This rally won't culminate into new bull market: Chokani

Samvat 2070 came in with a bang and the Sensex made a new high. Now the big question is - will this rally flatter to deceive?  Manish Chokhani, MD & CEO, Axis Capital says it won't and the Nifty won't revisit the levels of 5200. However, he not concerned with Nifty's moves, which is good 50 points away from life high, as long as one has 20 good stocks in the portfolio. "The market keeps rotating and keeps creating new leadership as we go along because with so much liquidity, it is tough to push this market down."

According to him the current rally won’t culminate into a full blown new bull market and a big economic expansion. So, the best way to approach the market is bottoms up and by being stock specific because the market is sure to make higher tops and higher bottoms, he adds. Meanwhile, anlysing the concept of 'own-the-good' business theory, Chokhani says, the best strategy is to buy companies or stocks that are at 10-15 times price to earnings (P/E) band and one won't go wrong. There are lots of pharma companies excluding Sun pharma. Similarly there are lot of IT companies excluding TCS where one can look at. However, he is not in favour of FMCG space where it is hard to find companies below 30 P/E multiples and it is tough to see wealth creation in them but in media he thinks the big turn has come for them. One can also look at smaller IT, smaller pharma, agro chemical and a lot of manufacturing has become competitive he adds. In the media space, bigger money will be made by broadcasters and the multiplex industry which has consolidated. If one has a proper asset allocation and a proper portfolio composition, I do not think one can go wrong in our country believes Chokhani. He is not in favour of buying gold versus equities." If you think our country is going nowhere buy gold, if you think our country is going somewhere, you would buy equities," he says. Also read: Success mantra for young India is create business: Chokhani Below is the verbatim transcript of his interview on CNBC-TV18 Q: You are doing a bend in the road yourself with your career but do you think it is a bend in the road for the market as well? Chokhani: If you are asking in the sense does this culminate in a full blown new bull market and a big economic expansion, I don’t think so as yet. It is like the last time we spoke as well, a kind of schizophrenic environment where we keep making higher tops, higher bottoms in the world economy because clearly they are trying to inflate their way out of trouble and just pour money down the system and so you get bouts of three months where it is a risk-on and then you get three months where you get it’s a risk-off and until the underlying issues are solved in the world, it is hard to imagine an economic expansion globally. Similarly, for India with big elections next year, I think for big serious investment decisions to be made by corporate India it is probably going to be deferred till probably next year. Having said that in markets we vote for rate of change and going from awful to bad, it is a rate of change and you get a big rally going. In context, the Indian market in dollar terms is down Diwali to Diwali, we are barely up 10 percent Diwali to Diwali. So provided you were in the right place, right sector, right stock, there was great money to be made. That is how one should approach the market - stay bottom up, stock specific, approach it like the 1990s' rather than the 2003 to 2007 sort of one size fits all bull market. Q: The trillion dollar question is global liquidity. What drives the next risk-off in global markets and everybody is focused on this taper January, March, April but I was reading a report from Chris Wood he says may be they are trapped and at some point that realisation may dawn. What to your mind could be the next turning point? Chokhani:  I used the word schizophrenic for thoughtful reasons - that is what the world has become and that is reflecting in our market composition as well when he says bipolar. When you use the word taper you are saying I am printing money at a certain rate and I am going to stop printing money at that certain rate but you are still printing excess money. And the reason they may stop printing money is because you think the multiplier has now started coming into effect on that money, which means the liquidity cannot stop - by definition it cannot stop. If they have put in USD 9 trillion in the last five years into the world economy to achieve barely 2 percent growth. So, if one thinks when interest rates goes up in Japan from 0.5 percent to 1.5 percent and they are levered three times their gross domestic product (GDP), it makes the GDP growth negative. When US interest rate went up from 1.5 percent to 3 percent in the last cycle, they all panicked because if you are levered 1:1, that takes 1.5 percent of your GDP growth away. So they are like these over levered companies which we don't like in India that is what the world is in. Therefore this liquidity gush isn’t going to stop. What they are trying to do is inflate their way out of trouble and that inflation means asset price inflation and it means inflation in our country as well. So you have a double whammy coming from both sides, on one hand you have foreign Institutional Investors (FIIs) pouring in money to try and lift up the asset values and the other side you have central banks trying to keep interest rates up to hold actual demand down. Therefore, you keep having this funny behavior every three months. So, I don't agree that we keep making a straight line between now and next May-June. We go up then in February we face the US debt ceiling again - In the last 40-50 years they have raised the ceiling 80 times so I assume they will do it 81’s time as well but the market will freak out for those two weeks. This liquidity gush usually ends very badly in the world - where asset prices will go down dramatically, in currencies there will be mayhem but can they keep the party going for a year, two-three or more and like the phrase people use that all these value investors are so determined to have the last laugh, they miss all the laughs along the way. So, I think there are a number of laughs along the way and I don't think anyone in the world including great central bankers has a clue how it is going to end. Q: What are the chances that we could be headed into another bubble globally? We saw one in 2007. Do you think this has the shape of building up into another bubble which has tactical and structural ramifications? Chokhani: