At 24,000 odd, a lot of investors who have made very handsome gains in their portfolios, trading books, as well as running their own money, are feeling they have disproportionately made money and it is also triggering a feeling to book out. What should they do?
Mihir Vora: So, of course, it is tougher to pick stocks now than it was a year or two ago definitely. So, I would say the universe is getting narrower and most of the themes that we are talking about are no longer undiscovered.
On the other side, the liquidity flow from the domestics continues relentlessly and we are amongst the few markets where the broader markets are doing so well.
Of course, the largecap indices are doing well, but even the broader markets are providing a good support to the market.
My guess is that the markets are looking towards the fact that for the next five years, we will continue to see policies which will foster domestic manufacturing growth, which will continue to see infrastructure being created and the fact that we need to now compete with China in a meaningful way is getting ingrained into the business system.
So, that bullishness and the hope that private sector investments are coming in and will continue to come up and hopefully in the budget we will see some more announcements for corporates to start investing, that is what is keeping the sentiment alive. Plus, the US economy has been much better than expected. It has been stronger for longer and of course, then it also translates to higher interest rates for longer, probably, but the fact is that the US economy is doing quite well. What I wanted to ask really was I mean, six months done for the year already, what lies ahead? Do you think that now you will have to sort of hunker down your expectations on a return basis? Is the best for the year already behind us? Has it already played out? And I ask because, I mean, there are a lot of political developments, a lot of global elections, the big one being US. And, for us as well, while it is always the chatter whether there is going to be any tampering on capital gains tax or not, but the chatter is there and there is always nervousness around the budget.
Mihir Vora: Certainly, no harm in being a bit cautious and selective. So, the one thing that we need to do is not go down the quality curve. Just because a stock looks cheaper in the SME space or the smallcap space, it does not mean that it is good. So, in such a, well, not exactly a frothy market, but in such a bullish market, I would say, one needs to make sure that we do not compromise on the basics, the fundamentals. You might end up losing a little bit of money, but it would not be a permanent loss of capital as long as you are in quality stocks and quality companies. But the other thing I wanted to discuss with you is financials, that is one space which has underperformed. And I was going through your top holdings, it continues to be ICICI Bank, HDFC Bank. You expect them to finally come out of a slumber and be big outperformers from here on?
Mihir Vora: Certainly. So, on a relative basis, financials are the most attractive, though they have disappointed surprisingly, in spite of having the best ever asset quality, decent growth.
But the concerns about liquidity being tighter for longer are probably weighing on the sector. Plus, the RBI is not directive, I would say, but indications that they might expect some tempering on the personal loans, unsecured loan part, that is probably weighing a bit on the sector.
But as far as the current fundamentals are concerned, I do not think we have ever seen valuations and fundamentals so attractive.
Perhaps they have been on the receiving end of the massive FIIs selling for the last two-three years. Do you expect now FIIs to come back because they may not have any alternative to the kind of superior growth which India offers and size and liquidity as well? You have been an FII yourself in one of your avatars. You understand their psychology and investing style well.
Mihir Vora: See, if you look at the long term, we have been discussing so many times, the India story in the last three years has never been relatively stronger in the global scheme of things. I think India is the best emerging market story as far as the global perspective is concerned. We all used to talk about Brazil, Russia, India, China. I think it is only India left now. Probably a little bit of Indonesia to some extent. But India does stand out in a big way. So, long term, I do not think there is any doubt that we will continue to get FII flows portfolio as well as FDI flows. In the short term, what could probably weigh on the market is this theme that we talked about, that the US is doing so well, that interest rates in the US and the Western world might remain higher for longer and you can see some stress building up in the global system because of that.
The biggest data point in the short term that I would look at is the Japanese yen because the Japanese yen has depreciated so sharply in the last few days that it is causing concern. Two issues, first is Japanese investors are amongst the largest investors globally, so you might see Japanese investments getting pulled out from other markets because of higher interest rates.
Go back to home market, that is one. And second is, if as a reaction to the strong yen, the Japanese government starts tightening, then there will be a further leg of competitive tightening in currency volatility, so that is one immediate risk factor that I see.
I see a good representation in one of the sectors is telecom. Now, telecom after five years is seeing the first hike and the general expectation is that there may be another one six to eight months down the line and one of the sectors where fundamentals are improving pretty sharply, but they have rallied as well in the last six months. How do you kind of balance it out? Do you see more scope for expansion if tariff hikes flow down to numbers and one more comes along?
