150 Wealth Creators
With the market indices trading volatile and the broader markets making lower lows, it is time that investors take a cautious approach on the markets. The recent volatility induced by the geopolitical situation involving Russia and Ukraine has punctured the momentum for bulls. The question remains whether the markets will remain higher hereon or investors should be prepared for the worst to come. Yogesh Supekar discusses the market outlook and shares some interesting insights to build a portfolio for 2022
Understanding the market is all about studying the top performers and focusing on wealth creators while also getting insights into what the triggers are that drive stock prices higher in specific stocks. While the market conditions were simply conducive for the stock prices to inch higher in 2021, the conditions in 2022 simply look the opposite i.e. not support- ive to stock prices. The historic low level of interest rates while the inflation levels are at decadal highs would simply be unsustainable in 2022. As investors attempt to figure out various ways to thrive in the new market environment it is important to preview the market performance of the past one year.
Says Ritesh Gujarathi, an HNI investor, “There is no doubt that 2022 is going to be lot tougher than 2021. After a superb recovery in 2020 the market performance in 2021 was simply better than expected. After two years of wealth creation in the equity markets it is easy to get lazy and expect a repeat perfor- mance in 2022. To better prepare in 2022 it is important to study how the market performed in 2021. For example, it is crucial to know which sectors outperformed and which underperformed. Most importantly, which investment themes worked in 2021 and whether the similar themes may work in 2022 would also be a significant factor.”
Market Story 2021
The market has slipped in 2022 so far and the headwinds are clearly visible, thus impacting the market mood in the near term. The story so far in 2022 is that power-sector related stocks are doing well as reflected in the performance of the BSE Power index, which has been the top performing sectoral index in 2022 so far. Along with the power stocks it is the metal stocks that have gained momentum. The story in 2021 was no different. We have seen that the power sector-related stocks and metal stocks outperformed in the past one year along with the IT stocks. IT stocks in 2022 so far have taken a beating.
In the year gone by, we have witnessed several multibagger stocks and wealth creators. If we look at the markets in the past one year, the textile sector stocks clearly have contributed heavily to the list of top gainers with as many as 147 stocks more than doubling in share prices. At least 17 stocks have gained by more than 500 per cent in just one year. Overall, we have seen at least 1,113 stocks that have gained more than 100 per cent in the past one year. This indicates the strong perfor- mance of the market. Several policy announcements and initiatives for the textile sector have supported the market performance of textile stocks in 2021. It will be interesting to note if the outperformance of textile stocks will last in 2022 as well.
Metal Stocks
“In the midst of chaos, there is opportunity,” Sun Tzu, the author of ‘The Art of War’ and an ancient Chinese strategist master, once said. When the global indices were in chaos last year the metal stocks were making new highs by outperforming all the other sectors. The BSE Metal index has soared a whopping 54.66 per cent in one year. A spurt in steel prices was seen last year and has been a sore point for the consuming industries, especially engineering goods manufacturers that account for India’s major merchandise exports and construc- tion companies. The companies have been looking for the government’s interference in curbing steel prices. Steel produc- ers, though, have been underlining a spike in their raw material prices and higher demand to justify the rise in the metal prices.
Global steel prices too have been escalating, particularly since 2021, because of recovery in the industrial sector. The econo- mies around the world opened up after repeated lockdowns with shortages of both base metals and ferrous, resulting in prices hitting multi-year highs. This helped the domestic companies to report huge profits in the last few quarters. Further, with China, which accounts for 50 per cent of the ferrous as well as nonferrous consumption, has been cutting production due to carbon emission targets. This led to negli- gible exports, thus supporting price hikes. In addition to this, some supply disruption in Europe led to a crisis of sorts in the energy sector (electricity), forcing aluminium and zinc producers to cut output, thus creating a deficit.
