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We are selectively bullish in these 4 sectors: Rajesh Kothari

“We like this kind of environment where prices are much more reasonable and good research help.”

ET Now|
Mar 23, 2018, 05.44 PM IST
ET Now
India will be probably lesser impacted compared to many other emerging market economies because India is not a export-driven economy
Talking to ET Now, Rajesh Kothari, CIO, AlfAccurate Advisors, says they have always avoided commodities and that is a good thing in the present trade war like scenario. Kothari prefers auto ancillaries, big private sector banks, consumer banking NBFCs and a few non-consumer durables.

Edited excerpts:

As a fund manager, have you been using this decline in the market to get back into your favourite names or you are sitting still for lower levels?

Well for new clients we are still holding a good amount of cash and we are deploying it in a very staggered approach manner. Generally speaking, whenever any client comes, we do not invest all money at one go. We invest over a period of time. And whether we like it or not but the companies, right quality names, high ROE and good corporate governance companies there the correction of course has been very limited compared to the normal other basket of the market. We are waiting and we will be adding the names slowly and gradually as the price keeps coming to our favour.

It looks like the tariff war is on its way to a become full-blown trade war. Who are going to be the victims? Do you think emerging markets like India are going to be the bigger victims?

I do not think so. India will be probably lesser impacted compared to many other emerging market economies because India is not a export-driven economy unlike many other countries in the world. We have a very strong domestic economy. Impact on India in terms of the overall GDP growth, in terms of export-import growth and corporate earnings growth will be limited to a few specific sectors and within that, a few specific companies. I do not see the current trade tariffs to have any major negative impact on India numbers.

What is the hypothesis which you are building now as far as the Indian markets go looking at the way environment has changed globally? Clearly the Street is now factoring in the fact that the kind of popularity Mr Modi enjoyed in the last election, wouldn’t be there in the coming election. He has clearly lost some political capital. Do you think 2018 could be challenging for the bulls?

I am not too sure about whether it will be challenging or not but certainly one thing which investors do not like is uncertainty. There is going to be volatility in the market in the current year driven by various events -- whether it is a global event or maybe the state elections and of course the general elections next year.

Having said that, these are the particular years where there is a difference between the men and the boys because in a bull market environment, when everything goes up 20% before you even think of the name of the company and by the time you meet the management, it is up another 0%. The present kind of environment, is actually good for investors like us where it gives enough time to the investor to do homework and then invest at the right price and right valuations.

We always have a more of a bottom driven strategy and even in negative years we have delivered good double digit returns to our investors. We like this kind of environment where prices are much more reasonable and there is enough time to do research on company, meet the management and do your homework before you are investing in the company.

How are you managing your portfolio right now? We know the kind of names you have in your portfolios and I assume that in the last two months some fresh flows may have also come in as you just said you have still not deployed it. For the remaining 8-10 months, what is your plan of going about managing the portfolio this year?

Good thing is that that as a portfolio strategy we do not invest in commodities. So, in this trade war, we are not going to be impacted.

The other sectors where we have been fairly bullish in last few years have been auto ancillary, private sector banking, particularly big names in retail driven banking. NBFCs, particularly the consumer banking NBFCs, a few companies in the consumer sector like tiles, plywood, consumer durable and of course few non-consumer durable.

This is the portfolio that we are holding from the last few years and we do not see any significant change in our proposition. We continue to remain positive on these themes because there are multiple factors which are going to drive it and importantly one more sector which is becoming very interesting is a cement sector because the demand growth is increasing slowly but firmly.

If you look at the third quarter, volume growth of most cement companies it has been strong double digit volume growth after a very long time. Pricing is of course still under pressure and there are cost inflation but I strongly believe that affordable housing along with infrastructure push can make probably cement companies to deliver better EBITDA growth, driven by volume growth rather than price growth. This can be an interesting space which we are watching and otherwise no major changes in our portfolio.

You said you had stayed away from commodities. Why is that because we did see a tremendous rally in 2017?

Yes, because as a house we strongly believe that commodity companies they are of course the profits are driven by commodity prices and that is one thing on which we do not much handle because there are a lot of policy norms. Tomorrow minimum import prices could get lifted, antidumping duty get revised. There are a lot of external factors and we think that there are many other themes which are more certain, more predictable with a much more secured demand growth as well as pricing growth so we prefer that basket rather than the commodity basket. So, we do not invest as an investment strategy into commodity.

ET Now: How are you playing the consumption theme on the rural side, say the tractor companies, M&M has in fact come out with very good commentary on the rural side? Also, two-wheelers after a big long spell of underperformance do you think there is a case rebuilding to look at two-wheelers?

Rajesh Kothari: Well, instead of two-wheelers we continue to prefer passenger car companies and of course there is only one best of the listed companies which is available so we believe that that is a much more secure story. Coming to rural as a theme we do not believe that it is going to be urban versus rural. It is going to be the entire India economy growth and urban is still doing very well.

It is not that urban is slowing down and rural is going to move up. Whatever steps that you are seeing from the government, is going to basically benefit the very lower end of the rural side, which in anyway does not make much larger difference to your portfolio companies from the market perspective.

Urban gives enough opportunity, rural on top of it also keeps growing as an overall consumption theme. We continue to hold the companies which are going to be beneficiary because of affordable housing, companies which are going to be beneficiary because of GST implementation and more importantly whenever e-way bill gets introduced there are many companies which are going to get benefit out of it.

We should focus on such companies rather than just rural theme because themes are always seasonal in nature. It is better not to focus on any themes and to continue to focus on the entire India economy as on piece.

You also like NBFCs as a theme but again there is that entire fear of valuations. Of course, they are all poised to gain market share and really post very strong growth numbers. Do you believe that this recent correction may have just cleared off some of the froth from these NBFCs?

Within NBFCs, we prefer consumer banking ones. We do not prefer housing finance companies because we believe that competition is going to be very-very a cut throat competition in housing finance and NBFCs do not have much room to grow. Even if they want to grow probably it will be at the cost of margins or may be the future NPAs. So, housing finance is one thing on NBFCs which we avoid, apart from of course, names like HDFC.

But we believe that other piece which is a consumer financing, particularly consumer durable financing is very strong segment. Please put disclaimer we continue to hold companies like Bajaj Finance and we remain positive on these names from the last so many years and even today we believe that that it is a strong structural growth play. The competition is limited, the risk to your margins is probably very low and on top of it the asset quality, the risk management side of companies like Bajaj Finance are very robust, very strong and therefore, it will continue to deserve premium valuations compared to the average industry valuations.

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