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Cover Feature

Published on: March 1, 2023, 9:50 a.m.
Reassessing strategies
  • The Indian markets offer a broader perspective, and the growth story will continue

By Daksesh Parikh. Executive Editor, Business India

The markets have been in a state of uncertainty and inertia since the Sensex reached an all time high of 63,583 on 1 December, 2022. The behaviour of the markets is analogous to that of a drunk being asked to walk on a straight line. It swerves left and right before getting on the line, takes one step forward, and two steps backward before moving left and right again. There has not been a discernible trend in the markets over the past several months. The monthly closing of the Sensex has remained in the range of 56,000 to 61,000 for the last 20 months, with the exception of three months (May, June, and July 2022) when it dipped below 56,000.

The Hindenburg report, released on 25 January, which made a series of allegation relating to corporate governance issues, fabrication of accounts, manipulation and overleverage by Adani group companies, did create a short term flutter in the market but the damage was largely limited to Adani group shares. The Adani Group promptly denied all accusations.

However, even before the accusation of the short seller could be proved or investigated, the Adani group encountered an unprecedented selling blizzard. Though rating agencies threatened to downgrade the group and MSCI moved to reconsider the inclusion of some of the Adani shares in its much followed indices, none of this disturbed the movement of the Sensex.

One reason for the Sensex remaining relatively undisturbed was that none of the Adani group shares formed part of the BSE 30 shares list. Even a fortnight after the release of the report the Sensex seemed unaffected. On 17 February, the Sensex closed the fortnight at over 61,000 – 61,003 to be precise, virtually unchanged from the level at the beginning of the year. In contrast, the Nifty 50, which has two Adani stocks – Adani Enterprises and Adani Ports and SEZ among its constituents – saw a decline of 2.4 per cent.

The issue however continued to be kept alive. It was raked up in parliament by the opposition claiming that the close connection of the PM with Adani was responsible for the meteoric rise in his fortunes over the last few years. They wanted the allegations against Adani to be investigated and clamoured for the setting up of a Joint Parliamentary Committee. SEBI and the Central Government did not raise objections to the Supreme Court setting up a committee under a retired judge to examine the allegations against Adani. 

However, the interest of general retail investors in the Hindenburg report was waning even as the opposition tried to keep the issue alive as they felt this factor could be used against the present government in the forthcoming Lok Sabha elections, scheduled to be held next year. Seven states will also take part in state assembly elections in 20.

Undoubtedly, investment sentiments were marred when Adani Enterprises decided to pull back its FPO to raise Rs20,000 crore, after it was subscribed. However, the low level of retail interest across Adani group shares (save for Adani Ports and SEZ and Adani Wilmar) saw investors deciding to move on. Frenzied selling was absent across the board in the stock markets.

Volatility was present even earlier and is likely to stay for some more time. It would be giving Hindenburg too much credit to say it had destabilised the Indian markets. Especially as not many retail investors – nor for that matter even mutual funds – participated in Adani’s growth story.

  • Banking sector may not see major pressure as there is still enough liquidity and banks have cleaned up their books over the last two years. The challenge will be to get new measures for valuations. Valuations will get rediscovered

    A Balasubramanian, MD and CEO, Birla Sunlife Mutual Fund

FPIs who were net sellers for the better part of 2022, continued to press sales in December, January and February. However, their power to influence the markets seems to have been neutralised due to heavy buying by DIIs. FIIs were net sellers in 10 of the 12 months. In December 2022 and January 20, while FIIs sold around Rs55,600 crore worth of shares, DII bought R57,600 crore worth of shares in the same period.

Retail investors, however, refused to be cowed down by such events. The monthly amount flowing into SIPs (Systemic Investment Plans) in January 20 was Rs13,856 crore, a record high, with the number of SIP accounts rising to 6.12 crore. 

“The markets may have over corrected,” says A Balasubramanian, MD and CEO, Birla Sunlife Mutual Fund. “One could see hedge funds stepping in,” he adds. Looking beyond Adani, Balasubramanian says other factors which will influence market movements in the short run are the Russia Ukraine peace talks (war) and the US Fed rates. In contrast, interest rates in India are still moderate and equity valuations are becoming reasonable. The banking sector may not see major pressure as there is still enough liquidity and banks have cleaned up their books over the last 2 years. “The challenge will be to get new measures for valuations. Valuations will get rediscovered.” 

