Exit on BREXIT ! Rather the other way round....

Another event, another knee jerk reaction.

Indian markets’ penchant for knee jerk reactions to sensational events, local or global, are well known and don’t need more discussion here. There have been umpteen cases where stocks have fallen more than 20% even, only to bounce back handsomely and reward investors who did not get swayed by such fickle events.

Friday only proved what I was saying above. BREXIT has finally happened. So what? The way it has been portrayed in the media would lead you to believe that it is the end of the world (it may be the beginning of the end of Euro zone as we know it today, but that is another discussion)!

Take the case of Tata Motors. It tanked 15% initially and ended up around 8% lower than its previous close. And for what? Are Brits or Europeans going to stop buying JLR cars because Britain is not part of the EU? Hardly likely. Agreed that JLR derives 24% of its volumes and sources 35-40% of its components from Europe. And post Brexit, import tariffs may make JLR’s vehicles more expensive than German luxury cars in Europe. JLR’s costs would also go up if it has to pay import duties on components sourced from the EU and adversely impact JLR volumes as well as margins. But seriously, do u really think the people who buy JLR card or for that matter German luxury cars would care for a few thousand pounds more for a car if they really wanted it? And that I think is the basic fallacy in this argument. And negotiations regarding trade between Britain and EU are yet to start and may only fructify 2 years down the line. By which time, I am sure the Tatas would surely have a back-up plan in place. So why worry about something which is only likely to happen 2 years down the line, today? Remember what happened to Hero Moto when it broke from its long standing partner Honda. It was as if the whole world has closed on Hero while what happened subsequently was exactly the opposite. And I won’t be surprised by a similar thing happening in TaMo. Ideally retail investors should go for the DVRs as they not only provide a higher dividend than the parent, but also the differential between the 2 is quite wide currently and will likely come down over the years.

Now look at the bright side of things, The CV market in India is looking up and TaMo is the leader here. Once the monsoon passes as expected, the rural economy will get a boost and that’s where TaMo’s strengths lie.

A similar case is being played out at Motherson Sumi. A while back, they were hammered due to the VW issue and for no fault of theirs, since they were in no way involved in any of the parts which were apparently falsified. And make no mistake about this. They haven’t gotten to the position they are in now by just doing what everybody else was. Instead of doing different things, they chose to do things differently. Apart from the VW group, they do have other global clients whom they can serve in addition to VW, unless VW itself closes down, which is unlikely. And recently they announced the merger of their profitable subsidiaries with themselves. The company will emerge stronger and will be able to pare a lot of its high cost debt, become much more efficient, and remove a lot of the duplication that exists in some of the subsidiary companies.

So, I think it is an opportunity for long-term investors to get in, but lower price levels make you feel more comfortable from a risk reward ratio.

Same argument holds good for the other 2 stocks which bore the impact of BREXIT yesterday - Vedanta and Tata Steel. It is public news that Tata Steel is getting out of its UK operations and it is only a matter of time when they will formally announce a deal in this regard. So how does it matter if Britain is a part of EU or not?

A couple of years down the line, people who have bought these quality stocks and retained them in their portfolio are the ones likely to be laughing their way to the bank than the ones who sold these today citing volatility. As for Vedanta, it is only a matter of time when the commodity cycle turns and this producer which mines all sorts of metals and minerals will be one of the biggest, if not the biggest, beneficiary.

A couple of years down the line, people who have bought these quality stocks and retained them in their portfolio are the ones likely to be laughing their way to the bank than the ones who sold these today citing volatility.