Some thoughts on current situation and a few stocks that I find attractive

Friends – 

India has 1,85,000 positive cases of Coronavirus as of today.

With the number of cases is doubling every 13 days – by June end, we should have around 7 lacs cases with daily 25,000 new cases being reported (right now US has around 18 lac cases). If this trend continues, by July end we could have 25-30 lac cases and appx 1 lac new cases per day.

Seeing the kind of movement of people across India, we know that livelihood has taken precedence over life. Lock down and physical distancing is not an option for many – it is, in fact, a luxury that only a small percentage can afford in India.

The govt has left it to each individual to take his or her call – there are a few guidelines ( 6 feet distance / washing hands / usage of masks etc) – and there is some level of imposition of these thorough police fines in cities – but, in principle, the govt has left it to the individual to decide his or her laxman rekha.

Here is a risk example that is similar.

We all know that going out on the road is risky – we can have accidents and get injured or get killed. But that does not stop us from going out – the govt has also put in some guidelines (traffic rules) and we all follow (to some extent) the rules as well – but we know we all carry a risk on the road. But that does not stop us from going out.

It is similiar now with the virus situation.

Each one of us will carry the risk of getting infected. 

How much risk we take depends on us. 

The virus will come to us in the coming months. Maybe it has already come to us and we are asymptomatic. 

Till we know that we are immune – each individual will be as careful as he/she can afford.

Immunity will come either by vaccine or by herd immunity. Either way, it is at least 18 months away (Sept 2021). 

Sweden which took the decision to go towards herd immunity and not lockdown has only 8% of the population that is immune (has antibodies) as of May end. So it will take time to get to herd immunity.

It takes time to develop the vaccine – even if one is developed – we have to make billions of doses and get the logistics in place to deliver it to each one of us – all that will take time.

Before Sept 2021, the virus is likely to reach us – there is no hiding from it. 

It does not mean that we have to be afraid of the virus – there is a very high chance that we will get through this pandemic with just a fever.

But till we get immune – we will have the fear – we will spend carefully.

We will postpone our discretionary expenses.

We will buy essentials (e.g. roti ) but not buy discretionary (Kapda and Makaan). 

So if you are a company with a product or service that is discretionary – your top line and bottom line will take atleast 18-24 months to get back to pre-corona virus days. So industries like FMCG (essentials) will be OK – but if you are in automotive or in tourism – there is a good chance that your company will struggle for the next 18-24 months.

Many companies that are financially weak (means they have large loans) – will collapse due to interest burden and will be targets for acquisitions. 

We had under-estimated the speed of recovery. There is no V or U shaped recovery for most industries – it will be a 18-24 month slowdown with a hope that once the immunity is reached, people will start to spend like before ( that is also a hope as of now – nothing can be taken for granted).

Sensex was around 41,000 in Feb mid – it is around 32500 now – a 21% drop. 

In our current portfolio, we just need to see that we do not have companies that are too leveraged or in industries that are highly discretionary in category. The stock market will be directionless and volatile for the next 12 months – no real money will be made unless we do short term trades.

But there are good opportunities for those who have liquidity and a two year or more time frame – there are stocks that, I think, are good to BUY through a systematic investment plan  – buy every fortnight so that we can keep buying it for the next few months on days when the market dips.

Some of the stocks that I find attractive are (these are not BUY recommendations and you should do your own analysis):

• ITC –even though its cigarettes business is the cash cow – t the non-cigarette FMCG business is the star and is now 1/3^rd of HUL in size. This business is now reaching scale  – it has a EBIT of 3% where as HUL has a EBIT of 10-15% ( depending on the product category). In the coming five years, ITC’s EBIT should grow to 7-10% and this should rerate the stock.
• HDFC bank – This stock has fallen almost 30% from its mid feb process – when times are tough, in the banking industry, those will strong balance sheets and liquidity will have an advantage. HDFC bank has both.
• Bajaj Finance – this stock has fallen by 50% since Feb mid and here we are betting on the management’s ability to steer the company back to health. I do not think any one doubts the management’s capability in this case. 
• Bajaj Auto -this is an export power-house when it comes to two wheelers and three wheelers – it has an export share of around 50% in motor cycles and 70% in three wheelers. Due to this, the operating profit margins are 24% as compared to Hero motor’s OPM of 18%. The current PE of of 15 Bajaj Auto is the lowest ever in the past ten years – the median PE is around 19.5.
• Hawkins – a very strong brand with a focused approach in a duopoly market and with low re-investment and a very high ROE ( a 50% ROE vs around 17% ROE for TTK Prestige) makes this an attractive stock.
• Interglobe aviation – Indigo is a well-run company – focused on operational efficiencies. When times are tough – only the toughest survive. The stock has fallen 40% since Feb mid and should get back to older levels in 18 months.