ET NowInfrastructure in all its form from low income housings to ports to roads to agricultural infrastructure are going to be big themes, says Madhav Dhar, GTI Capital Group, in an interview with ET Now, Dhar says credit, finance, insurance particularly are still very under-exploited, big long-term themes.
Edited excerpts:
Some analysts say forget being circumspect in this market and just focus on three things liquidity, a stable government and earnings which finally seem to be turning the corner. Would you share the same thought or would you say that hang in there valuations are looking extremely toppish right now and one needs to trade with caution?
I certainly agree and share the same set of facts though my conclusion may be slightly different in the sense that everything that can go right is finally starting to go right. Domestic flows are very strong, growth and profits are rising and the sentiment is very strong. But it is also the classic symptoms of a very late stage bull market which is where, I think we are - both globally and in India markets. When things are going well, it is for very good reasons and that is where we are. If you look at four factors that drive markets which are valuations, earnings, inflation and sentiment - it is definitely a mixed balance sheet where the growth side is good and getting better.
It is hugely the drying up of liquidity and the interest rates going up quite significantly both in India and in the US. But they are going up from very, very low levels which I think lulls people into a sense of complacency around the world and that is what has happened. People say interest rates and liquidity are still very supportive. They are, but at very high valuations, the marginal change in liquidity is what matters and that is decidedly negative. So, it is a mixed bag, sentiment is also not as crazy and as frothy as you are likely to see near the top or very close to a top of a big bull market, but we are getting there. So, it is a mixed conclusion. It is a big and a very, very fun party and you are not early, it is one in the morning and everyone has had a few drinks, everyone is having a great time; nobody is throwing up yet but it is a late stage fun party.
How do you enjoy the party? What do you absorb further because it is the usual suspects, the HDFC twins, the Marutis of the world which have done well. There has been a significant performance from Reliance Industries and even the non-movers like Tata Motors and ICICI Bank have contributed to the Nifty move. First let us talk about the large-caps. What is it that you like and what is it that you are avoiding?
I am a macro guy and I would rather not talk about specific stocks and I usually have a violent disagreement from some of the clichés that are thrown out that it is a stock pickers’ market. It is almost never a stock pickers’ market. I mean you could have thrown darts at this market in the last three years and you could have doubled or tripled your money. So, getting the broad themes right is key.
Staying involved in the markets over long terms is yet another key. People tend to time it, which is a terrible mistake and if you want to make strategic bets, it should be over or underweight in certain sectors. The difficult thing today is do you sell or do you hang in there and fundamentally I am strategically bullish on India long term. I have learnt the hard way to really just hold my breath and grit my teeth when it looks like things are getting very extended and when the inevitable difficult correction comes, you need to just step up and buy. This will be no different. We will have probably a very big serious correction sometime in 2018 and at that time, you have to have the nerve to step up and buy. That is one thing because I do think India is moving up to a 8% growth trajectory. The reforms that will get us there are about the way and you do not want to lose your position on a multi-year basis in a country and economy that is doing that.
Having said that, 26 times earnings as the price of entry has never ever historically been a time to have made great money and this will be no different. Earnings will grow into the PE and you will end up being okay. That is my best guess and in terms of themes and areas I like, some are boring without mentioning names and the credit, finance, insurance particularly are still very under exploited and are big long term themes.
Infrastructure in all its form from low income housings to ports to roads to agricultural infrastructure are going to be big themes. The focus has to be on employment and those are the areas that are necessarily conditioned to getting us there. That will get a lot of investment attention and therefore could be very interesting areas.
Do you think there is risk in buying some of the consumer staples and NBFC stocks because they may be great businesses, great companies run by excellent entrepreneurs but for stock market investors, the upside could be 5%, 10% and the downside could be 20 to 25%?
I do not just agree with that. I do not think I have a very strong view on it but I am not interested in those stocks. They have price perfection and they will continue to do well over the long term. Hindustan Lever had fantastic numbers but that does not attract me. So I side with your view that the game in the next two, three, four years will be elsewhere and not in the big consumer staples both because of valuations and tech related disruption -- whether it is distribution driven or not. At the risk of perhaps venturing into a controversial area, I think the world is going ex-brand to a great extent. Brands are not so cool anymore. I have been short Coca Cola globally for 15 years just as a hedge on other things and not because I think Coke will not do well from time to time. I have a different view from Warren Buffett for example, I think it is yesterday’s story. I think nobody wants to drink sugar water even though it was the biggest brand name in the world 15 years ago.