Indian equities performed with over 20 per cent gains, outpac- ing other peers in emerging markets. Despite the fierce second wave of the pandemic and rising inflation, the markets hit record highs multiple times during the year with pockets of super gains in a select few sectors. Data shows that metals outperformed IT stocks in 2021 for first time in the last five years. In 2021 so far, the BSE Metal index has gained 66 per cent – its best performance in at least 12 years, overtaking BSE IT index which has jumped 55 per cent in the same period. This compares to a rise of a mere 11 per cent of the BSE Metal index and 57 per cent spike of the BSE IT index in 2020. Both the sectors were the best performers of 2021. The positive momen- tum in metal stocks was also due to the expected decisions on reduction and waiver of import duties on raw materials used in steel and iron production.
I N T E R V I E W
Anshul Arzare
Chief Business Officer, Yes Securities
Are we done with the correction in 2022 or do you think there are more downsides left?
The markets are currently in unchartered territories, given the lingering shadows of the ongoing Ukraine crisis, crude oil price hikes, the ABG Shipyard scam, and massive fiscal deficits across different economies as the inevitable fall out of short-term measures to keep businesses afloat. These triggers have significantly impacted market sentiments, and Nifty could touch 15800-16000 levels in the short to medium term. An investor would look for safe options amid looming uncertain- ties at this juncture.
Notwithstanding the possibility of any further correction, there is no reason to counter the time-tested logic of staying invested amid the short market volatility. GST collections are stable, and the tax collections from listed companies have been on the rise. Consumption is now getting back at pre-Covid levels, which will lend momentum to the Capex cycle. The budget has been largely pro-growth given the absence of any fresh negatives. Infra spending is likely to go up going forward. The real GDP expectations are in the region of 8-9 per cent. Inflation should settle in the long run, whereas the low borrowings rate is a necessary breather. Talking of taper tantrums, last time there was an interest rate hike, Indian equities rallied, so undue fear around taper tantrums is unfounded. Clearly, the market remains structurally positive for the long term, and this belief stems from fundamental factors and not speculative takes.
How will IPO frenzy impact the opening of new demat accounts, and what is the growth potential for 2022?
IPOs act as a critical catalyst to enhance people-orientation towards investment in equities. The last year's IPO activity bears testimony to this fact. As many as 63 IPOs tapped the market in FY 20-21 and raised approx. ₹ 1.31 lakh crore. Important is to see that, in the process, bids worth ₹ 39 lakh crore were received. More than 15 IPOs were subscribed over 100 times. From an average of 4 lakh new demat accounts opened every month in FY20, it soared to 20 lakhs per month in 2021 with November 2021 contributing around 29 lakhs accounts. With more IPOs lined up in FY22, we foresee excellent traction in opening new accounts. In January 2022, over 40 lakh demat accounts were opened, mainly due to the buzz around the LIC IPO.
IPOs not only helps in getting new investors to the capital market but also help in increasing the depth by widening the overall market cap with the fresh capital infusion.
Where do you see the opportunities in 2022 for long-term investors?
As we are heading towards a 5 trillion-dollar economy, the biggest beneficiary would be the corporate sector, which augurs well for long-term investors. Out of 500 listed companies, 300 have fetched approximately 18 per cent margins on average. So, the growth narrative rests on a firm foundation. Having said that, the key factor for investors will be the ability to envision and make sense of the future business ecosystem quickly and accurately identifying which companies adopt the best-suited models in line with the evolving business environment and the changing transaction and consumption behaviours of the millennials and Gen Z populations.
Quality research will play a significant role in selecting the right stocks and ensuing handsome returns on the overall portfolio. Staying invested with a long-term perspective is the most prudent option, provided the portfolio comprises fundamen- tally sound picks. To make any fresh buys on dips, it is advisable to focus on a stock-specific approach backed by strong research rather than be swayed by the surrounding hype and noise. SIP in stocks is also a good option to build a quality long-term portfolio.
Market Outlook and Strategy 2022
The correction in broader markets is presenting a good opportunity for long-term investors with a high risk appetite. By now investors have realised that 2022 may not be as delight- ful as 2021 and that 2022 promises to be much more volatile. The market being volatile is one thing and the market falling sharply is another event all together. As of now the markets are headed towards more volatility without any signs of a crash or a big correction. Once the geopolitical events cool off the focus will be back on interest rates and US Federal Reserve announce- ments. Rate increase, both in terms of quantum and speed, may spook the markets. There are talks that the Reserve Bank of India (RBI) may increase rates in the next meeting.
