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Rupee crossing 70 is sentimental, it won't matter beyond a point: Ravi Dharamshi, ValueQuest Investment

"Right now, we are depreciating because the dollar index is getting stronger."

ET Now|
Aug 18, 2018, 02.04 PM IST
Ravi Dharmanshi - Linkedin
Even within consumer space, it is a very skewed kind of a boom, it is not across the board.
There are a lot of themes that are coming up, and nature of the market will change over the course of next 12-18 months, says Ravi Dharamshi, CIO, ValueQuest Investment Advisors (Market Makers). He spoke to ETNow's Nikunj Dalmia.

Edited excerpts:

Nikunj Dalmia: The Nifty is 6.5 per cent higher from the recent low. Small cap indices, which were down by about 15-18 per cent YTD, have also recovered 50 per cent. I would not say awful has become great, but awful has certainly become bad for the Indian markets.

Ravi Dharamshi: Yes, so let me just give you a perspective of how we look at it. So, the rally prior to 2017 was actually a very polarised rally where very very few stocks did well. So, what we are witnessing from this quarter result onwards is that actually the ocean, the breadth of the market, and the companies that are doing slightly better than what they were doing earlier are actually increasing.

Also, midcaps, small caps saw a nice correction towards the first half of this year. Now, the value is emerging and growth expectations have also aligned a little bit more with reality. Earlier, people were extrapolating much faster and large caps were attractive relative to midcaps. I think that is where the money is flowing incrementally.

Nikunj Dalmia: Historically, it is believed that when there is weakness in the currency, that is a harbinger of weak economy, weak macros and trouble for emerging markets. But in your latest tweet, you are perhaps proposing a different thesis that in the short term, there could be a sentimental correlation because of the weakness in the rupee, but in the long term, weakness in the rupee is actually good news for India.

Ravi Dharamshi: Historically, if you were to directly correlate the markets and the rupee, it is not like rupee depreciation has led to markets falling. What matters is definitely the pace at which it is depreciating and the reasons for which it is depreciating. Right now, we are depreciating because the dollar index is getting stronger.

Incrementally, our macros have also weakened a little bit. The RBI is focussed on inflation. The government is focussed on reviving the economy and we are not overleveraged or spread ourselves to think that we will be hit by something out of the blue. If that is the scenario, then I do not think one should be overly worried about the rupee crossing 70.

I think those are all sentimental things and would not matter beyond a point. The rupee actually should depreciate. It is more a symptom of what is happening rather than it is causing something. Yes incrementally, our macros have weakened a little bit, our current account deficit has widened, the fiscal deficit has loosened a little bit and that is what is getting reflected in the rupee.

But we are not at 6.5 per cent fiscal deficit. We are at 3.5 per cent and we will achieve those target, give or take away a little bit. So, I am not overly concerned about the rupee depreciation.

Nikunj Dalmia: Hyper growth, hyper valuations get replaced by reasonable growth and reasonable valuations. When you say hyper growth, are you referring to FMCG companies because they have given double digit growth? Are you referring to companies like Page Industries and Jubilant Foods because they have given 30 per cent growth, that is hyper growth?

Ravi Dharamshi: Precisely. Hyper growth combined with fantastic quality of a company are getting far superior valuations, rightly so. As long as growth continues, I do not see a derating at this point of time. But incrementally, investing in those names is an issue.

The last time we spoke, I spoke about still sticking with the companies where the growth momentum is still there. But if that growth momentum has been extrapolated two, three, four years out and the price is capturing in, then I think one needs to be a little weary on that front. Within consumer space itself, there are many companies where there are some issues or the other because of which they are not getting valued like that.

Nikunj Dalmia: But when we have a large political event which is now even less than 12 months away, some would argue that this market will remain volatile, capex commitments may not go through and entrepreneurs and promoters may refrain from committing. This will delay both demand and capex cycles and because of pure uncertainty, defensives may still outperform.

Ravi Dharamshi: Yes, that event is providing enough uncertainty and a negative outcome can actually lead to a way better entry point than today. We cannot rule that out... I have absolutely no sense of how that event is going to pan out. I have positioned my portfolio to the economic cycle. And I believe whatever the outcome of that event, the economic cycle is unlikely to be derailed.

What happened in 2004 even when the Vajpayee government lost, the economic cycle actually picked up in a big way post that. Can a similar thing like that happen? I think it is possible though I have no idea on the outcome. But I do believe that the economic cycle is just picking up and we are not done with the economic cycle. That gives me a lot of comfort in staying invested. Can we have a tactical 10-20 per cent kind of cash raise before the event, all that is possible. But at this point of time, it is too early to think about it.

Nikunj Dalmia: You will not take the easy way out which is buy two, three NBFCs or the popular names like Bajaj Finance or let us say Bandhan or AU Finance or maybe buy HUL or sit on Britannia. You will not go for the easy approach.

Ravi Dharamshi: That is not easy anymore, everybody is there. Definitely, that is the difficult part. Now, generating any kind of alpha by buying those stocks is next to impossible.

Nikunj Dalmia: Are you selling consumer names in your portfolio?

Ravi Dharamshi: Incrementally, as I told you, we are moving out of companies or stocks where the market has recognised growth. Those are the ones that we are incrementally selling and getting into names where market has doubt on FY19 numbers itself. I would focus on those companies with reasonable growth and valuations without any balance sheet issues. There are a lot of themes that are emerging, and nature of the market will change over the next 12-18 months.

Nikunj Dalmia: What are you buying right now?

Ravi Dharamshi: I think tactically with a 3-4-year point of view, one should align themselves a little bit more with the capex oriented. Whether you buy a corporate bank or a product engineering company, those are the kind of stocks where there has not been major wealth creation over the last 8-10 years and I think those stocks can give meaningful return and generate meaningful alpha over the next 3-5 years.

