Category Archive : Stock Market

Dec 2018 State Election Results – Impact & Analysis

Dec 2018 State Election Results

Why Positive Markets?

The market was expected to be negative and have a downward direction. But surprisingly, the market was in green.

The market was positive even after the news of RBI governor Mr. Urjit Patel resigning and even after BJP losing in all the states.

The reason behind this is that, days like these, example election result days, are managed by Domestic Institutional Investors (DII’s). And LIC is the biggest participator of this management. Almost `2,200 crores worth buying was done by the DII’s. That is why one should look at the reactions of the market on the next day, or after one week or one month or 3 months. Next 3 to 4 months are going to be very crucial to note the market reactions. The markets will remain volatile until the Lok Sabha elections in 2019.

Staying & Getting in the market

Until the general election the market will remain a little sluggish.

This is the best time for investors to develop their portfolios.

Investors having SIP’s should not stop them and continue with their SIP’s.

Investors should not make excessive and bulk buying right now. There might be some good buying opportunities in the coming months.

Resignation of Who is the New RBI Governor

Mr. Urjit Patel has resigned from the post of RBI governor stating personal reasons. But it is not confirm whether they were really personal reasons was there too much pressure on him. One reason behind the resignation could be that, the RBI has a lot of Reserves & surplus with itself. The government wants to, in this bad economic condition especially agricultural sector, use this reserves & surplus. This will provide a support to the economy but also has some political advantage.

The Real Market Reaction

The market went positive even with two negative events (RBI governor resigning and BJP losing in elections). Obviously, the reason as mentioned above was the management done by the DII’s. The actual market (one which is not managed) will react after all the current fuss settles down.

Future Election Results Economy & Markets

It can be noticed since in 2014 is that the elections results have been clear. That is whatever the result, there was clear majority. The democracy (or the people) have clear stand on who they want. This is a good sign and very good for the markets and the overall economy.

Even if coalitions happen, they should happen before the elections and not after. Coalitions made before the results are more beneficial to the market and economy.

In the future elections too, clear majority should be preferred. This will definitely have positive impacts.

Suggestions for Investors: –

  • Don’t stop the SIP’s and keep investing stagnantly and manage the allocations continuously.
  • Lump sum investments should be avoided. (Except for in the case of market experiencing huge corrections)
  • The fundamentals studied for selection of investment should be done carefully.

HUL Acquires GSK Consumer Healthcare Ltd

There were many players involved in the race to acquire GSK, some were private equity players. Even Nestle was one of the front runners in the acquisitions race. But GSK thought the all-share deal with HUL will be beneficial.

It was an all-share acquisition. No money was paid. There will be direct share swap. GSK investors will get HUL shares. No need to take loans and create debt. Both the companies are virtually debt free and they are going to continue enjoying this.

First lets the compare the two companies on certain parameters

HUL

GSK

Rs. 3,91,000 croresMarket Cap (as on 5th December 2018)Rs. 31,700 crores
Rs. 36,408 croresTrailing Twelve Months (TTM) SalesRs. 4,600 crores
Rs. 5,700 croresTrailing Twelve Months Net ProfitRs. 851 crores
66.84P/E Ratio37.05

Summary: –

  • The market cap of HUL is almost 12 to 13 times that of GSK.
  • A significant difference can be noticed in the TTM Sales (revenue) as well of both the companies.
  • There is a noticeable difference in the Net profits (PAT) too of these companies.
  • According to the P/E ratio, the investors are giving less price to GSK as compared to HUL.

Now, let’s understand the P/E ratios of these companies: –

HUL

GSK

109%Return On Capital Employed32.53%
77.57%Return On Equity21.18%

Summary: –

  • ROCE
    • A company which has higher ROCE get higher valuations in the market. Thus, because of high ROCE of HUL it has high P/E ratio.
    • The vast difference between the companies’ ROCE is the reason behind the difference in their P/E ratios.
  • ROE
    • The huge difference in the ROE of both the companies too causes the difference in their P/E ratios

Share Details

After the acquisitions, every 1 share of GSK will attract 4.39 share of HUL. For example, if you have 100 shares of GSK, then you will get 439 shares of HUL.

Acquisitions Benefits to the Foods & Refreshment Business

Foods & Refreshment Business is worth Rs. 6,500 crores. Total sales of HUL is of Rs. 36,000 crores. Thus, 18% of the revenue of HUL comes from foods & refreshment business.

It should be noted that it is in this business sector only that all the products of GSK are going to be added up. So, if we add Rs, 4,600 crores of GSK, then the foods & refreshment business amounts to almost Rs. 11,000 crores.

Distribution Network Benefits

HUL currently reaches to 80 lakh outlets with a predicted number of 1 crore outlets in the next year. For GSK, Horlicks, their main product, alone has reach of around 25 lakh outlets.

Therefore, after the acquisition, HUL will experience double digit growths in their distribution network. The synergies of the companies will yield better reach.

Double digit growth, greater outreach, better synergies, increase in margins as both have same operating profit at 22% will be advantageous to HUL in every way. This will also lead to increase in HUL’s share price.

