Buying cheap stocks a mistake; like Bata: LGM fund manager

Jeff Chowdhry is not worried about the Indian market’s expensive valuation.He says that is because the market comprises of very good companies that are expensive and very poor companies that are cheap“I would rather buy quality and I will willing to pay for it,” says the Senior Emerging Market Fund Manager at LGM, adding “buying cheap stocks has been the mistake of my career.Chowdhry is bearish on China and feels investors looking at emerging markets beyond China would prefer India, Indonesia and Philippines, and not Brazil or Russia.The good things for India according to Chowdhry are declining crude prices, a manageable current account deficit, decent monsoon and a downtrend in inflation and interest rates.The not so good things are recurring deadlock between bureaucracy and politicians, and the hurdles in the passage of some key bills like the Goods and Services Tax.Chowdhry is bullish on IT stocks as he feels India will gain global market share of the IT business. In particular he is bullish on TCS as he feels it is a well managed company."Eventually, most of the business in the IT sector will come to Indian companies; Americans, I am afraid, are losing their competitive edge," he says."People like Accenture will tell you they are as competitive as the Indians, but they are not," he says.On Infosys, he says it is a ‘show me’ story and he would wait for one or two years of consistent performance before taking a call.In the pharma space, he is buillish on Lupin as he feels the product pipeline is better and it has more growth opportunities compared to its peers. He is also bullish on Glenmark Pharma.On auto, Chowdhry says it is a difficult sector to make money in the long run."In pharma and IT, you can say those two sectors are world class and will continue to take global market share. Though auto is a huge market, the competitive threat from from both domestic and international markets is very high," he says.Among FMCG stocks, he likes ITC as he feels cigarette consumption in India will grow despite the government’s efforts to restrict tobacco use.In the banking space he is bullish on HDFC Bank and among midcaps, his top pick is Bata."They(HDFC Bank) are doing fantastic things on the mobile payment and IT side. Their technology is as good as anything you see in the West," he says.On Bata, Chowdhry says it has got an excellent name and a good management."The products are very good; they had some problem last year with the implementation of their new IT system through SAP," he says."But it is a company which does not have a real fundamental problem; obviously online is a bit of a challenge for them now. So that is a midcap which has fallen on a bit of bad times; got a good product, good brand, good management. I think it is a good investment for the next 3-5 years," he says.For full transcript of the interview, go to following page_PAGEBREAK_Below is the transcript of Jeff Chowdhry’s interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.Latha: For the past 2 months the Foreign Institutional Investor (FII) money has started trickling back into Indian indices and you can see the Indian indices have spiked in the past 8 weeks. Is this just a short oil - long India or a short commodity emerging markets (EM) - long India trade playing?A: Most of what you have said is right. You have got to add one more thing which is short China trade. I mean as you know, we obviously China has been going through a lot of turmoil in the last two or three months particularly with the share market. I am bearish on China, as you know. People who have been listening to me for a while know that I am very bearish on China and for emerging market investors, in terms of looking for opportunities around the world, outside of China, there are not many. You do not got to Brazil, you do not go to Russia, you do go to India and you go to places like Philippines and Indonesia.Sonia: You said you do go to India, will you buy India at the current prices as well, are valuations worrying you at all? A: I never worry about valuations on the market because I think the market is made up of some very good companies which are expensive and very cheap companies which are very poor. I must admit from our personal experience, as you know I have invested and been investing in India for 20 years now, I might rather by quality and I am prepared to pay up for that. The mistakes that I have made in my career have been buying cheap stocks and I don’t do that anymore. I prefer to buy expensive stocks which are good quality. So the valuation for the overall market doesn’t worry me as long as I can keep investing in good quality companies for the long-term.Latha: What have you made of the economy, do you think it is turning for the better at all? A: I think with India it is always a mixed picture. From an external perceptive there are a couple of positive things. One is the fact that the oil prices are excellent; excellent news for the current account and good news for the economy. So, that is important. The monsoon hasn’t been too bad this year which is good. Generally inflation and interest rates even though we might have a few hiccups is on a downward path. So, all of those are good things. I think there are lots of good things as obviously there are still issues in terms of bureaucrats and politicians getting results through. Obviously we would welcome the goods and service tax (GST) being passed as soon as possible and more infrastructure spending. However, there is an age old adage of India, it is two steps forward and one step back; I wish it would be different.Sonia: The parliament has been