This is the first time I know that the central banks themselves are interested in creating a bubble because if you lift asset prices, you will eventually get consumption going at least in the developed world. When I see composition of the market - the reality is FMCG from last Diwali to now hasn’t done anything extraordinary, it has been pharmaceuticals and IT which was led by the rupee depreciation and the consumer play moved to telecom, auto and media. The best performing media stock last year was PVR, when they started consolidating the multiplexes. So, the consumer play is surely going to play out in the world and especially in India because all said and done we will keep having unit value growth. I think the other end, if and when this world blows up is where you have hard assets which are hard to replicate. So, whether it is a port or whether it is a power plant or whether it’s a hotel, these things are not going to be easy to build again and they will have great amount of value. If you think back 25 years ago, you could built a cement plant for Rs 65 crore for a million tonne and it cost you Rs 750 crore today. So, even if you didn’t produce anything for 20 years you could still sell the plant provided it was operational. We are heading into that sort of environment where you will get pricing-power stalwarts which keep doing well. On the other end those which are in the awful category today, they have a slight rate of change  for example like you saw in telecom, slight rate of change in regulatory environment and competitive environment and the stocks have all been on a tire. I suspect something like that is due to happen on the other side. Q: The one thing which has worked over the last five years regardless of what has happened to the market is that if you picked a reasonably good business like for example if you had  bought Bajaj Auto a reasonably good company, you still made money – So, is that a prudent way to look at things. It is like saying, ‘I cannot predict the market, we will still have whipsaws but let me just own five good businesses I will be okay’. Chokhani: That is absolutely right and that is what has worked not just for last five year but for the last 100 years. Focus on the business and as long as you think this business will be around five-ten years later and it will be a lot more valuable, that is the way to go. And people lose site of the fact that if you are under two trillion dollar economy whatever we do we will reach USD 8 trillion in 10 years - which means are we going to sell six times the number of air conditioners, six times the number of automobiles, three times the number of two-wheelers and so on, these are inevitable things which will happen. That is why I keep coming back to the same theme that you have brands and consumer oriented companies which will be there 10 years later and they will surely have pricing power irrespective of what happens to the world, consumption won’t stop. And these hard to replicate assets, which people will not find it easy to put up incrementally with the environmental clearances, high cost of capital and so on which will be enormously valuable when you look out five-ten years later. So, if you keep a simple portfolio like that within a proper asset allocation mix you cannot go wrong. The grief I have as a country is our mutual fund industry in equity is USD 30 billion. We save USD 500-600 billion a year and our stock of mutual fund is USD 30 billion and we are so happy that foreigners have come and bought the market and they own 25 percent of India. It cannot be right for an average Indian to be risk averse. The young India should not just buy equities but create their own business. This country is going to be four times its size in actual GDP. There are large opportunities to go and build a business out there. So take little more risk, don't be like the Germans and the Japanese and keep money in banks and fixed deposits all the time, go out and venture and do something. _PAGEBREAK_ Q: Just one classification on this ‘own-the-good business’ theory. It is just that you can think of 10 good businesses but some of them are trading at valuation levels which are seemingly difficult valuations. So there how do you finesse it by saying, ’I want to come in now late may be to the part but I want to own it at a price which is not exorbitant where I lose money’? Chokhani: I will give you a very simplistic thinking, the highest interest rates in India are somewhere where we are now say 9 percent which means you are giving out Rs 100 to get 9 percent interest, therefore you are giving a 11 P/E multiple to something which isn’t going to grow. That creates the bottom in our market. At the same way the bottom of the interest rate cycle has never been less than 5 percent in India so you get a 20 P/E multiple on that reciprocal - that is your trading band. If you are buying anything over 20 and you are not a professional investor, you are looking for trouble. So as long as you are closer to the 11-15 type of band, where there are tonnes of good businesses and midcaps, I don't think you can go wrong. And with the rupee becoming so competitive now, there is a host of manufacturing businesses which will also do very well now. If you exclude for example Sun Pharma, lot of the other pharma companies is not that expensive. Similarly, if you take out the Tata Consultancy Service’s (TCS), there are lot of the other IT companies, which are not yet that expensive. However, in FMCG it is hard to find anything below a 30 P/E multiple so FMCG is difficult but one can look at  IT, pharma, manufacturing, banks – for example private banks, excluding HDFC Bank, the rest of them are at 10 P/E multiples. Even if you take the largest Non-bank financial companies (NBFCs), Bajaj Finance, Shriram Transport Finance, Sundaram Finance, all of those are 10 P/E multiples. So, how can you go wrong when you have a host of businesses like that - even agro chemicals he is right they are all under 10 P/E multiples. Q: Do you think we have a floor in place, I may take your point about volatility but do you think we have a floor? Chokhani: I think the last time we spoke as well, I don’t think you are going to go and revisit the horrors of some 5,200 Nifty or something like that. The market keeps rotating and keeps creating new leadership as we go along because with so much liquidity, it is tough to push this market down. Each time we find something is getting expensive, you might get for instance we got last week the short covering rally in public sector banks. No-one is saying that they