September 19, 2008

Credit crisis – Impact on us

The crisis is now full blown. I have not seen panic at this scale personally. I have read about it, but not seen it personally. It almost feels as if companies are being targeted one at a time. Lehman went into bankruptcy and AIG just survived through government help, though equity holders have been wiped out (almost). Now it seems the market has moved on to Morgan Stanley, Goldman Sachs and Washington mutual. It almost feels as if the market is killing one company at a time. Scary!

How does it impact us in India?
I think, the impact would initially be limited to companies with Global businesses. So IT companies with revenues in this space could get hit in the short term. However I think it should work out for these companies in the medium to long term as they find new clients, geographies and start growing again. The business model for IT companies is not under threat. However in the short run, IT companies are and could keep getting hit. However I would be worried about small IT companies with high exposure to the Financial and associated sector.

The next in line to get hit could be banks like ICICI bank and others, which have foreign operations and derivatives on their balance sheets. I am currently analyzing ICICI bank and I can tell you that complexity for most banks have gone up.
As I wrote earlier, I exited banks quite some time back when I realized that I could not evaluate the risks correctly. That said, I think none of the Indian banks are under serious solvency threat. The profits could get hit, but most of the Indian banks do not have massive exposure of derivatives. I am analyzing ICICI and other banks from a depositor’s point of view and not from an equity investment point of view. So I am looking at these banks from a safety point of view.

Other than the above two sectors, I cannot think of any broad sectors, which could get hit hard by this crisis.

Second order and higher order effects
What is missed out in most analysis, is the second and higher order effects of an event. Indian companies may not get hit directly, but a recession in developed countries and lack of liquidity and risk aversion is bound to affect us in the medium term.

For the last, 3-4 years almost every asset class in India has gone up. There were all kinds of reasons given for this rise, but rarely was liquidity mentioned as one of the key reasons. Now with the liquidity drying up, I don’t think we will be seeing such double-digit growths in Real estate and other markets.

What am I doing?
I don’t get worried about drops in stock prices. Such drops are a part of the game. When I invest in equity, my main worry is permanent loss of capital and not temporary losses due to volatility.
Personally, I had put my buying on hold for the last couple of months. For some reason, I felt that the markets could go south in the medium term. As a result I stopped buying some time back. However I did not back this hunch by going short, as I may very well may have been wrong. I did buy some puts, but did not build a decent position as I was not sure. I think I should start trusting my gut more.

I am still standing pat and not planning major activity for some time. I personally don’t expect these issues to get worked out in a few weeks and feel that I could be getting better bargains in the near future.

I have a question and would appreciate if some could answer, as I have not been able to figure it out – If the bank/ DP fails, what happens to my shares. Is it similar to a savings account where you can lose your savings or are the shares held by NSDL or someone else and hence I am safe?


Anonymous said...

Following you for quite some time now, I'm bit worried as well, its happening on same way, every sector is getting targeted not even Equity look at the way Currency, Commodities, Bullion, Crude is moving daily is so scary to reflect the reason in real sense. Said to be more stable market US/UK moving on 6-7% from within a single section. I afraid how India will behave tomorrow on these said to be actions from FED underway. Even today only buyer were DII and FII turns out to be seller again. What will be there next step???

Kannan Pothi said...

Your shares are safe as they are with NSDL or CSDL. In US, there is something called SIPC that gurantees even the money held in the borkerage account.

Now I am looking the common stock holders of FRE,FNM and LEH; they are simpley wiped out (Scary). Old LEH shares are now being traded at LEHMQ.PK and there are new stocks of LEH traded at old symbol strting from today. I am not sure the how the US govt is going address the pain of common stock holders of all these companies. No details available yet. There is not from Treasury that they will be buying common stocks FRE and FNM at the proce 0.00001 cent per share through treasury counter. :)

Kannan Pothi said...

Just to save the companies like
One more thing to add...

To save MS,GS and WaMu; now the long term players like pension funds, endowment funds have instructed brokerage house not to lend the shares for shorting.

Investment banks (its own brokerage units) are screwing each other by lending shares for shorting; now SEC gave a stern warning.

Puneet said...

Read the NSDL FAQ
Section XVII Question 6

Also CDSL:
"If any DP of CDSL goes bankrupt, the creditors of the DP will have no access to the holdings in the name of the BOs of the DP and the BOs can transfer their holdings to another DP."

Satish said...

Hi Rohit,

Does it mean that NIIT Tech being a small company and good amount of exposure to BFSI is a exit now in the short term ?


Mahendra Naik said...

Hi Rohit,

I don't think we need to worry about our shares held with DP' even if the bank/DP goes bust. The DP is merely holding the shares on our behalf, they are still registered in our names with the respective companies. Even if the worst of our fears come true & a DP goes bust, I am sure SEBI will evolve a mechanism where the shares could be transferred to a demat A/C with another DP.

Rohit Chauhan said...

Hi all
thanks to all of you who replied via comments and email on my question. that is quite a relief.

gurinder - i frankly have no idea how the market will move. i personally dont track that. if the market crashes and one the companies i am interested in becomes cheaper, i will start buying ..otherwise it is back to reading.

Kanan - i dont think the government should look at protecting the equity holder..on the contrary even the debt holders should take some hit. There is too much of a moral hazard if the government starts bailing out bad decision. the past bailouts have brought us to this situation in the US

satish - i cannot advise you on short term. i have no idea where the stock will go. However NIIT tech's major business is from insurance, travel and mfg. So the current crises could hurt them, but they should be fine in the long term.

mahendra/ puneet - thanks for the feedback

Anonymous said...

Rohit sir,

I have a querry,do you think it is a right time to buy NIIT tech,it is at 93 but technically looks so weak.Market has moved from a bottom of 3800 to 4300 but NIIT tech has not moved from it lows.If buying from a perspective of 2-3 years will it be ok to buy it now at this prize.

Also sir please have a look at HTMT global which looks fundamentally a great company to own.


Rohit Chauhan said...

Hi anonymous
i personally never advise on buying and selling any scrip on the blog. you can look up the posts on NIIT tech on my blog for my views.
i will have a look at HTMT global and let you know my views


perspicacious said...

I read your blog fairly often
Just wanted your view if any on the following companies
1)Deccan Chronicle
2)Sanghvi Movers
3)Opto Circuits
4)Micro Technologies
they are all midcap companies that have high net profit%, high roe, debt equity <1.33 usually and PE of less than 25
do you think any of them are a risk or opportunity
if you have an email id would like to take discussions further. Remember "Investment ideas are rare and precious" :-)

Rohit Chauhan said...

Hi anonymous
HTMT global seems to be selling for less than cash on books. have not analysed the company in detail ...but i really cannot argue against an idea which sells less than cash and the core business is profitable too