Ayaz Motiwala adds auto ancillary, FMCG stocks
Consumer companies always trade at 50-15% premium over Sensex or Nifty.
Global markets are going from strength to strength, setting new records. Back home, we are hitting records and looking pretty good, particularly post the festive season. Earnings have been more or less intact. What are you making of the current momentum?
The markets have hit a new lifetime high and generally there is buoyancy and a very sharp hope built up on recovery. There is some sort of anecdotal evidence on the two- wheeler side, there is reduction in auto inventory particularly among two-wheelers and cars. There is some sort of confidence on buying in the festive period and of course there has been the recent tax cuts by the government. All those are building up market confidence.
Are you also looking at this momentum playing out in a sustainable manner. Would you be looking at allocating further chunks when it comes to the Indian market looking at expanding the basket? How are you strategising at a time like this?
Ours is not a country specific fund and we have the flexibility to increase our weightage to any country. We are bottom up quality investors and are constantly on the lookout for high quality businesses which make sense in terms of what is implied in the growth and what we are paying to purchase those cash flows.
If that mix is appropriate, then we would like to own more in that particular country. I have said this in the past that quality has obviously been an expensive purchase anywhere in Asia and more particularly in India. In that backdrop, it is tougher to find easy sitting value. In some cases, we are paying pretty high valuations for proven quality companies and we are also trying to buy some sort of quality where there is a challenge on the growth front or where there is a hit on margins, raw material, etc, which have impacted their profitability. That is the way we are trying to approach quality investing.
What has been your last acquisition? In fact, in the last three, four, five months, what have you bought and what have you sold?
In the last five, six months, we are in the second round of quality-at-any-price kind of situation. That has been questioned by great market participants and good investors all across the board.
In our case, in specific, we have added a few auto part companies where we are hopeful of a recovery in autos. We have also added a couple of other consumer type names or specific consumer FMCG companies. I would love to illustrate one of that which brings the whole point of either a debt situation or governance or sustainability of growth and also why promoters have come to a point where they have a choice to either sell down or in some cases the company is being taken over by lenders as such. In this case, there was a large block of sell down by the promoter and we participated in that company.
You track the consumption space rather closely. While the purely FMCG companies are bracing for a tepid second quarter, ITC managed to spring a surprise because of tax adjustment. But net net, how should one look at consumption?
One has to look at it from a two-five year perspective in the past and then look a little ahead. I would say that over the long history of the Indian markets consumer companies, which along with a few other types of businesses that are commonly accepted as quality businesses which make sustained high return on capital, do not need new injection of capital, have a high dividend payout and solid balance sheets and profitability. They have always traded at a premium over the Sensex or the Nifty by between 50% and 150%.
At the very low point, if the Sensex traded at 12-13 times, these stocks were trading at 18-20 times multiples and as we speak, that multiple is probably towards a 2.5x of a Sensex, Nifty multiple is 20 odd and that is why we have seen these 40 to 60 times earnings that sets the ground for relative valuation situations as such.
The other point is in the first five years of this government, the market participants did meander around on the hope of a growth recovery. The factual numbers growth across the board is woefully missing and the Nifty earnings are probably in the ballpark of 3% to 4% or thereabouts. There are lots of exclusions on oil and financials. But suffice to say, earnings growth has been limited and has been disappointing.
The element of growth is one that people have veered to and the second in the more recent couple of years is the challenge on governance which is the other sort of aspect. This is affecting investor behaviour which anyway typically towards the end of a cycle, goes towards a flight of quality and this has been further accentuated by the entire IL&FS episode — the debt issues with lots of promoters and a host of smaller companies of turning out to be having very poor numbers or going bankrupt in a very short period of time.
All of these factors put together is pushing investors towards a particular corner where they are paying up either willy-nilly or in the hope that there is near term growth. The forward argument is if the growth were to be broad-based and we are seeing some signs of it like a recovery in auto and some auto part companies take off; there is a consumption recovery and other things happen, then the very narrow width of the market would broaden up which is again a typical market cycle. That is a good thing for investment market participants that the investment rally is more broad based than to specific 20-40 stocks.