The markets may react negatively in the short term at least with such announcements, thus fuelling some more volatility. The market sentiment may remain weak in near to mid-term owing to known factors such as the Russia-Ukraine war probability and rate increase globally. If earnings’ growth momentum is hampered and if the companies were to declare any negative surprise both in the US markets and Indian markets, the markets may head towards a steady decline. Poor earnings’ growth along with the geopolitical situation and rising interest rates remain the most important risks for the markets in 2022.
I N T E R V I E W
Prashant Pimple
CIO (Debt),JM Financial Asset Managment Limited
What is your outlook on the interest rates?
The RBI had eased rates and liquidity to aid the economy during the pandemic and we now expect it to gradually tread back on a path of normalisation. The RBI is already on the path of liquidity normalisation. But on interest rates its stance is still accommodative. In light of the large government borrowing programme next year and lesser flexibility on the part of the RBI to support demand via GSAP or OMO kind of instruments we expect upward pressure on yields next year. Also, internationally, inflation has been a major concern dominating interest rates and will be binding on domestic rates in general. As we go ahead, input price pressure due to rising commodity prices and demand improving on economies opening up is expected to have negative ramifications in local as well as global inflation. These factors in a way are negative for rates in general and hence we expect interest rates to be on an upward trajectory.
Do you expect FIIs to pump in money for debt securities in India in 2022?
We expect foreign money to have home bias as rates are expected to rise faster offshore in the near future. But factors like Indian bond inclusion and inflow in bonds through newly enhanced voluntary retention route (VRR) will decide the future in this case.
Amid rising inflation, what kind of impact do you visualise in the bond markets and the yield curve in the next few quarters? I think that though we have factors like Brent crude and other input prices acting against inflation, we will not have an alarming situation in our CPI numbers as we go ahead. Unless the food inflation behaves negatively, our domestic inflation seems to be in a tolerable range though slightly above the RBI forecast. CPI inflation above the RBI forecast will have some binding on rates but the domestic supply of bonds and interna- tional rates’ trajectory will dictate the future direction.
In the context of asset allocation, how much weightage should be given to debt securities?
Asset allocation depends on individual risk appetite and hence one should decide depending on the subjective risk appetite. Investors wanting stability of returns with reasonable predict- ability can look for target maturity funds above three years from post-tax return’s perspective. Investors looking at all- weather products can look at the dynamic category from 36 months and above investment horizon. Else, from a liquidity point of view, funds having extremely lower duration can be considered.
What is the yield curve and why does it matter so much for the financial markets? Why do interest rates in the US affect our securities’ market so much?
Yield curve is a reflection of interest rates for different tenors helping various lenders or borrowers to decide on their lending or borrowing rates for matching tenors. Financial markets use these interest rates for different purposes to deal in respective instruments. Since rates are used as a base for any calculation, it becomes very crucial for any market as an indicator of the prevailing interest rates. When the US rates go up, foreign investors find the US rates more attractive after pricing in exchange rate impact. This leads to outflow of current invest- ment in the emerging market to the US markets and the outflow impacts domestic yields. These outflows also create fluctuations on the foreign exchange front, spoiling the sentiment in our securities’ market.
Meanwhile, the rising crude oil prices also do not augur well for the Indian equity markets. Having highlighted the major risks facing equity markets in 2022, there is a very good probability of the Indian markets outperforming the emerging market pack and other major global equity markets.
Tracking the yield curve in the US markets and studying its impact on the Indian markets will be crucial in 2022. Yet another risk for the Indian markets remains the flight of capital out of Indian markets owing to the rising interest rates in US. If owing to steep inflation the rise in interest rate is sharper than in the Indian markets, there is every chance that the capital will flow westwards. This may lead to a steep depreciation of the Indian rupee as against the the USD. This development may be good for software companies that are export-oriented are also considered inflation-proof. The export-oriented sector may do well assuming there are no further supply chain disruptions and the pandemic level subsides in the coming months.