So, the world is going x brand to a great extent and even in India helped by Amazon, internet and distribution as well as social media, it has been much easier to disrupt brands. I just have a hard time with the very high valuations for a brand that is selling whether it is sugar water or high carbs packaging it beautifully to the people. So brands is a yesterday story. That is not where the game is going.
What do you make of the IT sector because these are companies where capital allocation is great? Are they going through a structural disruption or do you think this disruption is temporary? Will they get their mojo back and the new business which is the digital business will stabilise because tech is touching our daily lives more and more. It is hard to imagine a world where tech is going to be less.
Tech as you said is almost not a sector anymore. Every sector is going to be transformed by tech. Either it has to be adapted or mutated or destroyed by tech. It is not like the old cycles where you could analyse tech whether it was the semi conductors in the 70s or the microchips in the 80s or the personal computers. It was a standalone silo that you invested in but now it affects everything so when you say tech, it depends on what you mean. If you mean what happens to digital payments and to Paytm and some of these unlisted things versus what happens to the big Infosys of the world, I think those are frankly two different questions.
It is the incorporation and adaptation of tech in every sector whether it is fin tech or distribution, even clothing or the fitness industry. It is a structural exponential trend and if you do not get with it, you will fail to understand how the modern world is going to work. The old standbys of tech to me look undervalued and certainly some of the companies that have been in the news are starting to restructure and reform. It is a different game but that could be pretty attractive at these valuation levels. Both sides of tech seem reasonably interesting to me.
In the past, you have spoken about how you have held some large-cap PSU banks which probably means SBI is part of your portfolio. I was hearing on the Street that there is an investment rather that you have made in DLF as well and the theme behind it is really you looking at areas where the broad public perception is bad. Infrastructure also extends out to that theme because there is not that much capital commitment that is coming in via the equity route or the debt route especially from foreign investors into infrastructure in India. How should one selectively pick names within infrastructure, real estate and the stocks where there is fair amount of scepticism?
This is more a personal bias than some kind of universal truth. There are lots of different ways of making money in the stock market as long as you are good at it and you are consistent at it. Great growth investors make money, momentum traders make money, value contrarians make money. It is important to know who you are. If you do not know who you are, the stock markets are very dangerous place to find out. I know who I am. It does not make it good or bad but over time, it vaguely works for me. My predisposition is to buy cheap things that are undervalued and out of favour and where I can see something shifting and most people do not agree with me. That is what works for me.
I have a very hard time buying a great company at seven times book value even though it could be a great company. It does not make it wrong, my genetic predisposition does not lend itself to that. I had bought DLF. I do not like to talk stocks on TV but I bought State Bank of India and DLF two years ago. DLF was Rs 85 a share and I was joking with some people in DLF and my point was I would rather buy your stock than your apartments because I just think there was a complete disconnect at some point between trends which got overdone.
The real estate decline was reflected far more in the stock than in the current value of its real estate holdings which are drifting down and will probably bottom out here but the stock had completely overshot. I had a similar view on State Bank of India. This is the best bank or the best financial company in India, but below book value with improving book and cleaning up its act and frankly better management structures. I would rather take the arbitrage buying State Bank at a book value than a top performing bank at seven times book. Does that make it right? It just works for me.
A very important aspect of investing is to stick with what works for you rather than adapt to the next thing you hear and everybody’s predisposition is different. I do not have a trading instinct, I do not like to jump on stories and that sometimes does not work. You should jump on stories, why do the heavy lifting and the hard intellectual work of unearthing some little nugget that nobody has thought of? It is much easier to have somebody else discover it and get on with it for a 50% ride or 40% ride. I just have a difficult time doing it.
Edited excerpts:
Some analysts say forget being circumspect in this market and just focus on three things liquidity, a stable government and earnings which finally seem to be turning the corner. Would you share the same thought or would you say that hang in there valuations are looking extremely toppish right now and one needs to trade with caution?
