Basant Maheshwari, author of the book “The Thoughtful Investor,” spoke to CNBC-TV18 on how to investors should approach this tricky time in the market.
"Instead of trying to be the big cheap stock picker I think it is better to buy a little expensive and buy certainty," advices Maheshwari.
According to him it is better to not look at midcaps and smallcaps unless one is sure about the earnings growth for them. However, if one can find a midcap or smallcap which is a leader in their own sectors only then there is a possibility of them becoming large caps. "The best thing right now is to look at large established players rather than try and find out the next big thing," he adds.
He is upbeat on housing finance companies from the non-banking financial space (NBFC) space and not so bullish on PSU banks although he agrees that they would be the first one to rally if Nifty were to go up 400-points.
Meanwhile, he does not think Nifty is going go fall too much from here.
Below is the transcript of Basant Maheshwari’s interview with CNBC-TV18’s Sonia Shenoy and Reema Tendulkar.
Sonia: What is your own advice that you are giving investors at this point, is it a good idea to go out there and buy some of the good quality names and if yes what are the stocks that one should be looking at now?
Maheshwari: The market seems to be divided in-between. For stock prices to move without earnings is like trying to drive a car without petrol. Half of the market is devoid of earnings. We thought earning would come in FY16 but now we estimate them to come in by FY17. As on date you can’t see any ground signals for them to come.
The stock that seems likely to become the dinosaur of this Jurassic Park is Unitech. From the hall of fame of 2007 it is going into the hall of frame.
If one looks at PSU banks, they are crumpling - 3.5 percent net NPA and 12 times leverage, I think more than 40 percent of the book value is under cloud. So, even in spite of these stocks having fallen so much I would advice investors not to look at them.
Instead of them you look at private banks because once PSU banks are into that kind of a scenario they would stop giving loans and they would give back market share more to the private banks. So, if investors have to choose they are good to be with the top quality private banks – Kotak Mahindra Bank , HDFC Bank and things like that. These are not recommendations, they are just examples. Buy a little expensive and stay with them that is writing on the wall right now. Instead of trying to be the big cheap stock picker I think it is better to buy a little expensive and buy certainty.
Reema: What is your view on the index now because the fear is we have closed below that 8000 level and we have conclusively broken psychologically important level and perhaps now levels of 7600-7700 are also in store for us, what would your view be on the index now?
Maheshwari: I think the Nifty doesn’t reveal the pain, it just hides it. Nifty has fallen only 15 percent from the top but individual portfolios would have been slaughtered by 30-35 percent and that is because the Nifty has got the Infosys and the TCS and the Levers, these kind of stocks don’t fall too much. HDFC Bank and Kotak Banks, they are like the magnets of the Indian market they don’t fall too much in any case. However the individual portfolios have been slaughtered. So, even if Nifty falls 5 percent from here my worry is that the kind of stocks which people actually own in their own portfolios they are going to get down by 10-12 percent. So, 3-5 percent is nothing for a market but those kinds of stocks would fall.
I don’t think the Nifty is going fall too much from here, I am not a great forecaster of where Nifty can go but from the sense of it we are actually looking at the worst but the Nifty won't fall. The point is that there are stocks which cannot just go up without earnings. Once this kind of fear sets in, it is very difficult to ask a retail investor to put in more money because all he is now looking at is the value of the portfolio going down.
In such circumstances if you have to buy don’t try and average. If you have bought Bank of Baroda which is down 20 percent from your purchase price let it be that way, don’t try and buy more of it just to average it up, although it could bounce. Buy the good ones, buy the predictable ones and sit on that. Just look at the earnings, if the earnings come then everything would happen, hoping and praying wouldn’t work.
I would actually be out of PSU banks though in PSU banks you will see the biggest rally if the Nifty goes back 400 points from here and that again is going to suck everybody in because when you see a stock going up 20-25 percent, while HDFC Bank may move up only 7-8 percent, so again people would go into PSUs.
