See IT, pharma outperforming; optimistic on market: Damani

Damani is bullish on IT, pharma and media stocks for 2014.

“I know IT and pharma are the consensus trades right now; the trick is not to identify the right sectors early on, but to stay with them through the bull market. Fortunately or unfortunately, I am with the consensus trade,” Damani said.

He says he will not buy Just Dial at this price because it is too expensive. He is bullish on stocks like HUL and United Spirits in the FMCG space, and stocks like NBCC and Bharat Electronics in the PSU space.

In the realty sector, he is bullish on Godrej Properties from a long-term perspective.

Also read: US vs Europe: Which equities will win in 2014?

 Below is the verbatim transcript of his interview on CNBC-TV18

Q: October November December gave us the hope that perhaps we have definitely put a bottom and then there were some very brave calls for the first half of 2014 as well. Yesterday rattled everything, the way in which stocks fell in the second half rather rapidly. What is your overall outlook in 2014? What did you make of the kind of bottom fishing we saw in the last quarter of last year?

A: We have had very nice 2-3 months with great underlying strength. We tend to forget that corrections in bull markets do happen and I think that was a correction and that is the way we chalk it up right now. We remain optimistic because we see all the classic signs of a young bull market emerging in the sense that there is lot of scepticism, lot of people on the sidelines, any correction makes people get out for the exit doors as fast as possible, but market is not reacting to bad news and gains are being shown by investors despite the scepticism.

So the market is looking ahead, maybe ahead to the new general election, maybe ahead to an economic recovery, I am not sure but the breadth of the cash section has been as good as I have seen it over the last five years. There is a lot of money being made right now on Dalal Street so you will find that nobody on Dalal Street talks about policy paralysis anymore. People are busy trying to find stocks that would benefit from the upturn. So there is reason to be optimistic as the New Year unfolds.

Q: You wouldn’t be worried that in December we had a bunch of reasonably good news. We had the BJP win four out of four actually though of course another party went to form government in Delhi as well you had tapering which was fairly well received by the financial markets. Foreign Institutional Investors (FIIs) didn’t leg it out, the currency didn’t do a summersault but inspite of all that what are we month-on-month? With that bunch of good news we were at an index level just about 1 percent. So, is it that this is going to be more a stock pickers market; your optimism will reflect more stock wise and not in the index?

A: I always tend to look at the market in a stock pickers market whether the index is going or the cash is going up. You always do a bottom up type of stock investment. So, I am not necessarily comfortable making this big macro causes as to what is going to happen tomorrow is Goldman Sachs might do but I can only tell you from my experience that the under tone of the market is very healthy; as healthy as I have seen it over the last four to five years.

There is money to be made, there is a lot of skepticism in the market and the buyers are gaining. If you bought stocks in December,  you had sharp gains in number of stocks .This classic sign of the early stages of bull market where gains are made and then there is a left out feeling and the public starts coming into the market which will happen over the next three months or so.

Q: Although at the start of 2013 everyone was extremely bullish, but this market has been so bipolar for a major part of the year - IT, pharma and even today people will tell you just put your money in IT and pharma and you will be happy through the course of the year. Do you think that will change?

A: I heard the preamble to this debate with Udayan Mukherjee. He said that this is a consensus trade going on in IT and pharma and it is. A lot of people on the right sector get early stages of bull market. It is the people holding it through. Lot of stocks in a typical bull market will go up 10x, 20x, 50x, people do not realise that or the people have forgotten that. So the trick is not necessarily to identify the winning sectors early on, but it is to hold on these sectors through the bull market.

Fortunately-unfortunately I am of the consensus that IT and pharma are decent places to be in, there are other sectors too, but IT and pharma are good places to be in.

Q: Exhibit some foresight, some gutsy behaviour, no cyclicals at all at the start of 2014?

A: I am not a big one into cyclicals but I have always liked media as I have told you. Some of the stocks have started reporting good results. A sector that we bet on recently was logistics. We think this is a great contrarian call. Valuations are very undemanding and we see great opportunity ahead as gross domestic product (GDP) recovers, ecommerce recovers and all these things happen. So, those are my choices, a lot of people have other choices.

