Sage One’s Samit Vartak On The Kind Of Bull Market We’re In

There may be too many moving parts across the globe to predict if we’re at the start of a new bull cycle, but Indian companies are at levels never seen before.

That’s according to a memo to investors written by Samit Vartak, founder of SageOne Investment Advisors, which analysed nearly 700 companies beyond the top 100 listed firms over the last 16 years. The improvement shown by mid- or small-cap firms during this period, he wrote, has been more striking than its large-cap counterparts.

According to the analysis:

• Net debt-to-equity levels are at lowest levels in modern history. This should improve further by March.
• Cash flow from operations as a percentage of profits after taxes at highest levels since 2003 and at double the levels of FY08. Hence using metrics like P/E to compare levels today vs that in 2008 is unfair.
• Corporate profits as a percentage of GDP is at the lowest level compared to anytime this century.
• Current interest cover and interest as a percentage of sales at best level in this century.

The median earnings growth for nearly three-fourths of companies that reported their earnings for quarter ended December during the nine months through December 2020 was nearly zero, Vartak said. The total earnings growth is greater than 20% due to the banking sector, which is incredible given what the world has gone through, he said.

Corporate India has used the Covid-19 pandemic to optimise cost structures and strengthen balance sheets, Vartak said. There are various promoters who have survived through multiple shocks and emerged stronger over the past decade, ready to take on global competition, he said, adding with government incentives and reforms, such survivors will get an “easier” environment over the next few years to become global players.

While economic cycles are difficult to predict and unreliable to ride on to create wealth, great executioners and high-growth businesses can be relied upon to deliver, he said. It’s better to bet on companies and their execution powers instead of predicting macroeconomic factors, he said.

Vartak, however, doesn’t expect the 2003-07 cycle repeating, even as some parameters are at levels seen eighteen years ago. That’s because that was a global cycle and needed too many variables to align, he said, adding India then had a very loose lending environment and high risk appetite. Vartak said the banking system this time is very careful and emerging from its worst period of stress.

“There could be a bull cycle emerging but it most likely would be of a very different nature with very different industries benefiting.”