Unorganised to organised story was hyped a lot: Ravi Dharamshi
I am a contrarian positive, because there is nobody left who is optimistic: ValueQuest's CIO
So are you buying risk or growth in your portfolio or it is time to take a safety shelter kind of an approach; stick to stocks where you may not lose too much?
Ravi Dharamshi: Growth is not visible in most of the companies. Unfortunately you have to go with the quality of the company and the valuations and you have to pick the company or the stock where you believe that come what may they will not make cardinal mistake of overleveraging or something or doing capex at the wrong time of the cycle and if the market has punished them for the slowdown in the growth and all.
Growth, I feel, is a temporary thing, it is the more balance sheet issues that cannot be resolved very easily. So if the problems are of P&L (profit and loss) I am more open to buying them, but if the problems are of balance sheet, then I am still a little wary of picking them up right now.
Nikunj Dalmia: This is the fourth year where earnings estimates are going to be downgraded.
Ravi Dharamshi: I think it is eight or ninth year.
Nikunj Dalmia: I mean the optimism had come back four years ago.
Ravi Dharamshi: It is eight or nine years since estimates have been downgraded.
Nikunj Dalmia: So what does one do now?
Ravi Dharamshi: Do not stop estimating first off all because you are not getting it right at all. This year I feel the estimates would be around 25 per cent earnings growth. Even if we do not end up showing that kind of growth, we will end up showing somewhere close to 18-20 per cent kind of growth, which is good. it is not a bad year.
What matters more is the quality of earnings growth. If it is just a mathematical increase in earnings because you have provided less, that does not excite me.
I mean most of the earnings growth is going to come from the banks, which have gone through the provision cycle and their provisions are tapering off and that is leading to a increase in profits, but if that is the only reason then I would be a little wary of the earnings cycle rebound.
Looking more for where the growth is panning out, where some operating leverage is coming in and that is leading to an ROE improvement. I think those kind of stories would attract me more.
Nikunj Dalmia: But are there enough options like this where growth, valuation, operating leverage or financial leverage they can work together?
Ravi Dharamshi: I think in our conversations in the past you keep mentioning that good headlines and good valuations do not go together. So right now we are in a situation where there is bad headlines and along with that is coming good valuations. So the valuations and the quality of company remains the core that you have to be focussed on at this point of time because you will not have the growth visibility.
You have to focus that on the broad opportunity and believe that whatever the slowdown is happening is temporary in nature and within if your horizon is beyond one-two years then I think those companies will provide you with fantastic returns over a three to five year horizon.
If you pick the right company with the management and valuation perspective.
Nikunj Dalmia: You are still long on speciality chemicals, long on diagnostics?
Ravi Dharamshi: Yes. Those companies are facing fantastic tailwinds. Thanks to Mr Trump there is a global realignment of supply chain that is happening and India stands to benefit because of that and chemical/API intermediate pharma companies also will benefit because of that China happens to be like 40 per cent supplier to the world of APIs and intermediates and chemicals.
So this kind of a market share is definitely going to come down may be it comes down by 5 per cent or 10 per cent over the next 5-10 years. Which are countries that are eligible to replace that kind of market share? I think India is definitely up there, we have the scale, we have the manpower, we have the entrepreneurs. So we need to just grab that opportunity, and I think that this opportunity will last some more time. I can see it lasting at least five years to 10 years.
Nikunj Dalmia: Where are you taking a deep breath and assessing that look I worked with an assumptions see markets are about making scenarios there is nothing like a 100 per cent full proof investing risk is associated with best of the investments. Where are you saying that look my assessments, my assumption, my earning projections have got challenged? It could be the management risk or it could be a business risk and you said look you know I need to move on?
Ravi Dharamshi: Moving on is a secondary thing, but definitely where I feel one story that was hyped a lot was this shift from unorganised to organised.
Now that shift actually might happen now going forward and I am not giving up on that story, but definitely there has been a couple of years delay in that story panning out.
Nikunj Dalmia: Can you elaborate on that?
Ravi Dharamshi: E-way bill for example was supposed to be implemented that got delayed. The compliance with that is still a little lax and in fact in the meantime what happened is the unorganised actually got a super advantage because their costing was cheaper and they did not even have to comply. So that led to the organised guys losing out a little bit in some of the industries such as building materials and all that.
Going forward this might change, so I have not given up on that opportunity, I think it has just been a delay of a couple of years, but and if you can find a company that caters to that opportunity, I think instead of giving up now one should be focussed on placing a bet on that with a three to five years point of view and for all you know next six months can still be bad you have that assumption in your for example if I take building materials the main plank of the growth is real estate and that real estate is not reviving as of now.
So you cannot be making growth assumptions which are way beyond what the market is, it is not easy even for the leader to be growing at that rate.
Nikunj Dalmia: What will you not buy in this market scenario?
Ravi Dharamshi: We continue to not like cyclicals and especially global cyclicals.
Nikunj Dalmia: So no metals..
Ravi Dharamshi: Metals i mean it is more because our understanding on that front is a little poor rather than I have a strong view that one should avoid metals or something like that.