So, it is a good market to go out, look for stocks and find value. With inflation running at 9 percent what are you going to do in a fixed deposit; you just need to go out and buy equities and the returns for the last three months have made up for the pain for the last three years.

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Q: Private banks are seen as an exception in the cyclical space, what is your take?

A: I have actually avoided the banking sector, for some reason I am not comfortable investing specially in public sector banks and have very limited exposure to private sector banks.

Q: Let us look at the midcap space; that is a diverse space clearly outperformed especially in this October-December period. So, over there how would you go about looking for stocks? Would you even over there stick with IT, is it the midcap IT’s and the midcap pharma’s that you like?

A: The point that I would like to make when I look for midcap stocks - Why do we persist through this five year periods of absolute pain and torture that we go through the stock market? - Because there is a rainbow at the end of the road. What does the Indian market afford you? It affords you an opportunity – if you are a young man and India is a young country you can buy stakes in various companies and see them over the course of a bull market to actually create serious wealth.

For example, as you know someone bought Titan Industries. It is a jewellery company. It was an Rs 200 crore marketcap and today it is Rs 25,000 crore marketcap. It is an over 100X move in a basic business. You all have Titan watches but how many go out and buy the Titan stock?

Similarly, United Spirits; it was an Rs 200 crore market cap company. It is Rs 30,000 crore today all in the period of 10 years. You could have bought HDFC Bank. You could have bought some great companies in banking, in alcohol business, in jewellery business and had you held the stock to maturity, you would have made 50-100X your money. That is how you get seriously rich in the stock market.

We went through pain; in 2008 all the stocks went down 50-60 percent but they were great businesses. So, they came back over time. So, the question is if we are now on the cusp of a new bull market as some would believe we are and even if we are not there now, we will get there in the next year or so. Bull markets come in season. You want to identify the industries or the businesses that are important over the next five years. I am suggesting to you that I would look at media and most of my friends in the media are very skeptical when I say that but the valuations are throwing it away. These businesses cannot remain at these valuations for extended period of time. Ultimately, the market will realise the value of a media franchise or a logistics business. You look at the boom in ecommerce that is going on say for example in United States of America and you translate that back. Maybe three years from now we will have a boom in ecommerce, in online sales. Who is going to benefit from these type of plays? So, you want to hold these stocks through that period. If you go to look at it only on earrings basis every quarter, you are invariably going to be disappointed and sell the stocks. So, look at from a market cap perspective, look at stocks that are cheap…

Q: I hope you are not talking about Just Dial?

A: That is the flipside of something that is already so expensive. It is a great company, it is a very useful service but at Rs 10,000 crore, I would rather pass on that.

Q: Is Jubilant Foodworks a spent force now?

A: I would not say spent force, because these companies have delivered in the market and these companies have delivered quarter-on-quarter better results, but would I be comfortable buying them at Rs 10,000 crore plus market cap, the answer is no. However, would I be comfortable buying an e-commerce play or buying an online play at same market cap, I would be, because the future is there - lot of young generation moves online completely. They buy bottled water in America online. This has a long way to go in India too.

Q: Is there any unlisted plays that you have taken interest in the e-commerce space, because there are not too many in the listed space?

A: Not really, not at this point. A lot of them in the unlisted space in terms of the Flipkart’s and the Snapdeal’s of the world, their valuations do not make any sense to me. So there are better ways to find it in the listed space I would suggest to you.

Q: Lot of these MNCs are coming and hiking stakes in Indian subsidiaries - Do you think for the longer term this is the space that you could bet on, there is Maruti, there is Nestle, there is GSK Pharma ’s of the world. Is that the space that you were looking at?

A: I have had those stocks in my portfolio for years and years, almost unchanged in the portfolio. I think it is the ultimate sign of confidence that Hindustan Unilever (HUL) will come and pay 40 times forward or Nestle will come pay 50 times forward and increase the stake in the companies. It is hard to see if they are so bullish, why we would be so bearish on these companies.

One of the great disappointments in life is that the Indian public does not come and buy, but typically they will come and buy when you start making money and now that you started making money in cash rather than just promising that India is going to be the pot of the gold at the end of the rainbow, I think the public will come and buy. I think the pendulum is now finally tipping back. You are not making money in real estate, you are not making money in gold and people investing in equity are making money, so that would prompt them to come back.