Products Acquired by HUL

  • By Indian entity of HUL
    • Boost
    • Maltova
    • Viva
  • By Unilever, parent company of HUL
    • Horlicks

Unilever acquired Horlicks because it plans on selling Horlicks globally. As a result, HUL will pay a certain royalty to Unilever on sale of Horlicks in India. (the royalty amount has not yet been disclosed)

Ownership Details

Previously, Unilever’s ownership in HUL was 67.2%. Post-acquisition, this ownership of Unilever in HUL will become 61.9%. This decreased ownership of 5.3% has gone to the investors of GSK.

All in all, this is a win-win deal for both the companies.

Why Mutual Funds and Not Direct Stocks?

According to the report (till 2017 data) by Economic Times, it revealed that only about 4.5% of the total market capitalization in India is held through mutual funds. But, direct stock holding by individuals is nearly 22% of the market capitalization. This shows that the practice of directly investing in stocks is more favorable to a select group of Indians with strong purchasing power.

Choosing between the two kinds of investments depends on a person’s risk taking ability. It also depends upon return expectations and the ability to manage a share portfolio. The recent years have seen a lot of investors move from direct stocks. An increasing percentage of the average Indian population is turning towards mutual funds.

Here are a few reasons to buy mutual fund instead of stocks:-

1] Affordability –

Generally, to have a well balanced portfolio, you would need to have about 25-30 stocks in your portfolio. This can lead to a good mix of performance and stability. Such an approach can be achieved if you have a large enough corpus. As an individual, you may not have enough funds to create a adequately diversified portfolio of stocks. Mutual funds provide instant diversification. You receive diversification benefit without investing a huge corpus when you buy units of the mutual funds that are spread across several stocks.

For example, if you want to buy 1 stock of Maruti Suzuki India Ltd, you will have to spend Rs 9701 (closing as on 23rd July 2018). But if you buy a Mutual Fund which has allocation to Maruti Suzuki India Ltd stock, you can do that with for just Rs 500 as well.

2] Flexibility –

With stocks, you have to open a DEMAT and a share trading account. You have to do complex analysis on companies and sectors. This analysis has to be done to understand which stock to buy, know when to sell stocks, pay commission on each trade you make, and more. It is very convenient to invest in mutual funds.  Everything gets done for you for a very small management fee. Online platforms make it even easier to invest in mutual funds. They do fund selection, annual portfolio review, automated investments and more, completely online. Exiting mutual funds at any time is very easy. Mutual fund redemption procedure is quick, simple and transparent. Switching between funds can also be done in mutual funds.

3] Transparency –

Mutual funds industry is regulated by SEBI. SEBI oversees the functioning of all the security exchanges’ in India and sees to it that there are no malpractices performed. The stocks and bonds that a mutual fund invests in are publicly available every month, so if required, you can see what your fund manager is doing. A good fund management company should make all the information on funds and their functioning, available to an investor in the form of factsheets, portfolio statements, etc. on their website.

By the instructions given by SEBI, AMC’s do the following things:-

  • Transparency in purchase and sale price: – NAVs are declared and published on daily basis.
  • Transparency in portfolio of fund: – AMC’s disclose their portfolio details at regular intervals and investors can view the portfolio of the fund they have invested in.
  • Transparency in investor’s account: – Simple one pager account statements are sent to investor

4] Expert Fund Management –

Thorough research on companies and on the industry is required before investing in stocks. Whereas, mutual fund houses have professional fund managers along with a team of analysts to do all the research before picking the right stocks. They keep tracking them and use their skill sets to derive higher returns and mitigating the risks. Keeping watch on performance of every stock in your portfolio is not possible for every investor. Whereas, professional fund managers of mutual funds do this for you.

5] Diversification –

Mutual funds are based on the concept, “don’t put all your eggs in one basket”. This is known as diversification.

It requires good amount of money to create a good diversified stock portfolio. This limitation of stock investment is overcome by mutual funds. This is so because mutual funds receive money from public at large. This money ranges from a very small amount say Rs 500 to a large sum of a crore or more. This gives mutual funds huge power to invest in stocks across categories. This is by far the best advantage one can see of mutual fund investments.

But simply purchasing a mutual fund might not provide with adequate diversification. It’s crucial to check if the fund is sector specific or industry specific. For example, investing only in a technology and IT mutual fund might spread your money over fifty companies. But if stock prices of those stocks fall, your portfolio will suffer.

why mutual funds and not direct stocks

Market Emotion Cycle

It’s important to understanding that traders have specific emotions which have varying magnitude. This understanding is critical to learning how either you or another investor might behave. There is a cyclic process of psychology that explains the relationship between our feelings and our judgments.

The knowledge of this cycle can help you very much in your own trading. Following are the main stages in the market emotion cycle:-

1] Optimism –

The average investor enters the market feeling optimistic. It all starts with a hunch or a positive outlook leading us to buy a stock. We generally expect things to go our way, or may also have high expectations for the returns they will experience. Here, we feel positive about our investments and the overall market.

Example – Period of year 2004-2006 was time of Optimism.

