Motilal Oswal has come out with a report, the theme being contrarian investing where they explain that it pays to be different. The report covers two major themes based on consensus ratings and valuation multiples.
Gautam Duggad, Head of Research, Institutional Equities at Motilal Oswal Securities in an interview with CNBC-TV18 talked about the rationale behind the theme of contrarian investing.
The rationale was to look at alternate framework to look at more ideas which have not been popular in the past, said Duggad. Contrarian investing a popular theme worldwide and thought applying that in India, he added.
The approach while taking contrarian calls have been data driven without allowing any inherent biases to creep into this analysis. Therefore, most of the ideas that are mentioned in the report are not very popular now but if one were to see the data over the last 10-12 years, applying this framework has helped in India.
He said the approach while selecting stocks has been top-down and have looked at valuation multiples. Liquidity has driven this market for last 12 months odd but if one has looked at markets from long-term perspective, market moves usually follow earnings, he added.
Talking about his contrarians bets in IT and Pharma spaces, he said it is has been because they see a limited downside for them. It is a great opportunity to buy Sun Pharma with a 2-3 year view, he added.
Buy on Bajaj Auto is because it is trading at discounts versus its peers, said Duggad, adding that exports for the company are expected to improve in few quarters.
Moreover, with all the action RBI has taken, incrementally, things should improve for the sector be it corporate facing private banks or public sector banks. “The idea is to look at stocks that have been forgotten for many quarters and are now giving you opportunity,” he said.
Below is the verbatim transcript of the interview.
Reema: Very briefly, if you could explain what the theme of this report is and how can we apply it in the Indian markets in terms of picking the right stocks?
A: Today, popular perception if you see in India has been that growth investing which is a predominantly working theme and given where markets are at today, 9,600-9,700 a lot of the usual sectors have done excellently well. Same set of stocks have provided excellent returns in the last 2-3 years, valuations being where they are. In a way, it shows that there is a lack or rather the growth is not broad based and that is, in a way, reflecting in the way market is behaving.
So at this level of market, it will be very interesting to look at some alternating frameworks to find out if there are more ideas which can be gleaned which have not been very popular in the past and that is what has driven us to apply this framework to the Indian markets.
Contrarian investing has been a very popular theme globally. We though that we will see whether it just applies to India or not and the way you summarised in the beginning, those are the two buckets within which we have looked at contrarian investing in India. One is obviously the popularity of the consensus rating on the BSE 100 stocks and we have backlisted last 10-12 years of performance on a quarterly rebalancing basis.
And second theme we have looked at is the valuation multiple and of course, there are several sub-themes within each of those themes, net sell to net buy, consensus sell. There are three buckets we have looked at in valuation, price to earning, price to book. So those are a mix of things that we have looked at. The approach has been more data driven and account driven without allowing any inherent biases to basically creep in into this analysis. And as you can see, most of the ideas that I have mentioned there, today, they are not very popular. But if you see the data of the last 10-12 years, applying this framework has helped in India.
Anuj: I take that point that this is completely free of bias, because I am looking at your top contrarian sells and some of them are the ones where we have seen huge bull calls from Motilal Oswal and we have seen money being made there, the likes of Eicher Motors, Bajaj Finance, Escorts. Problem here is that we have seen how liquidity can sometimes throw valuations out of whack. Is that a risk to some of your sell calls as well?
A: Before I mention that point, just a normal disclosure which we have given even in the report, some of the ratings which are mentioned in those calls may not necessarily be in consonance with the bottoms of ratings that the analyst team may have. This is clearly a very top down approach.
Coming to your second point, I concede that liquidity has driven this market for the last 12 odd months, but if you look at markets from a longer term perspective, it has always followed earnings. There have been times, there have been periods, there have been a bunch of three years or four years where liquidity as well as fad has allowed few sectors to trade at valuations which are way above what they have usually traded at.
Now what are those sectors in the last 8-10 years? One obviously is consumer. Consumer's price-earnings ratio (P/E) used to be 20 times 8-10 years back. It was at 30-40 times depending on which set of stocks you look at. So yes, at times, it will play havoc with your fundamental thesis or even your valuation driven traditional approach, but end of the day, over a long period of time, I do not think, of course, there is a limit beyond which a valuation can rerate. It has to follow with earnings.
And we have seen multiple times. There are evidences in the last 10-15 years where valuations have reverted to mean. Valuations do not go just one way. They have reverted to mean in multiple sectors in the last decade or so.
