India only has a six-month window when it can expect meaningful reforms. After that the government will go populist “lock, stock and barrel”, according to Basant Maheshwari, long-time investor and partner of Basant Maheshwari Wealth Advisers.
One sector that he sees benefitting in this populism wave is housing finance, where select companies are also seeing growth in the range of 30-40 percent. Likewise, there are other companies which are beginning to show signs of leading the next bull rally. It's the investors' job is to "identify and play them rather than get on an old horse because an old horse never runs fast”, Maheshwari said on Thank God It's Friday this week.
Here are edited excerpts from the conversation.
Interest rates in India are as low as they can ever be. Are we looking at a new normal when it comes to price-to-earnings. We are already at 23-24 times, close to what we saw in 2008-2009. Is this the new normal when it comes to PE multiples?
When we compare the indices with the price-to-earnings multiple, we say 80 years back, the PE multiple was 26, today it is 22, in 2000 it was 50 and in Harshad Mehta's time it was 80, what we don't talk about is the composition of the index changes. In 1992 you had say 80-90 percent or 70 percent of Sensex – Nifty was not even born then – comprising of cyclicals which by their very nature are low PE stocks. In 2000, during the IT boom, but still the composition of the secular growth, the services let's say, that wasn't there. In 2008, the trend shifted. In 2017, it comprises predominantly of companies that are secular growth. So what was at 12 PE at the time, could well be 22 right now because composition of the indices have changed. I think comparing one PE of the Nifty with a Nifty which has completely different constituents, is dangerous because you cannot compare apples with oranges.
On the interest rates scenario, whenever a bull market is born, it's born at low interest rates but the beauty of low interest rates is...you need liquidity to fuel anything and liquidity chases growth. So we might say that Nifty is at 9600 and it could go up further. If that happens, there'll be 2-4 sectors that could lead the market and we have to focus on those sectors. And the classic thing that happen is that the leader of the previous bull markets never repeat themselves. In 2008 you had one of the the IT companies going bust which is Satyam. Right now, we have the telecom story going nowhere because of debt problems and things like that. Telecom was the leading sector of the 2003-2008 bull market. You had Unitech which was almost bankrupt, you had most of the infra companies going that way. So it's ups and downs, you have to take it that way, we have to make our money and lose a little and that's fine as long as we make more than we lose.
Earnings Recovery
Corporate earnings taken as a ratio to GDP is the lowest in 10 years. We are going to implement GST and may see some challenges with respect to the bottomline in at least the next couple of quarters. When can we expect robust broad-based earnings recovery?
I don't know when the entire market is going to recover. It's always been selective in India. In 2000 you had the IT boomed that fuelled everything. In 2008 you had real estate and infrastructure, telecom and a couple of retail stocks coming up. Between 2009 and 2015, there was pharma and the high quality names doing the rounds. We cannot expect all the 50 companies and all the 12 sectors in India to do well. If 4-5 sectors do well, that's fine. If you see the NBFC space, they have been showing leadership, some of them are growing at 30-40 percent. Of course some of them have been in a bad loan kind of problem but I guess it's temporary and they are going to sort themselves out. The housing finance companies, where we have been invested and super bullish for the past several years, are growing at 30-40 percent. I don't think the entire economy is going to improve and all the sectors are going to grow at 20-30 percent. That never happens because growth is very scarce.
The majority of companies that will lead this market are already beginning to show the signs. We need to identify and play them rather than get on an old horse because an old horse never runs fast.
The Downside Of Liquidity
You've earlier said, “A market driven by liquidity is like a Ferrari with failed brakes, driverless, on a straight road. What we have to take care of is the curves.” What are the curves in the near term or the medium term that could hit the market?
The market has become very difficult from what it was earlier. You have one Brexit and 10 percent gets shaved off, and you have demonetisation and so on. But you can't blame these things. If you ask me, I am bullish, we are completely invested for ourselves and for our clients. But if you ask me why I am so bullish? I don't know. Because except for a handful of companies, I can't see growth anywhere, I can't see earnings visibility. We have been saying that after two quarters it will be good but it's been about 8 or 12 quarters since we've been making that statement. It's like a guy who fails his exam and his dad says, ‘you failed?' and he says, ‘no next exam I'm going to do well'. So, he is right now in class 8 but still he is saying the same thing, ‘I'm going to do well in my finals'. Of course someday he will do well but that's nothing.
