It’s been another listless and directionless fortnight in the stock markets. The gains that greeted the unambiguous election results have started to level off. Now, all hopes are pegged squarely on the next big whammy — the Union Budget.
Whether the finance minister will manage to balance his books in these difficult times remains to be seen, but Indian corporates have been quick to react to the improved markets. They have planned to collectively raise over $2.5 billion of capital from investors. Our portfolios have stumbled along in these uncertain and indifferent times.
The relatively simple longonly mandate for Safe Wealth has prevented us from taking any aggressive exposure to markets (cash levels are 76%). This portfolio has gained 0.6% over the fortnight, while our long-short baby, Wealth Zoom, is a little more complicated, and has actually depreciated by 0.5% during the fortnight.
This has happened because our shorts (that we have initiated in the hope that the markets will crack) have misfired. Hopefully, this is a temporary phenomenon. My conviction level for each one of our shorts is high. It’s high enough for me to actually add to some of them this fortnight. Tata Motors announced disastrous numbers (consolidated losses of over Rs 2,500 crore) even after some clever, and dubious, accounting for R&D expenses at Jaguar/Land Rover.
The insipid CV sales figures for June 2009 have left me convinced that even the fairly profitable Indian part of the Tata Motors’ business is stumbling, while the JLR operations are surely going to squeeze the company, and its shareholders, dry. To our old short of 100 shares, I have added another 40.
Likewise, we have added to our loss-making shorts in the case of both Crompton and ABB, as it seems they are more than adequately valued under the present circumstances. While Crompton (after a surprising investment in a group company in the power business) looks costly at 17 times one-year forward earnings, it is ABB which is the more compelling short at over 34 times.
Why it should remain humongously costly in spite of threatening to post an absolute decline in all parameters (revenue growth, profit margins, working capital efficiency, tender wins and earnings per share) in 2009 is beyond imagination. Hence, we have added another 40 shares to our 60 shares’ short position. For Crompton, we have upped our short position of -125 to -175.
The recent noises emanating from the United States on the protectionist tendencies of the new government, combined with the known deterioration of the economic and financial environment, tell us that the IT outsourcing companies will face at least two years of flat or declining profits. Particularly hard hit will be the ones that are large and undifferentiated. You guessed it, we have doubled our short of 28 shares in TCS.
Add to the generally dismal conditions some stock-specific reasons for shorting, such as a cash-guzzling relationship with a key client, a brave, perhaps reckless, takeover of a scam-ridden rival and a sensational rise in the past three months, and what do you have? Another brilliant short in the making—Tech Mahindra. This worthy is now quoting at almost Infy-like valuations and presents a deep value opportunity to bet against its success in the stock market. A 50-share short results in an almost 5% exposure.
Finally, adding short positions to Tata Steel and Axis Bank was perhaps the easiest thing to do this time. Tata Steel’s much-touted Corus story is nowhere near a happy outcome. The net profit for 2008-9 fell by 60%, largely due to losses at Corus. Global steel demand is in the throes of a painful contraction, and all attempts to make Corus less dependent on merchant purchases of raw materials will not prevent it from running into losses for another year or two.
On the other hand, Axis is a genuinely decent bank. After growing at a scorching pace over the past five years or so, it’s taking a not-so-surprising breather, which should stretch to 2010-11 as well. Interest margins are falling as nationalised banks cut lending rates and Axis’ own low-cost CASA deposits saturate at over 44%. Fee income, an abnormally large part of the income profile for this bank, is also plateauing, while the big monstrous risk in banking—NPAs or bad loans—has reared its ugly head at Axis. The asset quality slippage is significant enough, in spite of being helped along by the ‘restructuring’ option, to motivate me to double our 40-share short exposure to 80.
Last fortnight, we added Dishman Pharma to our longs in Wealth Zoom. At under eight times 2009-10 earnings, this emerging CRAMS story is coming out of Solvay’s shadow. It recently won a significant order from Astra Zeneca, one of the big daddies of the global pharma industry. If things go right, the revenue jump can surprise even its most optimistic followers. The gradual reduction or phasing out of its low profit quats business may actually work to its advantage in terms of better quality of earnings. Stay tuned.