Surabhi: I noticed a fair amount of interesting stocks in your contrarian list. Axis Bank, Punjab National Bank (PNB), Idea Cellular, but the two that really caught my eye was Sun Pharmaceutical Industries and Tech Mahindra. These days, nobody wants to buy these kind of stocks. So let us get your sense. Why these two?
A: Nobody wants to buy that, that is why it is contrarian. Now you look at pharmaceuticals sector as a whole. In the last two years, the kind of carnage that we have seen in pharma, earnings as well as valuations as well as the stock prices, all the large top-four pharma have underperformed significantly in the last 24 odd months.
Now we are not saying that all of them have become buy because there are various stock specific, sector specific factors at play. One of the stocks that we have highlighted as you have mentioned is Sun Pharma and this is where we had the highest conviction on from a longer term, 3-4 year perspective.
Things may not recover immediately in the next 3-6 months, there are multiple issues at play. There is goods and services tax (GST) which is being implemented from a domestic point of view, there is buy consolidation which is happening in the US market, there is a pricing pressure, base price erosion. All of those factors are well known which is why the stock is trading at a 30 percent discount. We think this is a great opportunity to get into this name from a 2-3 year perspective.
Coming to Tech Mahindra, obviously another sector where things are looking very pessimistic, people do not want to look at those sectors and if you see in that report, we have highlighted 2-3 sectors. We have given a call that pharmaceuticals is a contrarian buy sector today at this point of time, whereas technology in our view is not yet a contrarian buy as a sector. But there are obviously stocks which are trading at a substantial discount to their long period average valuations.
And even there, we are not saying things will improve in the next quarter or two, but can you buy it today and hope that the downside is limited? The answer to that is yes. You may not derive significant outperformance buying those stocks today, but clearly we think that from a 2-3 year perspective, these are interesting levels to look at.
Anuj: The one that really stands out for me in your contra list is Bajaj Auto. The stock has done well but why I ask you this is Hero MotoCorp has got its rural piece going, TVS Motors has made a huge comeback, Eicher Motors we all know is in the premium segment and doing well, Bajaj, nothing is clicking right now, the export piece also not doing that well. Why is it a buy for you on these parameters?
A: There are two-three aspects on that. One is the stock is at a significant discount to the sector average as well as it is own average. That is as far as valuations are concerned. Second as far as fundamentals are concerned, I think I have listened to the management commentary yesterday on your channel, they are talking about exports stabilising. Last month was a run rate of around 2 lakh and similarly in the next six-seven months you will see export strategy also playing out for them where things may not improve significantly but they will stabilise.
Even on domestic front, I think they have taken pre Goods and Services Tax (GST) price cuts a month back. So, therefore volumes for the month of June were disrupted to an extent. We expect volumes to pick up from where they are right now. Now one of the common theme which you would see through most of the stocks is lot of the stocks have any thesis which are going to play out in the next three to six months. By virtue of that they qualify for contrarian investing. However, at the same time we think that fundamentals have not dislocated completely.
For example, in Bajaj Auto there has been concern on exports for many years now, this is not the new concern which has emerged. However, incrementally we think that the things will pick up from where we are, both for domestic as well as their export front. Secondly, valuations does allow you to take some risk given that you are not buying at 30-35 P/E for most of these two wheeler stocks, except for the ones you mentioned.
Surabhi: A quick question on two of the banking stocks that you have picked in this contrarian list. There is Axis Bank out there and there is also Punjab National Bank (PNB), just quick rationale.
A: In both the cases first is obviously the valuations. They are factoring in a lot of stress already in the price. Second is incrementally we think that with all the action that Reserve Bank of India (RBI) as well as the regulator has taken in the last couple of days, incrementally things should improve for the sector whether it is corporate facing private banks or whether it is PSU banks.
Therefore the idea here is that, to look at the stocks which have been forgotten for last many years, they are offering you an opportunity to look at it in the broader macro environment where the regulator as well as the government has taken the mantle upon themselves to improve the asset quality situation for the entire sector as a whole. From a big picture point of view, unless and until these things are resolved, I don’t think you are going to see any significant and sustainable revival in growth. So, that acts as a cushion for the stocks.In the last couple of years the stocks have underperformed significantly. So that allows you some sort of shield from valuation given that rest of the stocks whether it is in private sector or even in NBFC, they are not allowing you any valuation comfort today.