I certainly agree and share the same set of facts though my conclusion may be slightly different in the sense that everything that can go right is finally starting to go right. Domestic flows are very strong, growth and profits are rising and the sentiment is very strong. But it is also the classic symptoms of a very late stage bull market which is where, I think we are - both globally and in India markets. When things are going well, it is for very good reasons and that is where we are. If you look at four factors that drive markets which are valuations, earnings, inflation and sentiment - it is definitely a mixed balance sheet where the growth side is good and getting better.
There is very little doubt in my mind that both GDP and margins and therefore earnings will continue to be very strong and accelerating which is very positive and valuations are near or at all-time highs. It depends on how you want to evaluate it and that cannot possibly be a negative but valuations are never a trigger for a decline. It will tell you how far you will fall when the decline comes. So, it is not a catalyst, it is the extent of damage once the damage starts. The killer as usual is the fact everyone wants to believe that every time it is different, but it really is not.
It is hugely the drying up of liquidity and the interest rates going up quite significantly both in India and in the US. But they are going up from very, very low levels which I think lulls people into a sense of complacency around the world and that is what has happened. People say interest rates and liquidity are still very supportive. They are, but at very high valuations, the marginal change in liquidity is what matters and that is decidedly negative. So, it is a mixed bag, sentiment is also not as crazy and as frothy as you are likely to see near the top or very close to a top of a big bull market, but we are getting there. So, it is a mixed conclusion. It is a big and a very, very fun party and you are not early, it is one in the morning and everyone has had a few drinks, everyone is having a great time; nobody is throwing up yet but it is a late stage fun party.
How do you enjoy the party? What do you absorb further because it is the usual suspects, the HDFC twins, the Marutis of the world which have done well. There has been a significant performance from Reliance Industries and even the non-movers like Tata Motors and ICICI Bank have contributed to the Nifty move. First let us talk about the large-caps. What is it that you like and what is it that you are avoiding?
I am a macro guy and I would rather not talk about specific stocks and I usually have a violent disagreement from some of the clichés that are thrown out that it is a stock pickers’ market. It is almost never a stock pickers’ market. I mean you could have thrown darts at this market in the last three years and you could have doubled or tripled your money. So, getting the broad themes right is key.
Staying involved in the markets over long terms is yet another key. People tend to time it, which is a terrible mistake and if you want to make strategic bets, it should be over or underweight in certain sectors. The difficult thing today is do you sell or do you hang in there and fundamentally I am strategically bullish on India long term. I have learnt the hard way to really just hold my breath and grit my teeth when it looks like things are getting very extended and when the inevitable difficult correction comes, you need to just step up and buy. This will be no different. We will have probably a very big serious correction sometime in 2018 and at that time, you have to have the nerve to step up and buy. That is one thing because I do think India is moving up to a 8% growth trajectory. The reforms that will get us there are about the way and you do not want to lose your position on a multi-year basis in a country and economy that is doing that.
Having said that, 26 times earnings as the price of entry has never ever historically been a time to have made great money and this will be no different. Earnings will grow into the PE and you will end up being okay. That is my best guess and in terms of themes and areas I like, some are boring without mentioning names and the credit, finance, insurance particularly are still very under exploited and are big long term themes.
Infrastructure in all its form from low income housings to ports to roads to agricultural infrastructure are going to be big themes. The focus has to be on employment and those are the areas that are necessarily conditioned to getting us there. That will get a lot of investment attention and therefore could be very interesting areas.
Do you think there is risk in buying some of the consumer staples and NBFC stocks because they may be great businesses, great companies run by excellent entrepreneurs but for stock market investors, the upside could be 5%, 10% and the downside could be 20 to 25%?
I do not just agree with that. I do not think I have a very strong view on it but I am not interested in those stocks. They have price perfection and they will continue to do well over the long term. Hindustan Lever had fantastic numbers but that does not attract me. So I side with your view that the game in the next two, three, four years will be elsewhere and not in the big consumer staples both because of valuations and tech related disruption -- whether it is distribution driven or not. At the risk of perhaps venturing into a controversial area, I think the world is going ex-brand to a great extent. Brands are not so cool anymore. I have been short Coca Cola globally for 15 years just as a hedge on other things and not because I think Coke will not do well from time to time. I have a different view from Warren Buffett for example, I think it is yesterday’s story. I think nobody wants to drink sugar water even though it was the biggest brand name in the world 15 years ago.
