Whoever is winning at the moment will always seem to be invincible.
George Orwell
Key Highlights
- Another record close for the market and there is no sign of loss of strength for the market rally. But we should be careful. Why?
- A stock from the public sector has given 1,420 percent in just two years. Which is that stock?
- The real estate sector has gained public interest over the last two – three weeks and there is valid reason for that. But which are best stocks to bet on from the real estate sector?
- A stock that manufactures alcoholic breweries has doubled in last one year. Is it worth buying at current price?
Market Outlook
Nifty50 – the benchmark index of National Stock Exchange – rebounded from last week’s decline to a record close of 17,895.20 for the week. Midcaps and Smallcaps outperformed largecaps during the week. Among sectoral indices, Auto, IT, and Media gained more than 4 percent for the week.
The current market rally is more than two months old. It started in the first week of August 2021, after prices consolidated in a range in June – July 2021 period. Nifty50 is up 12.76 percent since 2 August 2021 and Nifty500 – an index constituting top 500 companies – is up 11.47 percent in the same period.
The strength in the rally will determine whether the market will hold onto the current price levels. A look at the performance of sectoral indices may offer some clues; and here is what we found – all the nine major sectoral indices we track are at record high or near their record high. This can be seen as a validation of the strength in the rally.
Stocks from the IT, Media, and Realty sectors were the outperformers in the rally that started on 2 August 2021. Nifty IT, Nifty Media, and Nifty Realty indices are up 18.2 percent, 25.5 percent, and 24.7 percent, respectively, during the period, while Nifty50 gained 12.76 percent.
Nifty50 was trading at 12,355.50 on 16 January 2020, but the detection of coronavirus in China and its global spread induced lockdowns, instigated massive decline in markets. Nifty50 lost 38 percent of value in a span of two months and traded at 7,610.25 on 23 March 2020.
But, in a surprising move, markets rebounded sharply from the depths of March 2020. The rally that started at the end of March 2020 is now eighteen months long and the current value of Nifty50, 17,895.20, is 135 percent up from the low of 23 March 2020 and, also, is up 45 percent from the pre-pandemic level of January 2020.
There were three factors that contributed to the massive rally of last one and half years – lower prices, massive stimulus measures taken by governments and central banks around the world, and lower inflation. But we don’t have these supportive factors anymore.
The massive rally of last one and half years has taken market prices to expensive territory. Central banks had signaled, over the last three months, their confidence in the sustainability of the economic recovery, and they are thinking of withdrawing the stimulus measures introduced in 2021 to counter the impact of coronavirus pandemic. Moreover, inflation has risen above the comfort level of central banks in major parts of the global economy.
All this means we are leaving an economic environment that was highly favorable for stock prices to an environment that, as previous experiences have shown, is not in favor of stock prices. And it is necessary for an investor to be aware of this change in market environment to make better investment decisions.
What is interesting is that none of these changes are evident in market prices. Market prices keep rising and new record closes are made every week. There is no evidence of weakness in the market rally.
But we need to keep our eyes open as history has shown that change in market trend from positive to negative is always preceded by high level of optimism, high participation in market by retail investors, rising prices, and record price levels.
Stock Discussion
The stock of IRCTC (Indian Railway Catering & Tourism Corporation) gained 27.7 percent last week. The stock got listed on stock exchanges on October 2019 and has created massive wealth for its investors.
The stock closed at a record close of ₹4,876.55 per share last week and has gained 1,420 percent from its IPO price of ₹320 per share. If you had applied for its IPO and got shares worth ₹10,000, its current worth would be ₹1,42,000. And this wealth creation happened in just two years.
IRCTC is a Govt. of India company under the Ministry of Railways and derives 100 percent of its revenue from railways through railway ticketing services, catering services, and similar related services. It has a market value of ₹78,025 crores as on 8 October 2021.
The business of the company was highly disrupted by covid-19 pandemic, resulting in a revenue decline of 65 percent in fiscal 2021 from fiscal 2020. Between fiscal 2015 and fiscal 2020, its sales grew at a rate of 16.4 percent per year and net-profit grew by 31.4 percent.
The stock, at current market price of ₹4,876.55 per share, trades at a price-earnings ratio of 276 and price-to-book value of 53. This is a very expensive valuation when compared to the price-earnings ratio of 27.40 and price-to-book value of 4.48 at which Nifty50 – the benchmark index of NSE – trades.
Investment Analysis
In investment analysis, we focused on the real estate sector last week. We did a basic analysis of six stocks from the real estate sector last week. They were:
- DLF
- Godrej Properties
- Oberoi Realty
- Ajmera Realty
- Capacite Infraprojects
- Sobha Developers
If we find any quality ideas during the basic analysis, we do a more detailed analysis on the stock. From the above six ideas, we find 2 stocks – DLF and Sobha Developers – interesting.
Portfolio Management
The stock of Associated Alcohols (AABL) is up 23 percent last week. AABL manufactures and markets alcoholic drinks, which includes both IMIL and IMFL. In certain states where the company has significant presence, the restrictions on cinema halls, bars, and restaurants were relaxed last week, and this might be the reason behind the stock’s good return last week.
We, AMN Capital, hold shares of AABL and it occupies 6.7 percent of our portfolio. We purchased shares in July 2020 when it was trading at ₹227 per share. At the time, the stock was valued at a price-earnings ratio of 15.14 and price-to-book value of 2.10.
Sales hasn’t changed much since our purchase, but profit is up 60 percent. The current market price of ₹546.15 is 140 percent above our purchase price. The stock currently trades at a price-earnings ratio of 27.50 and price-to-book value of 3.92.
We won’t buy the stock at the current market price but considering the company’s quality and potential, we are fine with holding the existing shares with us.
History shows that there are no invincible armies.
Joseph Stalin
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