It is just that we do not have the predictability of the global factors of the global cycle in my opinion is very very poor and we do not have any expertise in that and what we had from 2003 to 2008 was the global super cycle where the metals went through the roof that kind of a situation coming back again looks very very difficult to me because China has stepped out on the infra front and I do not see anybody else picking up the gauntlet, I do not think India can replace China so I would rather focus on the domestic themes in the terms of consumption or I can think of where India is going to replace China in the global supply chain.
I think I am more keen on playing those kind of stories.
Nikunj Dalmia: Is the bull market in mid and small caps over because…
Ravi Dharamshi: It has been over since I think one and a half year now.
Nikunj Dalmia: Is it over?
Ravi Dharamshi: We are in a bear market.
Nikunj Dalmia: Will this bear market continue for two years?
Ravi Dharamshi: I would doubt that historically if you see on a rolling three year basis I think the valuations would have reached a real bottom except for global financial crisis in 2008.
I think we are at the cheapest we have been in the last two decades. I think even probably even cheaper than 2001-2002, but my memory fails me over here I do not recollect exactly so in that kind of a situation I find it very very difficult to be bearish on the large part of the market.
So when we last spoke I think I mentioned that we will be going completely invested into the elections I think nothing has changed on that front because even though FII flows started coming in and that ETF money went more towards the larger companies and index companies, the large part of the market the breadth still remains weak, and I think that gap has widened even more.
So I think that gap has to narrow over the next two-three years. So one last thing we have nothing else if people have missed out on investing in midcap, smallcap I think this would be a good time to be allocating towards midcap, smallcap focussed fund. With the three year point of view I can never say that it is going to bottom out in one month, three month or six months so but the valuations are getting really really cheap and I think the jaw needs to narrow.
Nikunj Dalmia: What are the chances that midcap stay where they are but largecap start coming down?
Ravi Dharamshi: That is also possible. So right now all the indicators, which we track are all pointing to a slowdown whether it is globally or locally so one can never rule out that first leg is going to be down and if for one whatever reason election outcome is not what the market expected then that will provide even more reasons for the stocks to get cheap so that remains a possibility and that remains the scenario but one cannot prepare for it in my opinion. One cannot so if you actually go liquidate your portfolio going into the election and if the opposite is true then you will not get these kind of valuations in my opinion.
Nikunj Dalmia: So if we have to really summarise your today’s interaction, can I say that from a market standpoint election is important it is crucial but from a price adjustment standpoint it is a 5-10 per cent nothing more than that.
Ravi Dharamshi: I absolutely feel that. So I think it will not be a 20 per cent kind of a move that we have seen in 2000 where it comes out as a absolute shocker that this whatever the incumbent government lost and we had a 20 per cent drawdown. I do not think that will happen. We are not positioned in that way mentally as well as in our market position.
People are cautious, people are wary, people are suffering because of economic pain so the decisions have been more to get their house in order rather to go overboard in with optimism. I do not think there is any optimism left. So in that kind of a scenario, a negative event will not have a prolonged impact.
Nikunj Dalmia: So corporate banks you like, pharma selectively you are still bullish on you like within consumer some tobacco dominated names?
Ravi Dharamshi: I think we are going to be spoiled for choice if actually a negative event pans out. I think there are lots of spaces in the market where the valuations are getting really really attractive.
Nikunj Dalmia: What is on your radar?
Ravi Dharamshi: I will not name companies but as I mentioned some of the themes are the global realignment of supply chain may be now a delayed pick up in the theme of unorganised to organised and some adjustment in the financials from NBFCs to banks and may be even the PSUs become really cheap.
At this point they are just about factoring in survival little bit of growth coming back will also help them so but that is a trade for us, we have never invested in any PSU company so we like to focus on companies that have some competitive advantage and I think PSUs are losing competitive advantage by the day.
Nikunj Dalmia: When we had the option to plan this interview the choice was that we could have easily planned after election the fact that you have come and you have spoken about the market positioning ahead of elections speaks a lot about your thought process because after election with the clarity coming out you can easily give a very judgmental view?
Ravi Dharamshi: It is very easy… how you positioned today is going to be crucial to my portfolio and honestly there is… and I have to think beyond the immediate impact of the election results and we have to think of three months, six months, 12 months down the line and when you think of that I think only you cannot control the election outcome, you cannot even control how the market will react to that election outcome. Only thing you can control is your behaviour and I think keeping your head is going to be more important amongst whatever chaos that is going to happen so rather than getting even if election result is favourable and markets go berserk I think one needs to be still careful that it is not necessary that economic data is going to start churning out positive immediately.
Nikunj Dalmia: That is what we have realised after 2014 that it takes time for a cycle to pickup. I wish next time when we meet there is much more optimism in your voice. If I have to do a dipstick right now what you are telling me is a sense on the street everybody either is cautious or they are bearish, some are feeling scared but that is how typically bear markets have bottomed out.
Ravi Dharamshi: Very very difficult for anybody to be optimistic at this point of time I feel.
Nikunj Dalmia: When the diehard bull gets pessimistic I just…
Ravi Dharamshi: I am not pessimistic, I am just saying I am a contrarian positive because there is nobody left who is optimistic.