Instead of trying to anticipate and trying to extrapolate as to when everything will do well, investors should just look at the sectors and the companies that are doing well and just ride on.
When To Pay A Premium
I'm going to address the primary markets then. We have something like a D-Mart, for example, strong fundamentals but valuations are far from being reasonable. But for a retail investor there is little chance of them getting allotted at the IPO level. If there is quality, you reckon that people should still pay a premium?
Disclosure - we are invested in D-Mart, it's a first day first show stock for us. I'm completely invested and rather over invested. It's all at the first day first show price at Rs 600 or wherever it listed at. D-Mart looks expensive, but look at Page industries, which we held for six years from 2009 to 2015, it trades at 35 times FY19, Asian Paints 35 times, HUL 35 times. So D-Mart is say 40 times FY19, or maybe 38 times now or 42 times. And how many years has it been since we thought Asian Paints was expensive but still people have been making money on it. PE ratio is a very misleading term and also a very informative thing, depending on how you look at it. If you're looking at trailing PER and you are looking 2 years ahead, the entire thing changes. So, when there is visibility, when there is surety, when there is certainty, market tends to look 2-3 years ahead. When there is no visibility, there is no surety, no certainty, market doesn't look at trailing, it doesn't look at the stock also.
So looking at the quality of the stock, the idea is it's better to go wrong on valuations than on quality. Earlier it was very easy, you had an IPO and you bought it and then you sold it off. But with the private equity guys, they don't leave anything on the table for the retail guys. So retail investors have to look at the IPO market, and IPO doesn't mean it's overpriced. I think that's the place to be in over the next 2-4 quarters because lot of companies will go public.
Overall, companies that are going to grow at 30 to 40 percent will be in demand and you buy them, you assume you won't make any returns from them for the next 6-9 months. But then once the resultant earnings come in, they catch up with valuations. That's how we've been playing this game.
The Reform Agenda
The current government has a very strong mandate. What are the opportunities right now for the government to improve, not just business but other opportunities that they have as long as they are ruling?
This government, when it was voted to power, we all assumed it's going to be pushing for the middle class. But we have seen that this government has changed its stance and it looks like 3G - ghar, gareeb and the gaon. The middle class will benefit, with the GST and things like that. But I don't think this market needs the government to do anything as long the government can just execute what it has done. On the other hand, some of the decisions taken by this government might not go down very well. What about the loan waiver that happened. I am not a big proponent of these things because they kill the credit culture of this country. On the one side, we are talking about companies that are defaulting in the telecom space and on the other side we are looking at loan waivers. If the government can just do what it has done all this while it will be fine, but we don't need the government to come up with new policies, procedures, laws and legalities.
Next year will be the pre-election year. So whatever has to happen will happen over the next six months. After that we go populist, lock stock and barrel.
‘Super Bullish' On Housing Finance
You've said some time ago, “Don't buy a house, pay rent and buy a basket of housing finance companies.” Does this adage still stand?
It's a very old quote and I maintain that. The sector is growing at 18-20 percent. If you just do the math, the cost of owing a house by paying an EMI, a 20-25 lakh house, is lower than the rent that you would pay. Of course, aided by the tax benefits and things like that. So this sector is just going to boom. And the leaders will grow at 40 percent over the next 2-3 years. Markets comprise of 6,000 companies. Out of that, maybe 10 grow at 40 percent, maybe the other 30 would grow at 30-35 percent. There will be 50 more companies growing at 25 percent, 200 growing at 20 percent and the balance either don't grow or they grow at 20 percent. So, money chases the top 5-10 companies that grow at 40 percent and the history with these 40 percent growth stocks is that they never come cheap. So we have to pay top dollars to buy them, but once we've got this sector, you've got the sector tailwind, you've got the government pushing it through, you've got the entire country going for housing. And housing is a big populist thing.
So why not play the game the way the government wants to, and also benefit alongside. So of course, the recommendation is not to sell your house and buy a housing finance company because you may buy a housing finance company and it may go bust also. So that statement was made in terms of the opportunity that can come in the sector rather than just to tell people to do likewise.
Essential Business Intelligence, Sharp Market Insights, Practical Personal Finance Advice, Daily Fuel, Gold and Silver Prices and Latest Stories — On NDTV Profit.
