In India, When It Rains It Monsoons

02/23/2009 12:05 pm EST


Pratik Sharma

Principal, Atyant Capital Management Ltd.

Pratik Sharma and Rahul Saraogi, managing directors of Atyant Capital Advisors, explain why they think Indian equities look very cheap right now.

It appears that the Indian markets are moving from one piece of bad news to the next.

First, it was the collapse in credit that led to a crash in sales of commercial vehicles and durable goods (financed with credit). Then it was the terror attacks in Mumbai and now it is the fraud at Satyam Computer Services (NYSE: SAY). The final nail in the coffin (or so one is made to believe) will be a fractured outcome from India's general elections leading to a lame-duck government in May.

After a while, sentiment and bad news do not matter. When one can buy the stock of a company that is debt-free, that has the equivalent of its market capitalization in cash and that is trading at two times earnings with a 7% tax-free dividend yield, not much else matters.

What would matter is if the business of the company could deteriorate suddenly by any of the fears and worries possessing a gloomy investor base. The risk of such an outcome becomes significantly diminished when the earnings report of the October-December 2008 quarter demonstrates that the company made more money than before in the worst quarter for the world.

Do valuations matter? When well-run companies with honest and able managements trade at ridiculous valuations for extended periods of time, it is natural for one to cynically assume that there is no linkage between stock prices and underlying company valuations. But over time, the well-run company will transmit that value to shareholders in the form of dividends, stock buybacks, and performance.

As Ben Graham said, "In the short term the market is a voting machine and in the long term the market is a weighing machine."

The problem with patience is that we cannot put a time limit on it. Most of the time, a two- to three-year investment horizon is sufficient for many investments to play out. However, many times this period gets extended due to [other] factors or a series of [other] factors.

As long as the underlying investment is headed in the right direction, it is prudent for an investor to exercise patience. The important thing to keep in mind is that, most of the time (for sound investments), as the time horizon gets extended the potential return from the investment multiplies.

The valuations of Indian equities are absolutely ridiculous. If one has any free risk capital, one must selectively buy Indian equities. There is no way that these valuations are sustainable.

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