HighlightsWith limited liquidity, buy stocks which have the potential to turnaround. Bajaj Finance, L&T Fin, Piramal Ent., Chola or Aditya Birla Cap great buys among NBFCs.Pharma, healthcare good long-term secular businesses to invest in.Steel stocks like Tata Steel, EPC stocks like L&T and a whole host of PSU companies which are sitting on massive order book positions are where you can take a calculated risk, says Dipan Mehta, Founder Director, Elixir Equities. Excerpts from an interview with ETNOW.
One needs to take calculated risk in life and by life, I mean markets. Where are you taking these calculated risks?Deep cyclicals for one. I have not always been a great fan of cyclical businesses but bear markets make everyone a little wiser at the end of the day, unlike a steel you start buying gradually. Eventually all this mess within US-China is going to end and the global economy will pick up and steel prices will move up. If you gradually buy steel stocks which are available just now like Tata Steel at 0.6 times price to book. If they get the European business problem solved, the India business is really a power house for them.
If they are not able to fix Corus …Then they will bring it down to a level. At the end of the day, Tatas have been good at shutting down or selling off loss-making businesses. We have seen that in telecom for one. Something similar will play out in steel. We do not know what will happen or how it will happen but you have to have faith in the management. When it does, then over a two-three-year period, a stock like Tata Steel can easily double and that may give higher returns than something in the FMCG space or something which is overpriced just now.
There is calculated risk in steel stocks. There’s a calculated risk in engineering procurement companies and it could be private sector like L&T. Then, there is a whole host of PSU companies which are sitting on massive order book positions, right from the likes of NBCC to Bharat Electronics to Ircon, Garden Reach, Cochin Shipyard. They are all somehow related to government orders — be it defence, be it civil. They are sitting on order books which are anywhere from three to four-five years present sales turnover of these companies.
The visibility is there and valuations are extremely attractive– single digit or low double digit type of price owning multiple on a trailing 12 month, high dividend yield — extremely high return on capital. But there is fear because of the PSU label and because near-term performance has not been good. This is where you are supposed to take a calculated risk and lastly we spoke about the pharmaceutical and I would just like to add the hospital business, companies have been doing pretty well over there.
When the FPI tax came in FIIs wanted it gone and now that it is removed, why are not they coming back to India?Now, there is a slowdown in earnings.
So, tax is never an issue and it is a known devil?That is true. Everything is known and so hopefully everything has got discounted in the stock prices and we may have a bottom in place. Let us look at the positive side. No bad news is good news for this market and it is difficult to see how the FIIs think and why they sell and why they buy, but tax certainly was an issue. May be, it triggered a selling pressure and that generally gets some kind of a flow and then bad news follows bad news and then you just do not get the sentiment right. This causes the markets to go down. That is part and parcel of the stock market and it is a bear phase. you have to face it and spend that time in the bear market and hopefully if you are patient enough, then you will have the fruits of a bull market.
In 2017, prices were here, valuations were here. In 2019, where are the prices and where are the valuations?There are pockets of overvaluation still in the market and there are pockets of undervaluations but undervaluation is based on historical earnings. If an investor has the faith that wherever there is undervaluation, in those businesses, there are temporary problems in the sector or the company and eventually they will get resolved and the earnings will start moving up provide opportunity to make exceptional returns.
There are stocks which are highly overvalued and still going at 50-60 times PE and PEG of about two and a half times or so. Investors are migrating over there but anyway liquidity is low on those stocks. They are kind of a safe haven to invest in right now, but whenever the bear market turns and the bull market starts, I do not think that is the place which will you give the highest returns.
Investing is of course taking a little bit of a risk and buying when the chips are really down and good quality companies which have a track record to generate exceptional returns for investors in the past but are facing temporary problems, which once resolved, would see the earnings return. Those stock prices are moving up and so it is tough to get into the right stock selection and maintain a good balance. But then, who said bear markets are easy to navigate?
But in that pain and in that trouble in the bad news are you finding opportunities just yet in the market anywhere?The maximum damage has taken place in the banking and financial services industry, especially banks and NBFCs and there are a lot of opportunities. NBFCs, which have been supported and sponsored by large business houses, are available at very attractive valuations and you may see a quarter or two of slow growth and some more credit cost, but the long-term trajectory is fantastic for these companies. These are well managed, have the brand equity and the backing to raise cheap liquidity and to lend it forward. It is a viable business model. A NBFC like Bajaj Finance has demonstrated its capacity in bear markets like this but even smaller players like L&T Finance, Piramal Enterprises, Cholamandalam or Aditya Birla Capital are all great buys from a long-term investors perspective. So, that is one pocket which we are quite optimistic on.
Then there is this entire pharma healthcare space. While overall consumption has slowed down, the consumption as far as healthcare is concerned has actually increased and for the first time after many months, we saw double digit growth in domestic pharma sales as well. If you have businesses which have got strong domestic pharma or which are into healthcare like hospitals like diagnostics, they are doing pretty well. Some of them are slightly overvalued but these are good long-term secular businesses to invest in.
