Why Hiren Ved of Alchemy Capital sees opportunity in sin stocks
“One way to play consumption is retailing. Retailing is a sector which has done well.”
Talking to ET Now, Hiren Ved, Director & CIO, Alchemy Capital, says sin stocks will include liquor, gaming as well as cigarette stocks.
What a year it has been?
Real estate… Did you have Hindalco or Tata Steel in your portfolio?
Are you feeling bad then?
No but I still did well.
Because the midcaps and the small caps really rallied. They outperformed the large-caps.
Yes, but that could change.
Why would that change?
Any economic recovery, is usually led by the large-caps and we are in the fourth year of bull market in the small and midcaps. Today, if you look at the right time to probably buy small and midcaps as you guys were discussing, the consensus has always proven wrong. In 2013, when the markets were very bad, nobody wanted to touch small and midcaps because there was a complete risk-off environment and the small and midcaps were trading at a 650 bps discount to the Nifty on a valuation on a trailing earnings basis. Today it is the absolute opposite.
What has happened is that large-caps had a significant portion of their earnings coming internationally. Metals, earlier were not doing well, but now that commodity prices have risen, metals have done phenomenally well. If the economy starts to revive, with a lag, some of the sectors that showed negative growth like PSU banks and private corporate lenders, could see incremental profit growth, while the ones that are already doing well, might continue to do well.
The index goes to a new high because what is doing well continues to do well and what is not doing well adds to what is doing well and that is how you move to the next level in the index. Probably incremental change might come from sectors that are hated or are not doing well -- largely economy-related sectors and what is doing well are companies which are very well run and are designed to do well despite a bad macroeconomic environment/ They might continue to do well but maybe the returns may not be as high if you can catch the turnaround.
In cricket terminology, the flat pitch days are over. Now we could see a sharp turn, maybe some bouncers in this Samvat year? Should you prepare yourself for some volatile days ahead?
Exactly. You could have some unpredictable players making a century.
I will not talk about 20 years. Let us talk about what you will buy for your son. He has just gone abroad. He wants to come back. I am sure he also wants his dad to leave a legacy.
What will you buy in the portfolio?
I would say that sin stocks is one…
So you will buy liquor stocks in your son’s portfolio. Come on what kind of parenting is this? Beta maine daru ka share portfolio mein liya hai…
See if I buy or do not buy, he is…
He is not buying Cascade Whisky, he is just buying stocks…
Just like I have been a responsible investor, he can be a responsible consumer. No I genuinely believe that if you look at the sin stocks, they have basically taken it on the chin in the last two-three years. They have taken a lot of bad news -- whether it is regulation, whether it is tax hikes, etc, and it is a secular growth story. The risk reward is very favourable for a long-term investor.
So United Spirits, Radico Khaitan, Global Spirits…
I am not naming individual names here but I…
Even on Diwali day… But does your pool of sins also include cigarettes and gambling or is it fully restricted to spirits?.
I said all sin stocks which includes all three whether it is gambling, whether it is cigarettes or whether it is liquor I think that is one that will grow.
And there is no competition which will come from Baba Ramdev there. So the fear of description at least in this category is not going to be there.
Would you avoid consumption and financials? Would you book profits there perhaps?
The other way to play consumption is retailing. Retailing is a sector which has done well. Obviously given the fact that Avenue Supermart has taken the entire sector valuations up but I think that if you look at… we are country of 1.2 billion people. You look at the Fortune 500, Walmart is still number one company on the Fortune 500 list.
It is very fashionable to say that this is a consensus and markets always move not as per the consensus but consensus traders also work -- whether it is private banks or NBFCs because private banks have been in a 10-year long bull run. NBFCs have been in a three-year long bull run. As a category, how much are you currently invested in NBFCs and private banks? Would you like to ride them for next 12 months?
We have to understand the context as to why they are in a bull run for the last 10 years. It is because you have a very large proportion of the banking system which is still with the public sector banks and more than any time in the past, they are constrained at this point in time for capital and unless they receive a large shot of capital infusion, they are likely to continue to lose market share.
Therefore this is going to be a secular trend. India is the only country amongst the emerging market basket where the public sector banks are still 70% plus of the system. Nowhere in any other emerging market is it such a large proportion of the economy and therefore it is quite likely that the NBFCs and the banks will essentially continue to grow at the expense of…
So which private bank do you own and are you happy to own them for next two-three years? Same for NBFCs? Just give me the names?
We have been owing Bajaj Finance for a long period of time. We continue to own that. While we have trimmed it, we will continue to hold it because it is not just about the sector. It is a one-in-a-decade kind of a situation where you find a company which has executed so phenomenally on an opportunity and I see no reason why they would not. So the question of sizing, etc, is different but we will continue to hold it aswe have also laid a bet on small private sector banks. They are still cheaper compared to the bigger private sector banks and as the financialisation of the economy happens, some of these small private sector banks are also spreading their wings in terms of getting into retail lending.
Where are you most bullish within these small private sector banks? Federal Bank has come out with numbers, South Indian Bank…
That is one name that we own and we continue to be very bullish on that and there are several others in the same category. I mean people have to pick and choose the ones, but that is one basket of opportunity. If you look at next two, three, four years, whichever bank amongst this group is able to execute well, they are trading at very reasonable price to books. I see no reason why they will not start trading like some of the bigger private sector banks.
So you have an opportunity to not only make money on the earnings growth but you will also have a pickup on the price to book valuation as well. That is the other opportunity that I think will make money.
You said the money is to made in the underdogs. What about telecom, now with this consolidation with three large players emerging, while you are seeing some trading bets and some activity here and there. After Bharti, Tata Tele, is that a sector you are willing to bet on for the next five to ten years?
We have not done anything there but it is beginning to look very interesting given the rate at which the industry is consolidating. Jio is showing for the first time that they are willing to take price hikes means that the sector is ripe for a move. Obviously, we have to be mindful that it will continue to be a sector which will be very capital intensive. There is going to be 5G auctions and very strong balance sheets will be needed. There is still capex ahead of these companies.
So you bet on the big daddy and not the smaller ones?