ETMarkets.com“Nobody was talking about defence stocks like Cochin or Mazagon a year back. Who led the rally in the last one year? It was ITC, SBI, Mahindra & Mahindra and Coal India. Now nobody is talking about these stocks,” says Siddhartha Bhaiya, MD, Aequitas Investment Consultancy
The India Diwali got extended for Wall Street on Thursday or Christmas came early.
Yes, there was a massive short covering rally on Thursday and the Nasdaq was up 7%. On Friday Hong Kong was up 5%. Both these markets were extremely oversold. We have seen a little bit of short covering rally in New York and Hong Kong but I do not think those markets are out of the woods yet. But it is a totally different story for India. Our numbers look really strong. The Bank Nifty has made a new high and the Nifty has touched a 52-week high. So, domestically, things look very good.
When we spoke to you last, I remember we had a conversation on why you have a differentiated strategy of not buying into banks?
Yes.
The conversation happened before the earnings season. Post earning season, it is getting more and more pronounced that banks are not only in a sweet spot they are also enjoying the benefits of retail credit, corporate credit and a renewed capex cycle. Is there a change of heart? Do you think that it is never too late to buy into banks?
Errors of omission do not hurt as much as errors of commission. While the Bank Nifty is probably up 10% over the year, our portfolios are up 17-18%. While financials have done well, near term we would not want to own financials in a rising interest rate environment. Yes, near term they have shown very good margins but we have to remember that advance growth is far outpacing the deposit growth.
At some point in time, banks will have to raise their deposit rates. The credit deposit ratio within the system is already at 75% and from now on, incrementally banks will have to be very aggressive with their deposit pricing. Money only gets tighter from these levels. The economic growth is very strong right now. We had Rs 13 lakh crore surplus liquidity two years back. Today, we are in deficit. The economy is very strong and interest rates have to move up from these levels.
Most of the industries have not done any capex for more than a decade and we are just one year-one and a half year into the capex cycle. This is going to be a very-very long capex cycle. Most of the capital goods companies are actually net cash positive at this point in time.
A lot of the infrastructure companies are supposed to have debt on their balance sheet, the valuations are very attractive. Russell Napier came out with the report that the world is going to see a decade-long capex boom.
We are very bullish on infrastructure and I think that as a sector, it should do really well. Again, completely ignore the fact that the sector has not done anything for more than a decade. We are very bullish on the media sector right now. It is going to be a big big beneficiary of the growth in the economy, the advertisements are going to go through the roof according to me so I think media also as a sector again something which has not done well for a long time.
Since you are betting so big on capex, that obviously is going to come as banks are getting more business. I am still a little puzzled as to how you are under exposed to banks?
We have zero exposure to be honest with you and yet we have been able to outperform all the indices. We are more bottom up and not a lot of top down. We are here to make money for the clients. So it is fine if the banks have done well but we own stocks which have done better than the banks.
We very closely follow where the bank credit is going and for a significant portion of the last decade, bank credit globally went to the consumers because interest rates were so low. What we are seeing is bank credit is going back to manufacturing, it is going back to infrastructure, it is going to go to the government because government interest rates are going up. So the government is also going to crowd out the consumer over the next five to seven years.
It has been a good year for consumers – whether it is the apparel, footwear, hospitality or travel category. Even autos have made a comeback. As we look into the future, the base effect has kicked in and inflationary pressures are there. Is it time to move out of consumers? One can get an exit pretty much at the peak of the cycle now?
For the majority of households, the biggest expense from their monthly budgets is EMIs. That has gone up and while right now, we are seeing extension of tenure, at some point in time, banks will have to raise their monthly EMIs and that is when it will start pinching.
So globally and even in India, from a banking sector perspective, we are operating at full capacity and so the NIMs that we are seeing – 75% credit deposit ratio – historically, at that point interest rates start to rise and we have no option. Banks have to raise the deposit rates if they have to make credit grow. All the surplus liquidity in the system has gone. Coming to consumers, as EMIs increase, the surplus that is left in their pockets will decline. More importantly, look at the valuations.
I am looking at some of the newer listed companies they are quoting at 100 PE multiples. One cannot make money by buying stocks at 100 PE multiple. We have seen that with so many of the new age IPOs coming in. We are value investors, we do not believe or do not subscribe to buying stocks at crazy multiples.
One of the stocks you are very bullish on is Deepak Fertilisers. Why?
Deepak Fertilisers is the only manufacturer of technical ammonium nitrate in the country. It is very difficult to import technical ammonium nitrate. They are one of two manufacturers of nitric acid in the country and again that is very difficult to import. There is a shortage of nitric acid in the country. Given the TAN is used for mining as an explosive, there is massive increase in demand for TAN. They have done a massive capex where they are setting up an ammonia plant which comes on stream in the next six months. The kind of savings that they are going to make is phenomenal.
Balance sheets for a lot of these companies have improved dramatically at this rate, in the next one year, it is going to be a debt-free company. So valuations are attractive at 7-8 PE multiple, revenues in excess of billion dollar plus, a balance sheet which has become very healthy and only improving and it is market leader in TAN, in ammonium nitrate and in isopropyl alcohol, not just market leader, it is majority of the market. The rest is imported.
