Nitin Raheja on how he learnt to protect his profits
There are plenty of opportunities in services-oriented businesses in this bottom-up market.
What are you tracking in the broader markets? Any themes that are standing out?
Clearly this is a bottom-up market because a couple of factors are holding. There are these so-called quality names and people are ready to pay any sort of premium for those names. So, either you have one strategy where you are sitting there but beyond a particular level you find it hard to justify to yourself in terms of putting more money to work in stocks at that price level. This is a bottom up market yet. For example, let us take the CNX 500 and I am not going to talk about profit growth because that has got aberrated by the tax cuts. But if you take the overall numbers, sales have grown 5% for about 352 companies that have declared numbers and operating profit has grown about 11%.
Now that is not great but if you come down granular and start looking at it from a bottom up perspective, there are plenty of opportunities. For example, take the services-oriented businesses. The gas companies declared good numbers. On the entertainment side, the exhibition companies have come up with great numbers. Some of the private banks have shown good numbers. Hospital companies have shown good numbers. So one has to pick and choose and when you have been able to call the sector themes right, you will see the portfolio starting to outperform the index in the last couple of months. That is broadly the direction that we will continue going ahead.
What has been the biggest learning for you?
Coincidentally, we were also tracking ourselves and trying to understand what we learnt from the market in the last couple of years and we have seen that in the past. One of the biggest things is not taking your profits. Again, that could mean that at times you could probably lose in some of your big winners. We have been really looking at that aspect in terms of how do we protect profits because even if I look at our own portfolios in the last couple of years, we were sitting on humongous profits in a number of midcap names.
One of the big learnings that we looked and derived was that we did not adhere to stop losses in certain cases but more importantly, when a stock started correcting from the top, we did not keep it. . There is no accurate method but one of the methods that we found is that where a number of our stocks came near breaching the 200 DMA at least three to four times, those stocks finally breached and there was a change in fundamentals. What typically happens is we discovered prices are leading indicators and very often fundamental numbers continue to look good for two-three quarters before they would fall off, but the prices would start reflecting that far in advance. So one of the big learnings for us was in terms of formulating an internal methodology to protect our profits. We often saw companies, say for example Bajaj Finance breaching that indicator, bouncing back and going back up sharply. These are some of the things that we looked at really.
What is next for a Bajaj Finance, for HDFC Bank, for TCS or for that matter even Nestle which has managed to beat the industry rate of 10% sales growth in the quarter gone by? Has the time come to take some chips off the table when it comes to these top names?
It is always a very difficult decision to take and selling is something which most fund managers are not great at. You have 99 books on buying but hardly one book on selling. The point is that some of these companies which had showed consistency will probably see some sort of time correction. You do not really see them coming off the cliff, but I was more specific because some of these largecap names — be it HDFC or Bajaj Finance might get into zones where they might not give you returns for some period of time. That is really the law of normalised returns starting to play into some of these stocks.
I do not think they have necessarily the time to sell some of those stocks but more specifically, when you look into the broader market and a lot of the midcap names that we have seen out there, you know those cuts can be very sharp and deep. You have often seen most people are getting into these midcap names, ending up making humongous amounts of money. The important thing is how to protect those profits because these so called rich names might give you time corrections, might not perform but they are not going to really see you erode your capital. This becomes more important for the broader rather than the midcap names.
Would you be looking at some of the names that have been bouncing around of late, outside of the ICICIs of the world?
We all realised that the next one year is going to be tough and it is going to be a time for the economy to come back. During this period of time, it is very difficult to come up with other names that could come under stress because the likelihood of that happening could be very high. At this point of time, we would speak to some of the larger private banks.
If you go back a few years post the tech bubble crash, we saw that the larger tech companies had a greater possibility of withstanding intermittent shocks of a client going away and so on. Similar examples hold true for banks right now. If you are a small or a mid-sized bank, if there is one account which goes bad, the impact on profitability is far higher vis-à-vis a larger banks which can sustain some of those. We have seen that whether it has been the case with the HDFC Banks of the world or even ICICI Bank.
I would continue to remain in that because these banks have the capacity to raise capital if these markets go higher and garner more market share vis-à-vis some of the smaller banks.
What else should we talk about in terms of earnings specifically? Anything from the midcap basket that has surprised you, that you are looking at positively?
Across the basket, the cement companies actually showed decent set of numbers. If we look at the cement basket, we saw very healthy growth in their operating profit numbers and again I am not talking of PAT numbers because they were an anomaly.
The pharma basket which has been an underperformer for a long time, came up with a decent set of numbers. In fact, it could get distorted but among the pharma companies, we saw 133% sales growth and 40% operating profit growth. These were some of the baskets which surprised. Then there were the services entities like the hospital companies, the multiplex companies which did well during the quarter. And of course the gas companies have delivered some excellent set of numbers. So, these are certain businesses which have visibility and which are relatively non-cyclical. Also, they do not really trade at lofty multiples.
Clearly it seems that disinvestment is high on the government’s agenda. Is that a space which is looking attractive?
These stocks are going to remain buoyant on hopes of the valuations as far as disinvestment is concerned. Some have already seen a substantial run up and the pricing has got nothing to do with immediate fundamentals. We would rather stick to being with stocks where we see numbers and earnings growth.