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On markets & green shoots
I remain worried. I am not saying that there are stocks in this market which you should not go out and buy. There are more stocks that you should buy than avoid. In fact, the overvalued stocks are very few in number. Majority of the stocks are now valued below their fair price.
Buying happens for reasons like value, growth, earnings potential. People look at all sorts of matrix but if the top 10-15 stocks start correcting, then the selling would be widespread. Selling does not discriminate between largecaps, smallcaps and midcaps. We have seen that over and over again. So when I say I am worried about investing in these markets, I mean I am worried about investing even in the stocks which are valuation wise very well placed.
I still like housing finance. I still like a lot of the gold loan companies which irrespective of the fact that just two — Manappuram and Muthoot have grown 45% and 90% on price basis in the last one year. A lot of these are good companies to invest in and despite this growth, these are not expensive. The worry is when the stock prices cool off, everything will fall. Given the liquidity situation, there could be further run up.
In this market, I would be happier of earning a fixed return of around 9-10%. I know a lot of investment advisors will be out of business if they had such a view and which is why nobody has that view. But that does not change the fact that it would be the right approach.
On Market Sentiment
Last week, I had said I was worried about the levels on the broader indices. Not much has changed since then. I was looking at the MSCI India index, which has grown at par with MSCI Emerging Market Index from 2004 to 2014. Since then, till now, it is trading at a 40% premium valuation to the MSCI India Index. Now, the MSCI India index itself is around 25% cheaper than the Nifty50/ That shows how expensive the markets are. Yes, there are stocks which are trading below their historical valuations and they will do well. But I can assure you that when the selling happens, the underlying sentiment of selling is fear and a practical necessity to deleverage positions. To that extent, everything will fall. Now why that is not happening is no reason to justify or rationalise the extremely expensive nature of the markets. So, I remain as worried as I was the last time I spoke to you.
On Telecom Space
I have not bought any telecom stock in the last four, five years and it is unlikely that I will buy or recommend anyone to buy one until there are just two players left in that space. Until that happens, this war to gain market share would keep going on and Jio and Bharti Airtel in particular will keep fighting with each other.
At this point, somebody needs to ask either of these two big companies is not buying out Idea-Vodafone, which has the highest subscriber base. It is because they want to bleed each other to death. In this kind of environment, the only people who are going to benefit are the customers. Yes, this market is phenomenal. India is what we saw in the US about a decade and a half back. Now, everything is becoming internet enabled at home and at the office. Data consumption will increase. The market size, volume will grow but there is a mad war between the existing players to eat each other’s market share and until only two players remain you cannot differentiate one from the other in terms of who is going to give better service for which customers should pay more.
I am unlikely to recommend any of these stocks and Jio is a very interesting case anyways, it has got a parent like Reliance which has amazing cash reserves to keep fuelling this war. Airtel may keep struggling. Jio may just keep building on to its market share. Som who knows what happens?
In case of Reliance, I find it very hard to read its balance sheet although everything is segmentally is very well divided but expenses at Jio level are not very easy to understand. So I am not recommending anything in that space.
On Consumption Sector
I expect the growth to improve. It may just go up to double digit because as we go forward, we will be coming from the weak base and that will improve. The problem, however, is even if growth improves in higher double digits, it would probably still not justify the valuation for some of these, particularly the MNC consumption stocks where they are trading right now. These are very good stocks to buy but at the right price. If you buy them today it is going to take a long time for you to make money on it.
I know this rally has been very frustrating for a lot of investors where only the frontline stocks have kept running up. Consumption will improve, growth will come back, also because we have been really really low from the last few quarters. I do not think it would justify the kind of valuations at which stocks are trading right now. Stock prices have to correct about when that happens, I am as clueless as anyone else in the market.
On Real Estate
I would not buy into that sector again because I have not really spotted anything. I have not really looked at the space in detail but one thing sure that a lot of the companies in real estate space are not as leveraged as they were until a few years back, including the frontline names of the past like DLF.
They have consistently reduced the debt on their books, they have cleaned things up but the unsold inventory problem still remains and a lot of this inventory is still there. Real estate prices have come down but they have not come down to be in the reach of a lot of the first-time, second-time homebuyers. A lot of this real estate is still going to get sold if prices go higher because a lot of old investors had considered real estate as an investment class. But that attitude is now changing.
But having said that, this may be a temporary up move but I do not really think this can sustain itself. There is a lot of unsold inventory — both commercial and residential. I would not like to find reasons for a 10-15% up move in stock prices on the basis of revival, be it structural or otherwise.
BPCL Divestment
The government seems desperate to deal with their fiscal deficit situation. A lot of what they are doing at all fronts — be it GST collections, income tax collections and hurried disinvestments. IRCTC was a classic case, Rs 320-350 was the allotment price and the stock is trading at Rs 800.
If this was a private company and not a government company, whoever was the investment banker on the deal would have actually never got another deal to do because they grossly miscalculated the price or the sentiment at which people were perceiving the issue to be.
BPCL and a lot of these other companies that are being tabled right now for disinvestment, seems to me grossly undervalued. If the government is cash strapped and needs cash, the disinvestment in BPCL, HPCL and any of these OMCs should have been done long back.
I personally believe government should not be in the business of marketing oil when they are trying to reduce pollution and so that would be selective marketing. But the time to disinvest these companies was around three, four years back when they were at their all time highs, valuations were rich. At this price it seems to me more of a distressed sale than a disinvestment.
On Auto Sector
I am really positive on this sector because it is easy right now to say that the worst is over for this sector. I cannot really imagine anything further going wrong for the sector. The big thing that I am worried about is the shift from petrol and diesel to electric, particularly for stocks like Bajaj and Hero MotoCorp because those are the stocks which will suffer the most because their deadlines are the closest. But yes valuation wise these stocks are available very very cheap. Consumption in India is not going to die down, it would be the same companies which will bring the EVs to the market and growth volumes will come back. So, the valuations at which these stocks are trading right now, one should go out and buy them.
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