So Deepak Fertlisers is going to be a big beneficiary. The rupee has depreciated significantly. For a lot of manufacturing exporters, a 10% decline in rupee bumps up the margin by 10% because their realisations increase. A big caveat, we have been shareholders here for nearly nine-ten years and it clearly is not a recommendation to come and buy at these levels.
You are saying one should stay away from consumer facing stocks too. Do you also include real estate where we are finally seeing a turnaround after 10 years? In auto, there is pent-up demand. Are you not interested in that too?
No, we are very bullish on autos. We are very bullish on real estate. I think real estate demand again is going to be very strong over the next three, four, five years. The year on year real estate inventory in the top seven cities went down by 13%. The real estate developers had a lot of unsold inventory over the last seven-eight years.
That sector has not done well in terms of pricing. In a city like Mumbai, we have not seen prices go up significantly over the last seven to eight years. As the surplus inventory in the system gets absorbed, that is when we are going to see prices of real estate increasing and that is when we are going to see a lot of new launches.
Go back a decade and everybody is so gung-ho about real estate, ten years later the industry did not do anything and right now we are seeing the signs of revival in real estate. I think real estate and autos will do well, very well. We are very bullish on auto.
You have identified a lot of stocks that you have held onto for a long period of time. but you are saying now is not the right time to buy. So what is looking good at the current level?
There are certain pockets which are looking attractive. Infra has done really well over the last one year so one needs to be very careful over there. While it may do well over a ten-year period, we could have six months, eight months periods also. So, media looks very attractive to me. Autos look very attractive to me. Pharma is something where value started emerging. Infrastructure again looks good.
So yes there are pockets where valuations are very attractive. There are sectors that have not done well for a very long period of time but there is a lot of froth in some areas of the market as well. At the beginning of this year, I had tweeted that this is going to be a stock pickers’ market and I think it has been a stock pickers market.
The two big names which were up yesterday in the BSE midcap index were GIC and New India Assurance. Defence stocks, whether it is Cochin or Mazagon, nobody was talking about them a year back.
Who has led the rally in the last one year? It is ITC, SBI, Mahindra & Mahindra and Coal India. Now nobody is talking about these stocks. A contrarian approach in the long run always works, buying the popular names does not make you money in the long run, as Buffett said.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)
The India Diwali got extended for Wall Street on Thursday or Christmas came early.
Yes, there was a massive short covering rally on Thursday and the Nasdaq was up 7%. On Friday Hong Kong was up 5%. Both these markets were extremely oversold. We have seen a little bit of short covering rally in New York and Hong Kong but I do not think those markets are out of the woods yet. But it is a totally different story for India. Our numbers look really strong. The Bank Nifty has made a new high and the Nifty has touched a 52-week high. So, domestically, things look very good.
When we spoke to you last, I remember we had a conversation on why you have a differentiated strategy of not buying into banks?
Yes.
The conversation happened before the earnings season. Post earning season, it is getting more and more pronounced that banks are not only in a sweet spot they are also enjoying the benefits of retail credit, corporate credit and a renewed capex cycle. Is there a change of heart? Do you think that it is never too late to buy into banks?
Errors of omission do not hurt as much as errors of commission. While the Bank Nifty is probably up 10% over the year, our portfolios are up 17-18%. While financials have done well, near term we would not want to own financials in a rising interest rate environment. Yes, near term they have shown very good margins but we have to remember that advance growth is far outpacing the deposit growth.
At some point in time, banks will have to raise their deposit rates. The credit deposit ratio within the system is already at 75% and from now on, incrementally banks will have to be very aggressive with their deposit pricing. Money only gets tighter from these levels. The economic growth is very strong right now. We had Rs 13 lakh crore surplus liquidity two years back. Today, we are in deficit. The economy is very strong and interest rates have to move up from these levels.
Last time we were chatting, you were talking about how we are at the cusp of a large capex cycle. I guess that is already playing out when it comes to manufacturing. but just wondering whether with the likes of defence you would want to add railways as well to the bag?
Most of the industries have not done any capex for more than a decade and we are just one year-one and a half year into the capex cycle. This is going to be a very-very long capex cycle. Most of the capital goods companies are actually net cash positive at this point in time.
A lot of the infrastructure companies are supposed to have debt on their balance sheet, the valuations are very attractive. Russell Napier came out with the report that the world is going to see a decade-long capex boom.
We are very bullish on infrastructure and I think that as a sector, it should do really well. Again, completely ignore the fact that the sector has not done anything for more than a decade. We are very bullish on the media sector right now. It is going to be a big big beneficiary of the growth in the economy, the advertisements are going to go through the roof according to me so I think media also as a sector again something which has not done well for a long time.
Since you are betting so big on capex, that obviously is going to come as banks are getting more business. I am still a little puzzled as to how you are under exposed to banks?
We have zero exposure to be honest with you and yet we have been able to outperform all the indices. We are more bottom up and not a lot of top down. We are here to make money for the clients. So it is fine if the banks have done well but we own stocks which have done better than the banks.
