Moneycontrol PRO
Live: Gujarat And Budget 2023-24: What Should Government Do?

Daily Voice | This smallcase manager isn't bullish on new-age companies, sees Nifty beyond 20,000 by March

The most important factor that drives the markets in the short term is liquidity. Domestic liquidity has been extremely strong and our stock markets have done relatively well compared to other MSCI emerging markets, despite the relentless FII selling.

November 22, 2022 / 07:27 AM IST
Basant Maheshwari of Basant Maheshwari Wealth Advisers LLP

Basant Maheshwari of Basant Maheshwari Wealth Advisers LLP

The valuations of some of the new-age companies have been so out of whack that even after a 50-60-percent correction with relentless cash burn and no sight of profitability, they do not make sense from any investment standpoint, Basant Maheshwari of Basant Maheshwari Wealth Advisers LLP says in an interview to Moneycontrol.

He believes traditional companies with decent profitability and a runway for growth, are much better options to bet on than their new-age peers. The smallcase manager and co-founder and partner at Basant Maheshwari Wealth Advisers LLP, with over 22 years spent in the stock market, remains bullish on the IT sector as he doesn't see any material slowdown in demand.

Given that macros are improving and inflation seems to have peaked out, FII inflows may come back and could lead to the Nifty crossing 20,000 may be by March next year, says Maheshwari. Excerpts from the interview:

After first half of the FY23 earnings season, are you confident enough to say significant results upgrades are likely?

It is important to know that markets move on a remote controlled signal from across the Atlantic. So, no matter what our earnings season are, we need good cues early in the morning to start with. The current earning season has been broadly in line with what we expected.

Sectors like banking have shown good improvement in loan growth and asset quality because they had done the cleaning up exercises during and post the Covid era. With rising interest rates their NIMs (net interest margin) have expanded and lower provisioning has expanded the ROA (return on assets). Then there are sectors like cement, chemicals, and API where there have been significant margin pressures due to higher inflation creating a higher input cost pressure.

The Russia-Ukraine conflict has sent energy and other input prices through the roof. Hence, power and fuel costs have gone up impacting profitability. Also, there has been currency headwinds for some companies due to money moving back to safety - the US Dollar. Even FMCG companies have seen some impact as there is a lag in passing the rising input prices to the end consumer.

Inflation is now peaking out. Shipping costs have gone to pre-covid levels. Commodities like aluminium, zinc and copper have corrected 30-40 percent from the top. There are signs of improvement in semiconductor supply which has been impacting the auto industry. So, earnings of many consumer-oriented companies should likely improve from here. The worst is behind.

IT services has also shown decent results. Most of the IT services companies are very confident of the demand scenario and many large and midcap IT companies have even raised their revenue guidance. Supply side issues are also getting sorted now which should result in expansion of margins. However, the big move in IT will come ‘just before’ the US rate hike cycle stops. People waiting for clarity will have to pay the price of clarity.

So, from an overall perspective the second half should be much better than the first.

Many new-age companies see operational improvement. What's your take on these companies?

The old-age principles of investing in profitable companies with decent cash flows and ROE (return on equity) are still relevant in current times. Investors in this so called ‘new age’ companies are now painfully realising this fact. Hope works when then is abundant liquidity and not when there is a rate hike cycle happening. Added to this was the Nykaa episode which has soured the taste of most investors.

The valuations of some of the new age companies where so out of whack that even after a correction of 50-60 percent with relentless cash burn and no sight of profitability it still does not make sense from an investment standpoint.

Traditional companies with decent profitability and a runway for growth, are much better options to bet on.

What are your thoughts on the insurance space?

Warren Buffett became one of the richest in the world by running an insurance company. Both the life and general insurance industry are secular growth stories for the next decade. Last few years have been impacted due to higher covid claims. Regulatory tailwinds like BIMA Sugam will help in improving the penetration. Health and protection should show good growth over the next few years.

