Face-off

 

The strange ties of stocks and bonds, New and Old Economy, oil and demand, and the US dollar with recovery

 

The tussle for supremacy between stocks and bonds is one of the many paradoxes of investing. Both are dependent on each other for survival but feed on each other’s misery. Equities and fixed income securities are chased on signs of the economy blooming but for contrasting reasons: one for capital appreciation and the second to capture the prevalent rate-bearing instruments on expectation of borrowing costs sliding further. The mark-to-market value of a portfolio comprising loans taken by the private sector and the Union government and the central bank improves as lending cost looks set to tumble. A rate-hike cycle to pull back assets from entering bubble territory caps consumption. The valuations assigned to companies based on their projected north-bound trajectory on low-cost money go over the top. There is exodus from debentures and government securities in anticipation of future issuances at higher coupons and yields. The playbook is becoming increasingly visible of late. The rapid rollout of vaccines and a third fiscal stimulus in the US even as interest rates are near zero are sending yields soaring and correcting shares. The return of demand is triggering commodity inflation. Producers are ramping prices, setting the stage for a lingering inflation unlike the flare-up caused by the temporary bottlenecks in getting food and non-food supplies. Snapping up the diving counters is fraught with risks. They might turn dud if the drop continues. Locking funds in NCDs and treasuries might be lost opportunity for higher returns going ahead.

 

The ties of sustenance and destruction are not only between two types of investment vehicles. They exist even between opposing segments and within a grouping with similar characteristics. The shift of inflows from tech stars to Old Economy scrips is a reaffirmation that the regime of soft borrowing is beginning to end. The bout between growth stocks, requiring cash infusion to take off, and value stocks, languishing due to slump in usage during a period of pessimism, is yet another irony. The two categories thrive at the expense of each other. In the absence of opportunities for higher earnings in a low-cost environment, funds gravitate towards emerging areas because of their ability to expand rapidly in short periods. Traditional sectors start attracting attention only when they can reclaim their pricing power. Oil sprang 175% from a bottom a year ago as global economies clawed back to normalcy. The commodity has become a proxy to gauge the health of the global economy. After plunging in April last year as nations hunkered down, prices scaled back after a rapid rise due to renewed shutdowns in the European Union on resurgence of covid-19 infections.  Fall in upstream sales indicates trouble for both the explorer-refiner and consumer. Softness at pumps at the height of the pandemic provided no solace to the grounded aviation players. Prices rebounded when airlines were permitted to undertake flights with certain limitations. 

Industries with low raw material and intermediary expenditure should be a cause for alarm rather than satisfaction because of the transitory nature of the benefit. The initial bounce-back of polymers and paints was based on rural markets, buoyed by good monsoon and cheap credit. These sectors might not be able to maintain their margins with the bubbling of input costs. The recent upward direction of petrol and diesel inhibiting buying of automobiles is one side of the story. The other is the disruption in transport affecting delivery of semiconductors. The problem will resolve as soon as the threat of coronavirus is under control. The smooth resumption of transport will no doubt enable acceleration in output. The outcome will be higher prices of chips as logistic providers re-work their bill. Another confounding benchmark is the US dollar. It weakens, rather than strengthening, during a bullish phase in the US economy, coinciding with loose monetary and fiscal policies. Inflows into the world’s convertible suggest a difficult period ahead.  Investors departed from risky assets for a safe harbor in the greenback during the initial periods of the lockdowns. A strong currency complicates US recovery as its exports become uncompetitive. The Federal Reserve had to pull down lending rates to near zero to diminish the appeal. Those who prefer to stick to their comfort zone, own rather than lend to businesses, or have a long-term horizon usually sit out during one of the alternate phases. Institutional investors, who face redemption pressure at the slightest souring of the mood, rebalance their portfolio to make the best of the two cycles. Volatility is the consequence of such transition.  

