In case of some of the very large blue-chip companies which are trading at 50-60-70-80 PE, it is going to be difficult for investors to make high double-digit returns in the next three years, says Sachin Shah, Fund (Portfolio) Manager, Emkay Investment Managers. Excerpts from an interview with ET NOW.
How has your portfolio been doing? Last couple of days, broader markets have been coming back. I am assuming that the portfolio of PMS orientation usually has a good 30-40-50% chunk of midcaps.
You are right absolutely. Our flagship PMS is Emkay Capital Builder. It is a multi-cap PMS and we have a 40-50% allocation to midcaps and small-caps. In fact, we also run AIF Emkay Emerging Stars fund which is actually only a small cap AIF and we launched this sometime in January 2018. The BSE small-cap index was down almost 40% odd at one point, just a couple of months back.
We have been fairly patient about investing our money and we have not invested too much money and that is why we protected a large part of our capital from destruction. But you are absolutely right. The broader market is now seeing some bit of movement and that is a good thing. It was down 40% at some point in time. The smallcap index is now down about 32% odd.
But in the last five-seven trading sessions, we are seeing the advance-decline ratio, the breadth of the market is getting better. We are also in the midst of an earnings season. Some of the results and commentary are not as bad as one was expecting. That is a good thing and a lot of things are in the price.
The commodity is an area which you have avoided but autos are in focus. Mahindra numbers just came in. The stock is at a five-year low right now. There is a sense that perhaps the big recovery may not come. Which part of autos do you like?
We have been focusing more on rural auto. We strongly believe that in terms of public transport, there is a huge vacuum as far as the rural markets are concerned. Also this year we have had a beautiful monsoon. So we strongly believe that it is a matter of one or two more quarters and the demand from the rural auto side will be very strong. We are very much focussed on products for the rural market and we expect a huge demand coming in the next couple of quarters.
What about financials? There is one private sector corporate bank in the middle of a lot of trouble and it has to forcefully raise money. One of the promoters exited because of lending issues. But how good are things in the healthier ones — ICICI, Axis Bank?
We strongly believe that the couple of names that you mentioned have a great outlook. If you look at it their liability franchise, the CASA today is a good 40-50% for these banks. Second, last five-seven years, we have had a fairly rough patch as far as the corporate NPAs and the quality of the assets were concerned.
These banks have actually written off a lot of these things out. The worst is behind us and within the valuations, if you see the gap between the best bank today in the country versus this number two and number three, there is still a decent gap. We believe the fact that the top-level management have completely changed and in their commentary, they are coming out with a complete no-nonsense approach and clear growth guidance of at least 15-20% for the next two-three four years. We strongly believe it is a good secular growth story for the number two, number three, number four bank of the country.
Second-quarter estimates were so low this time that people are getting positively surprised that the actual numbers are not as bad as they thought. Commentary is not very negative for many managements. Tell us a couple of instances which you have observed.
Yes, the credit goes to some of these auto companies because in spite of huge double-digit volume degrowth, for the September quarter, their margins were fairly stable or probably a little better. So the negative operating leverage did not really play out as much. Basically they have done a decent cost rationalisation. They have got better realisations. So the profit dip was not as bad as one would have expected. From that perspective, autos have done a decent job.
What about hospitals? A lot of managements are taking proactive help to reduce their pledges. There are hospitals which are getting listed and generally the health of the sector has improved. Is there a strong case to look at this space?
I do believe so. We have seen a consolidation in this sector now. Companies are now trying to get optimum utilisation of their capacities. There is now a decent amount of clarity in terms of regulations also. There are still a couple of challenges but that will also get sorted out very quickly. From that perspective also, the worst is over for this sector and the managements are much more focussed in terms of generating good ROCs for the shareholders.
What are the unique plays which are available now? Since they are midcaps, they got corrected quite sharply. We are seeing greater traction in the leisure park kind of plays. Do you like them?
We have been fairly positive on the travel and leisure space. From a top-down approach, we are seeing the consumption patterns in travel and leisure space. Last one year saw some slowdown in GDP growth. But the spending budgets as far as travel and leisure have kept on increasing. We definitely like that space. There are a decent number of quality companies which are debt-free, cash flow generating, growing companies. These are probably available today at very, very reasonable valuations. This is one space that we have been invested in and we are fairly positive for the next few years.
Just a quick word on the area of the market which you find a strict no go on valuation terms and risk-reward is fully priced in right now.
We strongly believe that in case of some of the very large blue-chip companies which are trading at 50-60-70-80 PE, it is going to be difficult for investors to make high double-digit returns if you take the next three-year view.
Sachin Shah
Fund Manager, Emkay Investment Managers Ltd.
Sachin is a seasoned fund manager with over two decades of experience in the Indian equity markets. By virtue of his extensive research, Sachin realised early-on the need for a framework in which companies with evasively tricky standing needed to be filtered out very objectively, leading to the development of E-Qual Risk, EIML’s proprietary module which helps us to evaluate and compare listed companies on various aspects of governance. Sachin shares his knowledge and insights through various media interactions across print and digital platforms.