Q2 will be a washout but very bullish in medium to long term: Rajesh Kothari, Alfaccurate Advisors
We hold 25% to 28% in banking and finance and most of these are private sector banks and NBFCs.
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How are you analysing the market on both medium term basis and medium to long term basis? Do you think people have missed a big rally?
Let me first answer the short and medium term question because in the long term we will remain structurally very bullish on India as an equity market. In the short term, the second quarter result is definitely going to be a washed-out quarter. You will see muted earnings growth across the sectors, across the company and of course you are going to see challenging commentary as you enter into second quarter result season.
In the medium to long term, we remain structurally bullish because of macro factors -- low inflation, low interest rates and right steps being taken by the government to improve the confidence of corporate India. That is very critical because of the NBFC crisis. The liquidity crisis is still continuing and we need to make sure that there are no further defaults or major downgrades from the system perspective.
Before the show started, you have been doing a lot of roadshows, meeting a lot of investors and the flows in your portfolio services have been going higher in the last couple of months. What is the message you are giving to potential investors? And what is the feedback you have been getting?
We travel across the country and one common message what I hear from smart HNI investors is that there is clearly a difference between man versus boys. Two-three years back, investors used to compare X, Y, Z products which has given for example two years, returns of 40, 50, 60% compounding and of course many such stocks are down. Now, they clearly understand the difference between active management versus giving it to professional fund managers and more importantly risk adjusted returns.
Their focus is now more on risk adjusted returns rather than just absolute returns because if you compare any product, it is not about the returns. You also need to look at the underlying risk that the product is taking while investing into businesses. That is very important from HNI perspective. They have understood it and that works in favour of players like us who have been focussing on superior risk adjusted returns.
The earnings season is round the corner. What is the thing which you are looking at for bulk of these banks barring the Yes Bank. You have been adding Axis, ICICI and some of the premium retail centric private banks in the last couple of months?
If you look at the macro picture, then all these banks have survived and their asset qualities and balance sheets are very clean or have incrementally less issues compared to what they have seen in the last three, four, five years. They are basically the beneficiaries in terms of CASA, loan book growth, pricing, or asset quality. If you have a 3-5 years’ view, then incrementally select private sector banks and select NBFCs are going to be the natural winners not only in terms of the market share but also in terms of the asset quality.
It is going to need superior underwriting of assets. Therefore return on net worth and better ROA are most important.
So that is forming 25% of your portfolio right now?
We hold about 25% to 28% in banking and finance and most of these are private sector banks and NBFCs.
You like housing and cement. ACC numbers are out. The volume growth was soft but earnings margin was very good. What is your view?
The government had spending constraints which till the first quarter. From August onwards, government has been on a spending mode -- be it on infrastructure or affordable housing. As the economy recovers, everybody is having doubt and everybody says that it is going to postpone economic recovery. But these are large companies and the operation and the cost per tonne is quietly under control. The volume growth will play out after a year or so and the cost reduction per tonne will result in slightly better EBITDA per tonne and slightly better EBITDA growth.
In a few cement companies, the valuations are reasonable compared to what we have seen in the last five years’ average EV per tonne. If you look at last five years average EV to EBITDA, then the sector looks quite promising. Short term may remain challenging but if one has 3-5 years’ view, we are quite positive on cement as a sector.
Tell us, what else are you looking at in capital goods?
We have a very few select names to play in the capital goods capex story. Although it is going to take time but there are strong companies with a very strong business model and as capacity utilisation improves, these are the companies or sectors where from the overall perspective of last five years, nothing much has happened. It is a question of time when the recovery starts. As utilisation improves, this sector definitely becomes a natural beneficiary. With a three to five years’ view. this sector looks quite promising. We are holding a few multinational companies in the sector and one of the largest company is part of the Sensex.
What about specialty chemicals? Have you added some names?
This is a segment where everybody is talking about opportunity from China. This is the one segment where a few large clients who have been sourcing from China are looking for dedicated supply from India and fortunately India has very strong chemistry and therefore specialty chemicals is one of the sectors which we like for the last three-four years. Of course, we have been adding names in this sector.
In recent times, we have added two-three more names. Many of these companies have a very reasonable debt equity, less than 1:1 and a very strong underlying return on net worth and return on capital employed. This can give a meaningful upside in three years.
The way the market has panned out in the last 15 months, what are your thoughts? Do you think risks are still there on the table on any negative news flow or is a firm bottom in place?
You have a two questions. One is do we still have downside? Downside can be from a global factor like trade war and second can be a local factor like a major default by any company, whether it is banking or non-banking. We have already seen the bottom and I do not see significant downside. But these are the two potential risks.
On the upside side, if there is any major resolution which comes through -- be it an IL&FS or issue with any other NBFC which have went through the troubled time in last 12 months. Any concrete resolution will act as an upside to this.