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Hbj capital ventures llp monthly newsletter [april 2013]

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  • 1. Mar`13 HBJ CAPITAL VENTURES LLP Annual Newsletter: HBJ Capital Ventures LLP To The Partners & Co-founders, HBJ Capital Ventures LLP, #912, 1F Main, Girinagar, BSK 3rd Stage, Bangalore – 85, Karnataka, India Dear Partners, The Month of April has been pretty good for Indian Markets with the broader Indices gaining around 4% in the last 30 days. The biggest news flow of the past month has been the decline in Commodities and Gold prices. These as such spell Big Positive for India's Macro Economic indicators with the country being a large net importer of these Items. More over the bigger gains will get accrued from the decline in Gold Prices which will not only reduce the Current Account deficit but also revert back some sort of savings back into the Financial system which has got little incremental flows over the past 5 Years. There is a separate Macro Economic write-up attached with this letter to get you a Global perspective as requested by some of our Esteemed members. Before that, let us get a Quick update on our Portfolio performance. It can be clearly seen that the Uptick in the Portfolio, shows the Relative Quality of our stock picks compared to the general Mid-Cap and Small-Cap stocks. All stocks would fall in a broad Market meltdown, but only Quality Businesses and Stocks recover and give Profits to Investors. Our Portfolio has a lot of Quality Stocks and the Risk involved with a tough Economy doesn't apply to most of the Businesses except for Companies like Sanghvi Movers which is totally dependent on Investment cycle in the economy. This leaves our Portfolio in relatively better terms and we would continue to maintain a Solid portfolio of diversified Businesses, which will help our Clients to beat Markets and earn Good Returns. Two of our Main stocks, Indiabulls Financials and Cera Sanitary ware has declared absolutely high Quality results and hence, increasing our Confidence in the future returns of the Portfolio. Indiabulls especially continues to be on a very High Dividend payout spree with the Total Dividend of 20 Rs/ Share, for this Year. We believe the company continues to perform extremely well and the Re-Rating #912, 1F Main, Girinagar 2nd Phase, BSK 3rd Stage, BLR - 85 Page 1
  • 2. Mar`13 HBJ CAPITAL VENTURES potential is very strong in the stock. Cera has posted Good results and it can LLP continue to compound consistently at decent rates for several more years. We expect most of our Portfolio stocks to deliver good results and hence the Portfolio will continue to perform decently going forward. Macro Economics is never clear and hence instead of trying to predict all the several interlinked variables which are beyond prediction, it's good to Buy high Quality businesses at decent prices and stay Invested for longer as that would make sure that you protect and grow your Money. Our Macro Economic Views :Disclaimer : These are just our Interpretations of several Macro factors at play currently and how we see it going forward. Our Stock picking and Portfolio management doesn't get affected by these as we continue to be Bottom-Up Stock Investors. Globally, Equities of developed Markets are on a Fire with the US and Japan stocks continuing to touch new Highs. The Relatively Higher yields of Stocks compared to Bonds in a subdued Interest rate environment, has left very few areas for the large Liquidity to flow in. Also some structural Improvements including Yen depreciation, reduction in USA's energy dependence and Improving competitiveness of their Economies are adding to this argument of Bull Markets in developed markets. One of the most important events of the past few months has been the Improving consensus towards the need for continuously Higher liquidity and low Rates with higher Fiscal Deficits till a Solid Economic recovery, as proposed by Keynesian Economists primarily led by Paul Krugman. With the USA coming back to its feet and the Austerian Europe finding it tough, the arguments seems to have a clear winner at this point. We have seen that both Europe and Japan starting to follow this US model with low Rates and Higher Government spending. This has ensured that Global Liquidity continues to be abundant and then why does, Commodities fall which should also be a beneficiary of this Liquidity ?? Generally Commodities are required in large Quantities in the phase of an Emerging economy and growth of Developed Economies has little effect on Commodity prices. With a sharp slowdown in Emerging Economies, the commodity prices has softened. All these has led to a huge shift in Liquidity towards Developed Markets equities with a few even calling the Markets to be in bubble territory. While there has been so much of Mixed signals regarding Global growth, we believe that India #912, 1F Main, Girinagar 2nd Phase, BSK 3rd Stage, BLR - 85 Page 2
