Moneycontrol
May 08, 2017 03:25 PM IST | Source: CNBC-TV18

India in a raging bull market; like cement, railways, fin tech spaces: Madhav Dhar

This is not a young bull market because it has been seven years in the making and neither is it a cheap one, but it remains a bull market, said Madhav Dhar, Managing Partner, GTI Capital Group.

Last week was a range bound week for the market with Nifty losing 0.2 percent to end below 9300 but overall the Indian equity markets have been rallying for some time now. Experts feel the market is currently highly valued and seems to have priced in a likely recovery in corporate earnings and economy.

Madhav Dhar, Managing Partner, GTI Capital Group said the current bull market is likely to be bigger and longer and we could be two-thirds of the way through this bull market around the world.

“India will find it hard to buck the trend but the underpinnings in India are stronger because we have not been in a straight up bull market. India has had to face issues inflation, NPLs, economic down cycle,” he said in an interview to CNBC-TV18. However, slowly these issues are getting solved and so, we remain in a raging bull market.

This is not a young bull market because it has been seven years in the making and neither is it a cheap one, but it remains a bull market, he said.

According to him, in India, we are nowhere close to the peak of earnings cycle but just off the bottom of the earnings cycle.

He likes the broad infrastructure theme which could include spaces like cement, fin tech, railways, real estate.

Below is the verbatim transcript of the interview.

Prashant: You have a great way of capturing the current raging debate in the market and punchy one-liners and you have done so for us today as well. The question, as you framed it, is it a raging bull or is it an aging bull?

A: I was just listening to you checking off the list of new highs and the stocks breaking out and I think it is called a bull market, what is going on. Unfortunately, it is a bit of both, especially if you look at the Standard and Poor (S&P) which is the benchmark of equity trends around the world, we are 7.5 years into a straight-up bull market. So it is old by every definition, but the starting point was complete devastation after the financial crisis, so maybe this can be bigger and longer compared to an average bull market.

So, my best guess is we are two-thirds of the way through a big serious bull market around the world. I would add that India will find it hard to buck the trend, but the underpinnings of India are even stronger, because we have not been in a straight-up bull market and we have had all kinds of issues with an economic down-cycle with a non-performing loan (NPL) issue, with sticky inflation which slowly are getting addressed and solved.

My short answer is we are in a raging bull market and it is going to be recognised as such over the next year or so. And as the old saying goes, bull markets climb a wall of worry and we have had that all along whether it was the financial crisis or whether it was deflation and after that it was Brexit and then Trump, whether different reforms in India will go through, whether the NPLs will absolutely explode in India taking the economy down.

So, you have had many things to worry about and slowly those things are being overcome and the markets are starting to reflect that. So, we have a way to go, but this is not a young bull market and this is not a cheap bull market, but it is and it remains a bull market.

Reema: You are saying two-thirds of the market rally perhaps, is behind us. This is a raging bull market although it has been seven years in the making. But have we reached the excess phase of the bull market yet?

A: No, I do not think so. I do not think so at all. Usually, bull markets start where the markets go up and nobody understands why it is happening. And they second guess it. Then, the earnings in the economy come behind it to fill in and it goes higher. When it goes higher and the economy and earnings are in full flood, people extend that trend and say this is now the new plateau and this will continue. And that is usually what leads to excess.

So, I do not think we are anywhere close to that yet. I do not think people even believe that India will accelerate to 8 percent gross domestic product (GDP) plus. We are even second-guessing whether the 6 percent or 7 percent numbers we have are legitimate and what is happening to employment, what is happening to the private sector investment. So, this is not a sign of a mature bull market with an all-in feeling of participation, even though mutual fund participation and retail participation has increased materially, it is nowhere close to what you tend to see at the late stage or the last stage of a really serious bull run. So I do not think we are anywhere close to that yet, certainly not in India.

Prashant: So, it is an old bull market, but it is not mature yet? How do you square those two things? If something goes from Rs 5 to Rs 50 without earnings picking up and then when earnings do pick up, does it have to go from Rs 50 to Rs 100?

A: No, if it goes from Rs 5 to Rs 50, there is an issue. That is almost too much. You should more than likely take your money and run. I am just saying that let us say a bull market is up three times low to high. The first 100 percent move is just purely price-earnings ratio (P/E) expansion and the next 100 percent move is usually earnings and the last 100 percent move is a combination of both those things and flocky excesses.

As I said, I do not think we are at that third stage yet and all the history of different markets – history does not exactly repeat itself precisely the way I am describing it, but it vaguely rhymes. It is not the exact same pattern, but it is a similar pattern. If you go by similar patterns, valuations are slightly extended, but it is not where you see.

