Large-Caps: From Weakness To Strength
Large-caps have fallen like small-caps do in the current bout of market correction. Yogesh Supekar discuss how the large-caps have fared in the current market slump while the DSIJ Research Team shares a list of quality large-cap stocks
To download the Large Cap companies data
Investors are faced with a market situation like any student may face when he or she is asked an ‘out of the syllabus’ question in the examination. As the current crisis is more biological and medical than financial, any traditional solution may not apply in this unique situation. One thing is for sure: every crisis is different and hence the solution for the crisis must be different too. The best part of any major crisis is that it has an end! The only question is how much damage has the crisis made to the economy and how will the crisis change the way the world operates once we recover. It does look like the current crisis will surely transform the manner in which people and countries look at their healthcare systems and also at their dependency on a single country for supplies.
Opportunities The current precarious condition of several governments may shift the spotlight on the global pharmaceutical sector. The sector may be viewed with a totally fresh perspective once we attain normalcy in the economy. There is good chance that the healthcare sector in India will attract fresh investments post the crisis or even during the crisis. Healthcare infrastructure in each country is now being studied, observed and discussed in detail. In fact, it has become a prestige issue for certain countries. Going forward the sector will be viewed lucratively.
Having said that, the fate of the broader markets hinges on the recovery on ground. Till the time the crisis evaporates, investors will have to show a lot of faith and courage when it comes to equity investments. If we take a look at how the markets have fared on an YTD basis, it is easy to observe that the current slide in the market has been the fastest. It is the speed that has taken most investors by surprise more than anything else. If we take a sectoral perspective we find that healthcare, FMCG and consumer durables as sectoral indices have fallen the least. The Metal index and Bankex have taken the biggest fall.
Clearly then, sectors that had major FIIs’ holding and have shown weakness have fallen the sharpest. Interestingly, the broader markets have fallen less than the large-caps in the current market slump. Amongst the 750 odd small-cap stocks that constitute the BSE Small-Cap index, we find that almost 101 stocks have fallen by more than 50 per cent on an YTD basis. If we consider BSE 500 index, we find that there are almost 52 stocks that have fallen by more than 50 per cent. Investors can hunt for opportunities in the beaten stocks where the stock prices have fallen by more than 50 per cent in the current rout.
Outlook on Rupee
The sharp fall in the Indian currency is a knee-jerk reaction on account of the huge FPI and FII outflows on the back of falling indices since the novel Covid-19 pandemic outbreak. Normally, rupee depreciation should factor in a nominal effective exchange rate adjusted for inflation. Therefore, the rupee must gradually depreciate; however, it has already crossed the March-end level. We do not expect it to further depreciate sharply as it has already recorded depreciation from around Rs. 69 on April 1, 2019 to around Rs. 75, which amounts to nearly 8-9% depreciation.
It is expected to eventually stabilise close to the prevailing rates and may recover to some extent, influenced by the Reserve Bank of India’s continuous efforts to intervene in foreign exchange markets by using open market operations (OMOs) as well as the USDINR swap coupled with a lower import bill, which will not let the rupee fall further, barring temporary aberrations on the bunching of lumpy payment.
Bal Krishna Piparaiya Senior Director (Ratings), Brickwork Rating
Rajeev Thakkar, CIO, PPFAS MF
Investments
Just as the virus is most harmful to people of fragile health, it will also be harmful to fragile businesses.
Excessively leveraged businesses in the discretionary space could face survival risk (say a hotel with lots of borrowing which was facing difficulty meeting interest and principal before the start of this crisis). One should stay away from fragile businesses and not get into the temptation of buying more or averaging in such companies. We try to stay away from fragile businesses and to our mind, there are no companies in our portfolio that we see folding up due to this crisis.
Stance for the future
The indices in India as well as abroad have fallen about 35%. Even assuming one year of zero earnings at the aggregate, this fall is excessive. People who view equity investing as owning a business would find this an opportune time to invest. This is however contingent on the investment horizon being at least 5 years.
