“What makes the desert beautiful is that somewhere it hides a well.”
Invest speak: The commodity super cycle played itself out over the past decade putting the user businesses under severe stress. Margins of commodity user industries experienced a sustained squeeze as businesses struggled under the load of rising interest rates, falling demand and high raw material costs. Slowly, evidence of falling commodity prices is now showing up. India has however not benefited from these falling prices due to the weak rupee. Our companies are paying the price for the failure of the government to ensure fiscal discipline. This has depressed corporate earnings and distorted the actual cost structure of Indian business. As commodities see a sharper fall in global prices, India’s macros are set to improve significantly. The picture of our corporate earnings will look very different now and earnings expansion is set to accelerate. An earnings upgrade cycle has already begun and this is only going to gain momentum. Production, however, has not grown and will still take time. When production grows at a decent clip, Indian equities will become the toast of the global markets. For now, the businesses growing production refutably will trade at a premium. But, the real story maybe in companies which are struggling to grow now.
Investment Strategy: When you are surrounded by over exuberance, choose your company well.