Basant Maheshwari’s Two Favourite Sectors And The Four He Stays Away From

For veteran investor Basant Maheshwari, there is no good or bad time to invest, but more of matter of “keeping wickets intact and playing safe.” As long as the stock has the potential to gain, Maheshwari said, valuations and volatility do not really matter that much.

In an interview to BloombergQuint, Maheshwari talked about the stocks he considers investment-worthy, and the ones that are not. While Maheshwari did not name any specific stocks, he said he is “super bullish” on non-banking financial companies (NBFC) and housing finance companies.

‘Highly Recommended'

• Non-Banking Finance Companies
• Housing Finance Companies

‘Avoid'

• Information Technology
• Insurance
• Pharmaceuticals
• State-Owned Banks

The information technology stocks are in a limbo while drugmakers aren't faring any better, he said. "Banks need to recover the money they have lent first."

Maheshwari had made his disdain for insurance stocks clear in an earlier tweet.

Insurance is about spending a lot of time first then making profits - it's a great rocket to be in - after it leaves the earth's orbit ! https://t.co/BA8uEeWJZF

October 3, 2017

He reiterated that view.

If you have a 20-year view, go ahead and buy insurance stocks, but remember that in a stock market, 20 years are equivalent to 200 years.

Basant Maheshwari, Partner, Basant Maheshwari Wealth Advisers LLP

Here are edited excerpts from the interview:

Is this a good time to be investing or you believe people should keep some powder dry?

It's not about the right time to invest. What's more interesting is what you are investing in. So, if you are investing in the wrong stocks then there is no good time and if you are investing in the right stocks, anytime is a good time. Internally, we are born bulls. We are always fully invested and we don't keep our powder dry because we are so bullish on what we own. We get it wrong, we get it right, that's another issue altogether. But I think that if the companies you have bought if they are going to grow, they are showing earnings growth, then anytime is a good time to invest. We are completely invested.

We have to understand that 2019 is the election year and 2018 is a pre-election year. So if you are a farmer then you should celebrate the next 18 months, but if you are not a farmer, you are invested, you are a middle-class guy, then you have to deal with the ball. It will swing around a lot, so you just keep your wickets intact and play safely.

So try and buy companies which will benefit as a result of high farm income?

Not that. Whatever reforms the government had to do, it has done already. Two reforms which the government said they have done, one is demonetisation - it was not a reform, it was a surprise or a shock to everybody. It was an action which was sold as a reform.

And second is GST. I think GST is an old thing. We have been talking about GST for almost a decade now. I don't think anything new is going to come for the stock market as such, and whatever comes, will be only populist in some way. Because a major section of the market isn't able to stand on its feet.

Let me give an example. IT is in a limbo, pharma there is a problem, if PSU banks recover the old money first, then they can lend to new ones. So, three sectors out of your entire investing horizon are a problem. So, you are left with private financials, a few auto companies, auto ancillaries, and a few textile companies. So, the choice is limited, and I assume it will stay limited. But if you are the stock picker, you need 3-10 companies to put your money in. You don't need 50 companies, they are for the index funds. You just zero in on 5-10 companies and then say that's the way it should be. This is what we are doing and done.

Valuations have moved from expensive to all-time expensive. As a long-term investor, how do you react to this scenario?

Let me give you a different view. If you and your friend are being chased by a tiger then you don't have to run faster than the tiger, but you have to run faster than your friend.

So, if there are 50 companies growing at 30 percent, investors are splitting their money across the 50 companies. If there are 10 companies growing at 30 percent, then investors' money chases those 10 companies. Throughout the 300-year history of stock markets, liquidity has chased growth.

For example, take the case of Prataap Snacks which got newly listed (it's not a recommendation). It is 40 times FY20, less than 5 percent net margins. So, 40 times FY20, you can say it is expensive, but I thought it will be expensive at 900. But it went up 20 percent.

It's not always about valuations but it's about how many companies are able to grow at that rate. So, if the number of companies which can grow at that rate reduces then the money that chases those companies also create a bigger impact. Obviously, I would like to buy them cheaper but if you don't buy them cheaper then what you will do? If the growth is predictable, sustainable and sure, then you assume that I won't make money for one year or 9 months but the incremental earnings growth is going to reduce the valuations. But you have to be sure of what you are buying. If you are sure of what you are buying, then you can make money for 8-9 months or in one year in the worst scenario. But if growth is predictable, then the stocks automatically get cheaper with each passing quarter. That's how we are playing the game.

In a recent tweet you said, “Insurance is about spending a lot of time first then making profits - it's a great rocket to be in - after it leaves the earth's orbit !” Is it a good pocket to invest in if somebody doesn't mind holding on for a first few years of uncertainty or lack of returns?

It's good to say that I am a long-term investor and I want to buy the company for next 20 years. It doesn't happen. So, if you buy a company and then NASDAQ falls 100 points, you call up the broker and ask what's wrong with the company. So insurance companies globally, I get this theory of how American insurance companies have made so much money. But for first several years, you have to get your theory right.

For example, insurance is basically a bet. It's a bet on whether you are going to die or not. I can give 10 percent lower than the competitor but the risk of that will never come to you next month because nobody dies the following month when you have taken an insurance. Over the 5-10 years, you have to create a pool of reserves for yourself. You have to create a pool where you get a sense of how the market is evolving, how life expectancy turns out and the data for that is only with LIC and that will be the blockbuster. I don't think LIC will grow at that rate. If you have a 50-year view by a bank, by an insurance company then split the money to 50-50 and buy the best risk managers. You could be running an insurance company for 50-70 years and one wrong premium pricing could put you back almost to square one. It is fashionable to talk about how India is an underpenetrated market, insurance could grow because savings could grow, per capita income will be $3000 and all that. But you need to invest a lot in your reserves, you have to plough back and then you will get profits. For Birla Insurance, they were not able to show a profit for 5-10 years. We are not in a position to predict what is going to happen.

As an insurance company, I will say if you have a 20-year view then go and buy them where you will make 15-20 percent CAGR for next 20 years. But it's easier to talk about 20 years. For the stock market, 20 years is 200 years. I don't think that's the way to be.

Also, on an overall scale, the idea of leaving the earth's orbit was...when I wrote that... because most rockets you launch, don't leave the earth's orbit, they come back before they leave the atmosphere. In that context, we have to give lot of time and then can we invest. These private insurances are 15-20 years old and you don't have the history for that.

You also tweeted that: The growth out of the ‘India Growth Story' is out and now only the ‘Story' remains. So what happens to the consumer stocks that have been moving up, quoting at high valuations, be it auto or other durables, and the companies - the financiers who have been funding the story?

India is such a huge thing that we can find a segment and move along. When I said the growth has gone, I mean there is no growth in IT, pharma and PSU banks. So, the consumer segment will do well. For one company to do well, you don't need the entire economy to do well. In all kinds of market, you will always find your pocket of companies that will do well. So, you don't want to buy 50 or 100 companies out of 4000-5000 listed companies. All we want is 8-15 companies to do well. So because of that, those companies will do well. The valuations have gone up, but it will remain there till the time the growth continues. When the PE ratio gets set at the 50-60, then it's like Newton's law of motion, it's like inertia, it remains in that range unless the growth drops. If the growth is not dropping then the PE ratio remain in that range. But the moment the growth drops then there is a problem. As long as the growth is there and music is on you can keep dancing. The moment the music stops then we will have to look at the exit door.

Are you staying invested in NBFCs or make fresh investments?

I remain super bullish on NBFCs. We own NBFCs. Specifically, for housing and finance companies we are super bullish.

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