Looking for buying opportunities in stressed market? We have a shopping list

By  Devarsh Vakil

Long-term prospects of the Indian economy and equity markets look positive. Markets may remain stressed in the extreme short-term due to lingering selling induced by year-end capital gains tax related selling and selling to generate some resource for dividends. However, correction in the near-term should be viewed as a window of opportunity to enhance allocation to quality stocks. I expect Nifty earnings per share (EPS) of FY18/19/20 to be approximately around Rs 500/600/700. As these numbers show, I am expecting strong growth at the aggregate levels and individual stocks will have much higher growth than the averages.

Time to go for selective shopping

Short-term risks have led to correction and consolidation in the market. However,  the  long-term bull market  is still intact  and once this short-term  correction plays out, we will see markets back in momentum.  This correction will provide an opportunity to enter sustainably profitable business with a lot of margin of safety.  

From raging bull market of the last year, signs are this year market will consolidate in next three months. So, earlier, even if you pick a wrong stock for a wrong reason you ended up making money in raging bull markets. Now our mistakes will be severely punished. Be careful in what you buy and why you are buying. Be prepared that stocks you buy will not start moving into higher orbits and will consolidate before moving higher and giving you returns.

Rangebound markets with stock-picking will be only way to make money.  I like sectors which are direct beneficiary of the rural consumption theme to benefit from hereon I am also very bullish on media and entertainment space.
But before I discuss what to buy, let me first spend some time telling you what to avoid.

What to avoid:
It is important to check the quality of the balance sheet of the companies before you buy the stock. High amount leverage on balance sheet or the promoters who have pledged their shares are a clear no. Once you avoid such cases that blew up in your face, next step is to check valuations.  Do not pay too high price for future growth. Growth may not materialise as you envisage and you may not make any money on your investments. Identify sectors which are on the cusp of the cyclical growth. I find that media and entertainment space is at such juncture.

Media sector to boom
In the recent reports on 2018, advertising outlook predicted 12-13 per cent ad growth for the Indian industry. Radio is likely to post ~15% growth as new stations achieve better inventory utilization.  TV  will  grow  at  13 per cent,  led  by   FMCG sector’s aggression  to  tap  into  reviving  rural  demand. I like vernacular newspaper particularly attractive, and some of these companies have FM radio businesses as well.  I expect strong consumer pull for FM radio. Advertising rates will improve and that will generate good revenue growth for these companies. Balance sheets are lean and most will flow to bottom-line yielding superior stock returns.
 
Focus on rural India
Another area to focus is consumption boom in rural India. The  Government  of  India  has  taken  several  steps  around  improving  rural  India’s economic prosperity and ensuring their spending power goes up. These initiatives should pull out millions of Indians from poverty into consuming class. Also, it should  aid  the  existing  consuming  class  to  either  use  products  more  frequently  or upgrade to higher-end products. This should lead to both volume growth as well as value growth through premiumisation.

Direct benefit transfer (DBT), crop insurance, soil health cards and rural electrification are all great initiatives but the project with far reaching implications and a game changer for farmer is eNAM project.  Rural incomes are definitely headed higher. So, FMCG players focused in rural India, Agri machinery especially farm mechanisation, two wheelers are on my radar. Hope you add quality stocks from the themes I mentioned in your portfolio and see your portfolio prosper over time.

(The author is Head of Advisory-PCG at HDFC Securities)