For most of the PSU banks, the problem is that if the economy does not revive the net NPA figure and the gross NPA figure is going to worsen out. If we don’t recover in 6 months these figures are going to get bad. Plus they don’t have capital to lend; they are right now in a recovery mode. So, that is how the scenario is but it is really painful for everybody – retail investor, large investor, small investor, nobody loves to see stock prices going down. We all say when prices go down it is the best time to buy, buy when there is blood on the street but what do you do when it is your own blood on the street?
Sonia: You spoke about private sector banks and your interest there, what else should investors buy at this point? We all know private sector banks, the defensive names, the pharma stocks but tell us something different, tell us some midcap names that you must have identified which can become the next Eicher Motors or the next UPLs of the world?
Maheshwari: Nothing like that, but what happened between 2003 and 2007 when nothing was happening in India most of the Indian entrepreneurs they ran out. The Tata’s went and bought Chorus, JLR, so if nothing is happening in India right now you have got to look at sectors that are outside of India.
In the large cap space Cadila is a good one. They can give you 25 percent; they have got a lot of interesting things happening. Torrent Pharma is good. So, a mix of these things should be good. It is better in these times not to look at the midcaps because unless you are very sure of the midcaps and the smallcaps and that earnings are going to come just buying midcaps because the markets have fallen and assuming they would become Eicher or UPL is not right. These midcaps became largecaps because they were leaders of their own sectors. If you can find a midcap or a smallcap that are leaders of their own sectors then they have a chance of becoming big.
So, if you buy Heidelberg just as an example which is a smallcap in its own space but it is not a leader, it cannot become as large as Ultratech. So, if I have to buy a midcap or a smallcap I would focus on that madcap or that smallcap which is a leader in its own space.
However for the smart guy when it is raining bullets like that it is best to get behind a sand bunker and just wait and see. The best thing right now is to look at large established players rather than try and find out the next big thing.
Reema: You also spoke about how one should select predictable companies, ITC used to be predictable but it has fallen below Rs 300. Tata Motors has seen a fall all the way from levels of Rs 600 and that used to be such an outperformer. What would you recommend in names like an ITC as well as Tata Motors now?
A: ITC was predictable in sense of its business but it wasn’t predictable with what the government would do. The regulations ensured that ITC remained a predictable company from business point of view but the regulations were always uneven. From single cigarettes and packets and things like that - over a period of time we have seen that once the government gets after anything it is very difficult to make money out of it.
Tata Motors, in spite of all the Chinese hue and cry and JLR and all that I think the first stocks to recover would be the good ones – Tata Motors and etc.
The question of predictability comes to the fore when we have to assume the long-term predictability of a business. So, to that extent still the private banks, NBFCs they are as predictable as anything.
HDFC Limited for example it can be predicted for 20 years because it has got a 20 years history behind it and also HDFC Bank. I am not putting in a gloom and grief scenario, I am fully invested , I intend to remain invested, I am bullish, I just feel that the bull has been bruised and battered, he is weak and he is taking some rest, he is sleeping but he isn’t dead, he is going to come back. Once the government starts spending in Q2, Q3 of this year, I think we are going to get something by the end of this calendar year and that is when we resume our uptrend. However, till that time we have to take the blows, that is how the market is.
Sonia: If one uses this time to accumulate just leave us with a couple of stocks or a couple of sectors that you would be recommending right now. I know you are great at picking value buys, so what is on your radar at the moment?
Maheshwari: A blind buy in this situation would be non-banking finance companies – NBFCs specifically relating to the housing finance sector. You can buy them, buy them 5 percent lower, 5 percent up from here, keep them for 5-10 years. The two which I own, are from western India and southern Inia. I wouldn’t like to take names.
So those kinds of companies you can just buy them and keep them. Buy them 5 percent lower, 5 percent higher, it doesn’t matter. It wouldn’t matter to you today at what price you bought HDFC Bank in 1999 whether it was up or down, it doesn’t matter to you today. Investors have to reconcile to the fact that midcaps and smallcaps specially, can fall 20 percent without reason and by the time they fall 30 percent you have a reason but then you say it is already discounted in the price. So, those are the perils of investing in midcaps and smallcaps but that is what makes you money that is what can really create wealth for us.