Stock market is for big money

Mr Jeevan Basnet is among the gurus of the stock market in Nepal. Even big investors approach him for assistance when they are indecisive about which scrip to go for, or even when they are in trouble. Born in the family of traditional timber merchants, Mr Basnet did not like the family business considering its impact on the environment. Then he tried his hand at briquette industry. In fact he was the pioneer in the industry, but he failed miserably. In retrospect, he thinks that he was ahead of his time. Then he entered the stock market at its nascent phase, but again burnt his fingers immediately. However, the early failure in the market only encouraged him to understand the functioning of the stock market inside out. There has been no looking back for him since then.

ShareSansar caught up with Mr Basnet to trace the growth of the market in the country, where does it stand vis-à-vis more advanced markets, what are the prospects and challenges facing the stock market of Nepal and whole lot of other queries, which we hope will be very beneficial to all the stakeholders.

Excerpt:

When did you enter the stock market?

I made my first investment in the stock market around 20 years ago. At that time Nepal Stock Exchange Limited (NEPSE) was non-existent. In those days, the only place where we could trade shares was Securities Exchange Center. It was located at Batule Ghar in Dillibazaar. The market was very small and limited.

It all started one fine day when I happened to pass by the Center. I saw a lot of people gathered there. Just out of curiosity, I asked someone in the crowd, what was it all about. He told me that it is a place where people buy and sell shares. Then I thought I should also try my hand at the share market. I then bought 100 units of National Finance Company at Rs 900 per unit. But I had timed it bad; the market was about to collapse. The market eventually collapsed, and I could sell the scrip at just Rs 400, suffering Rs 500 loss per unit.

I was not deterred by the loss. I realized that share trading is an area of knowledge that I must gain. I wanted to study books of the share market. I visited all the leading book stores in Kathmandu such as Mahankal book and Mandala book, but to no avail. This compelled me to go to Bombay.

In Bombay, I got a good insight into the functioning of the stock market. I interacted with a lot of stakeholders, and returned home with around two dozen books on the market. This helped me a lot to prepare myself as share investor. In the meantime, NEPSE also came into operation, and there has been no looking back.

Hence, more than money, I was driven into the stock market by my passion to acquire vidya (knowledge) more than making money.

How were stocks transacted in those days?

Transactions were carried through a floor open outcry system. There were around 20 brokers. The buying and selling brokers would directly settle transactions on the floor. This system was in place for a long time – even after NEPSE had its own building. Brokers would be present on floor for trading while we stayed at the lawn, and we would approach them if we had to buy certain scrip.

Now that we have semi-automatic trading system, we no longer have to throng broker’s office to place an order for scrip. Hopefully, we will soon have fully automated system so that we can fully trade scrip from our homes.

You have exposure of the international stock market, too. How is our stock market lagging behind the international market?

Stock markets in the West, and even in India, are much advanced than ours. We are still dependent on the brokers to execute our order.  In the international market, we can trade stocks through a window in our home, though investors have to be associated with one or the other brokers who act as nominees for the investors even there.

But the million dollar question is how to choose the right stock among so many stocks. In Nepal we have only around 230 stocks to choose from, but in the stock markets abroad there are thousands of stocks. There are around 6,000 stocks to choose from in Bombay stock exchange.  So, how do we choose the right stock? In the advanced stock exchanges, they also have a screening mechanism so that we can choose the sectorial scrip of our preference by searching key indicators such as EPS, P/E ratio and paid-up capital on the trading window of our own computer. The computer will then select only those scrip, which meets our preference. An investor can also get information regarding the listed companies by directly mailing them. This way, an investor in the advanced stock markets  can thoroughly scrutinize the scrip before making an investment.

Information is vital for any investment. How transparent are the listed companies in the foreign stock market as compared to ours when it comes to information disclosure?

They are much more honest most of our listed companies, especially with regard to disclosure of information on time. Another problem with our stock market is that the trading of scrip of the BFIs on merger are stalled for months here. But this does not happen in the advanced markets. In other words, investors are largely protected in the advanced markets.

Talking about the protection of investors’ interest, what are the other mechanisms in the advanced market?

They have this wonderful investors’ clubs where an investor can discuss their problems. The clubs will then take up the issue with the concerned authorities.  Hence, an investor does not have to run from pillar to post to address their problem.

