Invest in consumer-related stocks; bullish on Infosys: LGM

LGM has more private banks in portfolio than government entities and advises investing in consumer-related stocks. It remains bullish on Infosys and expects the company to do very well in next few years.

Below is the transcript of Jeff Chowdhry’s interview with Sonia Shenoy and Latha Venkatesh on CNBC-TV18.Sonia: Has the mood towards the Indian markets become a little more upbeat post the recent spate of reforms? A: The thing about India is compared with a lot of other emerging markets is for global investors there is story there. The story is a very simple one which is new change of government; things are happening on the ground, inflation is going to come down because of the oil price. So, for long-term investors the Indian story still remains a very attractive one even though we have had a very good 2014. Latha: You are in India watcher since 1995 or early 90s? A: You have been very generous; it is early 90s. My first investments in India were late 1993. Latha: Since you have sold India or tracked India for almost 25 years what is the sense you are getting, is this mood a new high or this is one those things you have seen before in 2003 along with the BRICS wave and unless India delivers the energy can get quickly dissipated? A: What you are basically saying for India it is two steps forward and one step back and that has definitely been the case in the last 25 years. India goes forward in a couple of ways and then it gets step back. I have seen a lot of those in the last 25 years of investing in India. India is not perfect, there is still a lot of bottlenecks, bureaucracy creates havoc from time to time but in the 25 years that I have been investing in India I am probably more optimistic today than I have been anytime in the last 25 years for a couple of reasons. First of all is that genuinely I think that there is a mood in the country for change and positive change across the country. It is obviously led from the top, this is not a political discussion about BJP or Congress or anyone else but the mood that I sense from investors and people on the ground is that the change is happening and the change is good. There are days of sort of bureaucracy stopping you from doing this and stopping that is slowly changing. It is not perfect, power is a big problem across India, registration of India funds is still a big problem for many people. Why does it takes so long to register in new fund India where I can do it in Brazil in 10 days? So, those things still need to be addressed. Tax still needs to be addressed, a level playing field for companies. So, it is not perfect but I feel pretty optimistic. I think in dark days of the late 90s lot of my colleagues said let us just forget about India we will never come right. The tax and the bureaucracy will be terrible. I said let us just take it out for the long-term.

Sonia: What are funds like yourself or investors like yourself chasing at this point in India and what are you guys avoiding? A: I think it is fair to say that funds like ourselves and most funds in our position tend to take a long-term view. One of the things that strikes me when I come to India and I met people, fund managers, etc not all but quite a lot of them are short-term trend followers; the gold price has gone down so let us buy gold company like Titan or something or the engineering cycle has turned up so let us quickly go out Larsen and Toubro (L&T) for example. We tend not to do that for two reasons. First of all our own clients are very long-term so typically our mandates tend to be 5-15 years. So, as a result of that our investments are also that. So we say which companies do we want to own for a generation. So, some of the companies that we own, I own in my portfolio I have had for 10-20 years and they have been what you guys would called multibaggers. ITC, HDFC Bank, etc we have owned for many years.

Latha: What is at the moment fascinating you or if you were to get a USD 100 million how would you distribute it? Would you go to the Tata Consultancy Services (TCS) and Infosys which have been multibaggers over the last 25 years or will your design change or would you move away from IT. What would your typical composition be? A: First of all we wouldn’t move away significantly from companies which have delivered over long-term. One of the great mistakes in this business is people believe that they sell companies too early. People were telling me 10 years ago sell ITC it is far too expensive, sell Infosys or whatever. We never sold them because they were great companies. So, although they can be expensive and they continue to be expensive, a USD 100 million portfolio will still have a lot of ITC, TCS and HDFC Bank in them. So, that is given but the other thing which is important is that you should always try and look for those type of companies which either are emerging or turning around. So, some of the companies in the drugs space for example are exciting, some of the smaller IT companies are exciting. What a lot of people forget is that India has got an incredible competitive advantage in certain industries; not all industries but certain industries so drugs and IT definitely.

Sonia: Which are the smaller IT companies that you are looking at? A: We don’t specifically invest in those because our corpus is such that the liquidity is not there. So, we would go down not very far to companies like Glenmark for example or Cipla which are basically largecap companies. However, one of the things a lot of the smaller funds are looking at are some of the smaller companies in IT or mobile communications.The other area which has really exploded as you know outside of India which we are looking at very closely is the whole internet shopping, the gaming; you have seen what has happened to Alibaba which every Tom, Dick and Harry in the world has been involved in. So, that is a very exciting development. Latha: In India at the moment online shopping is only in private equity space or in the unlisted space. Would you still buy those kinds of companies, do you look at unlisted companies or will you look at the listed part which is booming because of the digital online shopping, the logistics space? A: We tend to play in the listed space rather than unlisted space but that doesn’t mean we say the phenomenon is not going to continue. It is a very attractive phenomenon. We have seen every part of the world and you can play in lots and lots of areas. You can play it through logistics as you say, you can play it through the people who actually sell the goods and you can play it through the internet and the mobile phone operators so there are lots and lots of way of playing.

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Latha: Telecom, do you like that story in India? A: I think it is turning around. If you remember one of the problems has been the whole nonsense about spectrum and selling off the spectrum and this is classic India; this is absolutely classic India. We know it is a great long-term potential, but the penetration of internet on mobile phone is still very low compared with China, etc. So, we know that the potential is there, it is just unlocking the potential. For India everywhere you look, there is huge potential. It is just that it has been a bit of a problem; either it is a bureaucratic problem or tax issue; that is classic India.

