In a chat with ET Now, Bharat Shah, ED, ASK Group, shares his views on the market and certain sectors. Excerpts:
ET Now: The event on May 16 is going to be a binary one. A stable government will take the market up, while a fractured mandate will push it back. So how should a genuine long-term investor, who is worried about his NV, approach this event?
Bharat Shah: Well, I am building my investment portfolio for 5 to 10 years and not for three to six months.
ET Now: So to your mind, in the backdrop of May 16 and in the overall scheme of things, where you invest does not matter?
Bharat Shah: No, I did not say that. What I said was that if I focus too much on the immediate, there is a chance that it would take me away from the whole task of focusing on the long term and equities are all about the long term.
I have to focus on businesses which are of high quality, represented by superior return on capital employed, clean balance sheets and have managements whose governance and competence one can believe in.
If these businesses grow, they will create economic value and in turn, investment value over a period of time. If I focus too much on short term, I can get distracted from that core objective of focusing on the long term.
So I am not saying that the event that is round the corner does not hold significance from the point of view of the markets. It does, but irrespective of anything, the investors’ job is to build portfolios for the long term and that is exactly what I will focus on.
ET Now: So from a long-term perspective, what are the high growth companies that you are focusing on, which one can buy today for the next, say, five years and still make money?
Bharat Shah: Well, they all continue to be the same. Pharmaceutical businesses continue to do very well. They have got great opportunities within the domestic and international markets.
The players, that are well positioned to benefit from both of these markets in terms of research and distribution and brand building strengths, would do very well. You equally have some very fine opportunities in the banking and non-banking finance spaces, where there are some superb businesses, which can create value in the long term.
You have a lot of opportunities in the agro and the agro nutrient-related spaces. Equally, the software sector continues to hold charm. Moreover, there are plenty of consumer businesses, wherein there is a fashion of late to say that they have become too expensive and cannot really grow.
However, I beg to differ. So a lot of consumer businesses offer a lot of opportunity and there are some very interesting names in the auto and auto parts sectors. That apart, there are some businesses which may or may not really have a large sector around them, but individually, they are terrific in logistics and so on.
Thus, we just need to focus on them from a bottom-up perspective. We have to remember that we are not buying economic macros, not global macros and not sectors, but we have to buy businesses.
Therefore, as long as these businesses have capital efficiency, quality managements, quality balance sheets, a reasonable growth and predictability of that growth and if you buy them at a fair price, you will create good investment returns. When I look at the spectrum of the opportunities, I still find plenty of businesses where all of these conditions are met.
ET Now: But some would argue that what is good is not cheap. So you may buy good companies, but are you also enjoying the pricing comfort, is the question. It has often been said on Wall Street that good business at a bad price should be given a skip.
Bharat Shah: I am looking for quality businesses, with quality balance sheets, quality managements, reasonable growth and fair price. If you look at several of these businesses on the basis of running three-year compounded returns, or running five-year compounded returns, they continue to grow their earnings beautifully, those earnings convert into cash flows and cash flows are reflecting in the valuations and the positive cycle of the earnings growth makes those valuations reasonable.
Bharat Shah: Well, I prefer not to discuss individual names on public forum. There have been businesses like Sun Pharma, which we have been invested in for a very, very long period of time. We continue to remain invested and have grown our position over a period of time. We continue to remain equally invested in Lupin Pharma. We have grown the position over a period of time.
There are some more names that we have bought into. So there are plenty of opportunities. Look at the capability of these companies, look at the kind of geography, product portfolio, technology portfolio and distribution strengths that these companies have built up and when you take into account all of these, Sun Pharma is not at all expensive.
It is just roughly about 20 times on PE current year earnings of 2014-2015. Lupin is at an even more attractive territory, at about 16 or 17 times. So these are by no stretch of imagination very expensive valuations for businesses with a potential to grow and which have demonstrated ability to grow their bottom lines upwards of 25% per annum, have return on capital employed in the band of 35% to 45%, if not higher in some cases.
ET Now: Are you confident of the earnings of Sun Pharma and Lupin for at least three to four years?
Bharat Shah: Yes, there are no reasons why both of them should not do well.
ET Now: In general, a lot of market men are of the view that it is time to re-visit economy-related stocks. If India clearly is on the mend, the next bull market really will start in industrials, beta names, beaten down cyclical. But you have a different approach. Why is that?
Bharat Shah: I am saying that ultimately you have to focus on what creates value in business and eventually leads to creation of value in investments. So you have to look at the size of opportunity, the ability and integrity of the management. The third factor is the combination of the two, which leads to reasonable predictable, secular, long term growth in the earnings.
Along with that is the fourth factor, which is quality of growth or the quality of earnings, or in other words, it is the ability of business to earn superior return on capital employed, and finally you buy that package at a reasonable price.
This is what creates value in a business or an investment. If there are some beaten down or economy-related businesses where these conditions are met, we have included them in our portfolio. But I am not going to buy something just because it is a fashion to do so, because that may be fashionable, but may not be profitable.
ET Now: Are you also happy to own large cap IT? For the moment, the spring time for IT seems to be getting over, everyone is bothered about what will happen to the currency, but is it a good time to nibble at IT?
Bharat Shah: Not only it is time to nibble at IT, but take a mouthful of that. Valuations are reasonable, they are fantastic, high quality businesses, they generate outstanding return on capital employed and these are superb free-cash generating machines.
They still have a long-term good double digit earnings growth ahead of themselves for a multiple year period. It is profitable and important to stay clear of that unnecessary noise and to focus on the long term and from a long-term perspective, software businesses selectively represent a very good opportunity.
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1 Comment on this Story
Mihir Kali Bhattacharya410 days ago
Yes, it is depends on high quality balance sheet from a good management. Big 4 in India is damaging the quality of balance sheet by giving very wrong advice and certifying/ auditing the wrong balance and getting escaped. These big 4 should be removed from India soil , the. The quality of balance sheet will improve