But we also have various forums for the investors, isn’t it?

Yes, we do have investors’ forums.   But they have not been as effective as these clubs in other countries. Nevertheless, some of such forums have done good works.  For instance, I was also associated with the Investors’ Association at one point, though I am not involved with it due to my age and other reasons.  This association was instrumental in making the central bank roll back a decision that could have otherwise hurt many investors. During the bull around nine years back, the central bank suddenly came up with a directive asking commercial banks to maintain a paid-up capital of only Rs 50 crore, down from the existing Rs 1 arba. We then took a delegation to the central bank. Krishna Bahadur Manandhar, the current chairman of Nabil Bank, was the deputy governor at that time. We urged the central bank officials not to ruin the bull, which had just begun. They agreed to raise the paid-up of the banks to Rs 80 crore and also to manage another Rs 20 crore from the secondary fund (reserve) on the very next day. The market then surged to a new high.

One of the reasons investors’ forums have not been active because those involved in such associations are busy with their own work. After all, you cannot expect investors and experts to devote much time to such voluntarily work.

If we have funds such as investor protection fund and awareness fund then we can devote more time on such associations. We have been urging the regulators to set up such funds so that we can actively engage in helping the investors across the country. But the authorities concerned remain by and large apathetic toward the cause.

As you mentioned, an investor has to have thorough knowledge of the scrip they are investing in it. But not many investors are fully aware about the profitability of shares before they actually make the investment. Since you are one of the most experienced investors in the country, what do you advise them?

Here in Nepal we just have 230 listed companies, which are further divided into seven sub-indices.  Even the banking index, which is the largest among the indices, has only around 30 listed scrips. It is not very different to carry out comparative study of these scrips. Hence, comparative study of the scrips is very important to make an investment in the right stock.

The second important thing that we need to understand is that we have to wait for the right moment to buy or sell a stock. Hence we have to know what is the right time to buy a stock, and how long to retain the stock, and when to book the profit by selling that stock. Here I want to add that though we can make some money by taking a short-term position, we won’t make big money through such a position. For instance, shares of CIT, NLIC and LICN, which were once priced around Rs 500 only a few years back have now grown by many times.  But those who sold those stocks for Rs 600 could only make a small profit. Those who held in for a longer period are reaping huge benefits out of them.

Remember that the stock market is for big money. Our market capitalization is Rs 800 billion. You can earn as much as you want -- why go for lesser things.  When I suggest you to take a long-term position, you do not have to wait for many years. I think three years are sufficient to get out with a big money -- around ten times returns.

You have been with the stock market ever since its inception. You have seen all the bulls and bears. How do you see the current market going by the track record?

This is the fourth bull, though this bull is yet to peak. To understand this concept better, we must understand the market dynamics. In Nepal, the stock market has a six-year cycle.  The current cycle started after the market crashed on Bhadra 15, 2065. It reached the lowest point in the next three years. Hence, it reached the bottom in 2068. The market gradually started to rise (the first wave) from 305 level and reached 555 level by the end of 2068. It further rose to 631 level by 2069 (the second wave). The third wave will come in 2071 (current year) and the bull will be over.

This cycle also applies to all the bulls and bears in the past. The market had peaked in 2051 at 160 level as the market was small at that time. There were only around 25 listed companies at that time. Nepal Bank Limited was one of them. Standard Chartered Bank was known as Greenlays Bank in those days. The market again peaked at 545 level in 2057 – in six years’ time. The market should have again peaked in 2063, but it was extended. We call it a coupled bull. Then the market again crashed in 2065, bottomed in 2068,   and began to rise. The bull will end this year (2071) to complete the six-year cycle.

Hence, Nepal’s stock market has a six-year cycle. India, which is more developed then our market, has a cycle of 5.5 years, and the United States, which is more advanced, has a five-year cycle.

That means the year 2071 is a golden period for the investors, isn’t it?

It is indeed a golden period for those who have been holding the scrips. But for the newcomers it depends a lot on how tactfully they deal with their stock. Irrespective of the returns, many of the new comers are going to get good experience of the market this year.

Given the situation, when you think the market would breach the previous high of 1175 level?

