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Surfing Through The Indian Volatile Markets

"There is a tide in the affairs of men.

Which, taken at the flood, leads on to fortune" - Julius Caesar

Indian stock markets have been subdued since the 2008 crash of the global markets. Further, with the slowing down of the Indian economy in the last 2 years coupled with the uncertainty in the global trajectory, the Indian stock markets have been through rough charters. The Indian benchmark index has been undergoing volatile movements with the Sensex gyrating in the range of 18000-20000 since 18 months.

Given the fact and understanding that investment in a stock is always a patience driven and a fundamental approach, it has been observed that despite these volatile markets there have been instances having attractive stocks.

Selection of stock in this fluctuating, and therefore vague market requires a thoughtful analysis of the stock's corporate strategy. This includes understanding the management's future business plan and the rationale regarding it. It also requires an observation of how the management maneuvered the company through the past two years' turbulent economic markets. Consistent handling of a company's objectives and realigning them with the economy's flow gives an indication of management's good performance.

The following would be some examples of how the managers have taken a sound decision making and therefore could be a good stock to be considered for investment:

  • Good dividend yield (more than 3%): Such stocks could be good value stocks and their ratios (Book/Price and Price/Earnings) should be closely observed. Further, consistent declaration of dividends by mature companies is a good indication of management's philosophy. The prime return of a mature company's share is dividend and its consistent increase is a good indicator of its balance sheet's strength.
  • Both healthy cash flows and EPS performance: Although EPS is a key performance indicator; however it would be necessary to give equal importance to cash flows statements. There have been instances where accounts are restated (as the management felt that another accounting policy is more suitable). An observation sometimes would reflect that though there is an increase in EPS on such restatements, however, cash flows do not give a strong operational or financial performance view. Hence, companies with strong profit recognition may not be attractive until they monetize them. It has also been observed that for some stocks like those of the real estate sector, cash flow statements are more important than Profit & Loss account statement for judging corporate performance.
  • Globally diversified operations: Companies with global operations that are facing both recessionary markets (India) and recovering markets with a better outlook (example, US). Such companies have an advantage over pure domestic companies since their segmental revenue from abroad (example like US, Brazil markets for some FMCG products) are growing at a better pace and their risk absorbing capabilities are better currently because of economic diversification.
  • Expansion to new markets & innovation driven activities: In the given subdued markets, non core assets which are being disposed off by debt ridden companies are being cherry picked at reasonable valuations. Such purchases are being undertaken by companies with strong balance sheets. Another way of expansion is entering new geographical markets - for instance, it is a better market to negotiate a long term leased space for the restaurant companies.