The overall market is not looking bullish now, Basant Maheshwari, founder of the Equity Desk, said. He recommends looking at companies that have some entry barriers and growth prospect of 30-35 percent over next 2-3 years.
Speaking to CNBC-TV18, Maheshwari said that approval of 7th Pay Commission is a welcome step. Pay hikes can have an incremental impact on demand to the tune of 5 percent.
Equity Desk, which has fully deployed its cash, is bullish on sectors like non-banking finance sectors (NBFCs), micro-finance and private banks. NBFCs are expected to grow at 20-25 percent, he said.
However, Maheshwari is bearish on the diagnostic space on the back of expensive valuations.
Below is the verbatim transcript of Basant Maheshwari's interview with Prashant Nair and Ekta Batra on CNBC-TV18.
Prashant: How are things looking at an aggregate level, are you little uncomfortable because many are, they are saying will the market is up, it is looking up, but we are kind of struggling to find reasons.
A: Last Friday was difficult, but one thing good about the media is no matter how much we scream and shout about the media on Twitter and Facebook and here and there is, the amount of discussion you do in an event, you actually priced the event in for the investor, so the media was more concerned about Brexit than investors were it apparently look like that, but what you did was a great favour because you priced the event in, because had we not discussed Brexit so much we would have been up today or this week or whatever.
So coming back to the market is really tough because as we always say you can cross one speed bumper, you can cross two speed bumpers, so we started from US increasing interest rates and the Chinese thing and then you had whether we will have good monsoon or bad monsoon, then we have Brexit and after three month we will have QE. One after the other it likes four fast bowlers bowling to you in the 1970s and all of them are West Indian, so you just cannot take your eye of it anywhere.
The problem is for a stock picker like you say there are still segments in the market that are doing phenomenally well, the small finance bank, the NBFCs catering to the rural segment. The housing finance are doing fine, couple of FMCG stocks are doing fine, the IPOs are coming in, so there are stock product, but if you want to have a entire market going up.
I don’t think we are well placed for an integrated bull market because every 3-4 months there is a global event coming and no matter how much I don’t like to look at global macro, but the thing is that everybody looks at them and it is very difficult to create a case for a one sided bull market, but we are in bullish times, we are in better times and that’s the way to look at it, but I am fully invested and super bullish on my stock.
Prashant: I think you would have bought on Friday?
A: No, we didn’t have cash, so we bought for clients but personally we are always fully invested.
Prashant: Some of the sectors that you talked about for a while which is housing finance, Repco for example we have discussed it extensively over the last couple of years, midcap pharma is something that you alluded to recently, smaller pharma companies which aren’t that much dependent on the USFDA for approvals etc., those remain largely unaffected from these global kind of events, but of course capital flows will affect everything, but you are more insulated in that sense in these sectors and that’s why you find growth as well.
A: Yes, that’s it and like we have always been saying that when this firing going all around you have to take a somersault back into a sand bunker, so these are the sand bunkers for me.
The thing is market likes growth, market chases growth, market is fascinated with growth and market is infatuated with growth. So you can say this is a great company growing at 15 percent or this is a phenomenal company growing at 12 percent, but market doesn’t care about it.
So even a mediocre company growing at 35 percent will find buyers, so the idea is to look at companies that are not mediocre in that, but still which have some kind of entry barriers and which can show you 3-5 years of sustainability of 30-35 percent growth and that’s how we zeroed in on these names.
But on an overall scale these names are not too many, when you try and diversify your portfolio you suddenly put your feet on a landmine sometime and then you say, “oh my god watch this”, but that’s the way we have to take it and finally it is a game of you lose some, you win some as long as you win more than what you lose you will be fine.
Ekta: Just on your point on NBFCs, a lot of them have already run up, we have for example the Manappuram and the Muthoot of the world already at fresh 52 weeks highs, Bajaj Finserv gains 2-3 percent every single day. Do you see further upside on stocks such as those which have run up already, but have a sound business model behind them?
A: NBFC by itself is a very large spectrum if you see you have got the gold finance companies, you got the housing finance, you got a small bank, you got the microfinance then consumer durable finance like the Bajaj Finance of course this is no recommendation at all.
So in the IPO segment, the small finance segment personally I am super bullish and we own almost all of them that keeps coming here and there, the microfinance segment so I think that’s the place to be, but if you think that gold finance companies are good for you, you can buy them.
See one thing about the NBFC is still they keep growing at 20-25 percent so even if a stock doesn’t grow for two years, the earnings accumulate and suddenly the price starts to move up again. That’s how it is, but the diagnostic space no recommendation at all just we are discussing.
They are very expensive if you look at it on an optical level, but some of these companies in the diagnostic space if you look at them then they are supposed to be growing at 30-35 percent, some of them will grow at 15-20 percent.
So normally we try and look at companies in the diagnostic space also that are promising to grow at 30-35 percent, that is how it all happens, but on an overall scale I think you got a portfolio of 10-15 companies you can choose them and that’s how you should be going about them, but apart from these 2-4 segments the overall market doesn’t look super bullish as it should normally but it doesn’t look that way.
Ekta: And you differentiate this between banks and NBFCs, you wouldn’t really like banks even though they have a retail focus, private or public?
A: Private banks are good enough, we don’t own it so the private banks are good enough, but even in the private bank space everybody owns it, so you make only as much as the company makes, you just make the EPS growth every year.
But in the small cap like there was an IPO which came about two months back, two small finance banks back to back. One of them look like a Rajnikant movie you just have to see it first day first show and we just backed up and bought truckload of it. The stock is up 80 percent.