Q: These MNC stocks you were talking about can you speak of some of them? Today we have source based news on Nestle. Is that something you can elaborate on?

A: I have been a long time holder in something like HUL and I was one of the few people who did not tender in the option, personally I have not tendered any shares. I have always believed the basic Warren Buffet theory that you do not a stock or a price - you buy a piece of a business and you want to hold that to a certain degree of maturity. I do not think HUL's best days are behind it. This is a company that is addressable to Indian market, has 50 years experience in Indian market and as the consumer middle class rapidly expands in India they are well positioned to do well.

Look at the lunacy in the market. At Rs 600 open offer price you could have tended any amount of HUL share and HUL would have taken the whole thing because it was undersubscribed and yet two months after the offer closes it is trading below Rs 600. It makes no sense to me. You could have sold it at Rs 600, why are you selling at Rs 550 today.

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Q: What about United Spirits (USL)? It has done so much for investors whoever got in at the right time. Is there more to go you think?

A: I think so. FMCG companies do not trade at 1 time sales, which is what USL is right now. I think the market in my opinion will give it a long rope, even if the results do not come in for the next 2-3 quarters, or even the next 1-1.5 years, because Diageo will cleanup the balance sheet, they are having some trouble getting the sales organisation in place. Barring any regulatory fiat that I am not aware or right now if something happens to the sale I think the market will give it extremely long rope. Typically this company traded at 4-5 times sales, so once you figured out what the sales are you will know what the valuations would be. So I would give it a long rope. I would not be in a hurry to sale it.

Q: I just want to pick up on one point you were making earlier about why retail investors have some sort of a distrust in this market. Perhaps one reason could be the regulatory issues that we have had. A lot of these cash rich PSUs are now being forced to get into crossholdings etc., use their cash for buying stake in other PSUs, so the Coal India, National Mineral Development Corporation (NMDC) some of these companies have been doing quite well. Do you think that this is a pocket that you would completely stay away from or have you bought in any of them?

A: No, I wouldn’t say that. I have bought a lot of PSUs, made a lot of money in my times in PSU shares. Again it is a bottom-up stock picking approach. Markets maybe in 1997-98 you could get a company like Bharat Electronics, one of the leading defense players in India at Rs 30 with Rs 2 dividend built into the company, the stock now after a huge corrections is still at Rs 1,000, so you made 30 times your money in period of 10 years. So you buy these PSU stocks that I have owned for number of quarters now is NBCC, it is a PSU.

Q: You are not saying Bharat Heavy Electricals (BHEL)?

A: As a stock picker I tend to pick the smaller stocks more easily than BHEL. So I am not completely familiar with BHEL at the current time.

Q: So NBCC and which else?

A: NBCC is a good example of something I have bought. It came out with IPO at Rs 100, it is about Rs 160 right now with a market cap of about Rs 1,800 crore, maybe Rs 1,000 crore cash sitting in there. There are number of exciting projects rolling out over the next 2-3 years where the cash flow and the visibility is pretty straightforward.

It seems like a good clean relatively uncomplicated business to buy and I happen to own it.

Q: Good, clean, uncomplicated, all those adjectives do not apply to the real estate. You never look at that space?

A: NBCC is a real estate company. They are into real estate. They are putting their own money in Mehrauli, Kidwai Nagar and developing properties themselves. You have to look at the balance sheet size and the size of the opportunities that the company is giving.

I have a large investment from a number of years in Godrej Properties. It has not done well to be honest with you. People make a huge mistake trying to look at the market in terms of the next quarter or next year. Look at what happened to a huge bank in India and how much they have gone over whether it is Kotak Mahindra Bank or HDFC Bank. If you had bought it at the right time you saw a great brand name getting pricing power and establishing itself.

The property market is unorganised, it will move to organised. When it moves to organised it is going to go with a great brand name. What are the great brand names? Who are the people you would trust? Who would have pricing power? The names like Godrej have come up. So over time they will do well. I cannot say it will do well over next 3 months, 6 months. But I am not investing for that. I am suggesting that we should all invest for next 3-5 years for a cycle when the real estate cycle picks up, when interest rates come down; these are well positioned businesses to take advantage of that.