  • 3. Mar`13 HBJ CAPITAL VENTURES continues to be one of the beneficiaries of a falling Commodity markets. This solves LLP several problems of India's Macro economy including the Twin Deficits of Fiscal and Current Account. While some Indian Economists argue that RBI should not cut Interest Rates and instead deal with stubbornly High Inflation and get back Financial Savings into the system. They argue that a shock treatment of Currency depreciation is required to get the competitiveness back into Indian economy and return it to High growth path. But we believe that this View point is flawed and would die down just as the Austerian economic viewpoints went away. Our understanding is that the biggest problem in India currently is the drop in Financial savings led by diversion to Physical Savings of Gold and Real Estate. This has been primarily due to the High Inflationary expectations set into the system. We believe that the Inflation would not go down by Rupee depreciation, instead it would make it move up considering the Inelastic Import demand of Oil and Gold. While the increased Gold prices would make Indians crave more for Gold and make the Financial savings worse, higher Oil prices would make the Fiscal deficit look worse leading to a bad Vicious cycle. Hence this is, never the solution and it would create huge pain which would be long and un-necessary. Even the so called improvement in Exports will be temporary considering the price arbitrage of Currency depreciation would not sustain without Structural reforms in the economy. The stubbornly High Inflation of Manufacturing Goods has been killed to an extent and there is no froth left in the system. Most of the remaining Inflation continues to be Supply side based and hence RBI has very little influence over it. With the Government's Financial team under Chidambaram taking proper actions, we believe that the pressure from RBI need not be very strict with a phased reduction in Interest rates going forward. Government's focus on DBT (Direct Benefits Transfer), GST, FDI approvals would improve the productiveness in the economy and even at this cost base, the country can expect to have a strong Exports base. Hence the Painful solution is not necessary and is a bad argument. The only area where India is losing competitiveness fast is in areas of Industries which require Large Land areas and we feel that Government will need to act on deflating the Land Bubble. The only issue here is the Vested Interests of Big and Powerful politicians in letting this bubble continue as Black Money currently has very few areas to be deployed. We believe that with these Improvements together with falling Commodity prices would lead to a Virtuous cycle leading to better Economic prospects going #912, 1F Main, Girinagar 2nd Phase, BSK 3rd Stage, BLR - 85 Page 3
  • 4. Mar`13 HBJ CAPITAL VENTURES forward. The only problemLLP sustained Asset bubbles which can get fueled can be the by Global liquidity in Emerging economies like India. High Yielding assets like Emerging Market debt can suck up liquidity leading to even more dependence of India's Economy on Global capital flows. While developed economies continuing to struggle to generate Demand and not so rapid change in the Demand mix, we believe that countries like India with improvements in their Macro Economies can emerge as huge Winners in this Liquidity Boom if we set the Policies right. These can be seen from the recent Buy back from Unilever of its subsidiary HUL's shares. The primary reason for this is the low Yield for its Capital in their Home markets and the attractive growth prospects in India. The withdrawal of Liquidity in Global markets would be a delicate decision and if our Policy makers don't have the right set of Capital controls and we get hugely addicted to the current Global Liquidity, withdrawal of Liquidity would be hugely painful for India. While all these predictions have several Variables with little certainty, we believe that the current situation of Global Liquidity and falling Commodity prices are good and we shall hope that India continues to perform well. Again to re-iterate the point, Macro Economics would never be clear and we would continue to see Un-Certainty in some form or the other. In fact, you get consensus on the future of the Economy only during a Bull Top or Bear Bottom. But that doesn't limit an Investor from making returns in Stocks. While we can have some dry spells, Markets will continue to give good Opportunities for Long term Investors. Regards, [Principal Fund Manager, HBJ Capital Venture LLP] Date: March 31st 2013, Place: Bangalore, India #912, 1F Main, Girinagar 2nd Phase, BSK 3rd Stage, BLR - 85 Page 4