So, the world is going x brand to a great extent and even in India helped by Amazon, internet and distribution as well as social media, it has been much easier to disrupt brands. I just have a hard time with the very high valuations for a brand that is selling whether it is sugar water or high carbs packaging it beautifully to the people. So brands is a yesterday story. That is not where the game is going.
What do you make of the IT sector because these are companies where capital allocation is great? Are they going through a structural disruption or do you think this disruption is temporary? Will they get their mojo back and the new business which is the digital business will stabilise because tech is touching our daily lives more and more. It is hard to imagine a world where tech is going to be less.
Tech as you said is almost not a sector anymore. Every sector is going to be transformed by tech. Either it has to be adapted or mutated or destroyed by tech. It is not like the old cycles where you could analyse tech whether it was the semi conductors in the 70s or the microchips in the 80s or the personal computers. It was a standalone silo that you invested in but now it affects everything so when you say tech, it depends on what you mean. If you mean what happens to digital payments and to Paytm and some of these unlisted things versus what happens to the big Infosys of the world, I think those are frankly two different questions.
It is the incorporation and adaptation of tech in every sector whether it is fin tech or distribution, even clothing or the fitness industry. It is a structural exponential trend and if you do not get with it, you will fail to understand how the modern world is going to work. The old standbys of tech to me look undervalued and certainly some of the companies that have been in the news are starting to restructure and reform. It is a different game but that could be pretty attractive at these valuation levels. Both sides of tech seem reasonably interesting to me.
In the past, you have spoken about how you have held some large-cap PSU banks which probably means SBI is part of your portfolio. I was hearing on the Street that there is an investment rather that you have made in DLF as well and the theme behind it is really you looking at areas where the broad public perception is bad. Infrastructure also extends out to that theme because there is not that much capital commitment that is coming in via the equity route or the debt route especially from foreign investors into infrastructure in India. How should one selectively pick names within infrastructure, real estate and the stocks where there is fair amount of scepticism?
This is more a personal bias than some kind of universal truth. There are lots of different ways of making money in the stock market as long as you are good at it and you are consistent at it. Great growth investors make money, momentum traders make money, value contrarians make money. It is important to know who you are. If you do not know who you are, the stock markets are very dangerous place to find out. I know who I am. It does not make it good or bad but over time, it vaguely works for me. My predisposition is to buy cheap things that are undervalued and out of favour and where I can see something shifting and most people do not agree with me. That is what works for me.
I have a very hard time buying a great company at seven times book value even though it could be a great company. It does not make it wrong, my genetic predisposition does not lend itself to that. I had bought DLF. I do not like to talk stocks on TV but I bought State Bank of India and DLF two years ago. DLF was Rs 85 a share and I was joking with some people in DLF and my point was I would rather buy your stock than your apartments because I just think there was a complete disconnect at some point between trends which got overdone.
The real estate decline was reflected far more in the stock than in the current value of its real estate holdings which are drifting down and will probably bottom out here but the stock had completely overshot. I had a similar view on State Bank of India. This is the best bank or the best financial company in India, but below book value with improving book and cleaning up its act and frankly better management structures. I would rather take the arbitrage buying State Bank at a book value than a top performing bank at seven times book. Does that make it right? It just works for me.
A very important aspect of investing is to stick with what works for you rather than adapt to the next thing you hear and everybody’s predisposition is different. I do not have a trading instinct, I do not like to jump on stories and that sometimes does not work. You should jump on stories, why do the heavy lifting and the hard intellectual work of unearthing some little nugget that nobody has thought of? It is much easier to have somebody else discover it and get on with it for a 50% ride or 40% ride. I just have a difficult time doing it.
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(What's moving Sensex and Nifty Track latest market news, stock tips and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)
...moreDownload The Economic Times News App to get Daily Market Updates & Live Business News.
Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.
Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price
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