PSUs can be leaders of Samvat 2076: Ramesh Damani
- The market is looking for new leadership in new year.
- For the extra money you want to put in, look for bargains in PSU sector.
- People ignoring smallcaps and midcaps at their own peril.
- Small and midcaps provide a margin of safety but they need a growth catalyst : Nilesh Shah
- When I see a bear market I say it; others talk about it in the bathroom: Shankar Sharma
- In India, while choosing stock, just worry about the integrity: Raamdeo Agrawal
- If life was so simple in stock market, Buffett won't have underperformed for 15 years: Samir Arora
What do you expect from the markets in Samvat 2076?
When the corporate tax rate came, the market responded very positively. Then it sold off again but over the last few weeks, we have seen the market factor in the bad news and the stocks are still going up. So, there is a suggestion that the long painful two-years we had with the market moving sideways is over and the index is back at near highs. The next Samvat will probably be much better for investors.
Markets always vote for a change of focus on where the buck will move rather than where the buck has moved. Are the markets at the current juncture, pricing in all the bad news? It is not an economic crisis but there is certainly a slowdown. Do you think a lot of bad news is in the price?
Let me give you examples. During 2001 to 2004 period, after the tech bubble burst, two things stood out. First, the PSU sector performed dramatically and was up 600% in the next three years. But the market at that time was only about tech and we were all focussed on tech. Infosys came with a very bad set of numbers and even veterans like me thought market is over now because Infosys came out with bad numbers and that was the day, the bull market started because it started looking at other sectors and founding great values in those sectors. It was the 2003 bull run. We we are in a similar phase right now. The market is looking for new leadership. This great bluechip corporate governance stocks have held the market together. It is a flight to safety, but the market will look for new stories, new action in the new year.
Is one late on doing homework on the list which has fallen 80% from the top but the market cap is still intact?
No, no absolutely not. I think there is an old investment maxim that buying what is comfortable is really profitable and everyone has moved to this corporate governance, high quarter returns.
Because you are so scared?
Yes so scared. You got flight to safety and that will reward you if you are moving from unorganised to organised in that sector. But as the growth of those companies slow down, there will be a flight to other companies and the PSU sector offers the opportunity of leadership because the government wants to unlock value.
So for the first time, there is general consensus that BPCL and Container Corporation can be done and if those actually get done over the next six months, the huge value unlock, is like one domino falling. Suddenly everyone will start looking at all the other ones. You recall the tapes in 2000 when IBP got done and the excitement on the market that day when Arun Shourie announced it.
We are perhaps entering the era of PSU disinvestment because for the first time, tax-payer money will now be productively allocated. There is tremendous value in the stock market. For the marginal money that you want to put in the market, look for bargains in that sector. Samvat to Samvat that offers the most promise to me.
My next question is a difficult one and I am going to ask you in both capacity as chairman of D-Mart and as an investor. What do you make of this whole consumer slowdown. Do you think the perception of slowdown is much greater than the actual reality?
The trick is you have to deliver value to the customers. India is such a large market. If you deliver value, they line up from morning, That is the experience we found. You have to deliver value to the customers, particularly in this hard time. I realise the dividing line. Market is making a strong mistake in throwing the baby out with the bath water because they go into the corporate governance quadrant and generally consumer companies, the MNC companies have the best reputation.
People are ignoring the smallcaps and midcaps at their own peril because there are a lot of extremely well run good corporate governance standards in those companies and while you cannot call them on a sectoral pick, you can call them individually bottom up to pick those stocks.
There are some astonishing bargains out there and particularly also in the PSUs. Here is the point I would like to make which actually my son forced me to understand. He said, generally you people (meaning the stock market fraternity) is so bullish on Narendra Modi government, the BJP, how can you not be bullish on the companies that he is running? If Mr Modi came in with the one point mandate to change the corporate governance to ensure there is less corruption and to make sure economic activity would proceed unimpeded, now that he is the master of all the PSUs, how can you not be bullish on the public sector stocks?
But is he the CEO of that cluster? Your last experience was not a good one. Banks were recapitalised, a lot of attempts were made to reboot the PSUs even in NDA-1. Unfortunately, nothing has transpired into what we thought at the beginning of 2015-15,
That is not true. Look at the PSU as one big sector and you can come through all sorts of knots and struggles in there. If I put all the Dewan Housing and Manpasands in one sector, you would also see bad performance of the private sector. You need to cherry pick, these are different companies in different sectors, some are in resources, some are like IRCTC and in e-commerce businesses; some are in defence and railways which are protected monopoly businesses. So, first distinguish between the two. Some PSUs have done well over the last 20 years. Bharat Electronics is a 200 bagger, Container Corporation has done brilliantly for the investors. So cherry pick those sectors but it is hard to see such large sectors going at such astonishing valuations, where they have order book visibility of 10 years.
You have single digit PEs and yields of 5-6% and the corporate tax cut would come straight to their bottom line and will be paid out as dividends. Investors need to refocus their attention. It has become very popular to say I do not buy PSUs, I do not look at PSUs, but if you are a genuine value investor, and particularly if you have a government now determined to disinvest, you should be looking at it.
We have these 15-20 stocks which are considered safe but they are also very expensive. If you are a value investor, what do you do?
Let me tell you a story of gentleman called Gerald Tsai. He was the fund manager of Fidelity, at that time the Google of fund managers, during the Nifty 50 era in the America of 1974. There were 50 stocks that kept going up in market cap multiples -- Kodak, Coca Cola, GE, Philip Morris, Avon, Polaroid. When the market sank, these stocks kept holding up and Gerald Tsai was a fund manager who popularised the theory of instead of being value investing, he did momentum investing.
He said you keep buying stocks no matter how expensive they are because the growth ultimately will make sure that they have become affordable and like all good theories, that lasted for a while and then the pendulum swung the other way and the companies disappointed in earnings and stocks fell 80-90% from the peak. I am not suggesting that here because I think they are some great quality companies in here and we are moving from very under banked, under-insured area, we are going from unorganised to organised.
Clearly these kind of multiples will not be supported over a long period of time because at some point, growth will be challenging for these companies but companies were moving from that unorganised to organised sector. In under penetrated sectors, the multiples remain lofty for a long period of time but for mature businesses, I am not so sure
India is on a path of recovery. Whether we grow at the rate of 7%, 6% or 5%, that is the only debate which we have on a daily basis. If I work with the assumption that tomorrow will be better than today, is one better off sticking to these great businesses or should one start treasure hunting?
As I said, buying what is comfortable is really profitable in the stock market. I would take it is a portfolio allocation. Would I get rid of my bluechip stocks in my portfolio because they are so expensive? No, but the additional money I am putting in some unloved ignored sectors because that gives me that alpha that I am looking for.
I am sticking my neck out, but if you are a value investor you cannot ignore public sector stocks that are trading at such throw-away valuations. The dividend itself will make up for the holding cost. Anything gives me a 6-7% yield, I am going to hold that for a long period of time as long as that yield is satisfactory. But I have the added sweetener here and the government might come and disinvest now that is the real cherry is on the cake.