For an investor with a medium-term perspective, there are lots of opportunities around the theme of Indian economy and one should buy on dips, says Pankaj Murarka, Founder, Renaissance Investment Managers. He was talking to ET Now.
Edited excerpts:
The fall in the broader markets is apparent. How do you see it?
We are seeing clear sign of capitulation when it comes to the midcap and small cap space and that is something which was long overdue. Last year, we had phenomenal move in midcap and small caps. A lot of midcap and small cap stocks have gone up 3x or 5x irrespective of the underlying fundamental and there was a clear disconnect between the underlying fundamentals and where the price action was. A lot of this price action was driven without an institutional participation. It was largely retail and HNI participation which was driving all of that. We are clearly seeing an unwinding and a capitulation there.
Globally emerging markets are seeing a round of profit taking and in India we are seeing some impact of that but for an investor with a medium-term perspective, there are a lot of green shoots around the Indian economy and this correction should be an opportunity to buy into desired stocks.
How much of this selling in midcap, would be the impact of this mutual fund scheme rejig which is taking place in the market?
It might have some impact but I do not think that is the only thing that is driving the entire selloff. There was a magnitude of froth that existed in all these midcap and small cap stocks. We had a situation where the midcap and the small cap indices were trading at about 40% to 50% premium to your large cap indices. We have not seen a follow-through in terms of earnings in a lot of those names. Clearly the growth expectation that were priced in into lot of those midcap and small cap stocks were too high and we have seen some round of disappointment there. There was a degree of froth in the way retail and HNI participation was happening. So, it is largely unwinding of positions.
Valuations in consumer staples is at a historic high. HUL is trading at some bizarre PE multiple, Titan at 60-70 times, Jubilant 40-50 times, Colgate Palmolive 21. I do not track PE multiples, but it has to be out of sync. TCS PE multiple almost 25-30 times. How come nobody is talking about rich valuations in these stocks where we know the growth is not going to be in line with what the underlying strength. PE multiple of 70 times for Titan means that everybody is assuming that the company will only grow at 70% for god knows how many years?
What has happened is over the last five or six years, the basket of growth stocks which have been delivering very consistent growth in India has narrowed and we have had too much of money chasing those baskets. These are large companies. For example, when you are talking about Titan, it used to be one of those midcaps but it is an index company and all these companies despite their size, are still growing in high teens or more than that.
A Titan is expected to grow 30% over the next two years and you are seeing a huge consolidation that is happening in the whole segment there because of change in government regulation. The result: the stronger or the bigger player is becoming bigger. The valuations in the context of the growth over the next two years are probably well justified and are probably trading at some premium but unless and until growth becomes more broad-based, you will have a situation where too much of money will chase a narrow basket of stocks and their valuations will continue to remain elevated.
What amazes me is that three years ago my view was that broad-based economic recovery was coming and with every quarter, forget the recovery being broad-based, the growth is getting narrower and narrower. If I had 150 stocks where I was confident of a 1-20% growth, that number has become 25-30. In your own words the growth visibility is only restricted to maximum 40-50 stocks. What is the story here?
Things are changing at margin. Last three or four years, India has gone through a difficult economic environment where we had to deal with a situation where we had broken balance sheets, twin deficits and we were coming on back on two successive failed monsoons. Also, you should bear in mind that last year was a year when in a matter of 12 months, we have done some of the biggest reforms that India has ever seen in Indias economic history in a matter of 12 months and the GST followed by RERA and IBC.
All these have been hugely disruptive. But today we have reached a situation where the real economy has started showing positive traction. The impact of disruption because of GST and demonetisation is behind us now and we have started addressing the twin balance sheet issues. The core sector of the economy have started responding pretty positively. If you look at the fuel consumption data, the electricity data or the freight indices they are all showing pretty strong growth over the last six or eight months.
If you look at the airline passenger traffic, that is growing at 20%. There are pockets of economy which have already started recovering. The way I look at it is India has actually been into an industrial recession for the last four years but now we are nearing the end of it and we are seeing positive traction in the real economy. Going forward, growth will become far more broad-based than what it has been for the last three years.
One highlight for the quarter gone by has been some of the so called consumption names where the unorganised market is shifting to the organised market. We have seen that in Sheela Foam, Britannia. How are you betting on that theme?
That is bound to happen. GST is the mother of all reforms and now as they are implementing those e-way bills. The point is we have taken all the pain of disruption caused by GST. We are yet to see the gains of it. The gains will start materialising now and the gains are two or three-fold. One, the organised players will have an edge over the unorganised player because the business model of a lot of these small unorganised player thrived on evading taxes. They lose that advantage now. You will clearly see a shift in markets from unorganised to organised player and more importantly, over the next few years, that will take Indias revenue collection or tax collection significantly higher. The kind of tax buoyancy that can emerge out of GST grows to underestimating that.
That is a fair point. When I started my career, the retail space in India had arrived, Reliance was moving into retail, Kishore Biyani had opened a Big Bazaar. Everyone told me that the kiranawala, the Laxmi Store outside our houses are going to disappear. But they all continue to exist?
Yes, what you are saying is absolutely right but..
I hope you are not getting carried away with this theme because the smaller players will always have some advantage.
What you are saying is right but what has also changed is that organised retail which was non-existent until 2001 or 2002, today has a 3% market share in Indias overall retail, Indias retail is so huge and growing because you are adding more and more consumers with more spending power.
The overall retail market will keep growing but organised retail, which was zero, is 3% today. Five or 10 years out that will be something like 10% or 12% and probably 15 years out that will be 20%. So that shift is happening but maybe it is not as visible because these are very long-term structural shifts which take 20 years to play out. So that story will play out.
What is the one word of caution you would want to exercise in a market like this? Given all the macro variables, given rising oil prices, how should investors approach their portfolio to protect their downside risk?
We do have some macro headwinds, especially from rising oil prices but at the same time, we also need to be cognizant of the fact that last time around, when oil prices was at $80 or $100, India was a trillion-dollar economy. After almost seven years, India is a $2.2-trillion economy. So, while higher oil prices does create some headwinds for India, it is far more resilient to deal with it this time around.
More importantly, the good thing is globally growth is accelerating and Indian economy has reached a stage from where growth is accelerating. So, I would say investors should look upon this correction as an opportunity to buy into some good quality names which are related to domestic economy because that is where it has started showing signs of recovery.
Indias investment cycle which was completely broken over the last four or five years, is getting back into shape and we see a lot of value and some cases of deep value there. Investors should be careful or cautious about the broader mid-cap and small cap basket because that is where there is a lot of froth but aside from that, I find a lot of opportunities for investors because the Indian growth story still remains very much intact and from a global perspective, one of the most exciting growth stories to bet on.
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