“Looking ahead, I feel it will be difficult to get very good returns from the markets in 20. Investors will have to temper their expectations and be satisfied with low double digit returns. Between 9 12 per cent,” says Anniruddha Sarkar, CIO, Quest Investment Advisors which manages AUM in its PMS and AIS schemes in excess of Rs2,100 crore. Sarkar reasons: “There was too much optimism witnessed last year. This year there is hardly any optimism. Expectations are low. Among the reasons for this are the state elections, uncertainties about earnings for the next two quarters and the unlikely return of FIIs till after the general elections in 2024.”

Sarkar feels that while markets will continue to remain volatile, value investment will score over growth investments this year. “Companies in defence, auto, auto ancillaries and chemicals should do well. While last year one had seen euphoria over defence stocks, recent corrections have made and some stocks look attractive.” While the Indian market seems more expensive than other emerging markets, corrections in December and January have brought valuations closer to the historical averages, points out Sarkar. 

While markets are still languishing, investors are looking for fresh triggers. “The pain in the market will be present for another quarter or so,” says Ajay Garg, founder of Equirus Capital, a full service financial hub. Garg says the big pain points are inflation, interest and the Ukraine war. While interest rates may remain flattish or even soften by the year end, inflation is under control. The Ukraine war is an uncertainty that investors will have to live with. Localised wars do not have any lasting impact on stock markets he says, drawing a parallel with the seven years’ war between Iran and Iraq.

  • None

    Indian stocks are, valuation wise, well positioned for the long term and present a compelling long term investment opportunity, if they continue to underperform for a few more months

    Nimesh Shah, MD and CEO, ICICI Prudential Mutual Funds

Recently, even the US markets rebounded quickly after slipping on announcements of the Ukraine war. “The most important factor which augurs well for India and the US is that both countries are going in for elections in 2024. Pre-election rallies normally starts months ahead of the actual event,” he adds. Garg says that Adani stocks have gone down significantly.

And retail investors as also mutual funds will find the valuations attractive as Adani has demonstrated his skills in execution and has built world class assets. The difference lies in buying good companies at high valuations versus buying companies at beaten down valuations. 

No one knows how low Adani stocks will drop. Does it make sense to buy now or wait? While timing the market is hardly wise one view is that the best time to buy is when shares start moving up decisively. In this case while one may end up paying more, the risks of trying to catch a falling knife are much less. 

Banks’ exposure

Indian banks which had exposure to Adani may not suffer, contrary to popular perception. One reason is that they have lent against the assets of the companies, relying on the operating cash flow generated from those assets and projects under implementation, rather than market capitalisation. This was pointed out by Mahesh Kumar Jain, Deputy Governor RBI, speaking after the announcement of the credit policy.

RBI Governor Shaktikanta Das also allayed fears saying that the size and resilience of the Indian banking system is such that it cannot be affected by an individual case.

SBI shares, which was ruling at around Rs569 a day before the Hindenburg report was released, were ruling at around Rs531 on 17 February. LIC, which had direct equity exposure, saw its share prices dip by almost 14 per cent. But to be fair, a part of this downslide was also due to the proposals in the Budget which saw many shares of insurance companies heading south.

The Budget proposed to tax the annual income from insurance policies where the total premium paid exceeded Rs5 lakh a year. This will come into effect from FY24. The exception being income received from unit linked insurance plans or income received from term policies on the death of the insurer. Insurance companies are planning to petition the government to make changes to the proposal.

  • Both the US and India will be going in for elections in 2024. Normally pre election rallies begin months in advance of the actual elections

    Ajay Garg, Founder, Equirus Capital

As a whole the Hindenburg report will not be able to undermine India’s growth story. While Adani group companies continue to perform well the group has the difficult task of rebuilding its image and regaining some lost ground. The Indian markets, however, offer a broader perspective, and the growth story will continue. 

Nimesh Shah, MD & CEO, ICICI Prudential Mutual Funds says: “India is still one of the most structured marketplaces in the world. As a result, among emerging and developed economies, India provides a secular growth story that is exceptional.” He says that the decrease in crude oil prices and the near peaking of the global interest rate cycle both support India’s macroeconomic position.