Sonia: The three sectors that everyone talks about that will benefit from the recovery in the economy is banks, autos and some of these players like cement, etc. In banks you mentioned HDFC but any fresh interest in these pockets, any stocks? A: I think cement is interesting. You have got to be slightly carful because it is a very regional market. However, one of the things which is interesting because we have a lot of internal debate within the company about cement and because we are global emerging market investors we look at cement supply and demand locally and other countries around the world. One of the push factors I always get from my colleagues is the supply and demand situation in India is not very good, there is excess capacity, etc and I just show them the share price chart of the cement companies like Grasim or Ultratech. You can have over capacity and have some great investments. So, longer term cement is a great story, we do own in our portfolios Grasim and Ultratech which are pretty well managed company. Grasim has got the VSF angle as well. However, we do like cement.

Latha: Very soon what will come to the table will be the PSU because the divestment has to kick off, it is very clear that they have not got enough money from taxes, yesterday they raised excise duty on oil products, fuel products, diesel and petrol. How would you react to Coal India? We hear that the ministers and the ministry is all set to double its production by 2019, looks a very tall order and yet sooner or later commercial mining will also start, how will you approach Coal India?A: The answer to the question of Coal India is we don’t know yet. We will have to have to look at the details of the plan. But I will make a more general comment about PSUs, simply selling of a stake without making any fundamental changes to the business or the management or the legislation or the taxes makes no sense. So selling of 5-10 percent of existing company without making any fundamental change to the company, in our opinion, is not attractive and I think most investors will look at it and say it is not attractive.Latha: That is why I picked Coal India and ONGC for instance. The government in its short tenure so far has said that it is going to clean up the coal act as well they have made diesel prices market determined. Does that convince you enough to buy ONGC or Coal India?A: It convinces us enough to have a look at them rather than buy it. The question I want to throw back to you is how many private sector managements are coming on to the board of these PSUs? How many professional managers are going to be run the companies? There is no professional management to PSUs. Many managers in PSUs are very good but how many have got a real profit motivation and have run private sectors - how many companies in India in the PSU space have got someone who has running it who has been a top CEO in a private sector company? Not many.Latha: That kind of lateral movement doesn’t happen, it happens the other way round though.A: Maybe because they have to take a big pay cut.Latha: Basically would we say that your portfolio is heavily tilted against public sector companies and of course the inevitable question therefore would be public sector banks because in the banking space -- 70 percent is public sector?A: A simple answer to that is yes. Our portfolio is basically made up of private sector companies not to say again like India that some PSUs don’t have huge potential, unfortunately our history with PSUs over many years in the early days in the 90s -- we did play, we did a number of PSUs but again it was two steps forward and three steps back because not only did we have to worry about the earnings of the companies but we have to worry about all sorts of other things like government legislation, interference etc. At least with private companies you worry about one thing which is long-term outlook, earnings and in many cases because the management is so good how to navigate the difficulties of India.Sonia: I am very interested in your holdings in the consumer staples business. You have about 15 percent in your India holding itself, you spoke about ITC but this quarter we have seen some slowdown whether it is Titan, whether it is Bata, whether it is Jubilant Foodworks, slowdown in consumer sentiment, what are the stocks that you would be interested in that you would buy on a dip?A: All of the companies that you mentioned are attractive, again well-managed companies, we like those companies, we like the auto space now, I am taking the two-wheeler space, four-wheeler space is good and again if a man from Mars came down and say listen I don’t know anything about investment, I don’t know anything about emerging markets or India, just tell me what I should buy, it is very simple, you buy the consumer. The story in emerging markets is all about consumers, rising disposable income, too many cars on the streets of Mumbai, that is the story. So little dips from cyclical basis etc -- don’t worry about it, just go to sleep and enjoy the multibaggers.

Latha: So is it only the cars you will buy or will you buy the pizza guys, Jubilant Foodworks, footwear guys like Bata?A: Anything which is consumer related is the place to be. I have covered China for 20 years and that is a classic example. So China had this huge deal in infrastructure boom five-ten years back, that is completely over. Most Chinese people spend more time surfing the net then they do going to work. So rightly or wrongly I am afraid in five-ten years time you will be talking to guests to say how many times do you spend on online shopping rather than actually making money. Latha: How is the emerging market fund flows looking like, is it likely to be healthy in 2015, emerging markets in general and Asia in particular? A: I would say very mixed. I think the two issues which are concerning investors is that the easy money period that we have had for so long since 2008-2009 is largely coming to an end. US interest rates inevitable at some point there will be tightening. Obviously tapering has basically come to an end, US interest rates will go up. So the problem that global investors have is that the bond markets around the world generally are very expensive although the Indian market is very attractive. The bond market here is very attractive but generally the bond markets are very expensive. Equity markets around the world are quite expensive. The US is clearly expensive. I come from Europe and Europe is in deep recession apart from the UK so the things are not going on well. In emerging markets Brazil and Russia have their own problems. If you look around the world there aren’t many investment stories out there and India is one of the few. Q: If you have to leave us with one stock that could be a multibagger, what would it be?A: One of the companies we follow for a very long time which has been through a very difficult space for lots of reasons but I think fundamentally is still a very good company is Infosys. I know Infosys has recovered a bit. It is a company which over the next five-ten years could do really well if they get their act together. Q: Will this commodity downturn continue you think in 2015?A: Yes. The Chinese boom as far as the incremental demand for commodities whether it is oil and gas, copper, etc; is something which is going to happen for many years. About 18 months ago I said the super cycle is over, that was 18 months ago. I still believe the super cycle is over. So it will be great for people who are consumers of commodities but it is not going to be good for commodity owners or producers.