 

 --Mohan Sule

 

 

Tailwinds and headwinds

 

Duds become stars and invincible stocks tumble as taste turns fickle in a liquidity-fueled era

 

The rebound of the global financial markets from the bottom over the past year is resembling a tempestuous romance, with its share of infatuation, breakups, and temper tantrums. From being besotted with the Fang club, comprising Facebook, Apple, Netflix, and Google’s parent Alphabet, to turning back on tech for the attraction of Old Economy sectors, and the re-discovery of the charm of bonds, the tumultuous ride has been replete with chills and thrills. The twists and turns in the plot have skewed time-tested theories. Nothing is untouchable. The decision of new-age Tesla to invest and accept cryptocurrency for payment propelled Bitcoin into the mainstream.  The search for the next big bet transformed stocks that would not have merited a second look in the pre-covid era into multi-baggers. Hitching on to the turned around electric vehicle pioneer on envisioning a distant future of road fuel-guzzlers being geared up from neighborhood chargers is understandable. Not so is the craze for GameStop, up 1,861% in seven months, and AMC Entertainment, up 715% in less than a fortnight, amid surging cases of infections, triggering more clampdowns, and the massive US$1-billion valuation accorded to the IPO of loss-making digital storage provider Snowflake. The return to growth of the video rental outlet network in the December 2020 quarter after years of struggle and narrowing of pandemic losses of the world’s largest theatre chain operator was perhaps a message of fatigue with OTT entertainment and yearn for taking back control over the viewing experience. Indeed, the anticipation of a sunny outlook for cloud services by ignoring the dull past seemed a throwback to the era when land banks and page views were the basis for demanding rich discounting in the giddy 1990s.

In India, fortunately, such instances of excesses were rare in the secondary market, largely restricted to the pharma and IT sectors, but abounded in the primary market. Expensive offerings across industries garnered oversubscription, with most listing at gains. Hardnosed moneybags swooned over swashbuckling qualities of daring vision and efficient execution to part with Rs 4 lakh crore for 33% holding in the digital arm and 16.5% stake in the retail arm of RIL at the peak of the outbreak. In the process, the counter’s 85.5% spurt outperformed the Nifty’s 69% gain during April-December 2020, emboldening other issuers. What endeared was the agility of India’s largest private sector company by market cap to draw on the indispensability of telecom services to stay connected during lockdown to recoup from the setback of Saudi Aramco putting on hold its US$15-billion investment for a 20% stake in the oil-to-petrochemical business. Sentimental attachments to entities with a record of good governance and dividend payment was discarded in favor of practical attributes. Fast-moving consumer goods dispensers earning major revenues from health and hygiene products were picked for pampering. Makers of entry-level passenger car and two-wheelers were fancied as they found increasing acceptance from pandemic-weary users keen to avoid public transport. Nearly 17% of the value of the name behind a top-end two-wheeler brand was knocked down in days in January. Passenger vehicles of India’s largest automobile producer were sought but its commercial vehicles given a cold shoulder. Tractors hogged the limelight.

Trending fads had short shelf lives. Value-for-money models are likely to lag premium carriers following skyrocketing fuel prices as the economy looks to normalize. Just like in matters of heart, complacency can be fatal as investors betting on leaders in industries with high entry barriers realized. A capital-intensive or cyclical field is no guarantee of limiting rivalry. The fiscal stimulus-fueled boom put a lost cash in the pockets of those looking for the right catch to avoid future shocks of infidelity and live happily. The roadmap preferred was to become an all-rounder, vested with wholesome appeal.  A cement manufacturer’s decision to flirt with paints was viewed as a strategy to become an integrated player by catering to downstream and upstream consumption. The shaking off a staid segment shocked an entrenched kingpin just like Reliance Jio’s entry, with free voice calls, disrupted a smug façade of first-movers’ pricing power due to shrinking of competition stemming from the huge spectrum acquisition bill. Any which way for those looking for suitable matches, the era of playing by the book appears to be over. The winners in the post-covid-19 world will be those who constantly reinvent themselves to stand out in the crowd.  