With the easing lot of concerns and trading at attractive valuations, do you think IT services sector is the best play in the Indian market?

IT services companies have recently underperformed due to concerns on higher inflation leading to US Fed increasing interest rates to a point where the US economy goes into recession. Expectations are that this would negatively impact the earnings profile of IT services companies in India.

However, we remain bullish on the sector as we do not see any material slowdown in demand going ahead. Most IT companies have maintained or increased their revenue guidance over the last quarter. Many of the structural and digital transformation projects that has commenced cannot be stopped midway. Clients can delay spends by one or two quarter but should not restrict their tech spending.

Also, supply side pressures due to higher wages have come down as work from home is gradually reducing and employees are gradually returning to office. This should aid margins going ahead.

Rupee depreciation is also a big tailwind for IT companies. With stock prices coming down by 40-50 percent from highs without any material change in earnings potential, the bottom has already been made and this sector should do well for a long period of time to come.

What is the reason behind the beginning of Basant Maheswari Vision 2030 Smallcase?

I came up the hard way in life. My first investment was 1,000 shares of Hindustan Motors at Rs 32 in 1991 with the money borrowed from my grandmother.

I always knew that the market was the only way to get rich. I started as a small retail investor and achieved financial freedom through stock market investing.

I started as a small investor without much capital. It took me around 10 years to know what works and I started making money from the year 2001, when I only had that money which I couldn’t afford to lose.

2001 - My family business had to be shut down and I only had that money which I couldn’t afford to lose.

2003 - Bought Pantaloon Retail (went up 40x over the next 5 years).

2006 - Set up The Equity Desk an online discussion forum.

2009 - Bought Page Industries (went up 40x till 2015).

Pantaloon built my capital and Page helped me carry it to the next level.

In February 2016, Co-founded ‘Basant Maheshwari Wealth Advisers LLP’, a SEBI registered Portfolio Management Service (PMS) with Shalu Mehra.

We wanted to manage money for friends and a close group of known acquaintances. The ticket size was high at Rs 2 cr because we didn’t want to go retail at that time. Due to the high ticket size, a large part of the investing diaspora couldn’t join us.

Of late, there were requests by the retail investors to have a product for the small investor. And we thought of having a smallcase scheme. Hence the ‘BM Vision 2030 smallcase’.

Our investing philosophy is simple. Buying stocks that showed above average growth and were leaders in their segments, generating a high RoE with barriers to entry either through a brand or low cost of operations.

We avoid absolute illiquid small caps which have entry and exit issues. A concentrated portfolio of 10-12 stocks is enough to beat the underlying bench mark (Nifty 50).

What are your key golden rules for investment in equity market?

A We like to invest in companies that have a predictable stream of earnings and are operating in sectors that have a tailwind behind them.

Growth with high ROE is a potent combination. A high ROE indicates that the growth can be self-sustaining without repeated capital dilutions. Moreover, the ROE also indicates the level of efficiency with which the business is being run (net profit ratio) or under which the sector dynamics (asset turnover) are placed.

A giraffe with a long neck cannot become a cheetah with black spots. Keeping this in mind the past operating history of a company is an important indicator of what the future could be. In some cases, there is a catalyst that initiates the change. Such catalysts could either be infusion of new management bandwidth, changing business dynamics or any other factor which could convince us that the future would be better from the past.

While the above holds true for most of the cases investing is less of a formula driven exercise but more of a feel-based endeavour.

Hence there would be times where the journey will take a slightly different path as long as the predictability of the destination remains intact.

Is there any strong possibility of the Nifty hitting 20,000 by the end of the current financial year?

The most important factor that drives the markets in the short term is liquidity. Domestic liquidity has been extremely strong and our stock markets have done relatively well compared to other MSCI emerging markets, despite the relentless FII selling.

Given that macros are improving and inflation seems to have peaked out, FII inflows may come back and could lead to Nifty crossing 20000 may be by March next year.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
Sunil Shankar Matkar
first published: Nov 22, 2022 07:27 am