We expect de-globalisation or re-industrialisation happening going forward: Nilesh Doshi

“Overall, we did very well by exiting a couple of sectors and by investing into a couple of capital goods and infrastructure companies, PSU banks, some integrated textile companies and energy related capex companies. Some of these things have worked very well for us,” says Nilesh Doshi, Managing Partner, Green Lantern Capital.

For CY2022, what kind of returns did you generate in your main scheme or strategy versus 2021?
2022 has been a very challenging year as far as the markets are concerned with global headwinds, volatility, liquidity tightening and so many things. What actually worked for us were a couple of things; one, apart from fundamental analysis, we are also trying to keep ourselves updated with a lot of macro challenges and we try to ensure that our investment hypothesis is not against micro headwinds also.

In short, we have attempted a very disciplined approach. We never went for over concentrated investment into any sector or stock and wherever we felt there were massive macro headwinds or challenges. We have exited those sectors or stocks.

For example, we exited IT and pharma in December 2020 or early 2021, seeing the challenges in terms of inflation come again and expecting the interest rates to go up. At the same time, we invested into capital goods which were very positive for almost more than two years. We invested in PSU banks, a couple of very niche businesses and all that worked very well for us.

Talk to us about your portfolio selection criteria. How do you pick stocks because that is differentiating your strategy versus many others?
We try and analyse the macro challenges and the micro supportives to the sectors. We also try to analyse where the earnings are going to come in and that is very critical. Typically, the market throws up a lot of opportunities with the belief that this particular stock or a sector may not have earnings coming in and that is where we try to analyse the reasons why those companies have poor earnings and what could be the reason these companies could have a change in or an increase in earnings. It has very well worked for us.

Apart from that, we try to ensure that our margin of safety at an entry point is good and that our risk reward is very favourable. For example, we were very positive on capital goods almost two years ago. We took a couple of tactical plays in metals last year and we exited those sectors also because the moment we realised that the earnings are going to or the hypothesis on which we have been investing is going to get challenged, we exit those stocks.

So overall we did very well by exiting a couple of sectors and by investing into a couple of capital goods and infrastructure companies, PSU banks, some integrated textile companies and energy related capex companies. Some of these things have worked very well for us.

Talk about some of the stocks which you hold in your key strategy and also what you are bullish on a theme? We have seen pipe companies making a lot of value from Maharashtra seamless, JTL Industries, APL Apollo and Tata Metaliks. Many of them are in your portfolio. Why do you like metal pipe companies? What is the trigger?
The reason for investing into these businesses is that for the last 10-12 years in a very benign inflation and very low interest rates cycle, there has been a lot of focus on ESG renewables. No capex was done in the oil and gas sector. One can say that the entire sector was deprived of liquidity and capital and a lot of anti belief systems say that this sector will be dead, the terminal value is zero.

One realised post Covid that a couple of refineries have closed down, the industry has not done any capital expenditure, any exploration for the last almost 10-12 years. So we believe that as the world economy normalises post Covid, the demand for oil and gas especially from the developing world like India, is going to go up substantially.

The world will be forced to do some capex, starting from exploration and even some refineries were closed down. We believe new refineries will have to come and apart from that, we also see that some de-globalisation or re-industrialisation will happen going forward, either from a geopolitical reason or any other reason.

All this will definitely lead to the capital expenditure coming into this sector. Along with that, we have PLI capital expenditure coming in and when you see some of these businesses, we definitely see very good demand coming forward. Of course in the short term, crude oil has cooled off from the highs and there could be some minor headwinds but in the longer term. we strongly believe that the capex will come back.

What about some of the auto ancillary space, particularly battery companies like Amara Raja and Exide? This pocket has not performed for a very long time. The view is that the fears of EV and the ICE engine battery requirement will be less. All of that is getting reversed. How do you see this pocket?
One needs to look at both the things in a little different way. Yes, these companies have not done well because of the belief of investors that we are done with lead-acid battery and the terminal value of these business is zero because the world over, it will be only electric vehicles and electric vehicles require very less amount of lead-acid battery and larger is the lithium ion batteries or may be some new technology.

Having analysed this, we realised that even if we keep it into two parts and both ICE engine and EV survive, then definitely this business of Amara Raja or Exide or any of the lead-acid battery companies will survive. Except for some volatility raw material in the past couple of quarters, these are the real great cash flow throwing businesses.

Second, let us assume that the world will shift to electric vehicles and in that case, definitely a country like India will require its battery manufacturing companies. In that case, who else can do it? One can have some MNCs coming in and starting a greenfield project but as of today, no MNCs have ever come in and if anybody wants to come and start the industry, it is going to take seven-eight years.

When you look at that angle, then both these companies are already ahead of the curve as far as domestic battery or electric vehicle batteries are required. One of them has already done a forward integration first. Battery pipe is the most critical component of any electric vehicle and now the company is going backward into making lithium ion cells.

In either of the scenario, if these companies are going to perform the best in the country and if any of the MNC electric vehicle companies are going to come to India with their capex plan, making cars or vehicles is the easiest thing for them to go to the company which are already manufacturing these products in India.

We feel that the companies available at 8-10 times forward and with a cash flow of Rs 1,000-1,200 crore every year and Rs 4,000-5,000 crore of investment lying in the books – fantastic balance sheets – are good and at some point of time, the market will recognise it and that is where the opportunity is good. There is hardly any downside as the company is quoting at 8-10 times forward.

One of the large PSU banks is there in your portfolio. The commentary coming from large PSBs like SBI, BoB, Union Bank give the impression that the runway of growth may continue because the cycle is just starting. Will you continue to hold them for the medium term?
Yes, we still hold that and we believe that in the long term, there are very few headwinds in the near term because of the global slowdown. We feel the India growth story is intact and these companies will definitely do very well. We have been holding this position for the last couple of years.