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Market’s growth-valuation framework has to converge at some point: Mahesh Patil

Beyond a point when something becomes irrational, one has to just stay back and keep on searching for new opportunities, says the CIO-Equities of Birla Sun Life AMC.

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Last Updated: Feb 27, 2020, 09.47 AM IST
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We have actually added PSUs in the recent fall, because they have become very attractive.
Two things have happened: crude oil has got crushed, bond yields have almost back to demonetisation levels 6.1% we are almost at 6% now how will that change the way how you would be investing for rest of the year, at the beginning of the year no one thought crude will come down by 25% or bond yields will come back to 6% how will this change the way how you value stocks and invest in and how earnings will move?

With interest rates coming down, the challenge has been transmission. We have not seen that play out. There is a perception in the market that while rates are coming down and liquidity is getting pumped in, banks are sitting on a huge amount of liquidity. Now with RBI rowing the LTRO window to borrow at 5.1 per cent, it will enable banks to actually take more risk and lend. So, a lot of the mid-tier companies, which were borrowing at much higher rates today find those rates come down. That should help. Crude oil prices coming down should provide some cushion to the government on the fiscal side. The situation has been very tight and there is little room for the government to invest and stimulate growth. If crude oil prices come down, that will provide some room for the government to provide stimulus and give a push to growth. In this context, clearly the domestic cyclicals will start doing better slowly once things become steady. Even in banking and financials, some of the NBFCs, including some second-tier NBFCs, have now started to get funding. Their borrowing cost has come off about 150 bps in last couple of months. That could be another trade: as credit growth resumes and borrowing cost comes down, you should see these companies show improvement in margins and ROEs. So select financials and domestic plays are what one can play in this theme.

Shanghai Composite, which is the index that matters, is trading at the highest point of day: it started flat because of Dow, but has stabilised slowly. This is in clear indication which way global financial markets are moving.

You cannot be more right. But it is way too early to say. Because at the time in China, this theme seems to have peaked out as workers come back from holidays and go to factories. One has to see if there is a second round of outbreak. For the time being, in terms of the number of cases, China seems to have peaked out.

Right now we are seeing some kind of a stability over there. But we will have to watch out. The next few weeks will be crucial in terms of how it pans out, but as I said liquidity can do wonders. We have seen that in last two years, when a huge amount of liquidity has come in and despite the fundamentals not improving, the market has gone to a different level altogether. I think that will provide a cushion to the market at lower levels. And the market could stabilise in the next few weeks or so.

How do you convince yourself when you see a D-Mart and other consumer-dominated big companies start going higher and higher? A fund manager ultimately wants to take the NAVs higher, but when stocks that have fundamentally gone beyond a logical stretch of imagination, keep rising and rising, how do you keep your discipline? Are you also tempted to look at them? For the record, do you own D-Mart?

We do not own much. We have a small holding there. That is the big dilemma: liquidity can take market valuations to irrational levels in the short to medium term and it can continue. As a fund manager, it is important for us to look at it not from a short-term perspective but from a medium- to long-term perspective. Eventually, the growth-valuation framework has to converge. We may like growth stocks, we like some of these high quality names, but that comes at a price. One has to factor in the fact that there has been a good amount of liquidity and interest rates have come down. To that extent, what criteria are we using to value some of these companies needs to be looked at. One can have some kind of leeway over there, but beyond a point when something becomes irrational, one has to just stay back and keep on searching for new opportunities. There are always stocks which are waiting to catch the fancy.

We are watching out for this big IPO of SBI Cards. Let us talk about that. Let us talk about SBI first: is it on your radar? I noticed some selling in SBI and then the big IPO is coming next week.

We do not talk about individual stocks. I think companies, especially among banks, a lot of value creation has happened with subsidiaries, whether it is an asset management business, insurance business or cards business. In this case, that is unlocking value. That value creation, to some extent, depends on the distribution strength and reach of the bank, which is what is driving value in some of these subsidiaries. That unlocking, as it happens, can create a new benchmark for us to look at some of these names. In many companies, the value of the underlying businesses is larger than the actual company. So one has to look at it from that perspective; what value creation the companies can do, and accordingly build that into your model and SOTP when one looks at some of these names. SBI Cards is a unique name in that particular segment. There is a lot of fancy, because people always want to chase a new sector. There is not much alternative to invest in that space, especially when the market is going to pay a premium for growth in this environment. For companies demonstrating growth of around 20-25% or more, there is always a rush and a huge premium is being paid at this point in time.

Just because you are a PSU does not mean you should get a step-motherly treatment. The railway subsidiaries that have gone public and what has happened to IRCTC are classic examples that a good PSU business can also get rewarded. The problem with PSUs is that good businesses have become bad businesses, good assets have become bad assets and good natural resource companies have been punished with high dividend and with everything in terms of government bureaucracy?

It is again about growth. A lot of PSUs are good value bets; they are good dividend yield stocks, have good cash flows but growth is missing over there. In PSU companies where growth is slightly better than others, the market is willing to look at and pay a premium for that. So it is the difference between growth and value.

PSUs have given the highest corporate tax, they have the strongest dividend yields, corporate tax has come down and dividend yield or dividend will be now taxed in the hands of the receiver. Why is the market is still not buying PSUs then?

We have actually added PSUs in the recent fall, because they have become very attractive. The challenge in PSUs has been the supply of paper, which keeps coming in. Because at whatever price you have bought the stocks, there is supply coming in at a lower level, and that has kept away investors. But things will catch up when you get dividend yields which is higher than bond yields in certain cases. There is some amount of growth, so you would not lose too much from here. I think it is a good time to look at some of these stocks when they are beaten down. They might not be high growth, but for investors looking at downside protection and reasonable returns, they offer good value. If the government acts sensibly in terms of how they are doing the disinvestment, there could be potential for some rerating in some of these PSU names.

If I put a flash out which says that you are bullish on PSUs, I will not be incorrect?

Yes, you would not be...

If I say you are buying PSU stocks and plan to buy more PSU stocks, I will not be incorrect?

Yes, you can say that. But again, we will have to balance it all. If you ask me whether you are positive, I think there is great value. In fact, we launched a PSU fund about two months back. So there might not be a good long-term secular growth, but looking at the risk-reward for reasonable returns, they offer a reasonable upside.

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