We are always focused on the market from the three to five-year picture. It has only gotten better in the last few months despite the market performance. We would like to move a little bit of our portfolio from our A++ quality stocks into a slightly B+ stock where the quality of the company, the balance sheet is not an issue but there are some near-term growth issues.
A++ stocks are Bosch, Eicher, MRF etc where market has recognised there is a fantastic story and it has been recognised. The B++ stocks are say an M&M Finance or an eClerx where the quality of the company or the business is not an issue but there are near-term growth issues and near-term NPA woes.
We are essentially chasing good companies which are going through a temporary slowdown.
IT and Pharma stocks are quality businesses and the core anchor holding of the portfolio:
Our investment philosophy is more about buying quality businesses. Now, IT and pharma are two sectors where India has proved beyond doubt its ability to garner hold of its own in the world stage. India has about 6% to 8% market share in the IT spending in the world. In pharma, we have about 5%-7% market share, I believe that is still a small number and trillion dollars of spending is done on IT or even on the drugs. India has a far bigger role to play in those markets and those are quality businesses. We are focusing on quality businesses and we believe IT and pharma still have a lot of scope.
United Spirits – strong consumption story which cannot be valued on current earnings:
Though United Spirits is plagued with lot of write-offs & even raw material cost problems, it is a strong consumption story from a three to five-year point of view and I would not like to value it on the current earnings because the future earnings can throw a really big surprise.
Aurobindo Pharma – re-rating expected
Aurobindo Pharma has performed brilliantly but I do not think market still believes that the 19-20% kind of margins are sustainable.
Aurobindo Pharma’s margins at 19% is a credible performance given that they had a big contribution from one particular drug Cymbalta in the previous quarter. So this is a normalised case of earnings. Now their Europe business is performing at a substandard margins, which is a big kicker. The Europe business can really surprise in Aurobindo’s case.
Aurobindo Pharma has not been given its due (in comparison to Sun Pharma) because it uses debt to grow and does not hesitate in diluting equity. Those are the things that investors are usually skeptical about. I believe there is a good business case to do those things. They went through a huge capex cycle and now that capex cycle intensity has come down. Now probably it is time to reap the benefits of the growing business.
HDFC Bank, Private Banks vs. PSU Banks:
Private banks are part of the core portfolio despite the fact that the gap between PSU banks and private banks now is actually at a historic high.
What is the real book of PSU banks, I do not think anybody has handle on that. On the other hand, bank like HDFC Bank where 80% of its fee income is coming from a retail base is a very solid predictable business. You cannot wish that away and if you look at it in PE terms, it is quoting at probably 17x FY16 so which is at a historical low for HDFC Bank.
HDFC Bank requires to be valued on PE basis rather than on Price to Book. As it generates 20% plus ROE on a book that is growing 20% plus, you need to give a PE multiple to that business and if there is some sustainability and predictability to that, it is not just a price to book story but a consumer franchise.
TVS motors – No longer cheap, dependent on the BMW venture:
TVS motors was identified about two years ago. It was a double-digit stock, closer to Rs 50. It is now north of 300 and a multibagger in last two years.
Our bet was purely on valuations. This stock was too cheap. It was available at a Rs 2000-crore market cap with Rs 400 crore cash on books with a growing scooter portfolio. So the story has played itself out, it is now at a Rs 14-15 thousand crore market cap. I feel that a Hero MotoCorp or a Bajaj could be better bet. Lot is dependent in TVS story on there, BMW card playing out, panning out very well which is still in my opinion 12-18 months out.
MCX – huge potential ahead:
MCX has come out of an existential crises. It has a strong promoter. It has an 85% market share in commodities trading. It enjoys huge operating leverage because the costs are fixed and all extra revenue flows directly to the P&L A/c.