Deep value stock ideas: Madhusudan Kela’s three deep value ideas for this market


We have seen the government action where they have tried to help the poorest of the poor by DBT. That is a step in the right direction; helping those who are really struggling to even eat daily bread. Then the RBI on expected lines brought rates down and they have come out with a moratorium period. But do you think the fiscal urgency is missing given how other big countries are now printing money and coming out with fiscal stimulus? Do you think the government should come up with something which will support sectors where the hit has been hard or the government needs to start even spending aggressively so that demand comes back because the problem now is, even though we are a country of 1.3 billion people, demand has just evaporated.
I think it will come. The priority of the government is to first ensure that people who do not have food should be fed and that is the right first step which has been taken. I am sure the government will recognize that the industry is passing through or rather will pass through very difficult times and that select sectors will pass through very difficult times. I am quite confident that the government and the RBI will go all the way to ensure that whatever package is necessary to revive the economy and the industries come.

We have to have some patience because obviously there is a bandwidth issue at this point of time even in the government and this is how much they can do. So over the next two-three weeks, I am quite confident that some kind of fiscal package for the industry will also come.

The strategy that the prime minister is currently adopting is survival first and revival later. It is important to save lives first and then the economy can come back later.
I think it will go simultaneously. What we are hearing is that you will definitely have some kind of a partial lockdown lifted after 14 April. Yesterday, I heard the UP chief minister already say that they are planning to lift the lockdown. So hopefully, over the next few weeks, life should come back to normal and I must say most people including me underestimated the impact of this on financial markets and stock markets. But hopefully, we have seen whatever had to happen and maybe we have passed through that or we will pass through that over the next two-three weeks and economy and markets will revive from here.

Since I am here, I cannot but talk about the markets. As I said, let me acknowledge in the beginning, we underestimated what coronavirus can do to the world and possibly also to India. So having said that, there are lot of companies and industries which have essentially come to very attractive levels and for a long-term investor, it is a really good time to selectively invest in a gradual manner in stocks and companies which you like and keep that three- to five-year horizon in mind.

Also, I would like to say that this is the time when one should invest not just because
itna sasta ho gaya
hai. One should avoid leverage as much as possible whether you are doing F&O or you are trying to do leverage investing by borrowing money. That is the biggest enemy for an investor; you leverage and if markets go down, then you suffer a big loss. So as long as it is your own money, I see very compelling opportunities to invest. So I think,
aap daan karoge, toh kuch na kuch aap ke pass zaroor aayega.

How would you think the market dynamics will change now because every time there has been a reboot, there has been a crisis? Will the shape of the market and the shape of the economy change? How do you think investors who are genuine long-term investors, who are looking at creating long-term wealth by investing in equities for next 5-10 years should really brace themselves? How can they prepare their portfolios for the new normal?
You have to believe that this is a one in a hundred years event. We all can curse ourselves for not being able to predict this but it is very hard to predict and it is very hard to predict that you can lose 40% in index in less than one to one and a half months. It is far worse than what we saw even in 2008. So I would humbly acknowledge that it was beyond me to predict this that we will suffer so much in such a short period of time.

Having said that, as you said, we have seen this many times in the past and we have come out of it. So if you have perhaps the longer term conviction that the companies will do well over a period of time and their stock prices will come back and if you are someone who is not invested or under invested, maybe this is coming as a real opportunity for you.

Where do you think the bearishness in the market has been slightly overdone and the stocks or companies which do not warrant that kind of selling?
Clearly there is a lot of selling which has happened in financials and understandably because they are the most leveraged. Banks and NBFC companies are most leveraged. As I said, anyone who is leveraged, whether it is a promoter or a company, those are the stocks which have seen the maximum amount of beating. But please have the standard disclaimer that anything which I speak, people must consult their adviser.

