Siddhartha Bhaiya on why he is not betting on consumption, IT or banks

“I do not buy the argument that while the economy is doing well, the financials have to do well. It is the same argument that was given in 2007 that if the economy has to do well. infra has to do well. The weightage of financials has gone from 8-9% of Nifty to peak of 44-45%. No sector can have such a high weightage. Going forward, my personal view is that with interest rates increasing, banks are going to suffer losses on their treasury books,” says Siddhartha Bhaiya, MD, Aequitas Investment

What is your current portfolio strategy
At portfolio level, we are largely invested. In the last couple of months, we have created a little bit of cash, 10% across portfolios. The global macro scenario looks really bad. The domestic macro numbers are very strong and so India is the only shining star in a very gloomy world right now. Does the good news continue or do things take a little bit of back turn from here? I say let time decide. As far as portfolio positioning is concerned, we are more or less bullish on infra.

You are underweight financials and some would argue that that is big contra call because it is very difficult to go underweight on financials when it is a heavyweight and when such strong growth is staring at us in terms of an economic revival.

I do not buy the argument that while the economy is doing well, the financials have to do well. It is the same argument that was given in 2007 that if the economy has to do well. infra has to do well. The weightage of financials has gone from 8-9% of Nifty to peak of 44-45%. No sector can have such a high weightage. Going forward, my personal view is that with interest rates increasing, banks are going to suffer losses on their treasury books,

NPAs in a rising interest rate environment are definitely going to increase and so I will be a little cautious. You have seen what has happened with Credit Suisse and Deutsche Bank worldwide. Every 10 years, some or the other major global banks collapse/ Historically, financials have commanded lower PE multiples. It is only in the last 10 years that the typical traditional benchmark for valuing an NBFC was one time price to book or one-and-a-half times price to book. For bigger global banks, it is two times or two-and-a-half times.

Valuations are still very expensive as far as the Indian financial sector is concerned and that is the reason, given that we are headed into higher rates, NPAs are going to increase more and so on the consumer side, that is the reason we are cautious as far as financials are concerned.

You said that you are bullish on the infrastructure theme. I want to stretch that point forward and understand how you are looking to play this basket? What is the outlook in general for the infrastructure sector, what is driving the optimism?
So to be honest, infrastructure is not a luxury, it is a necessity. I just travelled from Mumbai to Pune last week and there was barely any signal on the road as the traffic on the road was crazy. If we really have to achieve a GDP growth of 7% plus, we really need to spend a lot on infrastructure and with government revenue so strong, there is going to be lot of impetus as far as infra is concerned.

The valuations look very attractive for a lot of the infra and capital goods companies and these are stocks and sectors which were practically ignored over the last decade. It is very difficult for me to discuss individual stocks but look at the order book for some of these companies. They have built a book ratio of close to four years with a very little debt on their balance sheet. There is scope for growth and more importantly we are seeing a lot of the bank credit now flowing to the infrastructure sector. So infrastructure could be a big theme, not just for the next two-three-four years but probably for the next decade.

I am tempted to talk about the top five stocks in your PMS. Let us start with Technocraft Industries..What makes you bullish on this company for a long time to come?
In Technocraft, there are two major segments. One is drum closures ,where they have nearly 30% plus of the global drum closures market. That is a business which does more than 100% return on capital employed year after year.

Second is they are into scaffolding and they are seeing a very strong traction domestically as far as scaffolding is concerned. We are moving away from bamboos to steel scaffolding. It is a market leader both as far as domestic scaffolding is concerned and globally it is number two in the drum closures space. The company does have very high return ratios, lot of free cash generation and is available at single digit PE multiples so we have been holding this stock for a number of years now to be honest with you so all the top five that you see most of them we are holding for more than five year, in some cases we are holding them for nine years the stocks.

Deepak Fertilisers is a well discovered story. How much more headroom would some of these names have going forward? Are you looking at newer names to add here or reduce positions in the existing list?
Typically we do not churn our portfolio a lot. Deepak is something which we have been holding for close to 10 years now. It is the largest manufacturer of technical ammonium nitrate in the country; it is the largest manufacturer of IPA in the country. It is the largest manufacturer of nitric acid in the country and they have made a big investment as far as their ammonia plant is concerned, – more than $500 million. The ammonia plant is nearly six months away.

The kind of backward integration that this ammonia plant will give them and the kind of benefits that they are going to see in terms of raw material is going to be phenomenal.

We are long-term investors. We have held this stock for a number of years. It is a good company. Their balance sheet suffered a little bit during 2020 but now they are making truckloads of money and so we are staying put at this point in time. Again, the valuations are an attractive sub 10 PE multiple.

Some of the stocks you have been holding for six years. Deepak Fertilisers you have been holding for nine years; Gujarat Ambuja, Technocraft, Apar Industries and Maithan Alloys– which out of these stocks do you plan to own for another five years?
I would not want to put that. We monitor our stocks on a quarterly basis and practically on a daily basis, any news that is affecting our companies. Some of these stocks have corrected more than 50%, 60% over the last 10 years and not just once but on numerous occasions. So we would have the patience, we would have the understanding to hold stocks through a 50-60-70% drawdown but not everyone does so.

It is very difficult for me to say that look I am going to hold this stock for the next five years, it does not work that way. These stocks could double within next month and maybe we would be out of it for all you know. We look at valuations; we look at the underlying fundamentals of the companies and then take a call.

I do not see anything which has got to do with the urban consumption theme. I do not see anything which has got to do with technology. You do not have financials so it is a very different portfolio. Some would say that you are not betting on consumption which is the India romance, IT or banks a secular story?
I think these are themes which have already played out over the last decade whether it is consumption, nobody wanted to touch consumption stocks a decade back. You have to look at where the flow of bank credit is going to go. Banking credit was flowing to the infrastructure sectors 10 years back; it was flowing to government stocks. Even on a day like Monday, only PSUs and infra stocks were up and that is a very strong indicator.

The valuations of consumption stocks are crazy. With interest rates rising and with the government being the biggest borrower, the government is going to crowd out the consumer. A lot of the consumerism over the last decade was driven by cheap credit. So, I think that is going away.

If that goes away, there could be a little bit of impact as far as consumerism is concerned. The only way to kill inflation is to kill consumption. Let us not fool ourselves by saying that this consumption story is going to continue. While it looks very strong right now and might continue, at the same time, the valuations do not leave anything on the table, there is no margin of safety. My views are very contrarian.

What is the outlook when it comes to the metal basket?
I think metals are global, commodities are global and globally there is a massive recession. So the metal story is off for the time being.

Where to from here?
Does India truly decouple or have we seen the worst as far as the western markets are concerned? I am not clear. This is a time for consolidation, I do not expect a runaway bull market at any point in time. I would rather be cautious than being very aggressive in this market, let me put it this way.