How would you view a company like or which have great return ratios, very expensive but they continue to grow?
It is very difficult for me to fathom Asian Paints and put a valuation to it and think that it is rightly or wrongly priced. It is a fantastic company, let us not take anything away from it. It has delivered, it is consistent and the corporate governance is of the higher order. It is all priced in. So possibly we do not tread that path of buying what everybody likes. We are in the contra world where money is to be made, maybe a little more than the rest, by buying into names which are less crowded. There is an inherent mispricing of the asset and there has to be a upside which is not imminently discounted in the pricing.
We think about those names where we see both margin of safety and also mispriced assets and where we think that there is a bigger opportunity to make money. Asian Paints can give market plus returns but margin of safety and the mispricing of assets is possibly nonexistent in these kinds of names.
Do you think that till the real rate in the US remains negative, this bull market will be alive and kicking?
Is that your theory?
No, I am asking you because that is the theory which a lot of people are discussing and debating.
If that is the thesis, it is a bit dangerous because it has to be seen in light of the fact that asset bubbles are formed with massive liquidity. Asset bubbles are not very visible as of now. Is there an asset bubble in the marketplace in the US? I am not very convinced. There are bubbles in pockets but these are not large enough for central banks to reverse rates.
But liquidity can create bubbles and that is a fact of life and we all know that. What pricks the bubbles are the inflation expectation when monetary tightness comes in and reversal starts. Inflation expectation is crawling up which people are ignoring. The US inflation expectation has gone past 2% now. Second, oil has gone to $60-61. All said and done, despite the digital world, solar energy, India still has a little hiccup and chokes when oil goes past $60-65, 70 maybe. So the global trends are possibly ignoring some facts. But the liquidity rally has not resulted in bubbles of that magnitude that one will be very worried as of now. There could be pockets of froth like the US digital space but I am not very convinced that the entire marketplace is a complete bubble.
Do you see any opportunity in the consumer pocket?
The consumer space has been quite expensive, staples side. But having said that, we are very positive on consumer discretionary and we believe that the household savings have risen quite sharply over the last three to six months. The savings will get converted to discretionary spends which will show up soon.
The staples piece remains a bit concerned though there will be enough demand coming from the household as well but what is important is to see that the agri commodity inflation has been pretty strong. Oil prices have translated to higher prices for LDPE, HDPE and packaging materials.
Second, is if you think about bran oil or even copra, the prices are up quite sharply and the companies are struggling to pass on price increase and they are focussed about volume growth. In some state, this will hurt. So having said that, consumer staples has been a space where we have been very picky and choosy but are more focussed on the consumer discretionary space where I think there is a fair bit of opportunity.