We are not saying that these levels are the absolute rock bottom and that prices cannot go down from here. Proof of the fact that equities are quite cheap is the promoter and senior management buying of shares from the open market (eg. Bajaj Group, N Chandra of the Tata Group).
While the following are well known, it is important to reiterate these positives which are completely getting ignored right now
☛Very low to negative interest rates the world over.
☛Massive fiscal stimulus on the way
☛Rock bottom valuations
☛Low energy and commodity prices (These may be negative for producing countries like Saudi Arabia and
☛Russia but massively positive for consuming countries).
☛China where it initially began seems to have largely recovered, there are no fresh cases, death rates have come down. Just as a random data point, 90% of Starbucks outlets in China are open again and functioning as normal. China, in fact, would like Disney to open Disneyland Shanghai!
Summary Of Various Steps (Stimulus) Taken By Different Countries To Support The Economy
Below are the steps taken by different countries to ease the pain facing their respective economies as the coronavirus pandemic makes its swift pivot from public health crisis to financial catastrophe.
USA -The US Federal government, including the Federal Reserve, which operates independently from political parties, have taken various measures to stave off the crisis’s worst consequences.
☛ March 6: Trump signs $8.3 billion emergency spending package.
☛ March 12: Fed says it will pump more than $1 trillion into the financial system.
☛ March 13: Trump gives people with student loans a break: All interest on federal student loans would be waived for the duration of the coronavirus emergency.
☛ March 13: Trump declares national emergency: The move freed up to $50 billion in financial resources to assist Americans affected by the outbreak.
☛ March 15: Fed cuts rates to zero, launches $700 billion quantitative easing program.
☛ March 17: Fed takes new steps to keep money flowing: It established a Primary Dealer Credit Facility, which provides short-term funding to big financial firms, and a Commercial Paper Funding Facility to purchase corporate paper from issuers.
☛ March 18: Trump signs coronavirus relief plan to expand paid leave
☛ March 20: Trump invokes the Defense Production Act: After days of mounting pressure, Trump said that he would put the Korean War-era Defense Production Act 'into gear' to mobilize private business resources to fight coronavirus.
☛ March 20: Education Department says borrowers can pause student loan payments.
☛ March 23: Fed pledges asset purchases with no limit
Japan – The government has announced a $10 billion aid package for coronavirus hit business, mainly targeting SMEs, freelancers and parents.
India – The RBI announced OMO operations, including the purchase of Rs. 1 lakh crore to boost liquidity. Loans to NBFCs for on-lending to priority sector have also been extended by one year.
Denmark - The proactive government was able to negotiate with the social partners with 24 hours and announce support to the businesses. The government announced that it will cover 75 per cent of the employee salaries in business under budget pressure and affected by Covid-19. Financial help is announced to students, freelancers and compensation will be given for fixed expenses such as rent. Easier access is guaranteed to state-guaranteed loans.
Sweden - In probably the boldest move so far among the European nations, the government has allowed businesses to defer tax payments for up to a year at a cost of more than SKr300 billion (€27.5 billion) to the treasury, or 6 per cent of gross domestic product.
France - The country spend €45 billion ($50 billion) to help small businesses and employees struggling with the coronavirus outbreak, the country’s finance minister, Le Maire announced after President Emmanuel Macron declared the country was at war against the virus.
Germany - The German government is making up to €500 billion in loans available to companies hit by the coronavirus pandemic. Most of these will be provided via KfW, the state development bank. The loans will be available to all companies, from SMEs to blue-chips.
Italy - The Italian economy minister, Roberto Gualtieri has announced a fiscal package of up to €25 billion. The main measures are to provide €1.15 billion for the Italian health system and €1.5 billion for its civil protection agency, which is in charge of organising the country’s coronavirus response.
Spain - Spain’s government has announced what prime minister Pedro Sánchez has described as the 'biggest mobilisation of resources in Spain’s democratic history' to fight the economic impact of the coronavirus crisis. The biggest part of the government’s plan is €100 billion of state loan guarantees for business aimed at ensuring liquidity, especially for small and medium-sized companies.
