Value, not growth, to matter for next 1-2 years: Sunil Singhania5 months, 12 days ago
2019 would be a change in the sense that foreign inflows should also be quite strong both on the equity and fixed income side, Sunil Singhania, Founder, Abakkus Asset Manager, tells ET Now.Edited excerpts: Will it be a great 2019 for investors or is this going to be another challenging year? First of all, any equity investor has to be optimistic. If one is not optimistic, then one should not be an equity investor. Also, in a growing economy it makes sense to be optimistic. As far as challenges are concerned, we have seen many challenges over the last few years and these will continue. I think that is the essence of life. Notwithstanding the challenges and notwithstanding fact that 2018 was a very challenging year, we remain quite optimistic about 2019 and the years forward. But sometimes you have to be realistic. I mean in 2008, if you had become optimistic, then your optimism did not help. Now you are talking and comparing it to a very different year where it was euphoric. I do not see that in the last three-four years we have at any point of time been euphoric except for a period of six months when specifically on the mid and smallcaps we had become euphoric. The world overall has not been euphoric and that makes us believe we are not seeing an overboard kind of a market where people are long left, right and centre and are over-leveraged, In fact, it is the reverse. People have been very cautious. Investors have not been investing as aggressively as maybe their cash balances in the bank are. There is definitely not an over-leveraged situation, not only in India but anywhere else in the world. The situation is far different from the year you mentioned. What makes you so hopeful? 2018 was a year full of uncertainties — be it on crude, on geopolitical situations or for that matter currency. Do you believe that maybe finally after that long wait, we are going to see earning recovery kick in from the next quarter itself? You mentioned it all. Oil has been a godsend for us. From $85, we are down to $53-54. Fundamentally at least, we do not see oil moving beyond $60-65 even in the medium to long-term. Currency has come back to $70. If you see the last 20 years of trend on an average, rupee depreciates by anyway between 3% and 3.25% a year but that is like a step of function. We have a 10-12% depreciation and then the rupee stabilises for three-four years. It is fair to presume that after this 10% depreciation, rupee should be quite stable for the next three-four years. Inflation is down and going forward, the way oil prices have corrected, does not seem to be inching up despite the fact that we expect the minimum support prices (MSP) for a lot of farm products to be increased and consequently the 10-year G-Sec yields have fallen to 7.25%. Internationally, there was this fear that US interest rates might inch up to 4%. They have actually fallen to 2.65%. US markets have been volatile but again my view is that it is a very healthy market and I am quite optimistic even on the US equity markets given the fact that the S&P 500 is trading at like 14-14.5 times earning which is like 7% yield in a country where the interest rates are at 3%. On the flows front, we have always had good domestic inflows over the last three-four years. My view is that 2019 would be a change in the sense that foreign inflows should also be quite strong both on the equity and fixed income side. The last point which you also touched upon is earnings. It is generally led by a couple of sectors, predominantly corporate banks. We expect earnings for FY20 to inch up to 20% plus in terms of growth. Obviously a large part of that would be contributed by corporate banks but other small sectors should also kick in. Overall, given the fact that we are not in a very euphoric zone, we are may be at around 16 times FY20 earnings and three-four months ahead, we would start to discount FY21, I think there is reasonable optimism both on the economy front as well as from market front. My only concern with the current environment is that are we underestimating the fall in US markets? I remember this kind of situation happening in 2007 when world discovered a problem call subprime. Indian markets started outperforming for many months. Today we can take a lot of pride in saying that US market has gone down but we were up in December. We are better and we have better growth. But will that really last for a long period of time? Again you are comparing two different times and situations. 2007. as you rightly said was more of a crash over leveraged position. And in fact, I was yesterday seeing the documentary The Big Short. It is incidental that we are talking about it today. It was more about the banking system being levered up like 40 times. If you see the banking system in the US now, it is very healthy compared to 2007, in terms of their capital adequacy, in terms of their profitability etc. Second. we are not looking at PEs of 40-50 times in US. We are looking at a PE of 14.5 times for S&P 500. Again just to give you a perspective, there was a trillion-dollar buyback in US in 2018. If you add the last five years of buybacks, they have totalled around $4 trillion which is almost 20% to 25% of the market cap of the US. We are seeing companies having huge cash balances, having huge cash profits. The economy is doing very well. If you go to US and you just talk to people, there is hardly any unemployment. In fact, there is shortage, specifically on the technology side of people. I do not see a scenario of something like 2007-08 even near that and I would say that definitely things are much better and very different from 2007-08. As far as markets are concerned, even there we had this phenomena of the FAANG stocks among the technology stocks, where there was a little bit of over-optimism and those are the stocks which have fallen the most over the last three-four months. So one segment had moved up very sharply and has fallen equally sharply. It is similar to what we had in India where midcaps and small caps went up sharply, they fell sharply or quality was getting unusual premium and wherever that quality has disappointed a little bit, you have seen a sharp fall. It is more a case of over-optimism in a few stocks or a few sectors getting patted down and the fall is more pronounced there. Again, just to conclude, I do not see a scenario of like a meltdown of 2007-08, I do not see it as enything near that. In fact, if I were an investor, I would also bet on the US markets from here on.We had some interesting data thrown up yesterday with respect to the Russell 2000. A 10% fall historically has been followed by a positive year. Perhaps we could see that for the midcap index as well? Where are you seeing opportunity within the midcap universe?Over last three years, we have seen challenges which were quite significant compared to what we have seen earlier and those challenges meant that