  -- Mohan Sule

A year later

 

Despite the pandemic’s devastation being more severe than the September 2008 crisis, the recovery has been swifter

 

With the benefit of a rear view of nearly a year since stocks plunged to multi-year lows as nations prepared to down their shutters, the global medical emergency has offered valuable insights into markets’ stumble and rebound. The crisis differed from past blowouts in two ways. First, the magnitude of the devastation. There was no benchmark, sector or stock that was not swept away by the tidal wave of selloffs. While the Nifty’s 59% loss was spread over 10 months to beginning November 2008 amid the credit crunch, the index shed 34.5% in two-and-a-half months to 3 April 2020. Second, the suddenness with which investors were caught unawares. The Nifty was trading at a steady level of 12,200 for two months to mid-February 2020 before it started losing ground. There were sporadic, but alarming, reports about the breakout of a communicable disease that had prompted China to put an entire city under lockdown. Yet the potency and scale of spread of the deadly virus, which was so mysterious that for many days was known after Wahun from where it originated, was not something that had been anticipated. There were contrarian voices during the dot-com boom warning about the sustainability of the eyeball-based valuations and during the home mortgage madness about the dangers of exotic spliced-and-diced debt instruments. Even the beginning of the end of a cyclical bullish phase has enough red flags for those concerned about prices running ahead of historical earnings growth. Covid-19 was horribly different. There was no roadmap to vanquish an invisible opponent who seemed omnipresent and resilient. There was no knowing how long the war would last.

 

Nearly nine months later, the situation had changed for the better, with vaccines from six different sources in use and more on the anvil. The issue occupying much bandwidth is if the recovery is too fast and too soon. The Nifty rebounded to conquer its January 2020 peak in over seven months after the 23 March dive in contrast to the two years it took from the January 2008 milestone. The journey from the brink to back was not easy. There were restrictions on movements. Supply and distribution chains were disrupted. In the post-covid-19 world, certain ways of living had altered, either permanently or drastically. In the process, new stars were born, some got a fresh lease of life and others a second coming. The steps leading to the re-emergence from the turmoil comprised fear, rescue, differentiation, search for the next big idea and return of risk-taking. The conditions leading to the seizing up of liquidity can be mismatch between revenue inflows and valuations of Internet properties at the turn of the century, miscalculation of the direction of asset prices during the period of low interest rates in 2007, or disarray in production and reach of goods and services last year. The redeeming feature of the latest scary event was the exemption of essential services such as pharmaceuticals, polymers and fertilizers and the discovery of the indispensability of tech. These sectors attracted idle money and rekindled investor interest.

 

With the wisdom of how keeping the lending pipeline de-clogged aided recovery post the financial sector meltdown over a decade ago, central banks quickly loosened supply of no-cost money. Without any too-big-too-fail institutions to rescue to limit the contagion from infecting other healthy parts of the economy, governments resorted to direct cash transfer. In India, vulnerable sections, with the power of lifting other segments of the economy, were identified for support. Assured of a safety net, companies, on their part, cut costs and concentrated on keeping production running. The search for better returns during a period of negative interest rates had two consequences. Picks were not based on headline numbers. The scrutiny turned to niches and specialties. Makers of two-wheelers and farm equipment, insecticides, and health and hygiene products found fancy within their industry. The confidence to embark on the next risky bet, with the comfort of liquidity limiting the downside, resulted in a shift of attention from growth counters to value stocks, temporarily thrown out of gear. Renewal of buying in metals, infrastructure, capital goods and real estate coincided with the phase-wise lifting of lockdowns. If proof is required that the wheel has completed its rotation is crude more than doubling in 10 months to cross US$ 60 a barrel after hitting a bottom and estimates that central banks will likely tighten money flow as early as in H2 of 2021 instead of 2022. It had taken Federal Reserve seven years to lift interest rates from zero after September 2008.