You need peak multiples on peak earnings for a big serious market top. We may be at a higher end of multiples but we are not even close to peak earnings. In fact, you could argue we are just off the bottom of the earnings cycle certainly in India. So a long way to go in that sense. You may not get a lot of help from multiple expansion.

Prashant: Let us get talking about what you would do. You typically look at extremely contrarian, unloved kind of stories and I remember you highlighting two things – one is public sector banks, you really liked State Bank of India (SBI). This is about a year odd back. And the other was real estate and you were betting on DLF. Could you talk about both those?

A: I threw those names out as capturing two different concepts, not necessarily specifically those companies although I happen to specifically like those. They had similarities in which they were very cheap stocks that were unloved where the underlying fundamentals were starting to improve at the margins and most people were sceptical of it. To me, that is a very classic theme that I like and a big trigger is extreme undervaluations. People can bet caught up in confusing nice things and nice stories with cheap stocks. There is a difference.

When we talked about it, DLF was about Rs 85-90 and it has doubled even though there is very little evidence that the real estate cycle is bottoming out or some of the financial leverage issues in the sector have been addressed. But, things tend to bottom out at an extreme point of uncertainty and fear and that was hit about a year ago. And by the time the sales and prices stabilise, these stocks could be up another 100 percent and when things start picking up, they could be another 100 percent from there. DLF went from Rs 1,500 a share to Rs 85 over a course of nine years and that is a 90 percent decline. So it could easily go from Rs 1,500 to Rs 85 to Rs 400-500 which is 5x off the low.

SBI is not quite as extreme, but there is the conventional wisdom was that private sector banks are going to keep taking away market share from public sector banks, the new fintech startups are going to do more of the same and these bureaucratic, plodding, non-competitive firms are really dinosaurs. And frankly, that may not necessarily be inaccurate. My bet is that below book value for public sector banks and above 5-6 times for private sector banks is already telling you something. So, my argument is private sector banks should be 2-3 times valued compared to public sector banks, but not 5-6. And SBI, in that time, is up 80 odd percent from Rs 170-180 to roughly Rs 300 today.

So again, the point simply being that you can have huge price changes in companies that are struggling, reorganising, trying to improve, but do not necessarily tell a great story, are not as spiffy and shiny, as exciting as others are. Look what has happened in the tech area where you have the darlings of yesterday which are fabulously run and all the best and the smartest go to those firms and they have lousy investments. My biggest personal short over the years has been Coca Cola which is Warren Buffett's great position – you do not want to bet against the man – but this is one of the great brand names in the world, one of the most recognised brand names in the world even today. It has been a lousy investment.

So, the broader point would be to not confuse great investment opportunities for great provable stories that you can touch and feel and feel psychologically secure about. That is my point and that is my approach and to your larger question, what now? I think it is a little difficult because a lot of the bets that were compressed have started to play out. I still like those areas in stocks, I like the entire infrastructure space, although what constitutes infrastructure is confusing and not that easy. Cement is infrastructure, anything to do with railways is infrastructure, huge parts of the fintech area is broadly either tech or infrastructure and that is going to get built out.

So, there are lots of areas that are accelerating. It is a little more complex to figure out exactly what specific ways to play it. The entire defence area is infrastructure related and there are lots of opportunities there as well, not as easy to figure out exactly who the winners and losers will be. But that is where the tail wind is and that is where you should go hunting including real estate and banking.

Reema: Let me elaborate very quickly on financial technology. We have heard of stories on the private side, for instance, Paytm and many others. For the listed public sector space, do we really have opportunities to bet on in financial technology and if you could elaborate how can we spot them?

A: I am not sure you can. I am not sure there are in the public sector. I am playing two different trends. The public sector trend is that the NPA problem will be addressed better and faster and the damage to book value is going to be less than what people think. Uncertainty is usually worse than bad news. We are in the midst of uncertainty that is going to be slowly removed, they are being addressed all the time. The Deputy Governor of the RBI even said we should privatise some of these public sector banks which is a word or a sentiment we have not ever heard in history. So, the mindset is shifting.

The public sector bet is not a financial technology bet. That is a bet that undervalued stocks that are hated and destined to go away will be more persistent in providing value than people realise. SBI is not a 10-year bet, it is a 3-4 year bet. We are a year into it. So it is a different bet altogether. The entire tech space, I know it is much talked about and frankly, it is not even my thing, but I think what is happening broadly speaking in digital India is not a cliché. It is not a buzz word. It is real. It is massive and it is going to disrupt and change things dramatically for the better.

Certainly, some incumbents may be hurt. In fact, those could be the public sector banks eventually when they get priced to that level. It could even be private sector banks for all one knows and entire areas of banking and finance may be bypassed entirely. You could make the case that credit cards are irrelevant. They do not even matter. So, what happens to American Express or MasterCard, I have no idea but it is worth looking into in a very serious way.
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