Here's why Baring PE is betting on FMCG, Manappuram, Sintex

Raul Bhasin of Baring Private Equity Partners India remains positive on gold loan company Manappuram Finance. According to him, the stock is an attractive investment proposition because its structural drivers are intact and it is a consumer lending business.

Baring India on July 16, acquired 1.50 million equity shares of the company through its two funds - Baring India Private Equity Fund II (Fund 2) and Baring India Private Equity Fund III (Fund 3) via open market. Private equity major's shareholding in Manappuram has now increased to 11.56% from 9.48% earlier.

Talking about their investment - Sintex Industries, he said entry valuations look reasonable for the stock and its businesses is fundamentally attractive. “The stock price seems to have got a beating because market thinks high beta plays are not going to do well in the short-term,” he added.

Baring PE, which also holds large positions in Marico, Dabur India and many other FMCG stocks, continues to find the sector attractive.

“Bottom-up drivers would help sustain some of these valuations at some of these levels. Relative to the rest of the economy which is very controlled, one of the unique propositions of this industry is that this is one sector where the government has the least interference and that also makes it extremely attractive proposition for us,” he elaborated.

Also read: China's stimulus push, Japan election to aid gold: Expert

Below is the verbatim transcript of his interview on CNBCCC-TV18

Q: Could tell us about what you are doing with Manappuram Finance, which is your last big investment, since then there has been a lot which has gone wrong with the gold space, are you still optimistic?

A: Our own view is that a very small percentage of the gold in retail hands has been lent against. The structural drivers of that business have not changed. The bottomline is that two-thirds of Indians do not have access to the banking system; they keep their savings in gold.

The value of Indian savings in gold is as much of that which is there in the banking system or in bank deposits. And providing liquidity against those in an efficient cost effective manner with good systems and processes and risk-management is a very valuable franchise to own. We remain very bullish.

Our own view is that the market has not quite understood the fact that it is a consumer lending business with liquid collateral but the market is more obsessed with the volatility in the value of the collateral. Sure on that 2 percent odd default rate that the company has typically, maybe because there is volatility in the collateral the losses on realization of those bad loans might increase. However, we are talking between 40 bps and 60 bps and I think that is a very low loss ratio in any kind of consumer lending business.

Therefore, our own view is that there are structural drivers to the business, which are very attractive, it actually caters to a very useful social purpose, it addresses liquidity needs of the unbanked. I have got to believe that it is going to be an attractive investment proposition. We remain very bullish and some of our actions of trying to continuously raise our stake would only confirm that.

Q: Looking at some of your other investments in the Private Equity Fund 3, you have got Sintex Industries and that seemed like a good story a few months back but the stock has absolutely got decimated, do you have a handle on what exactly is going on there?

A: We have invested in the convertible bond in that company. Our own view is that it is an infrastructure related play in a large economy; it is a high-beta play. If the stock is being punished, it is the call that the market is taking that high beta plays are not going to do well in the short-term.

However, own view is that its businesses are fundamentally attractive and the entry valuation is very reasonable at this moment and we would be quite happy to ride this out.

Q: There is also Marico within that list and I am sure you have been watching in the secondary market that sector has moved to stratospheric levels in terms of valuations. Are you guys getting uncomfortable with the kind of valuations accorded to this fast moving consumer goods (FMCG) space or do you think there is a reason to justify where they are trading at?

A: Yes, we have large positions in Marico, Dabur India and a lot of the other consumer names also. Our own take has been that these are consumer franchises; they are very difficult to replicate.

If you ask me whether sustainable growth is the same in the next few years compared to what it has been, we have our issues and reservations. However, one we think that they are bottom-up drivers which would help sustain some of these valuations at some of these levels.

Two, relative to the rest of the economy which is very controlled, one of the unique propositions of this industry is that this is one sector where the government has the least interference and that also makes it extremely attractive proposition for us.

Q: Longstanding holding is Mphasis. We talked many years back when things were moving with HP and now there is talk that there could be some more fund interest on that one. How are you guys approaching these potential changes in terms of ownership?

A: I know the company reasonably well and I know even the HP management at the senior most level. The only people who seem to have an idea as to what transaction is happening and what is going to take place seems to be the Indian press. So, I should ask you the question because I can promise you the company doesn’t know and HP doesn’t know and I don’t know.

If there is something going on, it is news to me. As far as, I understand and to the best of my knowledge, there is absolutely nothing going on in Mphasis, which is in terms of any strategic change and control.