2] Euphoria –

At the top of the cycle is when investors experience euphoria. This marks the point of maximum financial risk but also maximum financial gain. Our investments turn into quick and easy profits, so we begin to ignore the basic concept of risk. We now start trading anything that we can get our hands on to make money. We fool ourselves into believing we can beat the market, we cannot make mistakes. Also, that excessive returns are ordinary and that we can tolerate higher levels of risk.

Example – Year 2006 -2007 was time of Euphoria

3] Fear –

Reality sets in that we are not as smart as we once thought. Instead of being confident in our trading we become confused. Many people will then start to act defensively. They may think about switching out of riskier assets to more defensive shares or other asset classes such as bonds. At this point we should get out with a small profit and move on but we don’t for some reason.

Example – Feb-June 2008 was time of Fear

4] Panic –

This is the most emotional period till now in the cycle. We are clueless and helpless. At this stage we feel like we are at the mercy of the market and have absolutely no control. In this phase of the cycle, the realities of a bear market come to the fore and an investor may become desperate. Many panic and withdraw from the market altogether, afraid of further losses.

Example – Sept 2008 – Jan 2009 was time of Panic

5] Depression –

We think to ourselves how we could have been so dumb. While the investor drowns in depression, the market hits bottom and gives way to a new bull. Some start to look back and analyze what went wrong. Real traders are born here, learning from past mistakes.

Example – Feb – Apr 2009 was time of depression

6] Hope –

We can still do this! As the market continues to strengthen, the investor is hopeful that the market will continue up. Eventually we come to the realization that the market actually does have cycles. We begin to start analyzing new opportunities. We start considering new investments. Also, our confidence about the market grows.

Example – May 2009 till Mar 2010 was time of Hope

market emotion cycle graph
market emotion cycle

Characteristics of Trading

India is an emerging market for trading, and is fast becoming a market for future growth. At present, only a very low percentage of the household savings of Indians are invested in the domestic stock market for trading, but with GDP growing and a stable financial market, these investments may see a rise.

Trading everywhere has some basic characteristics, which are :–

1] Frequent Trades –

Trading involves frequent buying and selling of commodities, currencies or other securities. Frequents trades help take advantage of the fluctuations in the market. Trading practice generally is buying when the market is down and selling when the market rises to its maturity and is about to fall again. Even smallest changes in market give high profits through frequent trades.

Some financial advisors and trading institutions advise not to make trades frequently. By engaging in frequent trading, the trader may increases the costs of buying and selling. This in turn reduces the overall returns.

 “What seems too high and risky to the majority generally goes higher and what seems low and cheap generally goes lower.”

– William O’Neil

2] Short term Gains –

Trading helps to earn short term gains by taking advantage through volatility through buying and selling. Even smallest volatility can give high gains. Short term gains are helpful in satisfying the currents need and fulfill the short term goals. Short term gains increase the corpus available in the longer period.

In theory arbitrage profits (short term gains) may seem possible, but practically they are not possible.

3] Short Term Approach –

Trading has a short term approach. This approach can be very lucrative, but it can also be risky. In trading, investment period can be as short as few minutes. Investments are bought when the market is low and are sold immediately when they rise even a little.

To succeed in this approach, traders must understand the risks and rewards of each trade. They must not only know how to spot good short-term opportunities, but also how to protect themselves. Some basic steps to be followed are – watch the moving averages, understand overall cycles or patterns, and get a sense of market trends.

 “The four most dangerous words in investing are: This time it’s different.”

– Sir John Templeton

(Any time you hear that things are different this time, invest as if things are the same as they always were.)

4] Focus –

In trading, complete focus is given on short term aspects. Basically, trading is short term and therefore its focus is also on short term opportunities. Trading focuses on finding out short term trends of underlying asset’s price movements. These short term trends in price movements can be analysed and sometimes predicted. Thus, gains can be made by focusing on short term trends in price movements.

Focus should be on trading process and not trading results. Overall trading results are the end game, i.e overall results should be the focus in trading. A trader must look at the big picture.

5] Technical Analysis –

Technical analysis is the forecasting of future financial price movements based on a study of past price movements. Technical analysis does not result in absolute predictions about the future. Instead, technical analysis can help investors anticipate what is “likely” to happen to prices over time. Technical analysis uses a wide variety of charts that show price over time.

Technical analysis is the most important part of trading. Technical analysis provides the entire base for making decision about trading. For this, charts and graphs are used extensively. Charts and graphs help understand various patterns, trends, etc on the basis of which trading decisions are dependent. Technical analysis provides with information on the past performance of an investment instrument, current performance of that instrument and its future probabilities.

“The stock investor is neither right nor wrong because others agreed or disagreed with him; he is right because his facts and analysis are right.”

― Benjamin Graham; The Intelligent Investor

( Stock prices ultimately go up because companies perform and the profits go up. They do not go up sustainably because of people’s speculation. Facts and analysis ensure that any uncertainties that an investor may have are satisfied leading to lower risk and good profit margins.)

Characteristics of trading.png

%d bloggers like this: