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One thing is clear that the RBI policy itself was very supportive. It was a great surprise because there were a lot of nice and refreshing aspects to the policy compared to the dogmas of the past. It may have its own risk and I acknowledge that but at least it is a path forward to doing something different.
Number two alludes to the budget. Let us be honest, the budget had nothing great about it. Since the stock market and economy are so linked together, the market is being driven by global flows or at least local flows.
Then thirdly, this whole thing about the value in midcaps has been built up to a crescendo at this point in time. As a result, more than institutional money, a lot of local money has gone into buying the same old stocks. If you look at Bajaj Finance, it has moved from Rs 4,000 to Rs 4,700 and so on.
It is one of the times when the local money has been convinced that this is the right time to buy into the market and they have bought the same old themes. I do not think midcap has been such a great theme but rather has by and large been about the same old stocks.
We are at a time where the absence of bad news is good news and there is so much money on the sidelines. Everybody has got so much money and what do they do with it? They go and buy a Nestle or a Bajaj Finance or a Hindustan Lever or a PVR or Apollo. We look at what will happen this year in terms of economy but investors are okay with the five-year horizon. They own Nestle or Apollo Hospital or PVR and are not looking at one-year horizon. It is a very different time frame that investors are looking at today compared to what the market participants typically believe in.
So what is the bottom line here? Can I say the fabric of the market will remain the same because the budget has done nothing that will take us back to 7 per cent growth and if flows are strong the same 15, 20, 25 may be 35 stocks will keep on marching higher?
If you even look at the phenomenal Delhi elections which just happened shows that economy does not seem to be an issue with anybody at this point of time and that is the scary part which has us worried. One would tend to believe that there is an urgency in the government or the system to address economic issues because those affect the electoral fortune. But that does not seem to be the case. Neither the winning party, which has astounding win, spoke about the economy nor the ruling party, which had nothing much to comment about.
You are right in saying that we will trundle along as far as the economy is concerned. One day the piper will call you when they say the dichotomy between the economy and what is happening in terms of the stock market will come to bear. I would still say that in a struggling economy we are going to see more and more concentration of economic power with the top 100 or 200 companies.
In a manner of speaking, the wish of the investors will come true. While the economy will struggle at 5 per cent or 6 per cent growth, some of these companies may produce good results. The lobby is strong. Let us not neglect the fact that the result of every company has tax benefit. This will not be the case next year; the base effect will catch up next year. It will be a troubled time for the economy but investors have nowhere to go.
With the money in the bank, you are not going to buy midcap or a very small cap given what has happened, such as the decimation of Coffee Day or Eros Media. You will buy the same stocks at this point of time and we will trundle along. The worrisome part is lack of electoral response to the economy. It is not a good sign for us because that means the urgency to handle the economy is not there at this point of time.
Should one invest in this low liquidity, low growth and abundant cash environment?
One good part is that while this market is doing well at 12,000 and thereabouts, large pockets are at historic lows and one of the key standpoints is that the biggest destruction in value has happened in the PSU stocks.
In the last five-six years, the sheer market cap reduction in PSU stocks could have financed all our fiscal deficit by that point of time. But on the other side, it gives a tremendous opportunity if you are getting your oil marketing companies, resource companies, oil pipeline companies closer to 1-1.25 book value. Look at GAIL, the stock was around Rs 121 and the dividend of Rs 6.5 was announced. That is an incredible situation out there.
There is a need to be in some of the pockets which are monopolies. Yes, there are PSUs to that extent in that market and more value destruction can happen but at some point in time, you will not destroy more value than what you have done. And I believe we are reaching a point where the value is so down that can you destroy it more? Maybe not. You do not have to necessarily go to the larger pockets. One can be in some of the pockets giving good dividends and hopefully good returns and PSU block is one such investment area.
Secondly, there are healthcare companies one can look at. All healthcare companies are now deleveraging at a frenzy which we had not seen before. In a year or so, all Indian pharma companies will have a leverage of 0.25 or below and at that number serious value will start to emerge. And then there are metal companies which are again at the bottom end of the cycle.
The dilemma is not where you invest, it is rather how much more do you invest in the largecaps — whether it is Bajaj Finance or HDFC Bank or HDFC. We are loading up on PSUs; healthcare companies will be countercyclical and there the alpha value will be significantly higher. It has not been proven true so far in the last 12 months, it has been on the negative side in fact but we are hoping it will turn around. Find some stable pockets of return rather than just piling up into the same shares.
