Wishing you and your near ones a happy new year!
Through Q3 an interesting situation has emerged. As the equity market has taken a breather, valuation comfort has emerged for the first time in a year. Valuation is never just about the current price, it is also about how much growth businesses can see over the next 2-3 years and what level of earnings they can deliver.
The bout of volatility seen through Q3 has seen the small cap index outperform the benchmark index by a good margin. This tends to happen in a typical bull market correction and rarely in a secular downtrend. In most serious corrections small caps get hammered, this hasn’t happened so far. Just an observation, no conclusions yet.
The other high level data points that matter
- Monthly GST collection continues to trend above 1.3 lakh Cr.
- Fixed Income market is poised for an adjustment in the interest rates trajectory * INR has shown strength after the RBI intervened recently
This round of private capex is likely to be driven more by internal cash flows than by high debt. This presents an interesting situation for lenders where the businesses worth lending to don’t need too much debt, those that need debt come with higher risks while unsecured retail lending is set to see some competition from the new age lenders. These new age players may not lend in high volume but might drive yields lower in a few segments in the quest to build a book quickly.
We will also see competition heating up in segments which have traditionally had just 3-4 leading players. When businesses go out and do category expansion into adjacent areas, the market gets excited for good reasons. See the difference in the market capitalization of TTK Prestige and Hawkins, Astral Ltd and Finolex Industries. Observe why the top 5 auto ancillaries trade at a different multiple compared to the rest. See the capex plans of some chemical businesses, promoters are investing 2-3 years of profits into gross block over the next 3 years.
Promoters invest based on demand visibility for the most part and not based on where interest rates are. Individuals buy houses when they feel the next 10 years will be better on the earnings front, not just because the home loan rate is below 7%. Govts are more open to put in place a better policy environment when tax collection visibility is better than expected. Interest rates do matter but it is expectations of better growth that has a greater bearing on investment and discretionary consumption. Monthly SIP inflows go up as people funnel their incremental savings into formal investment avenues.
Many of these are happening in India right now. This fundamental aspect of the economy will not change even if the equity market were to fall 10% from here. The pieces yet to conclusively fall into place are broad based private capex and higher Gross Fixed Capital Formation (GFCF) at the macroeconomic level. While equity market gyrations are exciting, long term investing success depends on getting the broad picture right in a developing market like India. The real money is made in holding good businesses over time and letting time compound a good chunk of your net worth at a healthy rate.
The market loves businesses that can grow at healthy rates over the long term without impacting balance sheets while treating minority shareholders fairly. Not participating in the growth of such businesses can be a mistake by itself, which is why the valuation multiple I am willing to pay for such businesses is higher today than it was till 2018. If we see both discretionary consumption and investment trend up over the next few years in India, we may be in for one hell of a ride as investors. Even if it is a volatile one.