hampered from working but would you say some progress has been made on the land bill and on the goods and services tax (GST) fronts?A: Happy is probably the wrong word, but I think progress. But, with India, all of us who know India very well is, to use the adage ‘Rome was never built in a day’, and with India, if you are moving in the right direction and there is some progress and compromise, remember, you see India is not China, I make this point a lot. If the Chinese authorities want to spend USD 200 billion to support the stock market, they switch a button. India cannot do that. it is just not possible and one of the downsides, or upsides, depends which way you look at it, of having a democracy is you have to build consensus, you have to move things slowly and sometimes, the tortoise actually does win against the hare. _PAGEBREAK_Latha: Now let me come to specific stocks - IT companies. TCS came in below estimates, while Infosys did better than estimates, so now would you prefer Infosys? Would you be buying it in place of TCS, which I think you hold?A: Before I talk about the IT sector, let me just give you a little bit of a story, because it think it brings into context, the IT sector today. 2-3 years ago, I was talking about being bullish long-term for the pharmaceutical sector and people were saying to me at the time, do not do that, because the outlook particularly for America and generics, etc. was poor and they were going through a period of very disappointing earnings. But we loaded up in that point of time in the pharmaceutical sector because we thought the long-term trend of generics, outsourcing and India’s competitive advantage, will continue.We feel exactly the same way on the IT sector. as you know, and this is disclosable fact, we have been holding shelves of TCS for many years. Yes, the near-term market outlook does not look at particularly exciting, but frankly, TCS in our opinion, has a real competitive advantage. And the competitive advantage that they have got, apart from the fact that it is a very well run company, is the fact that eventually, most of the business, or most of the business in the IT sector will eventually come to Indian companies. Now, it could be TCS, it could be Infosys, it could be Wipro, etc. I am afraid the Americans are losing competitive advantage. Now, they will tell you, people like Accenture and all these other people will say actually, we are as competitive as the Indians, but they are not. That is a simple reason, they are not. So, I like the sector very much. I continue to like TCS for the long-term, although the recent earnings was not brilliant. In fact the recent quarters have not been brilliant. But, when I believe in a company for the long-term, it genuinely means that. it does not mean five months, it means 5-10 years. Now, Infosys, you touched upon, is a slightly different story. Obviously, as you know, they have had a number of problems in the last few years. Not least of which management turmoil. For me Infosys is a show me story. I need to see an area or two where Infosys comes back on track for me to get interested. So, we are not shareholders at the moment in that company.Sonia: Let us get back to pharma, you were telling us that you like that space. Sun Pharma came out with a big earnings downgrade and yesterday Lupin also missed street estimates besides admitting to some FDA observations. Which are the pharma companies that you like? A: Just to disclose to you, we are shareholders in Lupin, we are not shareholders in Sun Pharma. I think it is fair to say that both companies are pretty well managed. We marginally prefer Lupin because we think that the pipeline is better and we also think that it has got more growth opportunities than Sun Pharma but Sun Pharma is a good company as well. We also own shares in Glenmark which as you know have done very well. Again, last year people were saying to me why you are holding on to Glenmark, it is a pedestrian growth company. No, it is a pretty well run company with good opportunities. So, again I like the pharmaceutical sector. We own Lupin and Glenmark and these in my opinion are just temporary setbacks on the journey like we have temporary setbacks in the bureaucracy in the political on reform.Latha: Let me come to the, probably the evergreen sector - auto sector. Bajaj disappointed yesterday with its numbers, but Maruti continues to garner sales. Ashok Leyland has been touching new highs practically every day. What's your pick of the pack?A: That sector is a difficult one to make long money on, on a long-term basis for a couple of reasons. I think, unlike the two sectors we talked about, the pharma sector and the IT sector, you can genuinely say that Indian companies in those two sectors are world class and will continue to take global market share. Now, obviously with the sectors that you have mentioned, the two-wheelers and four-wheelers, although obviously, India is a huge market, the competitive threat, both from domestic as well as international is very high. So, we struggle to find great long-term value in some of these names. We have been in and out of Bajaj from time to time and indeed Maruti for one to two years. But, if you want to ask me, would I invest on those companies on a 5-10 year basis with complete conviction, I have to say no I am afraid._PAGEBREAK_Sonia: Okay so now the FMCGs. Hindustan Unilever (HUL) and Asian Paints, both showed slower sales and worries about the low rural demand. Do you think this a time to buy into these companies?A: Yes, we do like the consumer stocks. I think the problem with the consumer stocks and this is partly due to the silver question you had right at the