Business outcomes are relatively easier to predict than investing outcomes, most of the time. Quoting from the May newsletter – Urban discretionary consumption stories have bullish commentary with the March revenue exit rate surpassing pre COVID levels. Almost all players here have opened more stores aggressively through Q4.
Q1 Results across urban consumer discretionary segments like travel, entertainment, QSR & branded garments are in line with the management commentary of Q4 FY22. Many brands have gone past their pre COVID highs on revenue. Urban India is consuming with a vengeance, a revenge consumption if you’d like to call it that.
When business outcomes start delivering, a useful construct is to see how stock prices react. If stock prices trend up on good results, you are in a good place. If prices don’t react well to good results, chances are all the positives are priced in. Go back to the market reaction to Q3 FY22 IT results, stocks were down 10% after YoY PAT rose more than 20%. A nice little lesson in there.
Quoting from the July newsletter – New stock market leaders reveal themselves at the beginning of every cycle, this time should be no different. Breadth of industry coverage should be a priority for every investor right now.
This has only gotten reinforced through July after some businesses declared Q1 results. We are finally seeing signs that India might become a more prominent manufacturing base for the world compared to what it has been historically. Investors once again need to choose their businesses carefully, through 2021 investors loaded up on the China + 1 narrative in chemicals only to see most of them run into severe margin pressure over the past 2 quarters. Eventually mean reversion to margins will happen at higher growth visibility, but it won’t be an easy journey in the meanwhile.
Through H1 FY23, the few businesses that manage margin pressures well may prove themselves to be a cut above the rest.
In the meanwhile, order book continues to swell for many business in the industrials and capital goods segments. When the Govt is in the mood to spend and has the resources to spend, order book translates into revenue predictably. Else the order book takes much longer to trickle down into the ecosystem. Thankfully we have a Govt that appears to be serious on things like power transmission modernization, discom reforms and railway infra modernization. Healthy GST collection gives the Govt enough ammunition to keep the spending momentum going, things might finally look up for these sectors after a muted decade.
Credit growth at banks is starting to print a healthy double digit number again as the sector comes out of the shadows of COVID related provisions and stresses. Lenders look more reasonably valued today than they did three years ago when 3 times price to book was the norm for a private sector bank.
The macro economic environment is likely to take at least 5-6 more months to get to a stage of predictable policy. While CY22 is all about policy pivots and macro uncertainty, chances are CY23 might be an year of policy predictability if not a policy pivot. In India 8% inflation is not a culture shock, we have dealt with this in the recent past, things are different in developed economies though.
It is time we started looking past the immediate effects of central bank policies on India. Time to think medium term about individual businesses that are improving their competitive position, operate in sectors that have healthy unit economics and have managements willing to build capacity to deliver the next round of growth.
Alpha generation is all about getting the micro story right while not being wrong on the macro story. If you get the macro story right without doing enough work on the micro story, chances are you will end up with headline index linked returns. In that case, why not just index it and spend your time elsewhere?