Learn from your children, never underestimate the power of disruption: Sunil Singhania
- Next 10 years, we are going to make twice as much money as we have made over last 70 yrs.
- Do not invesr in anything you don't understand.
- Learn from your childre, if needed, what disruption means.
In the short term, markets may act and react to election verdict but in the long term, they do not. But there is still a lot of uncertainty, anxiety and anxiousness ahead of the elections cycle. Why is that?
Due to aggressive or day-to-day monitoring, as investors we get worried about everything. It is not only elections. Over the last one year, there have been so many challenges which we have got worried about -- US-Korea, US-China, three state elections, long-term capital gains (LTCG) tax, oil moving up to $85, rupee moving up to 74 against dollar.
Election obviously is a big thing but for every event, as investors we tend to get a little overcome by the near-term effect and obviously elections is one in a five-year kind of an event. It is widely monitored, it is also widely highlighted by media as well as all the other agencies because it is crucial, it is a direction to the economy for the next five years. So, it is very obvious that in the near term, there is too much micro analysis.
But over the last six, seven elections, which I have been monitoring on a regular basis in my investment career, on the day of the election there is some knee-jerk reaction on either side, but ultimately markets stabilise and the last three elections in particular have been very interesting because the verdicts were surprising.
In 2004, the Congress and Left surprisingly formed the government. We had a knee-jerk reaction but it turned out to be one of the best times to invest. In 2009, again Congress got re-elected. There was some surprise and again you had a good period. In 2014, you had a big up move on the day of the election because of the surprise one side verdict but ultimately during the three five-year periods, the returns have been approximately 60% odd, which is mirroring the nominal GDP growth rate.
How should one position their portfolio in the runup to the elections? There are three scenarios; one, return of the current government, second, return of the current government with an outside support and the third scenario is a complete change of guard. What is it that markets are pricing in?
Markets are taking a call based on the perspective that there is going to be continuity as far as the government is concerned. That is quite clear. Whether they are pricing it or whether they want it from their hearts, is debatable but very clearly that is what the markets are pricing in.
At the same time, one interesting aspect, which is good is that there is a view that it might not be that easy. Markets are pricing in return of the incumbent government, but maybe they are not pricing a one-sided return of the government. There is still apprehension about the number of seats they get -- whether it is 250-260-270-280. There is also a fethat if we have a completely disjointed government, that is going to be an extreme event.
In that case, where there is a very fragmented kind of a mandate, where you do not know who is going to be the prime minister, which party is going to dominate the ministries, that would be a disastrous scenario. I do not think the markets are pricing that. All the other scenarios, the markets would be pretty okay with. I personally believe that this time we are not going to have a very big move post election. I do not think we will have a 10% down or a 10% up.
Irrespective of the verdict?
Except for a tukde-tukde sarkaar (fragmented government) or whatever you call it, everything else will have a much more muted kind of a move either side. But it will take away the uncertainty. I was in the US in March and even when I move around in the country trying to sell my funds to investors, I noticed that there is this huge capital which is lying at the side waiting to be deployed.
As I mentioned to you earlier, in the last one and a half years, we have had too many news-flow-based challenges which have dissuaded investors to invest further and the returns have not been all that great too. The capital pool is waiting to be deployed. So, maybe post election as stability comes back in terms of news flows, you might have that capital pool start to move into the markets.
If markets fall 5-10-15% post elections, will you be a buyer?
I would be a buyer irrespective. We have seen that news flow based falls have turned up to be the best opportunities in India to buy. We had that in 2009, we had it in 2004, we had it during the Brexit, we had it during the US elections, we had it during demonetisation. Any event which has caused the markets to fall by 10-15% in hindsight have turned out to be one of the best opportunities to buy. But I would give a disclaimer that in case of a very fragmented verdict, we will have to evaluate whether there will be continuity of the economic policies.
Can I say that the big learning for you in the last 30 years has been that event-based selloff should always be bought into?
100%. This nation has grown consistently -- from 5% to 6%, to 7% and hopefully to 8%. It took the economy 60 years to reach a trillion dollars. But it took ten years after that to be a $2.5-trillion economy. We believe that at 80 years of age post independence, we should be anywhere between $6-7 trillion. So twice the wealth which we have created over the last 70 years would be created over the next 10 years.