 

-Mohan Sule

A toolkit for recovery

 

India’ graded and targeted fiscal and monetary support should be a template for future economic crises

 

Rarely does a budget pleases all stakeholders. Union Budget 2021 has achieved the impossible feat. The government is satisfied that its intention to gradually withdraw from running businesses, except in four strategic sectors, has been enthusiastically embraced by the market. The Nifty gained more than 11% over the next fortnight. Companies are cheering the 34% increase in capital expenditure. The massive allocation of Rs 5.54 lakh crore to create assets in the coming fiscal year and the allocation of Rs 1.97 lakh crore for productivity-linked incentive scheme covering 13 sectors over the next five years will trigger private investment, essential for growth to sustain. The proposed development financial institution is a break from the piecemeal approach to infrastructure. The targets to build roads, railways and metros will spur offtake of commodities, capital goods, transport, and power. The resultant generation of employment will see higher inflows into savings and investments, apart from discretionary and non-discretionary buying. The surging stocks captured the enthusiasm of investors, particularly after the resilience displayed by most companies in Q3 December 2020 despite the lingering challenges of supply and distribution.  The Nifty Bank index flirted with a new high, spurting more than 11% since the budget, on the prospect of public sector banks cleaning their balance sheets by disposing of toxic assets to a bad bank and getting Rs 20000-crore capital infusion to prepare for the anticipated increase in appetite for credit. The Nifty Realty index galloped 15% in 10 sessions since end January, reflecting the change in the outlook for developers due to the growth-oriented budget, low interest rates and profit booked from a resurgent stock market looking for diversification.

 

There is more on the plate for the cautious investors looking for alternatives to the volatile equities. With the next fiscal year’s borrowings pegged at Rs 12 lakh crore, there is urgency to attract investment to the debt market. Infrastructure debt funds can issue zero coupon bonds below face value to capture current yields. Real estate and investment trusts can get dividend income without TDS to turn them into hot destinations for FPIs. The most significant change is freeing government securities to all categories. The jump in individual clients of brokers even during the lockdown and simultaneous redemption of mutual fund units indicate retail investors are snatching back decision-making from fund managers. Small savings schemes will continue to be an important option for a resources-hungry government. Surprisingly, even the finnicky ratings agencies have been circumspect. Instead of scolding the government for allowing the fiscal deficit to spiral to 9.5% of the GDP this year and to 6.8% in the next, there have been murmurs of understanding. The expenditure splurge, with the potential to bolster inflationary pressure, has sought to be offset by divestment and strategic sale of PSUs and monetizing dedicated freight corridors, airports, and railway infrastructure.

In fact, the four Atmanirbhar Bharat packages have created a new template for pulling the economy back from the brink by marrying loose fiscal policies with calibrated monetary measures. The standard operating procedure of liquidity infusion, found so effective in the aftermath of the credit crunch of September 2008 and repeated during the current pandemic, has been enriched by step-by-step policy support. Instead of dispatching monthly cheques, India deposited cash into the Jan Dhan accounts of the poor. Besides the quarterly instalment in farmers’ accounts, free ration to the urban and rural poor ensured food security. Access to low-cost money was eased for the vulnerable sections. Collateral-free loans to the unorganized sector and partially guaranteed credit lines to NBFCs smoothened the flow of money in the desired direction. The targets were MSMEs for their ability to create jobs, home buyers to set in motion demand for housing-related inputs and farmers, whose disposable income is a magnet for consumption themes such as consumer durables and non-durables. In the process, India has created a toolkit to be mimicked to contain future economic crises. The most heartening outcome has been Prime Minister Narendra Modi’s assertion that damning the private sector is insulting the youth. After the 1991 dismantling of licence raj, which was a covert nod to entrepreneurship but celebrated as coexistence of a mixed economy, the statement in parliament is the most overt acknowledgement by any government of India of the contribution of promoter-owned businesses in the country’s development.