With more negatives facing the market, the year ahead may remain challenging. The difficult market conditions in 2022 should lead to muted expectation for the investors. On the macroeconomic front the situation is expected to be robust. The Indian economic growth story remains intact and that growth rate is expected to remain above the long-term average growth rate. The strong macroeconomic indicators may support premium valuations for the Indian markets in 2022. However, with crude oil promising to outperform all the other commod- ity prices, it will be interesting to check how it impacts the Indian markets and the economy.
The strategic direction taken by the Government of India on renewable energy is creating some noteworthy excitement amongst investors. Opportunities in the renewable sector, ESG investing trend and the electric vehicle (EV) sector are expected to increase in 2022. While the year 2022 could be marred with bouts of volatility, correction and consolidation, the frequently dipping market may offer some of the most promising investment opportunities for the decade. Investors will have to be cautious as stock selection will matter more than the investment style and sector performance in 2022.
I N T E R V I E W
Vineet Bagri
Managing partener,TrustPlutus Wealth India.
What is your outlook on the equity markets in general and on small-caps in particular?
We maintain a neutral view on the equity markets in general. Earnings across segments have grown substantially from the pre-pandemic levels – Nifty 50 earnings have grown by 43 per cent and NSE Mid-Cap 250 earnings have grown by 60 per cent in comparison. BSE Small-Cap earnings have had a blockbuster period and have increased by more than three times from their pre-pandemic levels. We can say that at the index levels, earnings have somewhat caught up with the market levels. They are no longer in a danger zone where headline indices could crash substantially due to excessive valuations.
However, there are pockets of exuberance especially in stocks which are fancied by the investor community and where valua- tions are stretched. Going forward, we have to gauge the impact of opening up on earnings as a lot of this earnings’ growth has come from reduction in costs due to the pandemic. Structurally, there is a great opportunity for Indian businesses in manufacturing and services to actually gain market share globally and in the process grow locally. This could create a virtuous growth cycle. A lot of the industrial businesses are currently small and could become mid or large over the next five years.
For you personally, what portfolio management strategy has worked the best when it comes to beating the markets? What is the best way to beat the markets in the long term?
Keeping it simple is what has worked best for us. We prefer to invest in companies where the business model is established and there are no governance issues. Ultimately, in the long term, businesses which are simple and can be run without much ado are the ones that end up outperforming. Once a business model is established, it is all about execution and companies that execute well do win. This approach is the best way to beat the markets in the long term.
What are you advising your clients as regards equity exposure?
We are advising clients to follow asset allocation in deciding their equity exposure. Even though the India story continues to be good, there are several global headwinds – geopolitical and economic – which could have an impact on the local markets. In this kind of scenario, it is best to have an asset-allocated portfolio which is balanced on a quarterly basis.
What are the risks facing equity market investors in 2022?
The key risks facing the equity markets in 2022 are:
✓ Overvaluation in private markets
✓ Liquidity withdrawal by the US Federal Reserve
✓ Geopolitical tensions between major world powers
✓ High energy costs
✓ Persistent inflation.
A bottom-up approach will be crucial this year. Secular themes may not work in 2022. Also, the year 2022 could be the one where banks, especially private banks, make a comeback. Software sector stocks and banking stocks can be considered lucrative in 2022 also because both the sector stocks are considered inflation-proof. The Indian markets may continue to enjoy a premium valuation owing to their superior earnings’ growth trajectory and superlative economic growth. However, investors will have to tame their expectation for 2022 and it is possible that the broader market present some lucrative opportunities this year as the markets become more volatile.
The positive surprise for the markets can be inflation peaking out earlier than expected and the central banks not increasing the interest rates as expected currently. In addition, there are factors like the US Federal Reserve officials probably giving more weightage to sustaining economic growth rather than being concerned about the inflation rate, the geopolitical situation cooling down owing to diplomatic solutions and the supply chain situation smoothening out with no impact of the pandemic. All these positives may lift the market moods. However, it is a low probability event. Investors need to adopt a cautious approach in 2022.
