Don’t Press the Panic Button

190728 – As mentioned in the previous writeups, the Sensex and the Nifty have been moving up and holding the levels based on 6-7 stocks popularly called as Hrithik stocks. It is next to impossible to find anyone, be it individuals or fund managers who would have bought only these stocks.

The market has been performing badly since Jan’2018 and till date, there are no signs of recovery. There was some expectation which was built up before the budget’2019. The budget has been a total damp squib from the market’s point of view. Not that the overall budget was bad, it was prepared keeping the only long term in mind and hence nothing materialised for the short term for the market.

Two things which market did not like were, firstly, Higher Taxation of HNI’s and FPI’s and secondly, with this brute majority, the market was expecting the government to go capitalistic but they seem to be adopting the socialist approach to which even I am opposed to.

With clear thumbs down from the market, I feel there would be course correction in the next budget, this being not a whole year budget.

There are other reasons also due to which the Indian market is going down. Budget is a smaller excuse. One reason being the slowdown which India is facing right now. The most common thing being talked about is slowing sales of the automobile sector. The sector was going thru a rapid growth and with so many factors changing and expectations of the changes are slowing it down. I am not ready to link it directly with the slowdown.

The biggest reason due to which the businesses are talking about slowdown is Cash Crunch in the system. Majority of the companies today don’t have access to cash by way of loans, overdrafts, etc, Only a few companies with no debt on the books are in a happy situation today. Let me explain the earlier situation and what changed now in detail below:

Earlier, assume company X goes to a bank and takes a loan of Rs.1000/- Crs, also assume the management has no intention of paying the amount immediately. Cannot be termed as a fraud, but had the intention to use the money for a long time, maybe called as overzealous.

When the due date arrives to repay this 1000 Crs, the company goes to another bank and asks for a loan. Gets the loan and repays the first bank. The first bank actually ends up rating the company in high regards since they paid on time. Factually the amount still remains with the company.

When the date arrives to pay the second back, the company goes to the first bank again and the bank this time is happy to lend them double the amount since it was repaid on time earlier. Such loans kept on building up during the period 2004-2014 under the economist PM, these loans today are popularly called as NPA’s.

Then the government brought the IBC Law. Where in the government has made it clear to all those having debt that, it’s there problem and can’t depend on the banks and taxpayers money anymore? It’s their problem, they took the loans and now pay them back or they may lose the control over the company and in certain cases if found that the money was being diverted may end up in jail.

The result: Most companies are repaying or reducing debt.

Few examples: Emami recently sold a stake to reduce debt, Apollo Hospitals sold their Health Insurance business to HDFC to reduce debt, Anil Ambani is selling everything he owns under the sun to repay debt, there are many such examples.

Even the Chartered Accountants are feeling the heat.

Above all the IL&FS and DHFL issues have aggravated the problems.

Hence the slowdown! But go to any hotel, any resort, any airport, any mall and you may end up asking what slowdown! Even a few car models are overbooked right now.

This too shall pass, don’t let the bad times pass by simply, use the opportunity. We are seeing a severe cleaning process right now. In the end, we will have cleaner companies and balance sheet. You get the point right? Call up your advisor and ask which segment and which sectors to invest in right now. Invest more now, you won’t regret few years down the line.

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Happy Investing

Vivek Karwa

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