So buy event-based selloff; 10-12% Nifty return or benchmark indices return cannot be ruled out for the next five years. Does this mean that if you have a five-year view, equities will still do reasonably well and have the potential to give the best return?
We definitely believe so and we are very confident about that.
Haloed consumer brand companies, which Warren Buffett calls moat companies, have been darlings of the market. You have warned time and again that investing is not about buying gold at the price of diamond, it is like buying gold at the price of silver. Some of these stocks -- Page, Eicher, Maruti -- are down 30-50%?
Warren Buffett himself has said that it is always better to buy wonderful companies at a fair price rather than buy a fair company at a wonderful price. So, there is no denying the fact that companies have moats. Any company which has brand and which has stickiness in terms of the product and which maintain quality and so on and so forth. However, the world is dynamic and the world is also changing. There are other options available.
Over the last two-three years, so much money has gone into the so-called safe companies. Safe companies are those where the growth rate has been predictable and there has been no surprises in terms of earnings growth. Those companies from 20 PE became 30 PE to 40 PE and then they started to trade at infinite PE of 60, 70 and investors just did not bother about those valuations.
In these companies, the risk is that a one or two quarter slowdown punctures the complete PE. It is not about the earnings going down but it is the PE from 60 going to 40.
Some of the companies which you named are great companies but the problem is that once the PE from 60 becomes, you are looking at 35% fall in the stock prices. So again, we are also proponents of the great consumption story in India but at the same time, in my perspective, life has always been about what are you buying at what price because ultimately when you are buying or investing in a company, you are technically becoming a partner in the company.
If XYZ company were to be available 100% to you, would you buy that company completely as a business? If the answer is yes, then you should be investing.
How do you judge fair value because PE could be one benchmark? HDFC Bank has always traded at price to book of four times but on a PE multiple, it has never traded at PE multiples of 50-60 times?
For different sectors, it will always be different. The financials tend to get traded at price to book but recently we have started to see that ultimately investors have realised that these are like other businesses. You should look at them from a PE basis because good financial companies have been able to raise capital at will --- be it HDFC Bank or Bajaj Finance or some of the other well known financials. For them, capital has never been a constraint. So, it is not fair to look at them from a price to book value, because the moment they raise capital, the price to book value ratio just gets skewed towards the downside.
Having said that, even I like a few companies which are high PE but then the growth has to compensate for that higher PE multiple. If you look down at a company which is trading at X today and are paying a particular value, how much is it discounting in terms of growth and longevity? There are companies where the volume growth is 5% which are trading at 50 times. I would never buy them.
What is the benchmark you use? What is the PE and what is the growth which will justify this company?
So, for example, beverages is a very dear sector for me, especially the beer side. There we are seeing a double-digit volume growth. The company is gaining market share and the profit growth can be significantly higher than the volume growth and there is a lot of stickiness because there cannot be disruption. If you have to drink beer, you have to drink beer, you cannot take a tablet.
Launching new brands is very tough because advertising is not allowed. We are a young economy. Just to give you a perspective, 20% of all human beings born in the world after 1st January 2000 are Indians and they have still not reached the drinking age where now it is much more socially acceptable and all.
A theme which you have liked is cement. A couple of years ago the positioning in cement was strong, based on the idea that India will start rebuilding itself, plants will start re-tooling themselves and the demand for cement would be linear. But cement has not been a big money maker!
I would combine the EPC companies and the so-called construction companies to some extent -- capex companies and cement. Money has not been made over the last four, five years for a multiplicity of reasons even in EPC companies whose balance sheets were completely messed up. Construction companies became asset ownersand they diversified from their core of being a contractor to becoming an owner of the asset. The balance sheet got screwed and the interest rates went up, capital was not available and the whole cycle turned negative for them.
One interesting thing over the last two, three quarters has been that EPC companies also have started to have a little bit of discipline as far as their balance sheet is concerned. We have had the highest backlog of orders ever for the sector as a whole and the way the manifestos of both the BJP and the Congress talk about future infrastructure growth, there is no reason not to believe that this growth in order book is only going to increase.
The number of companies in existence have reduced because the fly-by-night operators or the companies which were not able to manage their balance sheets have all disappeared.
Third is companies have also realised that if you are a contractor be a contractor, do not become an asset owner. So that diversion of capital into assets which are of longer gestation, is now behind us.