M E T H O D O L O G Y
DSIJ 150: The Method and The Logic
Extensive research has led to the selection of India’s top 150 companies which have created wealth for their promoters, shareholders and the society at large. We have applied a professional approach and method in this selection process as explained below. This year’s list marks Dalal Street Investment Journal’s ninth year ranking of India Inc. and presenting the DSIJ 150. This is a result of a meticulously laid out process. What follows is a detailed description of the various steps that have been followed. For this study, we began with all the listed companies in India. Since our objective was to focus on companies that have been superachievers, a ‘short period’ study would not have been justified. Therefore, we spread our period of study over the past five years. A long-term study evens out any aberration in the results of any particular year and helps in providing a fair idea of long-term performance. We have deliberately left out certain categories and companies from our study of Elite 100. These include - Banking and Non-Banking Finance Companies. The reason for excluding banking and NBFCs from our study is due to the difference in the nature of their business and the way they should be evaluated.
THE PARAMETERS
Broadly speaking we have sought to analyse and rank companies based on the following parameters:
• Growth
• Efficiency
• Safety
• Wealth creation
Growth: The most important criterion for determining a company’s success is, naturally, the growth that it achieves over a period of time and also its capacity for growth in the future. Growth for a company can be defined in many ways. The most important and critical among these is the top-line which is defined by the sales or revenues of the company. The next growth factor is the operating profit which defines the operational performance of the company. Then comes the net profit which defines the eventual benefit to stakeholders either to be used this year in the form of dividends or can be invested to reap its benefit in the coming years.
Efficiency: It is not only the growth that matters but also how effectively and efficiently this is achieved. The more efficiently an organisation uses its resources, the higher the value that it creates for its stakeholders. Having said that, we have measured efficiency based on the following factors. Operating profit margins (OPM) Net profit margins (NPM) and Return on capital employed (RoCE). The OPM and the NPM together capture the efficiency of a company at the operating and the net levels, respectively. The RoCE, on the other hand, indicates how good a company is in utilising its funds. ROCE is a good indicator of a company's efficiency because it measures the company's profitability after factoring in the capital used to achieve that profitability. These parameters are evaluated on a relative basis for the current year.
Safety: Our recent experience shows that debt has become a big pain for many companies with the servicing cost escalating over a period of time. Therefore, we have used the debt-to- equity ratio to measure the safety of capital of the company’s shareholders.
Wealth Creation: The ultimate objective of any organisation is maximising the shareholder’s return. Hence, this had to be one of the criteria for our study. To evaluate companies on this front, we have looked at the movement at share prices in the last five years after adjusting for splits and bonuses. We have considered a total return given by these companies and not just a simple price return. This is because total return captures both the capital gains and the income generated from dividends. The latter provides a much more complete picture of performance — especially for stocks that have high dividends.
THE RANKING METHOD
After having laid out the data according to the various parameters as discussed above, we then embarked on the final step of ranking these companies. We have carefully assigned weights to each of the parameters. Even within that, companies in different stages of their evolution have been assigned weights according to the requirement. This led us to the creation of two broad categories. One, where we considered companies with a market capitalisation over ₹ 10,000 crore and another, where we considered companies with a market capitalisation of less than ₹ 10,000 crore but exceeding ₹ 1,000 crore. Accordingly, a higher weight has been assigned to the growth factor in the case of companies with a market capitalisation of more than ₹ 10,000 crore, the reason being that these companies are far ahead on the safety curve. They have been in the business for a greater duration and have achieved critical mass by now. What is important in their case is the growth factor that will propel them into the next orbit. Safety and efficiency have been assigned an equal weightage for the same reasons as mentioned above. On the other hand, growth and safety have been weighted at an equal level in the case of companies with a market cap of less than ₹ 10,000 crore but over ₹ 1,000 crore. Shareholder returns have been given due consideration for both categories. Based on all these factors, a final composite ranking of companies in both categories was arrived at. This gave us a list of the top 50 companies in the first category (market capitalisation above ₹ 10,000 crore), which is our ‘Super 50’ club. The top 100 companies in the second category make up our ‘Elite 100’ group.
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