The scene is little different this time around. The BFI scrip, which covers around 80 percent of market capitalization, has not hit the bull so far.  The bull is limited to only the non-banking sector, which covers only around 80 percent of the market. Having said that, we need to understand that the market will breach the 1175 level only if the bull hits the banking scrip. But if the BFI stocks do not rise significantly then the bull will close slightly below 1175.  We call this depressed bull. In general, the bull should cross the previous peak to complete the cycle, but since it has not yet touched the BFI scrip, we might just end up with a depressed bull. Nevertheless, since the market is yet to rise by another 350 level, hopefully the bull would hit the banking scrip.

Generally BFIs are doing better than most of the other companies, including the insurance companies. While the insurance scrips have surged dramatically over the recent months, why there is no significant movement in the BFI scrips?

Very good question. Actually some of the BFIs such as Nabil Bank, Everest Bank, Standard Chartered, NIBL, NB Bank, BoK SBI Nepal are doing far better than any insurance company. If we compare the price of insurance scrips with those of banks, we cannot fundamentally justify the growth of insurance sector, or the underperformance of the banking sector. To be honest there is no compelling reason as to why there is a bull hit in the insurance sector and not in the banking sector. One of the reasons could be that now investors have an option other than BFIs. And insurance scrip was a good option in that profitability was high largely due to the capital structure. Nevertheless, technically we also have to realize that the pattern has changed – there is a bull in the market without hitting the BFI scrips.

That brings us back to the wave theory. A cycle has five waves. We have two negative waves and three positive ones. The fifth wave – the positive one – is yet to be formed. But our calculations show that the bull is likely to end between 1088 to 1149 level. This would mean a depressed bull. Since the fifth wave is still in the progress, and if the bull turns to BFI scrips, then the market will breach 1,175 level. In any case, the bull should end by the end of the fifth wave in around nine months from now. I wish God would prove me wrong, but I think it will be a depressed bull, which could end at 1149 level, as I see a slim chance of bull hitting the BFI scrip. Nevertheless, technically speaking, the market is perfecting in line with the market dynamics.

But then there are other strong fundamental factors such as pro-market government and relative political stability in the country, which should spur the market. How could you be so sure that the bull will end within this year?

No. No. No. Nothing is going to make much difference. This technical knowledge is such that you have to be analyzed in isolation. Even if there was no pro-market government in place, there would have been a bull at this point. Even with the pro-market government there is no hyper bull. The economy has not changed much over the past five years, the gap between the rich and poor is widening. Hence political and socioeconomic factors are secondary, which can be taken into account or excluded. But I exclude such factors. You may say there is going to be an early budget that will bring many good interventions in the market, which will further fuel the bull. The market may rise by another hundred points due to such factors. But, as I said earlier, there is still a room for the market to grow by another 350 level.  Hence such factors are not going to make much difference. Yes, if there are some dramatic changes in socioeconomic and political front, say as in the sweeping victory of BJP in India, then there can be a coupled bull. But we do not have any such compelling factors so far.  We had the coupled bull from 2063 to 65 since the bull which was about to end was propelled by the central bank’s decision to ask the commercial banks to shore up their paid-up to Rs 2 arba.

Apart from merger, the central bank has also opened the path of acquisition of a BFI by another. What kind of impact this policy will have for the market?

It will not have much impact on market dynamics. But it will have impact for the companies concerned. The shareholders of lesser company, which is to be acquired, will benefit. But it will not make much difference to those who have stake in the acquiring company. For instance, the scrip of Citizen Bank, which is acquiring Nepal Housing, hovers around Rs 470. But the share of Nepal Housing stands at 200-something. After the DDA, if Citizens agrees to give half its shares to Nepal Housing shareholders, then the Housing’s shareholders stand to benefit more.

How important is to bring in real sector companies in the market?

It is very important, but I don’t know why the regulators have not taken enough initiatives in this regard. There are a lot of good real sector companies such as Dabur Nepal and Ncell which the government should seriously think about bringing to give more depth and maturity to the stock market.  Even if 10 to 20 percent of shares of these companies could be floated to the public then it would tremendously boost the market. See how Unilever, only 20 percent public, is rewarding the shareholders!  Some of the airlines such as Buddha Air are also doing great. Such airlines should also enter the stock market.

