This is almost the end of 2019, and the Indian economy is in doldrums. IIP, GDP, employment have seen their multi-year lows this calendar year. Indian economy is falling into the pit and political parties seem to be more interested in electoral politics than India’s economy.
So, the obvious question is whether one should buy stocks when they are in recession or trending down. Keeping in mind the current situations, it can be seen that pharma is still in the woods, software does not look too exciting and renewables have lost their shine for now.
However, there are selective sectors that which are trading at discounted valuation and have a good upside potential due to upcoming macro-economic factors.
Automobiles and Auto Ancillaries
The first sector would be automobile. In the automobile sector, there are two distinct segments. One derives large offshore revenue especially from US, UK, China and Europe and another that is driven primarily by domestic demand.
Tata Motors, Bharat Forge, Motherson Sumi fall in the former category while Ashok Leyland, Maruti Suzuki, M&M, Escorts constitute the latter segment.
A firm Brexit is now certain with UK Prime Minister Boris Johnson winning the Brexit referendum. This clears the passage for a transparent and clear trade policy of UK with its European neighbors and USA.
Tata Motor’s subsidiary, Jaguar Land Rover earns many times larger revenue than its parent firm, TML. Jaguar and Land Rover are premium automobile offerings which have decent China and North American market. US-China trade deal phase-I, which is supposedly ready, would rev up the China-USA trade considerably. Increased economic prosperity will jack up the premium car demand in China. Jaguar Land Rover, subsidiary of Tata Motors, is well poised to take full advantage of that demand. As overseas market activity of Tata Motors picks up, it will reduce TML's debt.
Old vehicle scrappage policy might soon become a reality. This will create huge market for new commercial and passenger vehicles. BS-IV standard pollution certified vehicles bought up to April 2020 have been allowed to complete their full legal lifecycle. This step will reassure buyers who are hesitant to buy automobile before BS-VI pollution standard kicks in from April 2020.
This is the next beleaguered sector one can consider investing in. However, it is best to avoid NBFCs facing uncertain future e.g. DHFL, Reliance Capital.
NBFC’s problem started with collapse of ILFS. NBFCs and Mutual Funds had a collective debt of over Rs. 99,354 crores, payable by ILFS which had to be almost entirely written off. This resulted in mutual funds, one of the main liquidity suppliers for NBFCs, to shun them. As banks and MFs turned off the NBFC lending tap, the economy collapsed. NBFCs provided the last mile funding for most medium and small ticket loans, for corporates or retail debtors.
As the NBFCs paused on loan disbursal, some big NBFCs like DHFL, Reliance Capital started defaulting, taking the entire shadow banking companies down with them. However, Government has now initiated remedial measures.
This would help NBFCs earn revenue by selling their locked assets at a fair value to PSBs on sudden liquidity withdrawal demand, instead of fire selling it at a deeply discounted value.
As solvent NBFCs are assured of continuous liquidity, they will start lending. This will fill the needs of loan starved economy. NBFCs are the first choice of borrowing for small to medium debtors, as its lending rules are less stringent compared to banks.
For investing, one can choose among the top 50 solvent, fundamentally strong NBFCs, which are undergoing this fierce economic downturn without resorting to extra equity allocation, distress selling or taking more debt.
Another sector now ready to take off is the banking sector, especially the big Indian PSBs (Public Sector Banks) which are going to merge other smaller PSBs in itself. SBI, Bank of Baroda, Punjab National Bank fall in this category. Rs. 60,314 crores have already spent on recapitalization of these PSBs and they are well placed to start lending.
The major factor that is still causing heartburn in financial sector is persistent higher NPA (non -performing asset) levels. However, the banks have already made huge provisions for these NPAs. Increasingly fine tuned IBC (Insolvency Bankruptcy Code) mean more chances of loan recovery from debtors by the PSBs.
Housing sector is another area where government is providing healing stimulus in form of special package for unfinished realty projects. Government has provided a special funding of Rs. 20,000 crores for selected housing projects that have got stalled. To avail this relief, the project has to be 60% percent complete, should not be in NPA (non-performing list of banks) or NCLT (probable candidate for bankruptcy) list. For investing, one can choose quality realty companies with proven execution capabilities, actively selling realty projects, having positive net worth and manageable 1.5:1 debt: equity ratio.
As seen from above we have chosen 4 industries i.e. automobile, NBFC, PSBs (public sector banks) and Housing and Housing Finance sector companies to bet for medium to long term, in these recessionary times for stocks.