Limit exposure in high-debt companies ahead of elections
Limit exposure in high-debt companies ahead of elections, say analysts
NEW DELHI: Although benchmark indices are hitting fresh record highs on a daily basis in the run up to election results which are due on May 16th, analysts advise investors to remain cautions of companies which have high debt-to-equity ratio.
Investors should focus on companies where the fundamentals are strong and earnings visibility is decent. But that doesn't mean that they should avoid that space completely but the idea should be to limit exposure in high-debt companies.
"I advocate a small exposure to these, because with all these companies, the assets are in place, where the utilisation is very low because the economy is doing badly. If the economy starts to pick up and utilisation levels pick up, then the returns could be disproportionate in these," said Jyotivardhan Jaipuria, HOR, BofAML Capital (India).
If you look at the enterprise value of these companies, it is very high, but if you look at the market cap of these companies, it is actually very low as a lot of the enterprise value in fact is comprised of debt, say analysts.
Economic recovery could be led by pick-up in infrastructure project execution, so companies in cement, engineering and banking shall benefit from such a trend.
Jaipuria is of the view that investors can look at high-debt companies in the infra and real estate spaces, because that is where a big change can come about if things start to improve.
Most analysts are of they view that these companies will only pick-up once they start working on their balance sheet and bring down the debt element in their books. In that case the returns could be disproportionate.
"We have not been really so positive on companies where there is balance sheet issues and with high debt equity ratio, because we think it is still not a time where you would see a significant and unless the companies are going in for de-leveraging and doing asset sale," said Mahesh Patil, Co-Chief Investment Officer, Birla Sunlife MF.
"We do not expect interest rates to come down in a hurry and these companies' weak balance sheets would not be able to capture any revival in the economy to be the stronger companies with strong balance sheets," he added.
Although analysts do not rule out a pop in the stock prices now and then because of the undervaluation but they don't think the bounce to sustain.
Most of the companies deferred their investment decisions largely on account of higher interest rates and slowdown in global and domestic demand. Companies with high debt to equity ratio may benefit if the RBI lowers interest rates or takes a dovish stance.
The growth in GDP has already touched at 4.4 per cent and is expected to be better than 5 per cent in FY15. This alone will trigger most of the corporates to increase the pace of implementation of stalled projects of most of the companies, say experts.
"Rather than what the government will do going forward, let us look at what the government has done in the last 18 months. A lot of steps were taken in to revive the investment cycle, especially in sectors like oil and gas, power, and roads," said Sanjay Dongre, Fund Manager, UTI Asset Company Pvt Ltd.
"Therefore, my sense is that post elections, removal of the bottlenecks in some of these sectors may prompt most of the corporates to increase the pace of implementation of the stalled projects," he added.
Economics Times
Thanking you
Regards,
Rajesh Kumar Kathpalia ¤ SMC Global
17,Netaji Subhash Marg,Daryaganj,
New Delhi-110002 Mobile No 9891645052
Email Id: rajesh.ipo@smcindiaonline.com
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NEW DELHI: Although benchmark indices are hitting fresh record highs on a daily basis in the run up to election results which are due on May 16th, analysts advise investors to remain cautions of companies which have high debt-to-equity ratio.
Investors should focus on companies where the fundamentals are strong and earnings visibility is decent. But that doesn't mean that they should avoid that space completely but the idea should be to limit exposure in high-debt companies.
"I advocate a small exposure to these, because with all these companies, the assets are in place, where the utilisation is very low because the economy is doing badly. If the economy starts to pick up and utilisation levels pick up, then the returns could be disproportionate in these," said Jyotivardhan Jaipuria, HOR, BofAML Capital (India).
If you look at the enterprise value of these companies, it is very high, but if you look at the market cap of these companies, it is actually very low as a lot of the enterprise value in fact is comprised of debt, say analysts.
Economic recovery could be led by pick-up in infrastructure project execution, so companies in cement, engineering and banking shall benefit from such a trend.
Jaipuria is of the view that investors can look at high-debt companies in the infra and real estate spaces, because that is where a big change can come about if things start to improve.
Most analysts are of they view that these companies will only pick-up once they start working on their balance sheet and bring down the debt element in their books. In that case the returns could be disproportionate.
"We have not been really so positive on companies where there is balance sheet issues and with high debt equity ratio, because we think it is still not a time where you would see a significant and unless the companies are going in for de-leveraging and doing asset sale," said Mahesh Patil, Co-Chief Investment Officer, Birla Sunlife MF.
"We do not expect interest rates to come down in a hurry and these companies' weak balance sheets would not be able to capture any revival in the economy to be the stronger companies with strong balance sheets," he added.
Although analysts do not rule out a pop in the stock prices now and then because of the undervaluation but they don't think the bounce to sustain.
Most of the companies deferred their investment decisions largely on account of higher interest rates and slowdown in global and domestic demand. Companies with high debt to equity ratio may benefit if the RBI lowers interest rates or takes a dovish stance.
The growth in GDP has already touched at 4.4 per cent and is expected to be better than 5 per cent in FY15. This alone will trigger most of the corporates to increase the pace of implementation of stalled projects of most of the companies, say experts.
"Rather than what the government will do going forward, let us look at what the government has done in the last 18 months. A lot of steps were taken in to revive the investment cycle, especially in sectors like oil and gas, power, and roads," said Sanjay Dongre, Fund Manager, UTI Asset Company Pvt Ltd.
"Therefore, my sense is that post elections, removal of the bottlenecks in some of these sectors may prompt most of the corporates to increase the pace of implementation of the stalled projects," he added.
Economics Times
Thanking you
Regards,
Rajesh Kumar Kathpalia ¤ SMC Global
17,Netaji Subhash Marg,Daryaganj,
New Delhi-110002 Mobile No 9891645052
Email Id: rajesh.ipo@smcindiaonline.com
--
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To unsubscribe from this group and stop receiving emails from it, send an email to Productupdatesforamc+unsubscribe@googlegroups.com.
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