Jyoti Roy, DVP Equity Strategist, Angel Broking Ltd
“It’s Difficult To Time The Market”
In this interview with a spokesperson of Angel Broking, the one thing that emerges is that even though the large-cap or very high mid-cap stocks are available at rock bottom prices, any kind of lump sum investment may not be advisable till the time the picture about the corona virus pandemic does not become clear
What is your outlook on large-cap stocks? The mid-caps have been under pressure for quite some time. Since January 2018 the large-cap space was doing pretty well because there was a lot of money coming into them. After the US Federal started its quantitative easing program again, sometime in August-September 2019 a significant portion of the FII inflows began to go toward the large-caps. Now, with the corona virus scare, FIIs have been flowing out of India and most of the FII flows are of course coming out of large-caps. So, the outperformance that we were witnessing in large-caps now seems to be over. Till the time the pandemic of corona virus continues, globally the markets are not going to differentiate between large-caps and mid-caps. This type of selling pressure on the FIIs has been seen for the first time after the crisis of 2008-09. Till this selling pressure continues, mid-caps and large-caps are going to perform equally bad.
If we were to focus on large-caps, what will be the key risks faced by large-cap companies? As far as large-cap stocks go, there are some good names to bank on. A lot of these quality large-cap brands are in the consumer sector. There is this bucket of stocks which falls somewhere in between not exactly mega-caps but in the range of Rs. 30,000 to 100,000 crore of market-cap. These include leading consumer brands which always seem to be extremely expensive. Now what is happening is that because of the corona virus issue, many of these very strong consumer names, especially in the large-cap space, have also started coming off, as for example, Titan Industry. Then, of course, there has also been a fall in gold prices.
Similarly, there are many of these high-quality stocks which have always been highly expensive and going forward what will happen is that because of the pandemic you are going to start getting a lot of super-expensive stocks at reasonable prices. Such companies would be found trading at 40 times or 50 times plus one year forward earnings. If we look at the FY22 earnings estimates, they will be trading at anywhere upward of 47 times or sometimes even 50 times with one year forward earnings. Therefore, those are the high-quality consumer-facing largecaps or very large mid-caps that one should be focusing on to build up a reasonable investment portfolio during this fall.
With these quality stocks available at a lower rate right now, would you suggest investors to pitch for them? And what should be the time-frame? I think that it is a bit difficult to take a call on the market level because this is again something that we have never seen before. It brings to mind the 2008 financial crisis in terms of the overbearing intensity of the fall. The current scenario too is quite similar. So if you ask me from an entry strategy perspective, it might be a bit difficult to call a bottom in the market till the time there emerges some clarity on the corona virus issue. As things stand now, Europe is going through a major spike in cases.It has moved from Stage 2 to Stage 3. Similarly, the US is a couple of weeks behind Europe and may witness a spike in cases.
Probably over the next couple of weeks or maybe a month, the corona virus will peak in the US. In India, we are still in a Stage 2 kind of situation and it’s still very early in the day to make any predictions. Whether India too will have a spike in cases may be known only by mid-April. Fortunately, the Indian government has taken a very proactive stand and learning lessons from what is happening across the world. Preventive measures such as social distancing might eventually help. It only after we get a clear picture that we will know whether we are close to the market bottom or not.
Thus, from an investment strategy, we believe that even if someone wants to enter the market at this level, it should not be a lump sum kind of investment. The investment needs to be spread out over the next two or three months so as to take advantage of the sharp decline in markets. All I can say is that the initial bounce-back from the lows will be pretty sharp. It’s difficult to time the market in such an exceptional or abnormal case. The market has fallen by almost 28 per cent from the peak and another 10-15 per cent fall cannot be ruled out if there is continued surge in cases globally over the next couple of weeks or one month.
Impact of the deadly Corona Virus on the FMCG sector
While the world is plagued with the deadly Corona Virus, the heat is also being felt by Indian FMCG manufacturers who are experiencing a sudden drop in their performance as well as the performance of the sector. While the industry did not experience any untoward changes in the month of February, a sudden impact is being experienced in March. It is difficult to quantify the damage as of now, considering the problem is worsening with an increase in the number of cases being recorded each day. The industry is waiting to see how the things move forward.
