unless
Indian consumption story is prime-pumped soon again.
THE CURIOUS CASE OF PSU VALUATION
The
Public Sector Units are particularly hit very badly in last few months. In a bid to manage its
own finances, Govt desperately sold off some public sector companies in
fire-sales in the JFM quater. For Govt, managing the fiscal deficit and credit rating is more crucial
than getting good price for their assets. The desperate sales have
been no less than lunatic. The effect had been so bad that minority shareholders confidence is shaken. Case in point is the largest steel maker of
the country, with its own ore mines, which was sold by Govt at 63 cents to
dollar book, at around 25k cr market cap, when they had already executed capex
worth 50k cr, mostly from its own internal accruals! What was required to be
done at good times, was done at worst. Such disinvestments in
bullish markets would have fetched 5-6x current prices. It is disheartening to
see the exasperation of entrepreneurs and the apathy of government.
However,
such gloom has created good opportunity. It makes sense to acquire few such
public sector assets. Clearly, it would be a smart move if one can raise just a
long hold PSU-fund and acquire assets here and sit on the ass for decade.
PORTFOLIO
The
composition of our portfolio is good. I am glad with the strengthening of their
balance sheets, and the way they are managing in such operational environment. There are no major problem of working capital, debt, or capital
structure etc – although forex volatility and general slowdown is tightening. All eyes are on governmental reform process to
lift up the business investment cycle.
The
biggest risk presently is paralysis to acquire assets. Mind usually freezes in
such times. This is not a time to be paralyzed over contraction of valuations.
But rather acquire assets slowly for long term. It may well continue for
months/years, but focus got to be kept on acquiring things which will do well
when the economy turns around. Recent falling sales or profits will recover, if cash producing
ability and strength of the balance sheet of the company is good!
As
Graham quotes Horace in Security Analysis - “Many shall be restored that are
now fallen, and many shall fall that now are in honor”
Few
good reads -