Fourth, companies which have some assets are able to sell them because the Canadian pension funds and a lot of large PE guys are willing to buy those assets. You are seeing ROEs for the first time, even in EPC companies, standing up to 15-17%. Due to the bad past experience, investors are ignoring them. My view is that it makes sense specifically looking at the huge spending which is going to happen in railways, on airports, even on roads, inland waterways. We are again talking about linking of rivers and so on and so forth.
Cement is a sector which has a lot of promise but which unfortunately has never been able to deliver consistently so there are three, four companies which have been able to deliver very consistently but a vast majority of the smaller companies have not been able to deliver. Having said that, things are now changing.
The intensity of capacity addition is reducing and for a change after two, three years we are seeing volume growth for three, four months consistently trending up at 7-8%.
If you actually look at the dynamics to set up a new cement capacity of a million tons, you need Rs 600 crore on an average. So, unless that company makes Rs 100 crore of EBITDA, it does not make sense for the capacity to be set up which means that you have to generate Rs 1,100-1,200 EBITDA per ton whereas the companies now are generating between Rs 500-600.
You have read the manifestos and frankly if I change the names the economic policies with a little bit of sugar coating here and with a little bit of a salt coating there, they are not different. How should one judge the ideology based on the manifestos?
Frankly after the last five, six elections which I have tracked, I do not remember the manifestos of any party for any of the elections. Obviously, manifesto is a public statement. I would say that it remains fresh only for the two days after the manifesto is declared.
But if you look at the inherent economy, no one can deny the fact that we are one of the youngest economies in the world. No one can deny that even if we do not perform to our aspirations and to our potential, we will still grow at 6-6.5% because that is the inherent growth which our young economy brings in.
You have mentioned in one of your notes that the delivery food business is changing. How will this change the restaurant business? Is there a sunrise theme in the making?
Unfortunately, India is one country where Indians have not been able to participate in these upcoming sectors largely because a), we always say that India is not an open economy. India is too open an economy and as a result of which, the Amazons of the world and the Ubers of the world and the Googles of the world have unrestricted applications and businesses here.
You look at China where they have restricted and therefore you have the WeChats, and Alibaba and the Tencents operational there and the investors have been able to make money. In India, we have not been able to do it. Even the Indian new generation companies like Flipkart and Ola and OYO are all in private domain and they are listed…
How can one participate there?
You have to do it now indirectly. Unfortunately, there are not too many direct plays. There are some internet companies, but it is mostly indirect plays. You touched upon this delivery business. I think one lesson over the last five, seven years is that you cannot ignore events and trends. You might not be able to buy directly, but you should also as investors be aware of what you should avoid because if a disruption might happen in a company or a sector. how good could that company or sector might be?
If electric vehicles were to become mainstream, a lot of auto component companies, particularly focussed on engines or carburettors and so on will be out of business. We saw what has happened to newspapers. They are still being read in India, but the growth rates have become either zero or negative because people are moving video and the online functions.
If we cannot invest, at least we should try and see where we can avoid. That is very important. In terms of the delivery business, it is a complete revolution. It is good for the restaurant business also because ultimately these are carriers and I talk to a few guys who are in the restaurant business. In fact, their businesses have doubled because without paying rent, they are able to have additional sort of revenue coming in from these businesses. I would say that new businesses should not be taken as a threat. New businesses will increase the markets manifold.
So the headline number one should be elections will come and go, your long-term investment planning should not change?
100%. You have to keep the big picture in mind that over the next 10 years, we are going to make two times as much money as we have made over the last 70 years.
Second, avoid expensive stocks but do not ignore construction and cement as core themes?
That is my philosophy, I would say that an investor should not invest in anything which that investor does not understand and that is again Warren Buffett’s philosophy, that if you do not understand something. do not invest just because everyone else is investing in it.
Do you follow the I do not know philosophy?
Yes, and it is okay, you cannot expect to make money in every stock which goes up but my view would be that do not invest in a 60-70 PE stock unless you are convinced that the growth rate is going to be for 10-20 years of a very high rate.
And the third trend which we could say is that do not underestimate the power of disruption, the good business has got disrupted you may not participate in it but it is an evidence or an indication of what to avoid so that your portfolio does not get disrupted because of trends?
You cannot afford to basically not to heed disruption. Having kids of 10 to 20 years age is always an advantage because they will tell you what disruption is. You will never be aware of what the disruption is.