This is what we spoke even the last time. I see some kind of leadership emerging; very early days in the pharma sector. If I have to put money now, definitely that is one sector we now very seriously consider putting money. Let me just give you some numbers about the pharma sector because I track it very closely. So pharma used to be Rs 1 lakh crore in 2009 and in 2014, the sector as a whole went to Rs 10 lakh crore. Now we are close to Rs 5 lakh crore. So in the last six years, no major company in the pharma space has made either a quarterly or yearly loss. So it has seen a significant derating in the entire sector as compared to what it was in 2014. In 2014, clearly the valuations were on a little higher side but considering that today lot of these stocks are available at a very attractive level, needless to mention that a lot of the promoters who run these companies do not have a lot of leverage, in this environment I think requirement of medicine logically will go up. So this is my most preferred sector right now.

Where do you think the new leadership will emerge now because in the last 10 years, the leadership belonged to financials, before that it belonged to consumers, before that to infra and before that it was TMT (technology, media, telecom) all the way. Where do you think the new seeds are being sown so that in the next cycle one can really benefit from the harvest or the blossoming?
Outside pharma, men will get separated vis-à-vis boys. This is what we have seen in the past also that you have to be able to find men in individual sectors. I am not saying the opportunity is only there in the pharma sector. You will find opportunities selectively maybe in the chemical sector. There are people who are making a case that a certain amount of outsourcing will surely shift away from China to India and in specialty chemicals, chemicals and pharmaceutical, there are a lot of players who will benefit out of this.

The other space which I am very biased is to look at real absolute deep value because this is something which has been hated for the last four-five years. The valuations have gone really favourable, there is a very attractive dividend yield in deep value stocks and that ranges from something like an ITC to a lot of public sector companies. So there is a lot of deep value. You need to dig a little deeper and you would find a lot of attractive stocks. So essentially three things have deep value where dividend yield is very high; second is pharmaceutical and third chemicals and specialty chemicals.

The problem started with China and thankfully China has come back. You cannot use the world normalcy, but yes, Chinese economy is also limping back. All basic data points based on movement of activity, generation of electricity and pollution levels are indicating that the Chinese economy is now back on the track. It will take some time before China will gain momentum but if China is back, is there a serious case for metal stocks and metal-related stocks to make a comeback?
Wherever things bounce back, metal as a sector again will bounce back because so much money has been pumped in; I think trillion dollars have become a very understated amount now. You have the amount of money which China is pumping into the economy, the amount of money European countries have pumped, the amount of money the US is pumping and we saw a stimulus being announced by Japan. There is so much money which is being pumped in and this is all at zero interest rate. So whenever this actually gets back into the economy, clearly the metal sector will be one to watch out for.

Markets have fallen 40% and you said that no one has seen something like this and this largely could be attributed to the fact that the world is very mechanical algorithm and digital-driven. Algorithms broke the back of the market and in less than 40 days, markets were down 40%. Do you think while we have been surprised, shocked and scared, on the way down, markets could be equally surprised and they could be delighted with the recovery because what algorithms have done to bring the markets down when market stabilises, the same algorithms will start working up?
You bring up a very important point. I think a lot of the selling which happened according to me also happened by the ETF route and it was also contributed by the fall in oil prices. So I would assume a lot of these sovereign funds which had invested money not only in India but across the world would have had heavy redemption considering that oil crashed from $60 to virtually $20 again in a matter of a month.

As you see some stability in oil price is improving, I also suspect some amount of this FII selling will also subside; so you will clearly have a bounce in the market once the FII selling subsides and once the fear of the virus subsides; now whether it will be absolutely V-shape or U-shape and how long will it sustain will clearly depend on a lot of factors; but for now, let us conclude that the markets are attractively priced and right now there is an opportunity to make investment on a selective basis.

We will revisit this market may be 15-20 days later after seeing what is happening in the world vis-à-vis coronavirus, oil prices and the overall financial re-stability which will come because of what has happened and then we will take subsequent calls from there.


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