 

 -Mohan Sule

 

Atmanirbhar Bharat 4.0

 

Union Budget 2021 draws a roadmap for growth after previous stimulus packages brought the economy back from the brink

 

 If Budget 2021 evoked memories of Budget 1991, it was not without reason. Both the exercises were undertaken against the backdrop of a perilous situation. If socialist practices had drained India of forex reserves, a global pandemic had sapped resources due to supply disruptions. The economy had contracted in H1 of the fiscal year. Timidity was not an option. After dismantling the licence raj that had turned Corporate India into a cosy club of cronies, India had to wait for three decades for a decisive about-turn on pampered PSUs. Many were draining cash without contributing to growth. Several central enterprises including LIC have been lined up for divestment. Besides IDBI Bank, two more government-owned banks and one general insurance company are to be sold off, reaffirming the intention of maintaining minimum PSU presence in strategic sectors. Additional capital infusion of Rs 20000 crore and the setting up of a bad bank to park non-performing assets will prepare public sector banks to meet the demand for credit as the economy returns to normal due to the vaccination drive, for which Rs 35000 crore has been allotted. If the aim of the three Rs 27.1 lakh-crore, or 13% of the GDP, Atmanirbhar Bharat fiscal packages announced in March, May and November and a series of intervention by the Reserve Bank of India was to support the vulnerable sections through cash infusion and loosening the loan availability to farmers, urban poor, micro-and-small-and-medium enterprises, home buyers and realty developers, Budget 2021 took forward the process by focusing on infrastructure, well-being, and minimum government.

The highest-ever GST collections in December 2020 suggest that the de-railed economy is getting back on track and ready to enter the next cycle of development. The launch of Swatch Bharat 2.0 for waste disposal, after Swatch Bharat 1.0’s nationwide coverage, is illustrative of the Modi government’s ahead-of-the-curve thinking. The unexpected hike in FDI ceiling in the insurance sector from 49% equity to 74% implies the time for incremental measures is over. In addition to spending Rs 1.97 lakh crore over five years on the 13 sectors identified for production-linked incentive scheme, setting up seven textile parks over three years will boost Make in India and generation of employment. The agriculture credit target has been ramped up to Rs 16.5 lakh crore. The outlay on highways and railway infrastructure will be Rs 2.28 lakh crore next fiscal year. Over Rs 3.06 lakh crore has been earmarked for power distributors over five years to upgrade their systems. Allocation to rural infrastructure fund has been enhanced by Rs 10000 crore and micro irrigation funds corpus doubled. Support to MSMEs is up 100%. Capital expenditure will be around 34% more than in FY 2021. The fiscal deficit of 6.8% of the GDP in FY 2022 is to be met, not by higher taxes, but through Rs 12-lakh-crore market borrowings, Rs 1.75-lakh-crore share-sale, monetising non-core assets, and handing over the running of freight corridors, sea- and airports, power transmission assets, oil and gas pipelines, railway infrastructure and sports stadia to private players.

The ease-of-living thrust comprises the Rs 5-lakh-crore AtmaNirbhar Swasth Bharat Yogna to strengthen the healthcare system and the urban water supply and waste disposal missions over five to six years. The gas distribution network is to be expanded to 100 more districts. Various legislations governing securities transaction will be clubbed into a single code. Investors will have a charter of rights. Continuing the targeted strategy implemented in the previous doses to help sectors that have a multiplier impact, the excise duty on petrol and diesel, whose end utilisation might get diffused and dispersed, has been substituted with cess to funnel resources into agriculture infrastructure. Loans to Food Corporation of India will be through the budget mechanism to bring transparency. A timeline for closure of sick PSUs will unblock assets. The tinkering with customs duties was restricted to a few items to promote local manufacturing and cool inflation and not to replenish the treasury. Concerns of rising bond yields due to government crowding out private borrowers are expected to be offset by higher investments by FPIS in infrastructure through development financial institution, zero-coupon infrastructure bonds and debt of infrastructure and real estate investment trusts. The key to success of these measures is the rollout of the reforms. The finance minister and her team deserve applause for attempting to restrict the government’s role to the social sectors.