Would you hunt that at all in autos? Has the time come to take a look at or take a relook at that sector?No, in fact, we made a mistake in auto and now we are looking at ways of exiting auto. When you have such a sharp slowdown in sales turnover, clearly there is something structural and not cyclical. I go back to the phases of high growth industries which when going through structural changes like say a telecom or IT or pharma in the earlier form. They used to have these high growth phase of 20-25% and then suddenly the earnings collapsed and when the earnings actually recovered, they are in that high single digit to low double digit.
Something similar will play out in automobiles as well where after a period of very high earnings growth and volume growth, it has completely collapsed and whenever this recovers, you will at best get a single digit or a low double digit type of volume growth. It will be highly cyclical and not create as much value. The best years for auto are behind us. We could go into the reasons — uberisation, better public transportation, high cost of ownership etc. At the end of the day, there is a structural change taking place and investors need to recognise that.
The only exception is commercial vehicles which also is a highly cyclical play and you could take a bet, if at all, on a company like Ashok Leyland which when the economy turns and we get back to 7-8% growth rates, then the volumes go up by 40-50% for a commercial vehicle manufacture like Ashok Leyland and earnings could double too.
So what you are doing with your portfolio is that you are preparing for a better tomorrow. You want to prepare your portfolio which will benefit from economic recovery and that cannot be captured in autos and consumption.Absolutely that is the underlying mantra. There is no great money to be made buying a stock at 60-70 PE multiple. Mind you, we look at companies like Titan, which had a high degree of visibility, expensive valuation and growth rates also but then if growth rates collapse tomorrow and the downturn lasts for some more time, even then, Asian Paints will not get impacted.
Given the volatility on the back of various news points, what is your take on Sun Pharma?We are positive on Sun Pharma. They are following the right strategy in getting into specialised products and a lot of strategy has been changed and they are focussing on the right products and the right geographies and attractive valuation mainly because of this overhang of corporate governance.
I do not see that much is going to come out of this particular controversy and whatever corrective action is required, they have already taken it. Its balance sheet is extremely strong and some of the acquisitions that they have done may take some more time to get the synergies out of it. But at this price, I do not think there is so much of a downside in Sun Pharma unless there is some fresh negative USFDA action or something new blows out on corporate governance side.
From this point, it can definitely outperform the Sensex and the Nifty and you need to have a slightly longer term view on this company because the strategy which they are following takes a while to start playing out, but it is the right strategy given the conditions.
Are markets paying disproportionate premium to some of the companies where near term visibility is there? Near term is two quarters and the companies are Asian Paints, Trend, V-Mart among others.I totally agree with you.
Does one buy them because they are safe or avoid them because they are expensive?Avoid them. If you are owning them, remain invested. Nobody wants to sell an Asian Paints even at 79 times trailing 12 months, but you cannot take a fresh plunge in these stocks.
You cannot take a fresh plunge in these stocks?I do not think so. I does not make sense. At whatever limited liquidity you have, you want to buy stocks which have the potential to turnaround.
Then why not buy IT/pharma? Ray Dalio, Howard Mark are saying that a problem is going to happen in the world. If that happens, the dollar is going to strengthen, rupee is going to weaken. So, pharma/IT maybe are the businesses that thrive on a weak rupee.As I said, we are positive on pharma.
No I am talking about the generic, not the Glaxo, Abbotts of the world.I am very positive on the likes of Sun Pharma, Aurobindo, Dr Reddy’s, Cipla the generic companies. Yes I think that all of these companies have done a lot of change in their strategy. They have right sized themselves. They are focussed on the products in right geographies and they are getting more productive as far as their spending and their assets are concerned. They are not just launching products left, right and centre. They are being a bit careful as far as their selection of products and geographies are concerned.
Considering that what they have gone through, base effect will benefit them, rupee depreciation will benefit them. At this point, there are more opportunities than threats. Of course, the US FDA will keep on, whenever that happens it is difficult to predict but by and large, you may see good times for pharmaceuticals over the next 12 to 18 months or so.
If you want to protect capital, then right now, IT is a safe haven because there is going to be no collapse of earnings over there but there is going to be no expansion of the growth rates as well. You are looking at 10-12% type of growth rates which is fine in markets like these while elsewhere you are seeing negative earnings. It is one sector which is at least showing positive earnings.
Do you stick by with the TCSes of the world or do you go little bottom down the line and maybe NIIT Technology, Hexaware, etc.?I am not convinced on midcap IT. Maybe TCS, Infosys are expensive and the likes of say HCL Tech, Tech Mahindra, Wipro may have slight bit of outperformance but it does not matter. You can go with the best buy TCS, Infosys. They will at least protect your capital in times like this. We are in very uncertain times over here and if this lasts for some more time, the bear market, then where do you hide, where do you protect your capital if you have fresh liquidity coming in apart of putting some of it into these ideas which will benefit from whenever bull market starts. If your intrinsic requirement is to protect some capital and yet be in equities, then certainly IT has a role to play.