Buy The Stocks On Every Dip Which Can Be Depended On

The year 2016 is becoming uglier in terms of equity returns with every passing day. On February 12, we had witnessed National Stock Exchange’s 50-share Nifty slipping below the crucial 7,000-mark to close at 239.35 points lower at 6,976.35 points—its lowest close since May 9 2014. Even BSE Dollex is almost down by 14 per cent in this year at the time of filing this copy. This comes after we had witnessed a nine per cent fall during the last calendar year. These returns have already made us one of the worst performing markets in the Asia Pacific region. The fact that despite a good day globally, when other major equity markets closed in green, we closing in red is making the situation worse. To make it worse, the recently shared good macro-economic data is also not soothing the market heat. The latest data released by the Central Statistics Office projected a GDP growth of 7.6 per cent in 2015-16. This despite growth decelerating to 7.3 per cent in the quarter ended December from 7.7 per cent in the previous quarter.

What is also worrying the fact that India’s underperformance likely to continue for a while from now. There are couple of reasons for such underperformance. First is the overall valuation of the market and second is the lacklustre earnings growth rate. Indian equity markets have always traded in premium to the other emerging markets, however, what supported this premium earlier was high return on equity. According to a report by a foreign brokerage firm, India's premium to the region has dropped from a high of 55 percent in September to 46 percent currently. Historically, India has always under-performed once its premium reaches 50 percent. Bank of envelope calculation shows that the current premiums is justified only if Indian companies are making RoE of 18.5 per cent. But if we look at current RoE, it is at just 13.5 per cent. What this means is that despite such a fall that we had seen in last one year, our valuation is still stretched.

Going by the current December ending quarterly result, we do not see any respite soon. The earnings growth has been shifted further. The same brokerage report further states that India's 2016 consensus EPS downgrade of 1.7 per cent is the biggest within Asia Pacific, adding this is not a one-off as India's 2016 consensus EPS has been downgraded by 21 percent since December 31, 2014 versus the region's 15 per cent. Our own analysis shows that result so far has not been that encouraging. Most of the results have been announced till now (February 16) and excluding financial, topline has declined by 4.2 per cent on yearly basis while sequentially it has declined by 1.6 per cent. This shows the week demand as well as bad performance by some of the commodity companies due fall in the prices. The bottomline, however, in same period has seen improvement of 10.7 per cent on yearly basis while sequentially it has fallen by 15.2 per cent. The reason for such improvement is the advantage to those companies that use commodities as their inputs.

We believe that the pain will continue for some more time, at least for next few months. After few months, situation is expected to improve. Till that time, we suggest buy the shortlisted stocks continuously over the next few months.