3. Sectorial

Housing as an Investment

• Check PE of house = Price of House\Earning (Rent)

• E.g. 2cr/3.6L = 55, why pay so high PE

• If rents grow by 10%, Housing price should also increase by 10% in long run

• If land cost grows higher than business, business would then invest in land rather than setting up a business

• Co-relation to be there between Annual per capita income / price of the house

  • The relationship has been broken in country

  • The EMI and rental are far apart, while in US ther are very close

  • Rental yield Vs Bank yield is inversed. Rental yield should have been higher

• When to buy house

  • When EMI and rental comes close

  • Stock market rising and home price falling

  • Check PE of House Vs Equity, if same buy the Equity

Is Gold a Good Investment

• Gold is not an investment, it is in a way currency i.e. a cash

Bitcoin is a Mirage

• Called as cryto-currency - still it is assumed to be a currency as well as investment

• Properties of Currency - stability

• If a commodity price isn't predictable in a currency for intra-day or longer term, then it is not a good currency

• If bitcoin happens to be great investment, no one would use it to buy items, hence it can't be a currency

• Currency either has utility or backing

• If shop-keeper doesn't have change of Re, he gives Eclairs and customer takes it as well - utility

• If govt puts a ban to trade using eclairs with high demand of eclairs in lieu of currency, people would left with eclairs with them, however won't be worried since eclairs has a utility of pleasure of toffee

• Even though eclairs doesn't have backing, it has utility.

• If bitcoin gets a ban, it has neither backing nor utility - it would become waste

• Gold again is seen as currency, it has utility but not a backing

• As currency Gold is better than Bitcoin

• A currency with backing - Token used with amount & signature, used in market transactions. Has individual backing, though not strong backing. It is better than bitcoin.

Sector Rotation

• Irrationality chances\frequency of Nifty is low, particular sector is high

• How about being Active with finding sector being relatively cheap

• General Burst is ~2years (p4), followed by boom ~5years (say phases p1, p2, p3, again followed by burst (say p4). Each phase say is 1.5-2years (approx). Can't be said accurately, could be over-lapping as well

• Burst is reflected by Low Demand, Low Inflation, RBI would do low interest rate

• Passive approach at burst would be to buy Nifty, Next 50

• Look at choosing sector which could give higher return than passive,

• Which sector would lead the economic cycle recovery:

• P1(Banks, Auto, Reality) - Interest rate sensitive sectors | Monetary stimulus

  • People would go to bank for loans for spending, Banks would get interest income

  • Invest in Bank Nifty (instead of selecting the specific bank)

  • What loan would people take generally? - Home and Car

  • Auto, reality would get this loan money, would trigger its growth

  • Let's consider sectorial bucket investment

  • Fiscal stimulus is difficult with reduced revenue, RBI gives monetary stimulus

  • This increased auto\reality demand would get fulfilled by existing production capacity, inventory

• Fiscal stimulus

  • At burst, economy slowdown, govt would also be getting lower tax collection

  • Govt may not have access money

  • If Govt has to increase spending, spending has to be more than revenue. This would lead to deficit

  • The increase in market orders would pick the economic activity

• Monetary stimulus

  • Stimulus created by lowering interest rates

  • At burst time, with tight revenue collection monetary stimulus is preferred

• P2 (Infrastructure , C.G.\Engineering, Energy) - Fiscal stimulus

  • After P1, govt tax collection improves with Bank, Auto, Reality recovery

  • Govt get confidence on future recovery and to sustain recovery start giving Fiscal stimulus means spending

  • Where does Govt spends? Infrastructure

  • To support increased sale from P1, govt need to increase infra capacity.

  • Also to control inflation by make demand meet supply through infra. - Economically imp to spend on infra

  • Also every Re spend on infra creates more jobs than any other sector - Politically imp to spend on infra

  • With lower rates over long period, demand would require more project to increase production

  • Capital Good companies are given order to build plants by Auto companies. C.G. help other companies to expand

  • Salaries and Bonus start increasing for employees with people demand

• P3 (Commodity)

  • Soft Commodity - Food etc consumables

  • Hard Commodity - Industrial (extracted from earth) - iron, etc

  • Prices start rising for commodities with demand, this may lead to inflation

  • RBI start increasing rates slowly from P1-P3 - means recovery has started

• P4 (Defensives - FMCG, Pharma, Gold)

  • RBI takes interest rates high to contain inflation, this lead to burst i.e. slowdown

  • Slowdown is planned by RBI to prevent economy overheat

  • While in slowdown, demand would be reducing. Some sectors may still have stable demand (Defensive)

