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February 16,2012
Letter to Investors

                                                                                                        

DearInvestors,           

Sense is coming back in equity markets after a period of irrational pricing. I amsorry for not communicating with you for a long period; I had nothing new totell you!

 Iwould like to share with you an observation: Market experienced unprecedentedvolatility during last 5 years, while mid-cap stocks in general declined morethan the pivotal stocks. Large investors had been getting rid of smallercompanies and took refuge in defensive stocks and tangible assets. In theprocess, hundreds of mid-cap companies are priced at a fraction of theirintrinsic value, while pivotal stocks like HDFC, ITC, Hind Unilever, TCS etc.had been rising and supporting the SENSEX and NIFTY. I believe that theseinstitutional favorites are well priced and Index performance could be modestin the coming years, where as selected quality mid-caps and large mid-capsoperating in the growth segments of our vibrant economy could presentannualised return of 30 to 40% for the next 2/3 years or more.

 Aftera series of bad news domestically and Europe’s financial crisis since 2011,mood is changing. Inflation and interest rates can not keep rising for longtime and you can feel the cycle is turning. The worst is behind us in thisregard. You are well aware of the debt crisis is some of the weak economies inEurope and political disturbances in Middle East and North African region (MENA),which are actively discussed today. Potential sovereign defaults could weakenEuropean economy and many of the large global banks will be affected. Thiscrisis is unlikely to end anytime soon and will remain a headache for the EU.How much should an Indian equity investor be concerned about this? Economicimpact on Indian businesses will be limited though markets could be nervous forthe short term when certain bad news breaks out.

 Any major break out of unrest in MENA could result in higher crude oil price, which is bad for India – so let us add more Selan Exploration, one of our largest holding in Portfolio.  Selan is priced at Rs.500 Cr today, against its estimated Oil reserves of over Rs.70,000 Cr in 5 proven oil fields spread across 200 Sq Kms in Gujarat! This debt-free, cashrich company has initiated an aggressive drilling program and is likely to grow at CAGR 50% for next many years. I find the management honest and very professional. Whatever happens in MENA or Europe, Selan should give us fabulous return in the future. Piramal Healthcare is another core holding in the Portfolio,which I believe is priced only at 50% of its real business value today! There are many such stories / stock ideas around us. I am not discussing more stocks now,especially the under-performers :)  Let us look forward to an excellent performance for this year.

I will stay in touch with you more frequently.

Warm regards,

 Porinju Veliyath

Portfolio Manager

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