Sachin Shah, Fund (Portfolio) Manager, Emkay Investment Managers, says “gone are the days when OMCs had to bleed a lot when the oil prices went through the roof. We are almost 90-95% linked to international prices and that is how we all pay for our fuel bills day in and day out. There will always be some bit of tinkering here and there which the government has to take actions keeping a larger picture in the overall scheme of things. I am not overly perturbed with LPG price cut. We will have to expect these kinds of announcements and overall if it is doing good for the larger community, it helps in terms of the overall consumption also.”
The market is fearing that the LPG price cut is a populist move which could extend to diesel and petrol price cut as well or something else. It appears like a populist move ahead of the elections. But this is an inflation calming move as well, isn’t it?
You are right, absolutely. I am sure these kinds of announcements will keep on coming as we enter the election season. I completely agree with what the oil minister said about the balance sheets and the financials of the oil minister said about the balance sheets and the financials of the oil marketing companies having strengthened very much over the last six-seven years. Gone are the days when OMCs had to bleed a lot when the oil prices went through the roof. We are almost 90-95% linked to international prices and that is how we all pay for our fuel bills day in and day out. There will always be some bit of tinkering here and there which the government has to take actions keeping a larger picture in the overall scheme of things. I am not overly perturbed with LPG price cuts. We will have to expect these kinds of announcements and overall if it is doing good for the larger community, it helps in terms of the overall consumption also, it helps in overall purchasing power and in holding on to the inflation numbers.
How are you assessing the risk reward in this kind of a market? One section of the market is only getting much more nervous given the sharp rally in smallcap and midcaps, others are waiting for a correction, but there is no really big major worry at the horizon yet. How do you stand on that argument?
Clearly, the valuations are not cheap for sure. Our sense is that at this point in time, they may be fully priced somewhere to maybe a little less fully priced; but they are definitely not very cheap for sure. There are a lot of businesses, a lot of stock prices which have actually delivered fantastic returns and they are now discounting at least, I would say, March 25 kind of positive earnings estimates also at this point in time. Now, of course, it is also going to be a function of how the companies deliver the results over the next two-three-four quarters. If they deliver the way today the stock prices are discounting them, then I think we are fine. But there is some bit of optimism now that is getting built into the overall sentiment in terms of the overall stock prices. So, we are definitely a bit cautious for sure.
Where are you booking profits? Your fund also has been doing very well. Are there some areas where you are trimming positions and maybe raising a bit of cash or looking for some more attractive areas of the market?
As you mentioned earlier, the smallcaps have actually done very well in the last three to four months I would say and that is one area where a few bottom-up businesses where we have had opportunities, some of the businesses that we have been holding on, say a power equipment company that we have been holding for the last five-six years and in the last 18 months it has actually gone almost 8x to 9x. Clearly, we have found opportunities to book profits over there. So, it is very company specific where we like the businesses but the stock prices have run up a little bit ahead of time. Equity markets always give opportunities on both sides, either it is too depressed or it starts getting into a fully priced, exuberant zone and long-term investors like us would like to capitalise on those opportunities. This is probably the time where at least in some of the stock prices we are getting some opportunities to book profits and we are happy to book profits at this point in time.
How are you looking at the hospitality space? Hotel stocks, be it EIH, be it Indian Hotels or smaller ones, the Chalet, all are rallying hard today on the back of massive wealth creation in the last two years. New triggers, perhaps the wanderlust, the festive season, cricket season, all of them coming together. Do you think bulk of the positiveness is already in the price there or if you are holding, would you like to hold it or even buy newer names or stay away?
We own a business which is part of the hospitality business but the business model is much different than the typical conventional hotel business. We have been owning this company called Mahindra Holidays for more than eight-nine years. We believe those kinds of businesses are highly cyclical, very high capital employed intensive businesses and obviously they will go through this cycle. Like today, we are seeing an upswing in a lot of hotel stock prices. That is also a function of the kind of depressed valuation, depressed stock prices that we have seen about five-six years back. Of course, today, the ARRs of all the hotel rooms are very strong and there is always a demand-supply mismatch which happens over a period of time and then, after two-three years, again, we will see supply coming back. So, these are cyclical businesses. I would only say that investors who are investing in these businesses will have to be very sure that they are getting into cyclicality of the businesses and you are not at the bottom of the cycle, but probably somewhere in the middle of the cycle. One will have to be a little more careful about exiting these businesses in time.
What about power ancillaries, especially the wires and cables variety? The KEI management says 18% growth visibility exists even after having a very good structural growth in the last two-three years and export markets are opening up. Do you like power ancillary stocks?On the power cable side, the export opportunities are really opening up quite big. In fact, we owned a power equipment business for almost four-five years and now we have fully booked profits there. It is a company called Apar Industries. First a disclaimer that we have fully exited this business, we have booked our profits after 5-6 years of holding. In this business, nearly 50% of the business comes from the export side and cables is also one very important aspect of their business.
Today, 50% of their cable sales come from the export side. The opportunity that they see, that they talk about particularly from the North America market and the Europe market is because in the Europe market, today renewable energy is a very big thing. They need to establish much more new transmission capacities for renewable power and in North America, they need to completely rebuild their infrastructure because it is now more than 50 years old. As the infrastructure is crumbling, they are look at replacing a lot of these cables and it is probably annually a $20 billion opportunity. So, the business outlook is looking very strong.
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.
