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Focus on balance sheets than P&L accounts in stock selection: Nilesh Shah

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Keep an open mind, factor in behavioural changes in your portfolio, says Kotak AMC MD.

What is looking safe then? Up until last week, you could safely say that even a basket buying of pharma or investment in a pharma-specific mutual fund will keep you safe. But that does not seem to be the case, because now rationalisation is setting in, and within pharma the market is separating the men from the boys. It is not all of them, but a few of them, which are continuing to hold up within pharma. How do you make that segregation now? Is it really a safe place to be, because the way the market seems to be treating some of the pharma names, it is like all of them are going to come up with a vaccine?

In pharma, different companies have different business models — some are local-focused, some are global-focused, some are vertically integrated from APIs all the way to the final product, some are just suppliers of bulk drugs. We would not be able to brush all pharma companies with one paint or one brush. We will have to take them individually. We have seen a broadbased rally in pharma. From here on, men will be separated from the boys.

One important thing in the market is that leveraged companies will find it very difficult. Equity shareholders in leveraged companies can be wiped out within a very short time, if this lockdown persists for a longer period. So safety will be in non-leveraged companies. You must invest on companies that will be able to survive the current downturn. If companies do not survive in the current downturn, then you as equity shareholder will not be able to make money. So focus on balance sheets of far more than the P&L of a company for next three months.

So where do you think the cycle will put the seeds or will lay the land for the next earnings upgrade or the next trend? With each cycle something new happens. When TMT got challenged in 2000, infrastructure companies made a comeback that led to the birth of China. When 2003 crisis happened in China, it led to the internet shopping culture. Similarly, after the GFC crisis, we saw a return of Indian consumers and private banks and some other NBFCs. When this crisis will settle down medically, where do you think the buck is going to move?

We will have to see. On the consumer behaviour side, some trends are visible. For example in entertainment, it is moving indoors; from theatres and stadiums, we will sit at home on OTT platforms. We will also see non-discretionary consumer staple being able to maintain that growth path, but discretionary consumer durables will probably get deferred, as income losses and job losses are visible. We will see down-trading of brands, as people move from uber-luxury brands to value-for-money brands. We will also see companies create products and services in smaller formats, in smaller denominations, so that consumers can continue to use them or pay for them despite lower incomes. These are some of the trends, which are visible.

What we are not so sure about is if the work from home culture is going to be there. What will be the impact on commercial real estate? Secondly, do we see huge supply chain diversification happening out of China? Which countries will benefit from it? Will we see strong participation in global supply chain management? If yes, then it is as big an opportunity like the IT sector of 2000. So we will have to see how things shape up. As I mentioned earlier, we will have to just keep our minds open. We will have to absorb the data that is coming in. We will have to factor these changes in behaviour into our portfolio, but as long as you stay away from leveraged companies, you have a far better chance of surviving the downturn. When the upturn comes, the competition will be less and people who survive will be benefiting.

Where is the entire IT services sector headed? TCS came on our show two days ago and they talked of something which is transformational: 75% of the work force will start working from home in next four years, which means the cost of running campuses, the cost of travel, SG&A expenses, the cost of boarding, the cost of canteen — everything gets a reboot. Do you think Indian IT companies could eventually emerge as one of the biggest winners, because now they are attempting and thinking what appeared unfathomable six months ago?

This is very good from a cost point of view, and from a delivery point of view. But it is not going to be a game changer from a business point of view. Just because I am operating from home, is it going to give me better business? On the product side, the answer is no. For product development, you will have to make investments, it does not matter whether you operate from home or offices. Many of our companies are making that transition from old technology businesses, which are into maintenance and infrastructure, application development and so on and so forth, on to the digital side of the business. But the transition will still have to be carried out despite this situation.

Now you are doing this in terms of cost, in terms of service deliverability despite the disruptions coming in because of the coronavirus kind of situation, but at the end of the day, you still have to go and achieve the sales. You have to be relevant to your customer in the new environment. The biggest advantage of Indian IT companies is that none of them are leveraged, most of them have cash on the balance sheets. So there is no doubt about whether they will be able to survive the downturn or not. But will they be able to participate in the upside in the changed world? Well they will have to focus on whether they can provide products on risk protection side. As people operate from homes, worries about phishing, hacking and all those things are coming out. Do we have product there? Similarly, as data moves on cloud, people who have servers on cloud, people who provide cloud computing data analytics over there. So companies will have to still keep on transforming themselves so that their services are useful in the changed world.

You have got two lovely daughters. So if you really have to write a letter to your daughters describing how should one understand coronavirus, what it means for them as college and school students; how will the letter to your daughter start and how will the letter end? What would you like to summarise? Indicate to people who in a sense understand about coronavirus but do not know how to really apply that in their learning curve of life?

I will simply say to them stay with the nature. We all have been created by an almighty with certain equilibrium. The world does not belong to humans, it also belongs as much to other living things, including animals, birds etc. So stay with the nature, do not mess with it. If you mess with the nature, you get problems like coronavirus. Stay safe, stay healthy, stay with the nature; that should be the only message to my daughters.



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Written by sortiwa

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