  • Defensives are FMCG, Pharma, Gold prices start rising

Phase of Economy

• How to find the current phase of Economy (P1-P4)

• Check the yearly earning growth of previous to current year, through Nifty

• Check the P\E and earning growth of each sector in P1-P3

• If any sector has both low P\E and earning, buy and hold it to get money growth by both

• Need P\E High and Low for each sector

||Sector||High||Low||Avg||Current|| - 2018

Nifty 30 15 22.5 25.87

Next 32 13 22.5 36.15

Mid|Micro|Small Cap ** (High PE Ratio) Ignore until high PE

Infra 45 13 29 68 (Has earning reduced too much? Yes. However Too High PE with Low earning is not super motivating)

Bank 30 6 18 30 (Earning has increased, however PE is not Low (30))

Energy 19 9 14 15

Wealth Maximization Today - 2018

• 50 Equity, 50 Debt

• Market\Sectors is not horribly cheap

• MC and SC are costly

• 30 in Nifty 30

• 5 Bank (PF is higher)

• 5 Infra (PE is very High)

• 5 Energy

• 5 IT

Economic Problems - 2018

• Bank - NPA

• Auto - Over capacity

• Reality - Supply much higher than demand

• 2003-2008 Extremely fast growth, lead to hyper inflation

• 2008 economic boom (heat-up) should have been controlled

• Companies set very high expectations from India's growth and invested in hyper expansion with heavy loans

• With heavy loans if growth doesn't happen, may suddenly lead to economical collapse and NPAs

Mess : 2003-2013

• Growth Fast

• Policy Paralysis - 2008-2013, fear of scams - decision making not happening

• Credibility Low, with scams

Mess Resolution Effort : 2014 onwards

• Bank : Demonetization, Bad Bank

• Bad Bank : How to get the fund ~5L cr for it

• RBI got the problem\power to solve NPA

• Auto: 7th Pay commission to make demand

• Reality: Had over expansion, low cost housing unfulfilled demand. Incentive for builder to facilitate housing to low budget demand. Here also over supply is a risk (not in near but later phase)

Dec 2020 - Sectorial Analysis

• Bank Nifty

  • PE max 60 (2019), False event due to earnings fall

  • PE low 7, PE high 27, Avg 17 (when bank interest rate high)

  • Assume Avg as 19-20 (when bank interest rate have fallen)

  • PE 28.47 (Avg ~20), PE is high

  • Earning 1055 (Looks average)

• Energy

  • Capex driven sector, pay less premium so avg PE is usually lower than Nifty avg PE

  • PE low 10, PE high 18, Avg 14

• IT

  • PE low 10, PE high 30, Avg 20

  • PE 30 (On higher side, Earnings Avg - not high motivation)

• Infra

  • PE low 13, PE high 40, Avg 26

• Metal

  • PE low 9, PE high 26, Avg 17

• Today 40 Equity, 60 Debt : Wealth Maximization

  • 30 - Nifty

  • 5 - Infra Beas

  • 5 - Metal

Dec 2020 - Is Nifty over-valued (high)

• After buying on 24 March 2020, Is it time to sell on Dec 2021?

• Dec 2020 PE: 36 Earning: 363

• Dec 2019 PE: 28 Earning: 429

• PE should be ignored for high value, since earnings have fallen

• Check MCAP/GDP = 0.83 (Does not look horribly expensive from any angle) - Should be seen as average

• Google BSE Top 100 mcap bseindia

• MCAP: 181 Lakh cr

• GDP: 217 Lakh cr

• MCAP/GDP Should be ~1 in long term, cheap if < 1. ~0.5 horribly cheap, ~1.3 horribly expensive

• MCAP?GDP 2008 Jan 1.46 Oct 0.5, Avg is ~0.98

• Check P/BV = 3.75 from Nse website

• Check 2000 , 2008 (Jan: 6.4 consider high, Oct:2.17 consider low) P/B to evaluate current high or low. Avg is 4.3

• So current P/B 3.75 < 4.3 Avg (means Not high)

• Book Value is net asset of the company (Net asset - net liabilities)

• Company could be valued by earning and book value both

• Check P/E, Earnings growth, Mcap/GDP, P/B

• How to calculate the fair value

• Calculate market price with fair earning and fair P/E = E projected (15% growth from previous) * P/E (avg pe)

• Calculated Price is near to current value, so markets looks to be be fairly placed

Dec 2020 - Is Nifty Next 50 (Junir Nifty) cheap today

• If Next 50 P/E < Nifty 50 P/E, it would be no-brainer to buy Next 50

• Also check on earnings growth of each in last 5-6yrs