Q: I just wanted to ask you about the more immediate in terms of the politics. There are a set of people who also buy for a year? How are you looking at first of all today’s press conference? The Prime Minister is going to speak?

A: Anytime the Prime Minister speaks and as you said he speaks so rarely that you have to listen and listen very carefully. What is he going to say? I hope what has happened at Delhi is a wake up call to our typical political parties only in the sense that, that is the level of discontent out here. So, let us see, let us not pre-empt it but let us see what Dr Singh delivers. Clearly, the nation wants change.

Q: Pharmaceuticals is a space full of land mines and gold mines. So, if you identify the right stock then you have hit the bull’s eye. Is there anything in that space that you own currently or you are advising?

A: I have owned for sometime now a company called Natco Pharma in Hyderabad which is going through a very good product cycle itself. The stock has almost had a dream run, so, I am not recommending it particularly at this point. It will probably do well but I have owned it for almost five to six years now.

I have owned Abbott India, again it is an MNC. I own a little bit of GlaxoSmithKline which is coming out with an open offer, I own some of Cipla. So, I have a broad spectrum of stocks but it is a tough place to find it because a lot of things can go wrong in the pharma space and you don’t know what happens at what stage of a trial. There is some caution needed as you approach the pharma space.

Q: You sounded a little positive about the market bottoming out - Would you say that about the economy itself or is it just that you are in areas where the businesses are run very well; on the economy itself what would your view be? So would you say it is bottoming out even though we had a fractured mandate?

A: I think it is bottoming out. The Indian electorate tends to move in waves. It was a two party system between Congress and BJP; I thought the BJP would end up perhaps with a wave. But now with Aam Aadmi Party (AAP) you don’t know how the calculus changes. It does change so you can’t really figure it out. Six months is almost an eternity in politics as you know. Who knows how these things are going to shape up by May or June.

Deepak Parekh once said that if India sleeps we would grow at 3.5 percent. So, we are pricing-in almost nothing. We have had a savage bear market for five years. Stocks have been decimated out there. So, even if the stock has gone up from say 30 to 60, what people don’t realise they have fell from 500 to 30. So, there is huge headroom yet up in a lot of these stocks, good quality companies.

The thing what people should try and avoid do is trying to find these stocks and flip them over, buy today sell tomorrow trading; I mean buy a business. This is the time. If you believe you are bullish on India over the next five years then buy a business that you want to remain in that business. That is what I would suggest.

Q: You are going to be anchoring a show on CNBC-TV18 where you are also trying to get a 360 degree perspective. Tell us a little about what you looked for and what we should look for in your chat?

A: It is a great privilege and an honour to be able to host a show on your public airwaves. I have been offered this opportunity to do a show RD 360. We interviewed two people. The first one is Akash Prakash - He is investors' investor - Citi Bank, Morgan Stanley, GIC, Temasek, ringside view of India in the last 20 years. He tells us how to invest in India, how to go through the pain and he is bullish at this point and he has built a brilliant portfolio. A number of great picks. Eicher Motors, which he talks about, media companies that he talks about that he has held for period of years and how he goes out constructing his portfolio and how he remains optimistic despite everything else and he has been calling the market actually fairly correctly. So, it is an insider’s view. So we kick off the series with Akash Prakash talking about his romance with Indian equities, the long boom he sees in India.

Then for a companion piece we go to a lady called Frances Dydasco who has not come on television before. It is her first appearance on television. She is a lady who knows Bollywood as well as the BSE Sensex. She is a fund manager. She ran the T. Rowe price capital fund which is one of the large emerging market funds for India. Now, she runs her own fund, but she is intimately familiar with India. Her knowledge of India will match those most analysts in India, but she came up with a negative view on India. She believed that she was bullish on India and she was bearish on China when everyone was bullish on China and now she has actually flipped positions. She says I am bullish on China. There are reforms going on out there. Their stock market is at multi-year lows, so she is bullish there, but bearish on India. When I asked her why,  she said, bad return on capital, bad corporate management, no economic decisions taking place and the index at loftier levels, so she said unless that changes I am not getting back to India.

So this is a good 360 degree perspective if you will - one from an old India hand who is bullish, and then other an old India hand who is bearish at this time.