It has now been observed that the impact is subjective to the region. While tier one cities / metros are affected, tier two and three cities are functioning at sub optimal levels. Companies that have a geographically well distributed network can balance out their underperforming region. The performance of one region has no far-reaching effects on the overall performance of a well spread out business.
Major factor propelling a drop in sales is the closure of schools, colleges, offices, theatres, malls, restaurants to name a few that have boosted in home consumption. In this current situation people are preferring home-made food and over the counter impulse snacks over outside food. The prevailing fear has gripped the sector. With social distancing being the only saving hope in this situation, many individuals are shying away from visiting modern trade avenues. Companies that retail through independent grocers and small retail stores are going to be less affected. Individuals working from home are now stocking up on food and snacks which also works in the favor of the industry.
Business and Sector Outlook
While currently it appears gloomy, it is too early to predict the direction of the wind. However, this seems to be short term and soon things should start improving. Companies should adopt a wait and watch approach prior to taking any important decisions. The government is taking all the necessary steps to ensure they curb the widespread of this deadly virus. Once there are signs of a revival, companies should increase production and adopt an aggressive go to market strategy.
The prevailing slowdown combined with the Corona Virus scare has slowed down the sector. The sector is expected to revive soon, and the industry is looking forward to the same.
Amit Kumat, MD and CEO, Prataap Snacks Limited
What to avoid?
In current market situation almost all stocks are falling including quality stocks. However it is prudent to avoid buying shares of certain vulnerable sectors such as automobile,retail,aviation,texti les,auto ancillaries, banks (weak) and NBFCs. Companies with negative free cash flows should be ignored along with companies that have balance sheet issues. The companies with high promoter Holdings may suffer more than others.
Things to avoid Bottom fishing and catching falling knife Selling quality stocks Leverage trading or investing Investing in equity using emergency funds
Conclusion
With indices freefalling the way they have done there is an opportunity of a lifetime for some long-term investors. Several large companies in the US markets have opted for buyback of shares to deploy excess cash, thus signalling to the markets that there is value out there for those who have the courage to buy now. About USD 1 billion combined is invested in the markets to boost the stakes in companies of the US markets. These ‘once in a blue moon’ bargains exist with one assumption though – the current crisis needs to be managed correctly. Any investor betting on markets at this point of time is essentially betting on the the country’s ability to manage the crisis successfully. More than the macroeconomic factors it is an acid test of the healthcare systems and facilities along with the standard of governance.
Meanwhile, investors should focus on companies that are market leaders, reflect strong balance-sheets and have steady cash flows. A strategically built diversified portfolio of large-cap stocks at a time when the major indices are down by more than 30 per cent could prove to be extremely profitable three to five years down the line. FMCG and healthcare stocks as well as stocks that can benefit from lower crude oil prices and lower rupee value are primed to outperform benchmark indices.
As there is a common denominator impacting the global markets, investors will have to track closer than usual about what happens in the US and European markets. At times like these, doing an average thing when everyone else is losing their mind can prove to be an extremely useful strategy. Sticking to basics and constructing a portfolio of quality large-cap stocks seems to be the most profitable or average thing to do right now. A strategy of staggered buying into markets is warranted in the coming few months.
Methodology
To come up with a list of performing large-cap stocks, we took into consideration four crucial parameters. The first includes market capitalisation. The second and third parameters obtained from the Profit & Loss Account include Sales and Net Profit. Lastly, we factored in the returns earned by investors by means of dividends. This is because we want investor-friendly companies to be featured in our list. Each parameter was then ranked by awarding it a carefully determined weightage based on its significance. We then segregated the companies into three categories as follows: Turnaround Performance : These companies include those that successfully managed to turnaround the losses incurred in FY18 into profits in FY19. Improving Financials : Although these companies still reported losses in FY19 as they did in FY18, they succeeded in reducing these losses by a notable amount. This indicates that they are on the road to recovery. Thriving Companies : This list includes all those companies that have seen their profits increasing on yearly basis for FY19.
To download the Large Cap companies data
All the raw financial raw is sourced from Ace Equity and price related in information are as of March 18, 2020.