Nifty in multi-year, multi-theme bull run: HDFC Sec

Latha: Do you think by March we are going to look at a five digit number for the Nifty?

A: You have hit bang on the head when you say that we have got confluence of positives here almost everything that was or used to be wrong with India is now getting right and that’s exactly where we are turning super constructive on investing in this country at this point of time.

Markets are different but they will run up ahead of reality for a while and then correct or consolidate and then you might have some bad news and you get a chance to buy. However, it is very clear that this is a multi-year, multi-theme, multi-faceted bull market in the making and it’s driven on the back of an economy which is substantially and structurally changing, so there will be market factors and ups and downs along the way but the journey and the direction are very clear at this point of time.

This conviction is grounded in the fact and we put it in our Samavat 2071 note around Diwali that the two big things that used to be wrong with India were excessive dependence on a commodity which has shot through the roof, which is oil. About 75-80 percent at last count of oil requirements are imported into the country and not to mention gas and the fact that for a variety of reasons we never had a government or a governance structure or a set of policies which were encouraging of business. On both counts these are the two big monstrous things that were wrong with India and both these monsters now seem to be gradually getting under control.

So, there is no reason you shouldn’t be bullish on India and I do not care that Quantitative Easing (QE) will stop in the US or there will be a structural break down or panic in Europe and so on. India deserves capital now, its not just that a rising tide is coming and will lift all boats all the way from India to Peru to Mongolia to Brazil to Venezuela to whatever. We deserve capital, we are a huge country and we are getting our act together and there is no way that the serious investors anywhere in the world are going to lose track of this.

Sonia: The Diwali picks that you have put out for us in a note so let’s start with two of the themes that will benefit from the domestic recovery – financials and industrials. What are your top picks there?

A: It is interesting that even in these 26 odd picks there are seven-eight odd stocks which we do not even cover and this is part of the big picture on change happening in the country which will drive stocks and businesses which are out of the radar into your buy zone because there is meaningful transformation happening in these businesses and the environments in which they work.

Specifically on financials for example we decided to put SKS Microfinance in the list. We do not even have formal coverage on it but a cursory look tells you that they have gone through horrifying period through last two years in terms of the crises that blew up at Andhra Pradesh and now Telangana. Also its the ex-Andhra Pradesh book which is now in spic-and-span shape; they have got high spreads, high return ratios, they are adequately capitalised, they raised Rs 450 crore, they are still trading very costly, their book size is roughly their market cap which sounds silly but this book size offers multiple years of growth opportunities and you can grow at 30-40 percent on this book for the next three-four years.

The book has a few Rs 100 crore of tax shields because of the carry forward losses. It is fully capitalised, and there’s no messing up on the asset quality front. Its wholesale rates are coming down. Barring them and Bandhan, I do not see any large sensible player having a pan India reach and it’s a market which is about 20-30 percent penetrated. Look at Federal Bank which has consciously cut down on its corporate loan growth in the face of difficult times and a little bit of a lack of grip on their corporate book and they are coming back magnificently and they are fully capitalised, they are waiting to play out. Look at Development Credit Bank (DCB) which has managed to grow at 20-25 percent in bad times with a very tight fix on asset quality and increasing granularity on their balance sheet. Why would I go to look at the large and established names when there are so many talented people in the midcaps doing a good job and very well poised for this new India now.

Latha: I have never heard anyone mention Siyaram Silk Mills?

A: It is India’s largest player in branded textile in the mid income or mid spend segment and polyester viscose is a fabric of the masses. I am excited at what is happening at Grasim Industries but that is a different story on viscose – that is more on the commodity or fiber side of the game.

On Siyaram what impresses us is that they are approaching the end of a capex cycle, so now the business is going to generate free cash flows meaningfully. It is already working at 20 percent RoEs and it is trading at 7x FY16 except for the fact that they are in textiles which nobody seems to like. The fact is that over the next two or three years there is going to be an incredible personal income upgrade which is going to play out in common man India and I do not see their margins coming off, I do not see their growth under any challenge and I do not see cash flows getting back into capex.

Sonia: Speciality Restaurants – there is a subdued demand environment but you would still buy it?

A: Yet another example of a company which we do not cover formally and yet said this is worth buying. They have a fantastic fine dining franchise. The naysayers are arguing that they are neither the five star bracket nor are they the quick service restaurants (QSR) and that they have capital intensive model which prevents them from making very large free cash flows but margins are at four year low, they have been battling food inflation for three years – that is coming off, discretionary consumption in the metros in large cities is taking off, they have got cash on the books, they do not need to worry about blowing up as a company just because demand has been sluggish for a while and profits are down. I am not playing the numbers here. I am playing a theme, I am playing a story here and the management is probably the most gifted management in terms of fine dining, branding and the quality of food. I know so many people how have developed a taste for Chinese food just because of Mainland China. Yes, they are costly. I would be happy if they sell their stuff at half the price but it is not going to happen. The pricing power is going to come back as the queues elongate outside their restaurants.