To – All Clients & Partners
Best wishes for the new year 2020 !
2019 has been a challenging Year for all of us. A heady cocktail of economic slowdown, slow earnings momentum in core sectors, liquidity crunch & SEBI’s reclassification norms led to a complete meltdown in broader markets, especially the midcap & small cap segments.
This one chart illustration by HDFC securities explains what really transpired during calendar year 2019.
This is clearly an earnings driven market. Wherever there is earnings certainty for the next 4 quarters, markets are willing to pay a premium. While asset-based companies are being ignored despite deep value & performance improvement. This scenario has opened up many pockets of opportunities as we enter 2020.
A Lot More Opportunities
2020 promises to be a year with full of extremely attractive opportunities. After a gap of almost 3 years, we are finding quite a few new investment ideas due to price correction, time correction & improvement in underlying businesses.
We see tremendous value emerging in large cap stocks. Barring top 10-15 stocks from IT, Private Banking / Financials & select consumer facing companies rest of the large cap category is highly underpriced. A mere reversion to mean & a slight hint of growth should result in good risk adjusted returns over the next 12 months or so. Stocks like SBI, Vedanta, GAIL, Coal India and few others are worth investigating from medium to long term perspective.
At the same time, we can spot quite a few high growth midcaps & small caps that are finally coming into attractive zone either due to time correction over the last 3 years or big price correction from December 2017 top. Especially the stocks with potential to enter 500 cr profit after tax club on a sustainable basis are of high interest to us.
Companies That Can Make A Comeback To 500 cr PAT Club
In 2010, 128 listed companies were making a profit after tax of more than 500 crores. And only ~80 out of those 128 companies continue to make 500 crores plus profit after tax in 2019. Rest of them have dropped out due to cyclical or structural reasons. We are on the look out for companies that can make a come back to this list as the cycle turns in favor.
New Companies That Can Enter 500 cr PAT Club On A Sustainable Basis
In 2019 – the number of companies making profit after tax of more than 500 crores has moved to 188. Resulting in almost 100 new entrants to the club. At this point, we are able to find few opportunities that can potentially enter the 500-crore profit after tax number on a sustainable basis or get somewhere close to the number. These are growing companies in the mid & small cap space.
The 500 crore PAT number matters, as this is the point where a major re-rating in the valuations takes place. As businesses become large, their ability to re-invest & grow accelerates, ability to protect margins goes up & the valuation matrix changes as well. In a country like India, it is very difficult to build a scalable business. Companies which are able to build such businesses on a sustainable basis & stay there for a longer time, are likely to fetch a valuation premium & increased institutional participation.
Looking Forward – 2020, The Year Full Of Action
In November 2019, Alpha Invesco completed 10 years of operations. Over the last decade, we have worked relentlessly to enhance our investment frameworks, broaden the investment universe. 2019 was a year where we reflected upon our mistakes, expanded the team, gained insights on a lot many new industries / sectors which we never used to look at before, and have developed inhouse screening tools. We are looking forward for a year full of action with significant changes & additions to our investment portfolios.
Regards
Chetan Phalke
CIO – Alpha Invesco Research
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