Why do you think that the mutual funds are receiving lukewarm response in the market? The only two mutual funds in the market – Nabil Balanced Fund-1 and SIGS1 -- have always remained undervalued. What’s the matter?

Mutual funds are essential tools in any stock market. I think we need more awareness about the benefits of such schemes. And there are other problems, too. For instance, SEBON has blocked 5.5 percent dividend proposed by Nabil Balanced Fund-1. This is unfortunate. I don’t see any compelling reason to block that dividend. The regulator might have faced some legal hurdle, but I don’t think blocking the dividend was a smart decision. They should have found a creative way to settle this issue rather than blocking the dividend of the mutual fund, which sends a wrong signal.  They should have removed the legal hurdle instead of blocking the dividend.

What’s wrong with the regulators?

I want to explain it this way: In India, chairperson of the Securities and Exchange Board of India (SEBI) are retired governor or deputy governor of the Reserve Bank of India.  Only an official of cabinet secretary level can be chairperson of both the stock exchanges in India.  Also in the United States, only the officials from the Federal Reserve can hold key the regulatory position for the stock market. This is to ensure that very creative and experienced people can only hold key positions at the regulatory bodies and the stock exchange. I don’t know why such provisions are not ensured when it comes to Nepal.

What are the best five stocks in your view?

My favorite share is Citizen Investment Trust (CIT). If an insurance company can earns money by selling policies, banks have to call deposit to generate income, but CIT does not need to do anything to earn money. Provident Fund are automatically deposited at CIT—that to the tune of Rs 5 to 7 arba.  You must have also noticed, CIT had recently issued a notice asking commercial banks if they wanted Rs 3 arba at 7 percent interest rate. Hence, CIT has no issue when it comes to fund.  On top of that CIT’s paid-up capital stands at only Rs 30 crore, and they are planning to shore it up to Rs 1 arba. Hence, you get bonus share every year. Another good thing with CIT is that they have open-ended mutual funds. Whenever any IPO is floated, a chunk of the primary shares are allotted to CIT. On top of that they are investors in some of the big projects, including Upper Tamakoshi. Hence the company is growing every day.  Talking about its profitability, CIT has two balance sheets. One of them is the centralized balance sheet, which covers the shareholders, and another is consolidated balance sheet.  Altogether Rs 18 crore profit has been shown in the latest balance sheet concerning the shareholders, up from Rs 12 crore.  It has Rs 6 crore in the reserve from the previous year. Hence it adds up to Rs 20 crore. Now since CIT has a paid-up of Rs 30 crore, even if it pledges 50 percent dividend this time around, it can still set aside Rs 9 crore in reserve.  That is not all. CIT is one of a very few Nepali institution, which can make direct investment in the Indian stock exchanges as a FII. We have been urging CIT officials to make good use of this provision, but they are yet to decide about it.

Another scrip is Chilime Hydropower Company. It is a world-class company. The profit this company has been posting so far is nothing compared to its profitability once the projects being developed by its subsidiary companies come into operation in the next few years.  Chilime itself will be developing more projects on its own. It is already distributing dividend to the shareholders very lavishly. All the credit goes to its management. It is run by very good people.

Among the banks, Nabil Bank is the best scrip though I do not hold any share of this bank. I do not focus on net profit when we screen banking scrip. Our concern is how much a bank actually makes through cash in hand, particularly deposit mobilization. We have a formula to calculate it. Any BFI which secures 3 point or above are considered really good. Nabil secures 3.5 – the highest among the all commercial banks.  And we conduct valuation of banking scrip on three bases: its monetary value, quality and governance. Nabil excels on these bases, too.  

Another very good scrip is Soaltee Hotel. The reason I like this scrip is that Soaltee has been growing steadily. They have huge loan in the past, which have now cleared. They have worked hard to promote the hotel through tourism development.  It is an asset-based company. It has property worth billions of rupees though their own valuation is around only Rs 20 crore.

Insofar as the upcoming stocks are concerned, Upper Tamakoshi is the one to go for. All I’ll say at this point is that if 22MW Chilime can create such waves in the market, what would 456 MW Upper Tamakoshi do.

Finally, what do you consider yourself – more of an investor or an expert?

I think I am more of a researcher than an investor. Even some of the leading investors seek my help they have to take crucial decisions, and I have rescued many of them in the past. But it won’t be proper to disclose their names.