 -Mohan Sule

 

 

Divide to grow

 

 Instead of one-size-fits-all approach, Union Budget 2021 should mimic the targeted pandemic fiscal and monetary packages

 The market’s reaction to the Union budget can range from temporary exuberance, despondence, or indifference. The exercise always has elements of shock and awe. The comeback of the long-term capital gains tax on equities in the 2018 Budget was expected. There was debate happening about how India was turning into a tax haven. Scrapping of the dividend distribution tax and shifting the burden to the recipients in the 2020 Budget came out of the blue. The old regime had grown comfortably familiar to induce complacency. The introduction of retrospective taxation in the 2012 Budget was disturbing but inevitable. If not, Rs 2500-crore capital gains due from the sale of an Indian telecom asset by the foreign owner to Vodafone would have to be let go after the adverse Supreme Court ruling a couple of months earlier. Some insertions are so innocuous that they sink in only after a scrutiny of the fine print. The backlash against increase in surcharge to 25% from 15% for non-corporates, with taxable incomes between Rs 2 crore and Rs 5 crore, and to 37%, for those earning Rs 5 crore and more, taking the effective tax rate on them to 39% and 42.74%, in the 2019 Budget was brutal. FPIs pulled out almost US$150 billion in the subsequent three weeks. Nearly 40% of them were structured as trusts or associations of persons. The Nifty wiped out all the gains made in the year in the month since the presentation of the budget on 5 July. The misadventure was scotched end August. Each budget, therefore, is unique. It cries of desperation, confidence, or prudence, hinging on the spending record of the government. A dispensation focused on its vote bank will rarely bother about income-expenditure mismatch as when the 2008 Budget granted Rs60000-crore loan waiver to farmers. 

 

The possibility of the 2021 Budget turning out to be a routine ritual is stronger than throwing sucker punches. The checklist of what remains to be done is getting shorter. Standalone peak corporate impost is now a competitive 22%, without exemptions. The September 2019 announcement was two months after the annual event. 2020 Budget revised personal income tax, exempting earnings up to Rs 5 lakh. The rate up to the Rs 15 lakh slab has been slashed 10-15%. The scope for tinkering with the goods and services tax is outside the scope of the budget.  State finance ministers meet periodically to review the levy. Only 19% items have a 28% burden, with 60% in the 12-18% range. Bringing fuels in the uniform indirect tax regime is overdue but unlikely as it will plug a lucrative loophole to boost revenues. The fiscal deficit has already crossed the estimate of 3% and might spiral beyond 5% by the end of FY 2021. The temptation to tinker with surcharge and cess on corporate and personal tax rates will be strong. Going by the Securities and Exchange Board of India’s directive of collecting margins on each intra-day trade, instead of at the end of the day, points to a hike in the 15% short-term capital gains tax. Such a move will blunt criticism that the 500-basis-point difference with the long-term capital gains tax punishes serious investors.

Tempering the excitement of a buoyant capital market presenting plenty of opportunities to squeeze out juice will be the sombre reality of contraction of the economy in H1 of the current fiscal year, and a fragile recovery since then, resulting from the lockdowns to contain the outbreak of covid-19. Any misstep will be a setback to the Make-in-India campaign. At the same time, the circumspection might not last till next February. Turning hawkish will pivot on how fast the economy rebounds. Most multilateral and domestic institutions are forecasting double-digit, and the highest compared with other countries, economic expansion for India next fiscal year. Another important reason why the leadership might not want to spook the stock markets with short-sighted measures to cap borrowing is the elephant in the room: PSUs. The pandemic de-railed the divestment timetable of Air India and BPCL. Successful stake-sale of the long line-up in the space will achieve two objectives: keeping interest rates low and getting funds for social schemes, whose penetration is crucial to win states going for elections this year. Saddled with a huge vaccine bill, the finance minister can take a leaf from the three Atmanirhbar Bharat packages and the central bank’s two major fiscal initiatives during the peak of the pandemic: targeted support. Differentiated import duties based on the country of origin is a potent weapon. The proceeds can be used to enlarge the production-linked incentive scheme and offer subsidies to encourage local manufacturing.

