K Sandeep Nayak, Executive Director & CEO, Centrum Broking, talks to
Money Today about good equity investing practices and where the market is headed in the next couple of years
.Q. A NUMBER OF STOCKS, SUCH AS TTK PRESTIGE, EICHER MOTORS AND LUPIN, HAVE GIVEN HUGE RETURNS OVER THE FIVE-YEAR PERIOD SINCE THE MARKET CLOSED AT 20,800 IN JANUARY 2008 AND SUBSEQUENTLY TOUCHED A LOW OF 8,160 IN MARCH 2009. WHAT INVESTMENT LESSONS SHOULD BE DRAWN FROM THIS?
A. The key lesson is that a simple business with consistent demand for its products, having a successful operating history and driven by high-quality management is likely to perform well despite the vagaries of a stock market.
Moat is a term made famous by Warren Buffett. It is defined as the competitive advantage that a company has over its peers. The wider the moat, the larger and more sustainable is its competitive advantage. The moat a firm enjoys enables it to consistently earn above its cost of capital and, thus, reward its shareholders. Picking right businesses with long-term prospects is key in choosing stocks.Q. WHAT PARAMETERS SHOULD INVESTORS USE TO SELECT MULTI-BAGGER STOCKS?
A. Using the principles of Warren Buffett, investing in a stock is like buying a business. To summarise Buffett's advice, you need to evaluate:
(a) The business, its operating history and long-term prospects and the sustainable competitive advantage the company has over its peers
(b) The management quality and corporate governance standards it adopts in treating shareholders
(c) The financial performance of the business in terms of its profit margins, earnings record, return on equity and dividend payout history
(d) The value of the company and the discount it is priced to its intrinsic value as a company's stock, though great in all parameters, can afford returns only if you enter at the right price pointQ. DO YOU THINK A BUY-AND-HOLD STRATEGY WORKS BETTER THAN FREQUENT READJUSTMENT OF YOUR STOCK PORTFOLIO?
'A GOOD MONSOON (IN 2014) AND A STABLE CENTRAL GOVERNMENT COULD SEE THE SENSEX REACH 25,000 LEVELS BY NEXT DIWALI'
A. A buy-and-hold strategy works when you are sure of the businesses invested in. Frequent readjustment indicates you are unsure of the stocks. If I use my example, I try to evaluate a stock by the criteria stated earlier. A stock investment is made based on available information. However, new or additional information enables re-evaluation of the rationale for investment. New data on the market or a company or recognising a misjudgement may change your view of a business.
If a business does not meet your criteria, then exit without losing time. This may lead to an increased churn of your portfolio. Usually, investing in businesses fulfilling your criteria for investment should result in a buyand-hold situation. However, be bold enough to cut losses and exit investments where assumptions of investment have changed.Q. WHAT SHOULD BE THE TRIGGERS FOR EXITING A STOCK SINCE THERE WERE SHARES THAT HAVE ERODED INVESTOR WEALTH DURING THE SAME PERIOD?
A. The triggers are its failure to meet the parameters used to invest in a stock.
Deterioration in the company's financial performance beyond missing one quarter's numbers or obsolescence of a company's products or the loss of sustainable competitive advantage can be triggers.
Also, a stock's corporate governance record being sullied could be an important trigger. Promoters pledging their equity is another warning for an investor to exit, as, in the past, we have seen investor wealth eroded due to sudden lender liquidations.
Finally, investors in mid-cap or small-cap stocks must have a price trigger, decided at the time of investing, for exiting a stock based on your risk appetite.Q. HOW DO YOU SEE INDIAN MARKETS FOR THE NEXT THREE YEARS?
A. Next year's market is dependent on two factors - pickup of growth and reaction to the outcome of central government (Lok Sabha) elections. The GDP growth for this year would be around 5%. Next year's growth should get GDP back to the 6+% levels. If the elections result
in a stable alternative to the current formation, it will be perceived positively by the markets
The impact of corporate earnings growth and a revival in investment cycle should lead to positive sentiment and a good equity market in Samvat 2070 (Hindu calendar year starting 2 November 2013). The consensus EPS, or earnings per share, estimate for the Sensex, as per Bloomberg, for 2013 stands at Rs 1,334 and at Rs 1,582 for 2014. Even at 15 times multiple of consensus estimates, the Sensex will target 23,730. The market should hover between 19,000 on the lower side to about 24,000 on the higher side. If we have a good monsoon next year and a stable central government, the next Diwali could see Sensex reach 25,000 levels.
Over the next three years, the economy's growth trajectory should return it to the 7.5-8% mark. Top companies should be able to grow at about 15%. The Sensex EPS for 2015 should be about Rs 1,800 and about Rs 2,000 for 2016. A target of 15-18 times multiple of 2016 earning gives a range of 30,000-36,000 for Sensex in 2016. The only risk to this estimate is political instability and global liquidity risk following QE, quantitative easing, easing by the US Federal Reserve.