When we are looking out for multibaggers there is a sense that we might miss out if we do not get in at these levels because despite all the recent blips we have had markets have continued to bounce back. In that context, what about PSUs when it comes to some of those cyclical names? In infrastructure, some of those pockets still seem to be beaten down but could they provide manifold returns?
PSU stocks represent very high risk and very high return because it’s difficult to understand how one can destroy this kind of value in five or six years. I am a buyer and I have a large holding in PSU stocks and it runs across the spectrum. I have oil marketing companies, gas companies in my portfolio; you name the PSU on a dartboard and I think I will have it in the portfolio. But that is a very tough call but we have taken that call and we are enjoying the dividend to that extent.
Let us be honest, we cannot blame the investors if they don’t pick PSU stocks because when they look forward ahead three-four years, they need to find safety. If you just read the budget, it is a scary document, look at the write-offs sitting on it, the Food Corporation of India, the electricity distribution companies and now the government says they will not be able to compensate the states for the GST. So, growth will be really out of the window.
If we look at the financial landscape, it looks scary. I do not think many will survive in the next three years time frame. The RBI has kicked the can down the road. There will be MSME restructure one-two years down the road and that is required perhaps but what will happen in two years’ time when all become bad debt? Let us be honest about it.
We are looking at the transmission companies’ bad debt, production of electricity bad debts, Mudra loan bad debts, now the MSME bad debts. If you were to put your money in the bank where would you go? You will just go to an HDFC Bank, a Kotak Bank and put the money and sit tight. I cannot fault the investors and we must respect the wish of the investors to say that in an economy which is wobbly as ours we are not willing to take the risk with our money. We are willing to ride with Nestle or HDFC or Bajaj Finance but not willing to ride with Yes Bank or IDFC First. And that is a very sensible choice. I would still tell investors to extend their horizon of return longer and longer. We had a large holding in Nestle, we are just buying it thinking it is going to take five years but it gave a fantastic return in 12 months’ time. So, the market can surprise you but this is a market for quality, not for risk. If you are buying value on risk basis on midcap and smallcap, you are going to come to serious grief as all of us have come in the last three years.
There was a view that the markets are getting specifically focussed on earnings, performance. In midcaps and smallcaps we have seen that there have been select names that have shown steady performance. Would you stay away as a blank risk averse or would you actually also look for some quality names in the broader markets?
Again it is the definition of midcaps. After Sebi formula, the midcap is a fairly large space. Would you qualify SRF to be midcap or largecap? I am not sure. It has done fantastically well in terms of performance. Therefore, we are talking of companies with a turnover of Rs 2,000 crore. When we talk of midcaps, we talk of companies sub Rs 500 crore and that is an extinct species. In the three-year time frame, very few such companies will survive. So, it does not matter if you may have an odd quarter. In an economy growing at 5 per cent, if the market leader grows at 10 per cent, that means everybody else will have to de-grow by almost 50 per cent in terms of their growth rate. The arithmetic is clear. It is against the small companies so a good result should not get you excited. There are lots of good names but again they are overvalued. If you look at Dr Lal PathLab, Metropolis, they are hugely overvalued in the context of their growth scenario. Growth is where the FIIs are going to buy at the end of the bottom line. Growth is not going to come where the local HNIs are going to buy because of a single jerk and the price cut could be 20-30-40 per cent. In this environment of low economy, draw the line unless you are willing, like us risk-takers, to say I want PSU, healthcare, etc. Your dividing line is if it is on the FII list or not. If it is not, it should not be on your list also.
What are the lessons learnt from DMart?
Retail as a sector we all thought was gone and out but DMart is an amazing story out there that surprised everybody. Not only DMart, the second one which has surprised us more than DMart is IRCTC.
If you have missed out on the story, don’t lose heart because there will always be such cases as DMart, etc. The lesson is that you will find such cases, enjoy the look of it, congratulate the guy who actually invested in it but stick to your investment thesis because while looking for DMart you may end up buying a Coffee Day as well.
A great compounder can also be multibagger. Look at HDFC, it has been a multibagger but it has been compounder. Which is that great compounder, which looks like a compounder today boring, dull, ordinary business and gives you a 15 per cent return but at the end of the decade it may turn out to be a multibagger?
Three-years back we were discussing a similar concept, saying not HDFC but what could be the next Maruti. We had volunteered to add, not that we recommend stocks, PVR. I still believe that is one story which is going to be the story of the decade. It is absolutely phenomenal. They have the expertise, the right model, and a passionate promoter. It is not even a stock that offers 10-15 per cent but it will be the story of the decade. All of us go and see movies, so we keep contributing to their earnings.
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