We are aligning incrementally, it does not have to be overnight. And my job is to look for companies in that space incrementally.

Nikunj Dalmia: When you say you are betting on capex, what is the best way to do so?

Ravi Dharamshi: Whether it is a product company or a consumable within industrial or an EPC firm, our preference is in that order. Within capex, you can actually find spaces where a certain sector has moved ahead. When all the major capacities are absorbed, then probably the steel capex cycle will start. Cement capex has already started. Road capex is already happening. Railway capex is already on. The point is which are the companies that are aligned with these sectors and how they can benefit. I would like to go with companies with product and engineering capabilities.

Nikunj Dalmia: We have discussed the entire diagnostic/healthcare theme in the past. Are you still hot on that space because somehow numbers are not there for any of the hospitals. We may make a big picture construct that India needs more hospitals and hospital beds, but even though there are some fine listed companies out there, somehow numbers are not there?

Ravi Dharamshi: The biggest challenge for hospitals is that a particular hospital is profitable but making that model scalable is the challenge because there needs to be enough of your hospitals doing well to take care of your new hospitals that are coming up. It is a long gestation business. A hospital takes 7-8 years before it breaks even and starts throwing cash. Until that business model reaches a scale and size from where the incremental growth does not take away from the base business, those ups and downs are likely to happen.

In this scheme of things, with the introduction of the new Ayushman Bharat, one thing is for sure. The insurance penetration in healthcare in India will increase dramatically over the next few years and that is the single-most factor why the healthcare services penetration will also increase. And whether it is a hospital company or a diagnostics chain, they are the secondary beneficiary of this improvement in healthcare infrastructure.

Nikunj Dalmia: Would you buy hospitals or diagnostics because right now we have 4-5 listed hospital plays and 3-4 diagnostic companies. Will you buy both?

Ravi Dharamshi:
Both the spaces are likely to do well, but at the same time what I would prefer is a company that has got its balance sheet together and they can fund their own growth through their own without raising too much of funds. Execution capabilities need to be above par. This huge wave is coming where penetration will increase and services will grow. The guy who has got his act already together is the one that will benefit the most.

I would like to align whether it is diagnostics or hospitals, it is not either or for me, I like both the spaces equally. But diagnostics comes slightly at a higher valuation at this point of time and there is some amount of risk of slowdown because of price cap. Those kind of things exist more on the diagnostic side than on the hospital side. So I am still looking for a bet, honestly I have not bet on it but I am still looking for one. I will keep looking for an opportunity in the space.

Nikunj Dalmia: Most mutual funds managers and PMS fund managers are inclined towards financials and the favourite go-to space has been retail banks and retail NBFCs. Are you looking at a change there as well when you say that get out of crowded the trade?

Ravi Dharamshi: Yes, it applies as much to consumption and larger FMCG companies as retail and private banks as well. That is a crowded space and nobody can afford even a small hitch over there. With the kind of view that I have on the capex cycle, the credit growth will come back, the corporate lending will come back and the valuations in that space are very, very reasonable. I do not have to be right about the next quarter or six months from now.

If I am right that the capex cycle will pick up in the next 2-3 years, that is a fantastic space and the first movers will always be the financers. Corporate banks are the one and already some kind of a movement is already seen where the corporate banks have started doing well and private banks are stagnating to some extent.

So that is the thing. You have to position yourself over there and in a 2-3 year timeframe, I am sure with very high probability that we will be right. Whether we are right in the next six months or not, nobody knows.

Nikunj Dalmia: The pool of corporate banks or at least the large ones is only 2-3. ICICI Bank, Axis Bank, State Bank of India, BOB and then you have to take a deep breath as to which is the one and after a deep breath, you do not want to go beyond BOB. So, you will have to hunt in these 4-5 names only?

Ravi Dharamshi: Four, five names are more than enough, I do not need a sixth name. Yes, I mean, why should I even bother about smaller companies? I have no idea how this space will emerge. There has been stealth privatisation of PSU banks, they have been losing market share and they will incrementally continue losing market share, but a few well managed corporate banks from the public sector will also come up who will do well.

If you can identify it, great. If you cannot, then there are well-known names where you might make less money, but that is safe money to be made as well. Yes, that is more than enough number of companies for me to look at and I will pick and choose probably from those.

Nikunj Dalmia: Optically staple stocks are expensive like Nestle, HUL, Britannia. But if the economy picks up and which is where we are headed, demand will surprise us, the consumption demand will surprise us on the upside and new smaller categories will become large categories, whether it is QSR or aviation. Which is that one large niche consumer category you are betting on that could be interplay between recovery and growth?

Ravi Dharamshi: So the consumption story that has panned out till now has been more on the in-discretionary front and what we are betting now is on the in-discretionary front. If there is one big positive that I hold myself to, that's the GST implementation. Till now what we have witnessed is only the benefits of the rate cut in GST. Actual structural benefits of GST implementation will pan out over a medium term when the screws are tightened.

So, there is still a government that has a more benevolent attitude towards the smaller guys and they are letting them be. Once the screws are tightened more and more incrementally, the market share will be taken by the larger organised guys and that story has been delayed to some extent because of delay in e-way bill implementation or e-way bill implementation not being tight enough.

Once that happens, I think the story of unorganised to organised will happen. I am betting more on the discretionary going forward, consumption space where there is a large unorganised market and right now, there is movement in the sub Rs 1000. But this will spread out to higher premiumisation and premium category as well.

Nikunj Dalmia: The binge will start...?

Ravi Dharamshi:
Yes. Even within consumer space, it is a very skewed kind of a boom, it is not across the board.
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