Current inflation levels are around 15% as per official figures. The deposit rates are below 9%, so we are looking at negative real interest rates. The demand for food and commodities looks strong in India. Very strong unmet demand for housing, despite the murkiness of the real estate business. On the other side, the sales from the auto sector suggest there is demand for both low end and premium models. I would expect these companies to pass on price hikes to the consumer since the demand is so strong. The problem I see is that these sectors are very capital intensive and competitive so volume growth may not necessarily lead to high return on capital. Automobiles is more or less a commodity business since there is no brand premium really.
High inflation suggests its actually a good time to be invested in equities but overall the index is not very cheap. There will certainly be tightening of money supply by the RBI to control inflation but a countering factor will be the likelihood of more cheap money coming via the FII route. I think there will be a phase when the market corrects . Overall India is a good market to be invested in for local investors purely as an inflation hedge.
Having debated whether to go via mutual funds or pick stocks, I continue to take the SIP route via mutual funds. Stock picking is a fulltime activity and I dont think I have quite figured out how to do a good job. Meanwhile Indian funds continue to generate returns better than the index so at this point it makes sense to go with active funds.
The challenge is to figure out how to invest when there is a lump sum to be invested. I havent quite figured that out yet.
Sesa Goa is an interesting company since it has been beaten down but am still nervous about buying commodity stocks.
I had another look at Indian Hotels - low ROCE does not justify the valuation in my opinion.
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