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We are done for the year but still bullish on 2 themes : Basant Maheshwari

In an interview with ET Now, Basant Maheshwariof Basant Mahe..

In an interview with ET Now, Basant Maheshwariof Basant Maheshwari Wealth Advisers, says Nifty can go up to 11000 but that is not where money is made or lost. Money was lost in small caps and it would be recovered from the small cap index. Private financiers and consumption are the two sectors which are continuing to do well.

Edited excerpts:

Bulls have gone for a long hibernation. Do you think that for the moment, Indian markets are stuck in a range?

There are two things to it. The Nifty can go up to 11000 but that is not where money is made or lost. Money was lost in small caps and it would be recovered from the small cap index. So, we talk about the Nifty, we talk about the Sensex but the average investor is still nursing the wounds he incurred when he bought the stocks during January or December or November last.

On a broader scale, we are done for the year. We are done till elections but the Nifty can go up but the average person on the street does not buy Nifty stocks. He is the over-smart guy, he is the greedy guy, he is the self centred guy who wants to make 100% in six months. Now, you do not make 100% in six months in Nifty but he is losing 50% in six months.

That is what is happening with the small caps that he bought and all those chakri (circular-trading) and the kachra (garbage) stocks that he has bought but I do not think there is any hope there.

Obviously the markets are going back to quality. And that is where a stock pickers mind is put to use because when every stock goes up, nobody cares a damn about which stock is going up 40% or 30% in earnings. At that time, price becomes a determining factor but now with price being the determining factor, earnings would become the determining factor and that is great news for anybody who wants to buy good quality and sustainable businesses.

There is no hope lost. The engine of the car should now be strong enough because roads ahead are bumpy for companies that were devoid of earnings.

The market concentration for the moment is centred around companies which are giving you decent growth visibility like Bajaj Finance, HUL, Titan or Jubilant Foodworks. But while the market is getting polarised, the flavour of the market is where earning visibility is strong. All those bhangar caps and chakri (circular-traded) stocks have come down. A lot of investors have burnt their fingers. Do you think the risk for investors now at least in buying quality stocks is actually valuations?

Growth acts as a pain-killer to the pain of valuations. If the valuations are high and if there is growth, you do not feel the pain. Growth, you could say is the ibuprofen of the stock market. The moment there is no growth, then there is only pain and there is trauma.

As long as your companies are growing at 30-40%, nobody would be bothered with the valuation. On a broad scale, the market would be tilted towards buying those companies but the moment growth drops from 40% to 25%, new investors would rush in but the market would behave quite irrationally with those companies where the growth drops.

That is the time where you have to know that you are buying these companies for a certain set of assumptions which is growth and sustainable businesses and all that big management talk that we keep doing.

You have to be very nimble footed with these kind of companies and as long as you are sure of the growth, the party carries on and you should just sit back and focus on whether the company is growing or not.

Again, the problem is you cannot have seven themes and 700 stocks growing at 25%-30% in the market. In the market, there will always be 1-3 themes, so people say bhai kuch naya batao, koi naya sector batao (please talk about some new sectors).

How can you get five different sectors in one bull market? It has never happened in the economic history of the global world. You will always have one, two or three sectors and that is what is happening. The private financers and the consumer space are the two sectors that are doing well.

In between you will have those IT stocks doing well just because the dollar has appreciated and just because the pound sterling has weakened against the Yen.

But if you are playing for a company on the basis of foreign exchange movements why do not you go and bet in the forex market? Why buy a company and have a double derivative and a third derivative of a certain thesis that you have created.

Within private financers as well as the consumption theme, one is increasingly seeing the trend wherein better is becoming the best and the laggards are remaining laggards — be it the auto space, private financers or even IT . Leadership remains concentrated at one end of the curve. Would this trend remain wherein the best of the leaders will continue to demand lofty valuations because you got to pay a price in top dollar for the best?

The poor cousin theory does not work in todays environment. When internet started, we used to go to Yahoo search and Altavista and all that. But then Google captured 80% on the market. When we wanted to make new friends and connect with the old ones, we had Orkut but suddenly Facebook came in and it captured the entire market.

When you wanted to buy a phone, you had 25 different options but today if you want to buy a phone either you have the Apple or you have the Samsung. Of course, there are smaller brands which will always do well. In an environment where scale leads to a lower cost in production, it becomes economically unviable for a new entrant with a smaller scale of operation to actually go and challenge the existing incumbent leader in the business.

For example, once you have digitisation and once you have loans which would be sanctioned over a mobile phone because you just you have a tab and you put in your details and you go on, the breakeven point for a new loan comes at Rs 5000. It was Rs 20,000 earlier. So, this is the bottom of the pyramid for urban India.

We have to see who can come and challenge companies which have got scale and have set the cost of production lower. Even in the west, all those fancied names, the Facebooks, the Apples and the Amazons and the Netflix and the Googles of the world, are growing at 20-30% and have a market cap of $800-900 billion. If you have companies growing at 25, 30, 40% with that kind of a market cap, obviously, they are capturing the entire world. There are just two ways to do it either you can sit back and say no some days it is going to burst and if you are consistent. some day you will be right but before that you would have made enough.

Any new hunting grounds or should one stick to the same buy more of the same on dips in this market?

The hunting grounds change with respect to the stocks, the sectors remain the same. The theme does not change. Obviously, the theme took a back seat when the PSU recap started in October and that time we were scratching our head seven times a day rather than seven times in a year trying to understand what has gone wrong, why are companies which are reporting earnings at 30-35% not moving?

The moment you saw this PSU bank problem come up again, whether it was a Nirav Modi or the PSU guys having gone back to loan recovery. About a couple of months back, Uday Kotak made a very interesting statement, he said the ratio between private and public goes to 50-50 over the next five years and if it is coming from Uday Kotak, one has to sit back and think a lot more on that.

If you do basic high school algebra on that, if it is 70-30 right now and if the nominal growth credit growth is 15% little more than the GDP growth and if it gets to 50-50 in five years, it implies that the private financers should normally grow at 27% CAGR, but that is too much for a sector.

You can have companies that would grow at 22-23% or you will have companies that would grow at 35% and you would have new entrants into this space.

When a sector is growing at 25%, you want to be with the best, you want to be with the ones who can manage risk and you want to be with the ones who can scale up.

If you get all three in a single sector, then obviously, you change horses because the old horses become weak and then you say this guy cannot trend too much. Then you go and buy a new horse or you bet more on the existing horses. You can change the horse but the track remains the same.

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