How are you picking your spots in pharma? How are you picking two or three names from two to three dozen listed companies?
Every pharma company is very unique and so it is not possible to buy everything. We have a few pharma companies. Our portfolio has companies which have some Covid exposure — whether domestically or internationally. Also we are bit cash flow and value focussed and these are companies which are at max trading at a forward PE of 18-20 times. But as you rightly said, every pharma company is different.
So, what we have to look at is whether we have a pharma company which has a portfolio of products which are not very easy to make. They are complex. Whether there are some value upsides in the next two, three years in terms of some approvals coming or some FTFs coming and what has been their track record in terms of their regulatory approvals as far as their facilities are concerned.
This has become very important because for a pharma company if there is a headwind in terms of regulatory issues, then they can lose two, three years. These are the three, four things which we like to tick mark before investing in a pharma company.
How excited are you about PSUs? Do you think these are seasonal fruits not permanent investments?
Some seasonal fruits are delicious like our own Alphonso mango, but at the same time too much of them can lead to rashes on your body and that is what PSUs have proved to be from time to time. We do not want to invest in anything based on news flows. If we believe that fundamentals are in our favour, then we would definitely like to invest.
One good thing is that we do not invest in companies where the return on equity visibility is less than 14-15% and that helps us because most PSUs do not qualify and we have stayed away from it. We have a couple of PSUs. In one fund, we have the largest public sector bank which has not done well in the last three months and the other is a midsized public sector bank. Our entry point was superb but these are the only two PSUs we have.
There is merit in trading in some of these PSUs but one has to be very agile because a lot of these PSUs operate on the commodity front and therefore your view on those underlying commodities has to be perfect. We do not like to invest based on news flow and just because a PSU is being sold at 50% higher than the market price, we won’t go and buy it.
You bought into Route Mobile because you were bullish on the digital growth of India. Where else are you picking up your spots in the tech space? IT services is a play on buy the bad news, sell the good news. These are secular 10-12% compounders.The real meat for a midcap investor like you is to buy new themes. Where else are you catching things young?
One, I would like to correct you. IT services companies in India have given much higher returns than 10-12% which you mentioned. In fact, if you compare them with the so-called high quality FMCG, good IT companies in India have generated more cash, distributed more cash and have grown at a faster rate than most of these FMCG companies. They grow at like 10%, 12% in dollar terms. You add 3-4% in rupee terms. They have been growing at 15-16% year after year. In fact, in stock market parlance, they would have become 10x in 10 years which is a great return! We continue to be optimistic and positive on the IT services companies. In fact, the top three companies which have declared their results for March 21, all have seen record additions in the numbers of people they have hired and that clearly points to the pipeline of business they are seeing as we move forward.
The other thing is that Covid has ensured that the issues of visa and travel and onshoring and all that is behind us and they are able to offer their services at a much more competitive rate and that is even more profitable because your travel costs have come down.
Third, companies globally are making themselves digital ready and that again is a big opportunity for Indian IT services companies.
In the digital space, you mentioned Route Mobile. Unfortunately, most of the companies and opportunities are in the private domain and for listed investors, the opportunities are few and far in between. But wherever one gets those opportunities, one should take that call and we are up there. We invested a small position in a travel company which got listed. We invested in a small company which is into medical equipment. What we look at is even if it is not AAA company, if it has decent promoters with intent to be fair in the present and the future, we are willing to give them the benefit of doubt. So we are in fact more than happy if companies do not attract attention in the initial phase because then one can buy them at a decent price. As we move forward, many more companies might come up for listing and we are up there.
A quote from Mark Housel’s latest book says too much of good news and too much of bad news rarely last. Demand and supply catch up. What would be the turning point for you to start selling steel stocks? Will it be price, will it be trend?
Steel has always been a good sector for us right from the Reliance days. We caught the steel cycle quite early between 2003 and 2008. You will never be able to buy it at the cheapest price and sell at the highest price. The other thing is you cannot have 15-20% of your portfolio in commodity stocks because the way they move, the prices move up higher and they can also go lower. One has to manage the portfolio in a manner so as to be able to digest the volatility at the same time make returns out of it.
People say that these are low quality stocks. I do not agree with them. If you look at the largest paint company, the cumulative 10-year profit of that company is less than one year’s profit of the steel company in India this year. So you can say that the profits may go up and down. but over a period of 10 years. A steel company would have made much higher profit with decent ROEs. Obviously they are capital intensive and someone in the country will have to spend money on creating capex as otherwise nothing will work in this. But at the same time, do not start to project five-year forward in a commodity company. No one can do that.
Whether the steel prices today are Rs 50,000 a tonne or will be Rs 45,000 or Rs 55,000 even after six months, I can bet no one can project and therefore one has to be very careful of what they are getting into. Do not build your projections based on the current prices. Build your projections on a five-year, ten-year cycle and then move forward. In fact, the best time to buy commodity stocks are when their PEs are the highest. That means, some years are so bad that they hardly make profit. So sell commodity stocks when the PEs are the lowest. That means in a year when commodity prices are so high that they make record profits and therefore the PEs are low.
I would say that one should not have more than 5% of the portfolio in very high fluctuating commodity stocks. Having said that, one good thing about this cycle is that the balance sheets of a lot of these companies would have improved. The biggest PSU in this field would have reduced its debt by half in one year and if the cycle continues, maybe, would turn debt-free in the next 18 months. So balance sheets have got repaired significantly and that also adds to the profitability. Suddenly if you find that thousands of crores were being paid in terms of interest and now you do not have that, even at a lower price, the profitability might be higher. So have a holistic view and do not get carried away.
If you want to continue with your mango eating habits, all you need to do soak them overnight in water.
Equity is also like that. Storing in water is basically ensuring that the background work is done perfectly and there is no scope for only momentum to be in play.