beginning, is in terms of valuations. Many of these companies like Asian Paints, Hindustan Unilever, great companies, well managed and demand is good. The problem is at some point, even if the earnings are actually okay, the stock does not do anymore, because the valuation is, which is extreme. I mean, we like ITC, we again have been shareholders in ITC for a number of years. That creates for us an opportunity because obviously, the government recently has been targeting ITC in terms of the increasing taxes. What I do not understand about it is why are they focusing on the branded cigarette sector and not focusing on the unbranded and the bidis, etc which are killing more people than the branded sectors. But anyway that is a different issue. But obviously, volumes for ITC have fallen this year as a result of this. But ultimately, I am afraid whether you like it or not from a moral perspective, cigarette consumption in India will continue to grow and ITC are very well positioned. So, that is our favourite stock in that sector.Latha: Do you like United Spirits despite all the problems that that stock has from promoters and government? A: What is the consistent theme here for me is not only do we like companies who we believe are well managed like ITC, TCS or HDFC Bank but we also like companies which have consistently delivered. The problem we have in the spirit sector, we look back and we say actually they have delivered one quarter and then they have disappointed the next five quarters and etc. Unfortunately old people like me who have invested in India for a long time have got a lot of history and one of the advantage of being old is I do remember when companies have disappointed 10 years ago and I am concerned about those.Sonia: Reliance Industries is a stock that everyone is talking about today. It announces its numbers, this is a stock that did nothing for five years but has done a lot in the past 10 weeks. Is it time to buy Reliance for you? A: On Reliance you have hit the nail on the head. It has underperformed for 10 years and it has done well for last five weeks. You have probably answered the question for me. I would rather have companies the other way round actually to be absolutely honest. I would rather have companies which have outperformed for 10 years and underperformed for five weeks. Reliance does operate in very difficult cyclical markets, the company is a pretty well managed company but it is not one for us. It operates in very difficult cyclical sectors where pricing power in some case is difficult, input costs; there are too many moving parts. I am a pretty simple person, if I can analyse three things that is enough for me, when I try to analyse 30 things I just can’t do it, I am afraid.Latha: Well, we have to state our disclosure, Reliance owns the company that owns the channel you are watching. Let me shift to the other things that can move the Nifty. L&T and BHEL, there are some signs that capital expenditure (Capex) cycle is turning. Do you like these stocks?A: Yes, again, I think L&T again, is a pretty well managed company. If I had to have exposure which I do not at the moment, as a capital goods sector, L&T would be the pick. Again, the problem with L&T is even though they have diversified themselves pretty well into the private sector as well, they do rely for a certain amount of business from the government and from the states and again, I cannot forecast what is going to happen there. So, that is a bit of a tricky one.Sonia: Now, onto financials, they form 30 percent of the index, you like any part of this sector?A: Our long-term core holding, which will probably hold well passed the time that I leave this business, is HDFC Bank. Again, this stock has been pretty good this year. That is a good company which again continues to deliver. That is recognised by the stock market even though the valuation; 10 years ago, I was told HDFC is far too expensive, you do not want to own this company. I ignored every, and look at the share price, look at the compound return. They are doing fantastic things on the mobile payments and the IT side. I would say that their technology in terms of what they are doing as far as their consumers, is as good as anything in the Western world. If I can get a loan by simply showing my smart phone, I cannot do that in the UK and with HDFC’s IT platform, I think you can basically do that now. So, that is our core holding in this sector. We like it, we like some other companies in the sector like ICICI bank and Yes Bank as well who I think are pretty well run. They have had some problems, particularly ICICI Bank in terms of their non-performing loans (NPL), etc. But those are the three names that are our biggest positions in the portfolios.Latha: A blank cheque kind of a question, do you like any of the midcaps – Voltas, Hitachi, Crompton Greaves – so many things fly, any great Indian midcap story? A: On the midcaps we kind of like Bata. Bata has got an excellent name. The products are very good; most of us have had a Bata shoe in our life throughout. They had some problems last year with implementation of their new IT system through SAP. My recommendation to every company is before you introduce SAP, be very careful because companies around the world seem to have implementation problems and looks as if so they have gone back to their old IT system. However, it is a company which doesn’t have any real fundamental problem, online is a bit of a challenge for them now. So, that is kind of a midcap which has fallen little bit on hard times. Got a good product, good brand, good management team, I think it is a quite a good investment for the next three to five years.