Where are you treasure hunting in the semi midcap or the smallcap pond?
It is a good time to look at the textile sector. There are a lot of companies in the textile sector, maybe even lower than that Rs 2,500-crore market cap because that is one sector which the government would focus on, plus it is coming out of a long cycle of mess and a lot of problems. I am looking at opportunities there.
I have always maintained that in the Rs 2,500- 10,000-crore range, there are a large number of second-tier steel companies which over the next year or two would give good returns. I am a believer that metals have more steam to go with a pullback.
Similarly, there are a good number of second-tier manufacturing companies belonging to good, well established families. You will be able to find many of them in cement, in ancillaries and a lot of other places. So there is a huge basket available in that space. There will be 50 to 100 companies worth evaluating and considering which will give good entry opportunities if the market cracks.
I think these are the pockets of the smaller companies which are still off the radar and people are not focussing on them. This is the place where investors need to be in but obviously this is a difficult space because you need to do a lot of homework and understand things, read the annual reports and research reports, it is not easy to get the next 2x or 3x stock within this universe.
What will you completely stay out of?
There would not be anything that is a clear avoid. All portfolios normally have underweight and overweight positions but at this point of time, contrary to consensus on the Street, I would be a little wary of the IT companies which have started to trade at closer to 30 multiples.
Similarly, a lot of branded consumer plays are there also. I would be underweight for the time being on companies which are trading in the multiple of 50, 70 or more. Those are the two places I would have very little exposure to in my portfolio.
I saw you retweeting a view on Reliance the other day saying that it has a return on equity of barely 9% which does not even cover the cost of equity and the ROE despite significant profit growth projections is still expected to be 10-11% over the next two years. How does it all tie in with investment into Reliance?
At this point of time, particularly in the 1900-2200 range where Reliance is trading, it has got most of the positives priced in, particularly because some of the platform businesses where there have been a lot of excitement. Those businesses are going to take a substantially long period of time to actually see cash coming in.
In order to see positive returns and capital coming in, they would borrow a good amount of capital and the petrochemicals business is exactly where the ROE and all those things have been coming out. But even the petrochemicals business does not seem robust enough right now to actually carry the stock getting further from the current levels. It is in the upper end of the range but longer term, once the whole unlocking story is out, we will have demerger of various verticals into separate listed companies — be it retail or the Jio IPO that have been talked about. Once that happens, we may have some upside coming in but as a stance, plus minus 10% or 15% is all that Reliance has to offer over the next 12 months.
Out of insurance, hospitals, drug companies, diagnostics — where is the opportunity for not just in the short term but for next two to five years?
In the broad healthcare space, priority would be diagnostics because it has phenomenal potential if you tag this with insurance and other issues particularly in Covid. People are going to get more timely health checkups and in any case, healthcare in India is evolving in such a manner that the entire methodology has changed.
As soon as you land up with a physician or a specialist, the first thing he asks you to do is some tests. I think diagnostics is a very big market in India and it will continue to grow and the existing players will really become big and some more new players will come in. It is not as capital intensive as hospitals. It is more of a logistics-oriented business and there is a phenomenal amount of mechanisation, automation, technology that has gone into this business. So, that is where I would like to be. But overall healthcare as a theme is very positive.
After that insurance is a big bet. So diagnostics along with insurance is the biggest opportunity in the healthcare space. Hospitals yes, but hospitals are very capital intensive businesses and it requires a huge amount of investments which takes a long time to give returns.
So to cut a long story short if you want to take exposure to the healthcare segment, I would be into diagnostics and insurance and of course individual pharma companies which are way ahead.
How should one bet on internet or e-commerce IPOs?
It is near impossible to get the right valuation metrics for these companies because most of these companies tend to burn a huge amount of cash in the initial phases which they are in right now. Companies like Zomato are burning a lot of cash but the bet you always make is on the company that is going to emerge as the winner. After a few years of cash burn, the leader finally starts breaking in profits. So the IPOs get lapped up and no one looks at cash flows or anything. There is enough liquidity in the system but sustainability is a whole question. It is like what we saw in Burger King. The kind of volatility we have seen there in just a short span of a few weeks. Exactly the same thing would be repeated ee in some of the internet companies. But they are very exciting businesses and you need to evaluate them carefully and have some of them in your portfolio for a longer term five-ten years. I am very optimistic on something like Zomato.
What is a realistic return expectation or a year-end target that an investor can keep in mind?
You have to be smart enough to just sit aside and get in when there is a deep cut in the market. You obviously cannot get in at the bottom and by deep cut I mean if the market falls about 5-8% and even if you have got in when it fell about 4 or 6%, there is a good chance of making a 15% return from that level.
But timing has become very tricky now because indices have rallied a lot. So, if you were to take a call and a return based on purely indices it is very difficult to do as market timing becomes very critical.
I would on the other hand advocate timing in the market and not market timing, that is get your right stocks, stay put in them for the next 2-4 years and then you would make returns. But trying to game your entry point and when you can sell is very difficult. Most of the aggressive volatile moves in the market are a function of things other than domestic happenings like the dollar index, EM flows and a lot of other combinations.
It is near impossible for even someone like us who have been in the markets for decades to really game an entry level when it comes to indices. So to cut the long story short let us just stick to good quality stocks which you understand, hold them in your portfolio, ride them out over the next three, five years and you will make good money. But if you want to get too cute to game an entry or exit based on an index, then you are basically a trader.