have gone and put their portfolio over there but something happened and they moved 20 percent in a day. If they look ahead, a year from now the rate of change in interest rate should be heading down, that itself starts giving you a lift to P/E multiple. So it creates a proper floor for the market. So I am not worried that we are going to fall off a cliff unless the world blows up and we get a completely cataclysmic hung parliament something like that otherwise we should be okay. Q: How do you see the road between now and elections? If you were to predict what trajectory the market will take, what would you say? Chokhani: I am not doing a Crystal Ball. This world turns around every two weeks now. It will be volatile and there are events lined up but the events won’t spook the market, there will be something else which comes out which will scare us. Having said that the underlying trend like I said is higher top-higher bottom being formed and the good businesses keep going higher and higher and higher. When you look back five years, you could have bought the cream of Indian companies and they have all tripled and quadrupled in value. So, while the index may make a nominal new high, the reality is if IT, pharma, media, FMCG, auto, cement seven sectors are at 40,000 index levels. Within that the composition changes; while the top 50 companies are half of India’s marketcap the rest cannot be languishing forever and they are equally good businesses. Therefore I do not necessarily agree that midcap as a class has to catch-up. I do not think there is any FMCG midcap which is under 30 PE even today. So, it is not a midcap problem, it’s a sector problem. FMCG has done its bit, its tough to imagine wealth creation happening from there, you will compound at the way earnings will but the smaller IT, the smaller pharma, media still continues, telecom; the big turn has come for them, lot of manufacturing has become very competitive. Q: What do you means when you say manufacturing? Chokhani: Just as an example there is a small tyre company which will make USD 150 million of profit next year and they may be at USD 300 million marketcap. It is very competitive and it’s a large size business. So, there is enough stuff to do there and it’s a good competitive businesses. Also agrochemical space - there are seed companies and there are agrochemical companies which are poised very well, they may have a global footprint as well. There is enough to do there. _PAGEBREAK_ Q: You were also bullish on media. Which end do you think; a lot of people globally seem to like the distribution end, Dish TV. Goldman Sachs bought into DEN Networks. Do you like that end? Chokhani: The bigger money eventually would be made by the broadcasters because for today they are not even monetising anything. So, as incrementally money comes into them, they aren’t spending anything extra for that. Between the distribution and eventually it’s a direct to home win and they have to get average revenue per user (ARPU) growth going whereas on the cable side a lot of the play has to happen on continued carriage fees which doesn’t make sense in this kind of world especially with 4G coming. Also you have to invest and build out the plant allover again to get the last mile in because you are currently working without paying any government taxes and so on. So, it is going to be increasingly difficult for the cable players and increasingly better in my view for the DTH players. In media the multiplex industry consolidated. Last year when we put the deal together, PVR is up more than 100 percent last year, INOX has bought out Fame and others. When you go to see a movie now in India, there are these two change that you have to deal with and their bargaining power with the producers has gone up quite a lot as well. Q: Not terribly expensive either? Chokhani: They are not cheap but they are not terribly expensive. When you look at aggregate size of opportunity in the marketcap, then you start thinking that can I pay this multiple of sale. The difference I have with them on FMCG today is the rate of change from here won’t be 20 percent earnings growth given the kind of stress we are seeing in the economy. Otherwise, when you create a portfolio you will have consumers, you will have energy, you will have banking and financials, you will have to exporters which is pharma, IT and others and you will have some of these hard assets. That is a proper portfolio construct. The thing is that from time to time one sector overwhelms and grows, we do not turn the knobs and keep the portfolio balance right and then if something corrects then we rue. So, if we run a proper asset allocation and a proper portfolio composition, I do not think you can go wrong in our country. Q: What about you, this is a tricky one because people have gone wrong in banks? Chokhani: In a business which is highly levered I don't think there is a question in mind you want to buy the management and whether it is private or public the issue in public is you don't know who the management may be three years later. So it is not a private versus public, it is really a management call. Especially since you are so levered and you can literally blow up the bank one afternoon when you go out for lunch. Having said that by and large people end up therefore looking at private sector banks. Excluding HDFC Bank, and may be one-two others the rest are really cheap. Even the well run Non-bank financial companies (NBFCs), Bajaj and Mahindra and Sundaram and Shriram and so many others, great opportunity. Q: Would you own gold? Chokhani: It is down 20 percent last Diwali to this Diwali. I learnt a very good term on my trip abroad, they said invest as a SWAGER, which means silver, wine, art, gold, equities and real estate - that is a diversified portfolio. Reality is gold in India is worth more than a trillion dollars, our market cap is slightly north of that and we don't own enough of that. So it is an asset allocation thing and if you think our country is going nowhere buy gold, if you think our country is going somewhere, you would buy equities. Q: By next Diwali when we speak are we 7500 Nifty or 5500 Nifty?
Chokhani: It makes higher tops higher bottoms and frankly no one out there buys the Nifty, we buy stocks and sectors. So I don't care what the Nifty does. As long as you have 20 good stocks in your portfolio and a proper asset allocation that is what matters. I want to add, like he said for the young India use the phrase ‘wake up early, work hard and strike oil’. Strike oil doesn’t mean get luckily but create a business.