So you are not betting on the borrowers, not lenders.
We very closely follow where the bank credit is going and for a significant portion of the last decade, bank credit globally went to the consumers because interest rates were so low. What we are seeing is bank credit is going back to manufacturing, it is going back to infrastructure, it is going to go to the government because government interest rates are going up. So the government is also going to crowd out the consumer over the next five to seven years.
It has been a good year for consumers – whether it is the apparel, footwear, hospitality or travel category. Even autos have made a comeback. As we look into the future, the base effect has kicked in and inflationary pressures are there. Is it time to move out of consumers? One can get an exit pretty much at the peak of the cycle now?
For the majority of households, the biggest expense from their monthly budgets is EMIs. That has gone up and while right now, we are seeing extension of tenure, at some point in time, banks will have to raise their monthly EMIs and that is when it will start pinching.
So globally and even in India, from a banking sector perspective, we are operating at full capacity and so the NIMs that we are seeing – 75% credit deposit ratio – historically, at that point interest rates start to rise and we have no option. Banks have to raise the deposit rates if they have to make credit grow. All the surplus liquidity in the system has gone. Coming to consumers, as EMIs increase, the surplus that is left in their pockets will decline. More importantly, look at the valuations.
I am looking at some of the newer listed companies they are quoting at 100 PE multiples. One cannot make money by buying stocks at 100 PE multiple. We have seen that with so many of the new age IPOs coming in. We are value investors, we do not believe or do not subscribe to buying stocks at crazy multiples.
As I said, errors of omission do not matter, it is errors of commission that matter. If you have one Delhivery or one Zomato or one Nykaa in your portfolio and you lose 60-70%, you are never coming back. So I would stay away from consumer stocks as well.
One of the stocks you are very bullish on is Deepak Fertilisers. Why?
Deepak Fertilisers is the only manufacturer of technical ammonium nitrate in the country. It is very difficult to import technical ammonium nitrate. They are one of two manufacturers of nitric acid in the country and again that is very difficult to import. There is a shortage of nitric acid in the country. Given the TAN is used for mining as an explosive, there is massive increase in demand for TAN. They have done a massive capex where they are setting up an ammonia plant which comes on stream in the next six months. The kind of savings that they are going to make is phenomenal.
Balance sheets for a lot of these companies have improved dramatically at this rate, in the next one year, it is going to be a debt-free company. So valuations are attractive at 7-8 PE multiple, revenues in excess of billion dollar plus, a balance sheet which has become very healthy and only improving and it is market leader in TAN, in ammonium nitrate and in isopropyl alcohol, not just market leader, it is majority of the market. The rest is imported.
So Deepak Fertlisers is going to be a big beneficiary. The rupee has depreciated significantly. For a lot of manufacturing exporters, a 10% decline in rupee bumps up the margin by 10% because their realisations increase. A big caveat, we have been shareholders here for nearly nine-ten years and it clearly is not a recommendation to come and buy at these levels.
You are saying one should stay away from consumer facing stocks too. Do you also include real estate where we are finally seeing a turnaround after 10 years? In auto, there is pent-up demand. Are you not interested in that too?
No, we are very bullish on autos. We are very bullish on real estate. I think real estate demand again is going to be very strong over the next three, four, five years. The year on year real estate inventory in the top seven cities went down by 13%. The real estate developers had a lot of unsold inventory over the last seven-eight years.
That sector has not done well in terms of pricing. In a city like Mumbai, we have not seen prices go up significantly over the last seven to eight years. As the surplus inventory in the system gets absorbed, that is when we are going to see prices of real estate increasing and that is when we are going to see a lot of new launches.
Go back a decade and everybody is so gung-ho about real estate, ten years later the industry did not do anything and right now we are seeing the signs of revival in real estate. I think real estate and autos will do well, very well. We are very bullish on auto.
You have identified a lot of stocks that you have held onto for a long period of time. but you are saying now is not the right time to buy. So what is looking good at the current level?
There are certain pockets which are looking attractive. Infra has done really well over the last one year so one needs to be very careful over there. While it may do well over a ten-year period, we could have six months, eight months periods also. So, media looks very attractive to me. Autos look very attractive to me. Pharma is something where value started emerging. Infrastructure again looks good.
So yes there are pockets where valuations are very attractive. There are sectors that have not done well for a very long period of time but there is a lot of froth in some areas of the market as well. At the beginning of this year, I had tweeted that this is going to be a stock pickers’ market and I think it has been a stock pickers market.
The two big names which were up yesterday in the BSE midcap index were GIC and New India Assurance. Defence stocks, whether it is Cochin or Mazagon, nobody was talking about them a year back.
Who has led the rally in the last one year? It is ITC, SBI, Mahindra & Mahindra and Coal India. Now nobody is talking about these stocks. A contrarian approach in the long run always works, buying the popular names does not make you money in the long run, as Buffett said.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)
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(What's moving Sensex and Nifty Track latest market news, stock tips and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)
...moreDownload The Economic Times News App to get Daily Market Updates & Live Business News.
Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.
Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price
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