Bet On Domestic-Oriented Counters, Not International Themes, Says Jyotivardhan Jaipuria


Customers shoot targets at a night market carnival stall in Taipei, Taiwan. (Photographer: Billy H.C. Kwok/Bloomberg)
Customers shoot targets at a night market carnival stall in Taipei, Taiwan. (Photographer: Billy H.C. Kwok/Bloomberg)

The current stock market rally has more legs to go, according to Jyotivardhan Jaipuria, founder and managing director of Veda Investment Managers. But investors should keep some powder dry in the event of a correction, he said on BloombergQuint’s weekly series, Thank God It’s Friday.

Fund managers see India as the “most promising country” over the next 5-10 years courtesy a strong macroeconomic backdrop and well-managed companies, he added.

Here are edited excerpts from the conversation.

More Upside Left?

Does the current rally have more legs to go or is the market now ripe for a correction?

We will have to break it up into two. Is this the peak of the market over the next 2-3 years? The answer is no, there’s more to go and corporate earnings will probably come back and and we will see markets giving good returns. But can we get a correction from these levels? Can people buy cheaper?

My view is that we will probably get a correction at some point and so you can keep a little bit of powder dry so that if you get a pullback, you can get a better chance to buy a stock.

India In A Sweet Spot?

So far this year we have already seen foreign portfolio flows twice as much as 2015 or 2016. If not valuations, what is it driving foreigner investors to come to India? It can’t be just global liquidity?

We have seen Indian markets do well this year. We forget to keep that in context of what the globe has done. A lot of Indian market returns don’t come as a result of India factors. It comes from what the emerging market does. The correlation between MSCI emerging markets and MSCI India is as high as 85 percent. So, part of it is MSCI doing well, global markets doing well and so India is part of it. The second thing that probably attracts people to India is two things. If we will look at macro, India is seen as the most promising country over the next 5-10 years. The macro stress is very low. The earlier twin deficits are no longer a concern. We always had good micro level management companies.

If you ask people globally, they will say India is one place where I will be active in over the next 5-10 years. 

So, people are hesitant on valuations but at some point they want to take exposure at these valuations. And when there is a pullback, add to their India positions at cheaper valuations.

GST Hurdle

Were the GST-related challenges in the quarter overblown?

The challenges were not overblown but may be the impact on the stock price was overblown because I thought we will get correction when we get companies not reporting good numbers because of GST. But what we have seen in the last 10 days is that every time some company reports bad numbers, markets said, okay this is a GST problem, it’s a temporary thing, and brushed it aside.

Q1 Earnings: Mixed Bag

What have you made of earnings so far?

It’s still very early days but you can see that there have been GST-related problems. All the consumer companies have reported weak earnings and there we may not get a recovery as quickly as people wanted. So, if we see the last three weeks, there is are mixed feelings. Some companies are saying things are getting back to normal and others are saying its not normalised yet and probably will take two months to normalise. Even the September quarter will not be a great one. It will have some impact of the transition to GST.

The Big Bad Loan Problem

We did see corporate-heavy lenders like ICICI Bank, Axis Bank report slippages which were mostly outside of their watch-list. Do you think that most of the stress is already being reflected on the books of Indian lenders or do you see some risk in the sectors they have flagged off?

A lot of the stress is partly linked to revival in the economy. Once we get earnings revival and economic revival coming, a lot of stress will start easing off. RBI has forced banks to now provide quite a bit for what they believe is stressed. But there will be new companies which may come under stress which didn’t appear a year ago to be a stress factor. Overall, given the provisions we’ve had over the last two years, I don’t think we will get provisions higher than what we have seen. So, it’s about how quickly the provisions come down and how some of these guys recover. There will be some companies probably going into the watch-list which get into NPLs. But worst of that is getting over and corporate banks are the interesting place to be in.

Banks: Buying Opportunities?

Any banks where you see valuation comfort?

There are retail lenders which are very finely priced and quite expensive but very great quality. There are corporate banks which are relatively cheaper but there is much more stress there. For people, it could be a buying of mix of those. But we are slightly tilted towards the corporate banks because in the next two years, this is where you can make incremental delta.

Do PSU banks figure in that list?

We never say no to anything. You have to weigh the risk and returns. There are some interesting private sector banks which, more or less, give you the same sort of reward with probably lower risk. That’s why we are not inclined toward PSU banks.

For information technology companies, the commentary has shifted to digital revenue over the last 3-4 years. But a lot of companies are reporting single-digit growth rates. How do you choose a good IT company because choosing along mid cap or large cap doesn’t make difference..It all comes boils down to the business model.

IT is one sector where I have not been bullish for years now. What we have seen in the sector is that growth rates are going to slow down and it’s just a secular trade. It’s not a cyclical trade. A lot of this companies are cash-rich. They are doing buybacks and trying to return some money back to shareholders. So, in an environment where nobody owns them and valuations are looking expensive, there are some tactical thing where you buy some of the IT stocks because expectations are zero in them. Some of them are trying to reduce their cost pressure to match the revenue. So, it may not be a bad place to be in when the market is doing nothing. It may be a hiding place but not for us, we are not very bullish on it.

My theme is that, for the next 2-3 years, you have to play domestic-oriented counters and not international themes.

Consumption Theme

You spoke about consumption as your biggest theme. Will you continue stay invested there?

Yes, we continue to stay invested. One is the cyclical element, which is that the monsoons have been good after two years. But apart from the cyclical element, structurally we have an election after two years. The better part of 2017-18 Budget was spend on rural India and that trend will continue. Secondly, the government has brought about steps like the crop insurance scheme. There is a lot of infrastructure spending in the rural areas. A lot of these things will give farmers some income stability. Volatility will come down as a result of the crop insurance scheme.

This space will do well over the next 3-5 years and so you have to get some exposure to this sector. And there is a cyclical element helping it this year.

What’s the best way to play the rural consumption theme?

What we are playing largely are the tractor companies and the agro-chemical companies. I am worried about the non-banking financial companies. Loan waivers are being given to farmers but there will be no waiver for the microfinance companies. The farmer will say, ‘I don’t pay these guys, so why should I pay microfinance guys? Let me see what happens and some day I will get a loan waiver there also.’ So, that’s the one thing which has been worrying me.

It could be a spate of loan waivers that could just accelerate as we get into 2019.

What about two-wheeler companies, FMCG companies, consumer durables?

The two-wheeler space is interesting but it’s just that we preferred to play this theme with the tractor companies. The one two-wheeler space is a similar way of playing it. I don’t find valuations attractive for stocks in the FMCG space. A lot of these are great companies but some are expensively priced. To that extent, how do we make money out of it? A lot of the good news is in the price already.

PSU Consolidation

There is so much consolidation going on in the oil and gas space, especially with ONGC and HPCL. Is this on the whole beneficial for shareholders?

I don’t see any rational behind it. The government benefits because they get money which helps the divestment number. But beyond that I don’t see the synergies behind these mergers. In the PSU banks too there has been talk about mergers. One is not sure how it will play out - whether the minority shareholder will benefit, whether it’s creating efficiency, or is it more like an exercise where the government gets the money.