Next bull mkt to be led by housing fin cos: Equity Desk

A: Let me start with Page, on a broad scale Page is a dominant monopoly in its segment. So, first thing you look for in a stock when you look at it you say what has it done in the past? If somebody comes to you for employment, what do you do? You say show me your track record. So, you go back, last 18 years company has a sales CAGR of 35-40 percent. So guy who can execute that well, who has taken your revenue from Rs 2 crore to Rs 1500-1600 crore this year you can’t fault him for any management lapse.

Secondly what happens is you look at how these companies are growing and then you look at whether it is a sector leader or not. This is the most important thing, why I will tell is if you ever bought a sector leader in the Indian market it was a challenge to have lost money. Had you bought ACC in 1992 in spite of all the Harshad Mehta boom, you would have not lost money, you would have recovered it back. Had you bought Infosys in 2000, you would have got your money back, had you bought Larsen and Toubro (L&T) in 2007, Nagarjuna Construction is still 80 percent below its highs but L&T will still get your money back.

So, irrespective of what you do if we can just focus in life that I am just going to buy sector leaders you will do well, then return on equity, management and those financial things. However basically I look for a big sector tailwind. There has to be a tailwind, you can be a great company but if you don’t have a tailwind there is very little you can do in life. So sector tailwind, management and it has to be the number one in the sector.

Sonia: What about something like Maxwell Industries just to compare the VIP and the Jockey brand, of course Jockey heads but what about valuations? Would you buy something like a Maxwell as well?

A: About valuations, in the stock market you can’t buy mangoes at the price of bananas. So, if a stock is valued at a certain percentage the market is paying you for the consistency of growth. Latha knows HDFC Bank so well, it is valued at 4-6 times book for the last 15 years and I have never seen somebody bring out a big buy report; the only buy report you get on HDFC Bank is of 10 percent upside and the stock has gone up 100 times with those 10 percent incremental upsides. So, Maxwell again you back, you see what have done, look at the five years, look at the sales growth there is nothing almost too sure. So, why would I be interested in a Maxwell in that sense?

Latha: Why Hawkins and why not Prestige?

A: Hawkins is a focused company; they have got very high return on equity. Prestige is spreading itself very thin and wide. What they have done in the last four or five years, they have brought in so many products. However, Hawkins is more focused, it has got capital efficiency of 80-85 percent return on equity, they give 80 percent of capital back to shareholders.

So, in spite of the problems that you have in a company like Hawkins the stock price will never fall because the dividend yield protects the stock and it is of course very illiquid. When you are buying an illiquid stock, you have to have the protection of dividend yield which acts like a life jacket to an illiquid stock. An illiquid stock without dividend yield is like going into water if you don’t know swimming so that is what it does.

Look at TTK Prestige, they have grown well, 20-25 percent but they have used too much of capital. I like companies which don’t use too much of capital and then still grow. So, then what happens is over a period of time that capital translates itself into dividends for shareholders and the stock price doesn’t fall in bad times because you don’t know how much good times will last, as in your life and similarly with the market. So, when bad times you need the protection of dividend yields for a stock to remain at that price.

Latha: At what price did you get in, in Page?

A: The first price was Rs 350, that was March 2009, the world was falling apart. So, that was the time. It was very difficult for me to buy Page at that time because I had made a lot of money in Pantaloon and your company’s share, TV18. So, those companies were going at 40-60 percent so when I bought Page this company was growing at only 30 percent. So, it was a big step down for me, I said why should I buy a company that is growing at 30 percent? However, that is how it all happened and you just went back and checked their history and saw this is what they are doing.

Sonia: You bought Hawkins Cookers at Rs 350 as well?

A: Yes, around that price.

Sonia: Tell us why you like Repco Home Finance and what kind of potential do you see there?

A: I think the next leadership for every bull market has to have a leader. You can’t have a bull market with 100 stocks leading the market, there has to be a select few. So, if 1992 it was cement and steel, in 2000 it was software led by Infosys and 2007 is for real estate and infrastructure led by Unitech and Larsen and Toubro (L&T).

I think this time the bull market could well be led by housing finance companies. There are so many housing companies in India but the real trick is to get into the low-ticket housing finance companies because if you are servicing a housing loan for Rs 20 lakh, you compete with an HDFC with an LIC Housing and you compete with the big guys out there but if you are servicing for 4-10 lakh people then there is no competition; those guys don’t have documentary evidence to show that they are making money.

Just to give you small number, Repco is basically a Tamil Nadu-based company. GRUH is Gujarat and Maharashtra. Maharashtra is 33 percent of India’s mortgage market and Tamil Nadu is 18 percent of India’s mortgage market; that is a CRISIL study. So, if you bought Repco at a market cap of Rs 4000 crore and GRUH at a market cap of Rs 9000-10,000 crore you are playing 50 percent of India’s mortgage market with these two companies. However, if you go to Can Fin, what happens is again you compete with an LIC Housing. If you go to LIC again you compete with a HDFC. Those are the big boys; they won’t let you make money; the borrowing costs are very low.

Latha: Why not Dewan Housing in that case?

A: Dewan Housing is also good but if you look at the yield at which they lend, it doesn’t lend at 12 percent. Repco lends at 12 percent, GRUH Finance lends at more than 12 percent. So, that is the trick. You got to take more, if you have a home loan how much does it cost you? 10.5-10.6 percent so if you have got a guy who is lending it at 12 percent and whose borrowing structure is the same obviously your net interest margin would be making more money.

Latha: Is Repco the new Page?

A: I am as bullish on Repco as I am today as I was on Page about five years back.

Sonia: You are one of those investors who made a lot of money in Titan as well. I think you bought it in 2008, at what price did you buy into Titan?

A: It was adjusted at Rs 40 now; it was Rs 800 at that time when I bought it.

Sonia: Is it still worth buying Titan, do you expect that to continue it’s up move?

A: Titan will do well but size is the biggest enemy of any company in this world. Titan in 2008 was a smaller company and at that time you didn’t have Tribhovandas Bhimji Zaveri (TBZ), you didn’t have a Joyalukkas lurking around in Kolkata. Titan was the only national brand at that time and people used to say I want to buy jewellery from Tata’s shop. So that concept has changed. I have got two TBZ stores in Kolkata right now, Joyalukkas has come right from South India to Western India, North India, PC Jewellers is going into South India so the dominant theme of a single nationalised jewellery retailer that is going down. With the government theory of gold on lease, take it back give it again that is a problem. However, Titan will grow at 15-20 percent, no problems there but I normally prefer to look at companies that grow at 25-35 percent.

Latha: You said that home finance would be perhaps one of the leaders of 2015. Any other leaders you can spot?

A: Just to answer the question on loan book and loan assets, out of the Rs 5000 crore that Repco has lend they have blown up only about Rs 4-4.5 crore till date. They have got a lumpy loan book because of self employed thing. However, coming back to the leadership thing, I think bull market leaders remain for 2-5 years. They don’t remain just for one year. Housing finance is definitely there, you look at all stocks associated with housing, just broadly, Symphony, Whirlpool, Kajaria Ceramics, Cera everything is hitting an all time high. One brilliant thing of finding out a leadership is those stocks have to hit all time highs, you won’t get a bull market leader hitting all time lows.

Latha: You have something in the home improvement space?

A: Anything, that is for you to decide and figure out. Whirlpool, Kajaria Ceramics, Symphony, Cera, etc anything that is related to your home is supposed to do well. Secondly my big theme is the urban consumer where the Jockey fits very well; it is riding well and I think it should ride well also.