investors got comfort in the so-called growth stocks or companies which were not impacted by what was happening on the economy front. So, consumption and quality got disproportionate PE. What we are seeing now is that some kind of multiples are not sustainable if we have even a slight sort of correction in their growth rates. And we have seen that with a large innerwear company and a two-wheeler company, how the multiples have corrected very sharply. My view is that over the next one two years, value will take precedence over growth. Companies which have been slowly growing but have not seen rapid growth have been ignored by the investors and a lot of those companies are on the mid and smallcap side. Going forward, maybe companies which have value and which have been in sectors that have been ignored for their challenging past like may be a construction company, some old gen companies, capex companies. Moving towards them because they have seen sustainable addition to their balance sheet in terms of strength, in terms of their cash and the high PE stocks which were getting unusual flows just because they were performing well. Maybe, it is time to see money moving out of them into so-called value and predominantly they are even on the mid and smallcap side.I was hoping you will get slightly more specific in terms of what are the themes you are betting on.There are a lot of power generation and distribution companies which are now trading at like 7-8 times cash PE multiples. It has been sort of a taboo sector because of all the stress they have undergone over the last four, five years. But going forward, India is a growing economy and we are seeing power demand growing at 7-8%. If we believe that there is going to be power for all and standard of living is going to improve, there is going to be growth in the power generation side as well as on the distribution side because you need to take the power right to the final customers. Also, there has not been any significant addition to capacities. So, companies which have good assets on the generation and distribution side, which have balance sheets that are not stressed or which can raise a question mark regarding their survival, some of these companies will do well. Also on the EPC side, one interesting phenomenon in the September results which we were analysing is the fact that for the first time after a lot of years we have seen EPC companies not only start to generate 15-18% ROE, but have also seen their debt levels go down. This is a dream for an investor in EPC companies because over last 7-8 years, EPC companies have only seen their balance sheets bloat by higher and higher debt. These are some interesting observations and obviously there are other companies in sectors which have been ignored because they do not grow fast. It may be a very boring sector but a few textile companies would be worth looking at. They are boring, they do not grow fast but with the kind of cash which some of these companies are generating maybe in the next three, four years, you will have one period where they will give like 50-100% return. From investor point of view, we have to find whether returns can be made in a block of three, four, five years or whether you are looking at making returns every week or every month. If you are in the former category where you are cognisant of the fact that returns will be made but you are indifferent whether returns will be made in three months but ultimately will be made in a block of three, five years, there will be a lot of companies which will keep on improving their cash flows, balance sheets and that is where the focus should be. On the other hand, there are companies which are doing well, which are growing and have huge brand value, huge ROEs and are at 60-70-80 PE .I do not see a scenario of these companies making you a lot of money unless the growth rates can last for 10, 20 years. So, on the consumption side, our view is that one should stick to consumer discretionary where the penetration is still low, where you can still hope to grow in double digits for the next 10-15 years and I think one of my favourite themes, the beverages sector comes into play. But there are a few emerging discretionary consumption stories which can also be looked at but for a consumer staple kind of companies to give 50-60 PE at least I do not find merit in that.Since you track the financials very, very closely where else do you find opportunities? Can PSBs be looked at right now? Corporate banks are a sort of a consensus trade but despite that, decent returns should be made there because even now, the markets are underestimating the recovery as far as earnings is concerned. On the other sub themes, we like select niche NBFCs. The current issue over the last three, four months has meant that the competition from new NBFCs will reduce quite significantly. On the other hand, NBFCs which are well capitalised, which have a history of managing risk quite nicely over the last five, 10 years will get a disproportionate sort of growth opportunities because of lack of competition or reduction in competition. On the other sub themes we like insurance as a theme though we would like to wait for the markets to give us an opportunity which is much more entailing. I believe that India is going to grow in terms of both asset as well as wealth management businesses because of the huge savings which we have and despite under-penetration, select wealth management companies which we can play through maybe a few brokerages definitely looks to be a good option. A good thing is that valuations now are much more reasonable than what they were three, six months back and at this point of time, we would be very constructive in quite a few NBFCs across different segments. A few areas where we still have issues are obviously again the consensus kind of things which are wholesale funded with a lot of exposure towards real estate. That is one segment where we are not seeing an uptick at least as far as the high end residential markets are concerned.A lot of regulatory headwinds and savings which were going into real estate from an investment perspective have completely stopped and that also makes us believe that those savings will come into the asset/wealth management space. You are better off playing the savings part through the asset/wealth management companies rather than trying to bet on NBFCs which are more exposed towards real estate.Since you are bullish on asset managers, would you buy your previous company Reliance Nippon AMC? It is a listed pure asset management company?As I said, the business of asset management as well as wealth management is definitely good. There are near-term headwinds predominantly from the regulatory front. The reason I started my own company Abakkus is because of the fact that I am quite bullish on this segment and at this point of time my biggest investment in asset management company would be in my company.
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