He explains: “In recent months, Indian equity markets have lagged behind other markets. Indian stocks will be, valuation wise, well positioned for the long term and present a compelling long term investment opportunity if they continue to underperform for a few more months.”

While the market may continue to sway one way or another, investors have plenty of sectors and companies to invest in. In times of crisis – perceived or otherwise – a contra investment policy generally pays good returns for investors willing to play the waiting game. Normally, the pre election rally starts months before the announcement of election dates. This time around, with a number of states going in for elections, the results could well be looked on as mini elections, mirroring the results of the final.

Even for a risk averse investor it may be well to look at high dividend paying companies during such periods. The dividend yields of many companies is far higher than the interest received on fixed deposits of good companies. Value investment strategy or pursuing high dividend yield companies is bound to benefit investors during volatile periods as is being experienced currently. Till such time as a trend is clearly discernible, a safe option for investors is to stay invested.

  • None

    Value investment will score over growth investment. Companies in defence, auto, auto ancillaries and chemicals should do well. While the last year had seen euphoria over defence stocks, recent corrections have made some other stocks look attractive

    Anniruddha Sarkar, CIO, Quest Investment Advisors

Good performance and reasonable valuation will spark investors’ interest in Adani  

It is evident there is a perception issue with Adani. He has to rebuild his relations with the main shareholders, including the Total group. The fact that many of the large overseas institutions subscribed to the FPO of AEL even after the Hindenburg report was released, is indicative of the goodwill which Gautam Adani enjoyed. His risk-taking abilities and the infrastructure assets he built, especially in the ports along the coastline, are of excellent quality. Besides building greenfield projects, many assets were acquired through M&A.

The latest being Ambuja Cement and ACC. Huge debt were incurred in building the assets as also acquiring them. It is the high leverage of the group which is causing concern, despite the fact that Adani has not defaulted in servicing of debt. To instil confidence the Adani group has embarked on a strategy of repaying a part of the debt in advance, beginning with the money raised on pledge of shares. 

However, despite the prepayment, albeit on a smaller scale, the fact remains that the shares of the group companies, which were riding high, have been badly hit. And the most affected were those whose valuations had soared. Adani Total Gas which had p/e over 800x saw nearly 72 per cent decline in its share prices by 16 February. Of the total decline in marketcap of over Rs10.5 lakh crore, Adani Total (down by Rs3.08 lakh crore) along with two other companies – Adani Green and Adani Transmission – contributed to nearly 70 per cent of the erosion in the group. Adani Green saw an erosion of Rs2 lakh crore while Adani Transmission saw a depreciation of Rs1.93 lakh crore. 

Besides attempting to change perceptions and making a token prepayment of debt to the extent possible, it will be the performance of the group that will really instil confidence in investors. Adani Enterprises, the group’s flagship company, staged a smart recovery post the announcement of its quarterly results on 14 February.

The PAT for 9 months was more than twice the annual profit for FY2022. The EPS for the period was Rs15.04 compared to the EPS of R4.29 for the corresponding period, and Rs7.06 for FY2022.  This was one of the reasons for the share price staging a smart recovery from the low of Rs1,017 on 3 February to Rs1,722 on 17 February. Short sellers were apparently covering their sales.

Adani Ports and SEZ, which had declared its results earlier on 7 February, also contributed to share price stability. While the company is not committing to any future capital expenditure, there has not been a reduction in on going capital expenditure on projects which are under execution. In the post results meeting with analysts, it was specified that no reductions would be made on committed expenses for projects.  The payment for Haifa Port, a natural deep water port in Northern Israel taken by Adani, was already completed. A cargo cum passenger port, it is one of Israel’s largest ports.

In a bid to save cash, the group took a conscious decision not to bid for PTC, a public sector PSU involved in power trading with a market cap of Rs2,500 crore. However even if Adani and his team were to ensure completion of his various projects under execution, he will still have his hands full. And stopping capital expenditure for a year or so may not adversely impact growth.

The challenge would be if any of his joint venture partners were to pull out. This would make a dent in the group’s finances. It is still a debatable question whether the group future borrowing programmes will get impacted on account of Hindenburg’s report. This is unlikely as there will always be lenders in India and overseas – at a price. The risk premium may probably result in a marginally higher interest rate.

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