-Mohan Sule

 

The Year of Rebalancing

 

What to do with growth stocks, PSUs, and legacy blue-chips in the portfolio on return to pre-covid-19 normalcy

 

If 2020 was the year of triumphing adversities, the New Year will be a period of introspection. Priorities will change as life gradually returns to the pre-covid-19 normalcy. The vaccination coverage is set to encompass the globe by the first half of 2021. Multiple products will compete on effectiveness and price. The challenge will be last-mile delivery. It is likely the entire western world and the prosperous nations in Asia will have completed the exercise entering the second half of the year. Equities’ rebound from the bottom anticipated the pandemic coming under control eventually. The record-breaking spree that followed is accounting for growth. The question is if the economy, hobbled by disruption in supply and distribution chains, has the stamina to sprint. The aim of the monetary and fiscal packages was to tide over the temporary slump in business. The outcome has been lopsided consumption. The shopping cart predominantly comprises food, hygiene products and utilities. Emerging from the medical crisis, the possibility is that demand for discretionary items will explode. The stock market is already visualizing such a scenario. Traditional industries are attracting attention for their tested business models as against the in-flavor tech providers with plenty of promise at high discounting. Buying is shifting to mid and small caps as investors wrestle with slowing returns of large, safe bets and untapped upside of promising risk-takers.

 

 

The problem is producers of non-essentials have absorbed the major impact of lockdowns. Capital expenditure has been put on hold to conserve cash. They might be not in the best of shape to meet the release of spends. The return to Old Economy boosted crude beyond US$50 in December, indicating inflation is gearing to recoil. Many manufacturers have taken a hike in prices beginning January.  The Reserve Bank of India will not be comfortable with consumer prices beyond 6% and the Federal Reserve will be happy if the 2% target is breached. The rollback of liquidity will begin. Investors’ dilemma will be whether to ignore the pressure on the margins for top-line growth. Companies balancing the pull of revenues and the pressure of higher input costs will see valuations soaring. Obviously, they will be at the top of the market or have a unique presence without comparable peers. In the crosshairs will be banks, expecting improvement in demand. A series of interventions has insulated them from the effects of the infectious outbreak. The central bank allowed one-time restructuring of non-performing loans. The Supreme Court put off recognition of bad assets after the end of the six-month moratorium on servicing. Dear and scarce money will test the mettle in managing slippages.

 

It will be make-or-break time for PSUs.  They have lagged in recovering from the March lows. There is no clarity about their future. IPOs used their monopoly as a bait. Many have minimum public float required to stay listed. Yet they are constituents of benchmarks because of their size. The opening up of practically the entire economy to the private sector has erased even the scarcity premium. Attempts to extract whatever juice is left through offer for sale in dribbles is worsening their plight. The Union government is squeezing cash from those quoting below book value through buybacks. Profitable enterprises have been told to ramp up dividends. The shareholders will have to decide between cutting losses and waiting for strategic sale, triggering an open offer, to unlock value. Some legacy holdings in the private sector, too, are evoking mixed feelings. Besides their foreign lineage and professional management, what is common between HUL, ITC and L&T is their mediocre growth record. Their five-year CAGR in revenues is in single digit and profit in teens. Ex-core competency contributors, tech and financial services now make up nearly 60% of infrastructure player L&T’s turnover. Branded foods, personal-care offerings, apparels, hotels, farm products and paper together consist 55% of cigarette maker ITC’s sales. HUL seems to be ceding space in the hygiene category in favor of the discretionary beauty- and personal-care portfolio, comprising 56% of the profitability. Risk-averse investors looking for longevity and transparency have a difficult choice: A pricey fare whose valuation seems to derive from sticking to being a play on its sector, a chameleon running helter-skelter, with over 30 subsidiaries and associates operating in diverse industries, to overcome its identity crisis, and an ageing thespian trying to be trendy by injecting the growth elixir of happening sectors to experience the adrenaline rush. 

 --Mohan Sule