Mihir Vora: See, telecom I see as a steady growth sector now. I no longer see it as a very low growth sector or a very high growth sector. If you look at the long-term macro, when the telecom sector was growing at fast rates because the penetration was low, the spending on telecom as a percentage of GDP went up to almost as high as 2% of GDP, this was in the mid 2000s, etc, when the sector was growing exponentially.
Then, you had this big tariff cuts as the big player came in in 2016-17 and then the percentage of GDP came down to as low as 0.5%.
So, from 2%, we went to as low as 0.5% of GDP. And now we are creeping back gradually, but it would not be a super growth sector. It will be a good decent, I would treat it more as a consumer sector, FMCG kind of sector.
Where is super growth happening in your view?
Mihir Vora: Super growth, we all have been discussing all those themes so many times.
But it is getting priced in as well.
Mihir Vora: Absolutely. So, one needs to be more picky and choosy. And the other theme that is emerging is probably a little bit of more populism than last year. We are seeing that already in a few states, whether by the opposition ruled states or in the incumbent governments ruled states, so that is another theme that we need to think about.
So, does the FMCG and the rural plays, be it auto, across the band also become a tactical play?
Mihir Vora: More tactical, yes, I would say. Again, FMCG would not be a super high growth sector over a long period of time, but yes, tactically it does tend to act as a defensive from time to time.
But what is conspicuously missing in your list, at least from the flexi-cap fund is no pharma names or at least not a big representation. Not yet time to go overboard on pharma?
Mihir Vora: No, we have, it may not figure in the top holdings, we are kind of neutral on the sector. We have three-four names in the segment, so we are neutral. But I think the worst is over for the sector and we would be looking to pick more stocks in this segment.
But what, healthcare, diagnostics, the manufacturers, exporters, domestic facing?
Mihir Vora: More of the generic exporters because that is where the maximum stress was for the last four-five years and that is where we hope the turnaround will happen.
In your flexi-cap fund, what is the average valuation of that fund versus one year forward earnings growth picture?
Mihir Vora: So, our price to earnings ratio for the fund as a whole would be probably around 30, which is a little higher than the Nifty 500, I would say. But then our earnings growth is also higher for the portfolio. So, while the Nifty PEG, PE to growth would be around say 2 or 1.5 to 2, our PEG would be between 1, 1.5. So, we have higher growth as well as higher valuation.
And earnings growth, 30 something?
Mihir Vora: Absolutely, yes.
So, if you form a good portfolio company with 25-30% kind of earning visibility one or two years far out, it is okay to play slight higher on the valuation side?
Mihir Vora: Absolutely. So, I always keep telling you cannot look at PE ratios on a standalone basis. You have to adjust it for growth and you also need to adjust it for ROE and the cash flow of the underlying.
I have a question for you in a very high growth and super growth category. Every company in that category, electronics manufacturing is what I want to talk about. But there are half a dozen big companies where liquid, well-traded kind of companies. Then, there are a bunch of micro-cap, I would not go there. But the five-six top names, 50% kind of CAGR and visibility for next two-three years. Is it prudent to even look for fresh purchases in some of those electronic manufacturing names? Some of them have semiconductor play now emerging, of course, auto is the most normal one, but complex electronics also, is it okay to purchase there fresh?
Mihir Vora: So, we have a couple of names, of course, in the portfolio, but we need to be picky and choosy. So, for example, if the company is looking at a large capex, then you need to adjust for the fact and you need to understand that when a capex happens, the utilisation may not happen immediately.
So, there might be some periods where you might see that the depreciation, etc, hits and then the turnover picks up. So, you need to be ready for quarter-on-quarter volatility in companies where there is lot of capital expenditure happening. There are certain companies which are doing more modular stuff. There the visibility is more consistent, less volatile, so to say. So, you need to adjust for those kind of factors. But having said that, the macro tailwinds are obviously in place.
A quick word on cement, what is your take on cement? Are you playing cement midcap, top tier because it has only been an efficiency story so far. Pricing, I mean, it is so much under kind of regulation of sorts, but how do you play cement in your portfolio?
Mihir Vora: So, cement we are, I would say, neutral and I would not play for margin improvement in the sector. So, we prefer stocks which are going for capacity expansion. Over the longer term, I would rather favour volume expansion and capacity expansion rather than margin improvement. If it happens, then it is a bonus, but I am not betting on it.
