Time to start nibbling into mid- and smallcap value buys: Vinit Sambre, DSP Mutual Fund
Don’t wait for the green shoot as the price points would no longer be as good.
Do you think that markets will remain feeble because of oil?
We are currently facing a slowdown which is impacting most of the businesses. But all this while, oil was supportive. But if oil also starts to play a spoilsport, then that will have its bearing in terms of higher input costs. Also, fiscally it will not be positive for the country and as such would not be a positive factor as far as our economy is concerned.
What is the right way of looking at the current market – macros are great and micros will get better or after this oil shock both macros and micro will be under pressure? Do you believe we may not see anything grand for the market for the rest of the year?
By and large, I agree to the view that given the current slowdown which we are witnessing and if oil starts to flare up, those will not be good indicators as far as we are concerned. We are not seeing the uptick as far as the results are concerned. Whatever little data we are able to capture or gather show the festival season is yet to gather much steam.
All indicators are pointing towards continuity of this slowdown for a while. Hence, going with the existing setup, it becomes slightly tough from the market’s view point. But from the investing thought process, the price points of many companies are getting to reasonable levels versus what it used to be in 2017. From the long-term investment view point, for the investors who have the patience to sit through and see the volatility for a while, this also makes a case for such investors to start nibbling in and looking at markets at the current juncture.
You are a midcap specialist. You have a smallcap fund. How is that end of the market looking? Do you think there is more pain left? Is it true that midcaps have fallen but they are not cheap?
By and large, most of the midcaps have fallen. Some of them have become quite reasonable as far as their historical valuation goes, but there are a couple of them which have still not seen decent correction yet. That is one category which probably is not as cheap as some of the others and hence from the investment point of view, it will be ideal to look at the companies which have gone down to interesting levels in terms of the valuations and probably wait a while for the ones which still look expensive but given that the earnings are likely to disappoint, may cool off a bit.
Have you begun hunting within the small and midcap space because that is where valuations are attractive and there are some growth stories as well? Or do you wait for the froth to settle down and see those green shoots emerge when it comes to growth?
It is a very important decision which every investor is trying to find the answer to. I always find it difficult to wait till the last point. The moment one starts seeing green shoots of recovery, the price points would not be as attractive as what you see today. Given the slowdown in the economy and given that the earnings are likely to disappoint, there is a fair chance that before the recovery, we may have to see some bit of a down dip as well.
Who knows what will be the lowest point in terms of the markets? But by and large, long-term investment is all about trying to identify pockets of attractiveness in this turmoil and starting to invest because if we look at the smallcaps, it has got corrected significantly in the last one and a half year or so. The valuations there also look pretty okay right now. So there is a fair chance that given where we stand as an economy, the turn will take a while. There is a fair chance that they may see further correction but the ideal stance would be to start looking at it now and keep gradually investing into these companies.
Where do you think the markets are not paying attention to either valuations or the strength of the business and pure technical factors? Liquidity have taken those businesses down and that is one pocket; the second pocket is where do you think markets currently are over paying for the growth. There is near term visibility but there are very different ends of the market.
The pockets where the stocks seems to be overpriced today given the fair degree of near term earnings visibility include FMCG and retail categories as such and a few private sector NBFCs.. But other than that, if we were to by and large, look at many other categories I think they have seen decent corrections including the auto ancillary, building materials as a category, healthcare as a category where selectively we are looking at opportunities in those categories. Excluding the FMCGs or some of the retail companies and some of the private sector NBFCs, the other categories are fairly cheap.
Interesting that you actually find opportunity within auto and auto ancillaries. a) where do you find opportunity within auto and auto ancillaries considering it is such a diverse space and b) would it have to be a long drawn investment plan?
Yes, auto and auto ancillaries are looking attractive from the price point. Like you said, the stocks have seen massive corrections and rightly so. The reasons have been pretty solid where we are sensing slowdown not just in India, but globally. By the way, we have a lot of these strong brand franchises. Extremely good brands have been created in India. There are many auto ancillary companies which are globally competitive today. They are not just catering to the Indian markets but are looking at the global market.
In terms of the mix, there are a lot of OEs which are purely not dependent upon OE demand. There is a huge amount of replacement demand which they can cater to. I would say that within the auto ancillary as such, there is a diverse set of business which provides some bit of cushion in the slowdown and the wait period may be slightly longer. People may want to have some clarity around whether there is going to be any regulatory support which is going to be there in terms of GST cut. People are wanting to see what happens to the price point post the BS VI implementation.
As clarity emerges, we would expect the cycle to gradually come back and with the fall which most of the OEs are witnessing in terms of the monthly demand, a low base is also getting created. So for achieving slightly reasonable growth, they will not have to look at high numbers. The reversal, whenever it happens, can provide a decent opportunity for the investors who are disregarding this category as such.
You are looking positively at healthcare. Explain the rationale there and is there any particular strategy that you are putting in place when you are looking at some of these healthcare names?
Healthcare, solves two purposes. Were people are worried about overall markets and many categories are reporting low numbers, healthcare fits the bill well and anyways there are many companies which had seen issues around their USFDA inspection, generic pricing related issues. And many of these companies are coming out of these problems which they had seen three, four years ago. So, selectively it makes a case to look at these companies as they are coming out of the problems.
Beyond that, there are domestic-focussed companies and the domestic market is gradually picking up. By and large, the domestic-oriented companies tend to have very strong balance sheet; their return ratios tends to remain very strong. Overall healthcare as a sector, is out of favour for the last three, four years. The valuations are also sounding pretty reasonable. Due to these factors it makes sense to have some bit of allocation to the healthcare sector as such.
Are you not cognisant of the fact that a) the generic prices are still not very stable b) Amazon is planning to enter the US generic market and the US pharmacy business! God knows what will happen to pricing?
Yes, we are cognisant of the fact and we are just looking at the slope of the price points. If we look at the generic price change in the last two to three years, there was a massive decline one and a half two years back and now that decline actually has got arrested. There are many companies globally which have withdrawn from the products which are not remunerative for them. This means that we can probably assume that from the price pressure point of view, we are reaching a sort of a trough.
Indian companies are cost competitive and there is a play for the Indian generics in the US market as such. Also, we have started witnessing, not in a huge way, that the Indian companies are getting to look at some of the US opportunities. They are trying to grab a decent share of the market there.
So irrespective of the fact that the generic pricing pressure has not fully abated, I still think there are pockets of opportunities. We are cognisant of the fact that this is one sector where the regulatory overhang will remain pretty high -- be it the Amazons of the world, be it the own governments changes as far as the pricing are concerned.
One will have to remain alive to those facts and those risks will always be there but by and large, risks are everywhere. For every business where disruptions are taking place, one has to look for strong brand franchise, good balance sheet, great cash flows and great management. That is the only way one can do relatively better over a long period of time.
Do you have an internal mechanism in place at DSP wherein there are parameters that you are going to be looking out for? What are those three things that you are looking out for?
We have a team of analysts and we constantly keep doing the parallel checks in terms of the dealer checks, going on the road trying to meet a large set of people who are an important part of the value chain and trying to assess the first hand information as to what is really happening. Are there changes which we can foresee?
As of now, whatever little checks we are carrying out, is still not showing encouraging trends as yet. Despite the beginning of the festival season, we are not sensing big changes in the trend as far as demand is concerned across various categories of goods.
We may require more concrete steps, in terms of policy related changes and in terms of a push from the government for a confidence boost which will create a virtuous cycle of improvement in demand.