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Why Raamdeo Agrawal believes in focusing on individual firms than index levels

The market veteran believes that there could be companies with good quality and reasonable valuations at this time as well and the focus should be on picking such firms.

September 04, 2017 / 05:06 PM IST

Notwithstanding the stellar market run in the past one year, voices on the Street raised concerns on its mismatch with the fundamentals. Raamdeo Agrawal, Co-Founder & Joint MD of Motilal Oswal Financial Services believes it best to have a company-specific approach in current scenario.

“The noise about worries is clearly deafening. There is so much concern everywhere. The important thing should be to focus on individual companies rather than at the index level,” Agrawal told CNBC-TV18 in an interview.

Agrawal said the broking house picks stocks based on parameters of quality, growth and longevity, among others provided they are also available at a reasonable price. “Investing is all about selection, allocation and monitoring of your stocks,” he added.

Speaking on auto sales trend, he said growth has to be assessed based on things such as growth year to date, month-on-month or quarter-on- quarter, among others. “Earnings on a broad-based level are not present and hence, the focus has to be on companies,” Agrawal told the channel.

The same strategy applies in case of stocks with expensive valuations. “Why should one buy only expensive stocks?” he asked, adding, there are ample companies which could be reasonably priced and one could look into that. It depends on how much the buyer has faith in the future of the company as well.

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Among IT and pharmaceutical names, he noted some companies, no doubt, are high on quality, but growth has been invisible or limited. However, he does see growth coming for pharma particularly newer markets and molecules.

PSU banks, Agrawal said, could look attractive as business cycle turns but it is still some time away. He is bullish on financials such as housing finance and highlighted the sector was high on PM Modi’s agenda.

In light of the recent actions around defaulters and their resolution cases, Agrawal is not looking to buy turnaround companies for now. But, if there are chances of good quality later on and good valuations, the broking firm could look at it as well.

Below is the verbatim transcript of the interview.

Anuj: Your sense of the market climbing wall of worries. A lot of people think that the market is not in sync with valuations and is at the risk of a big correction. Would you be in that camp or do you think the bull market will keep climbing the wall of worries?

A: The noise about this worry is clearly, it is just deafening in the sense that there is so much of concern. Anywhere you go, most of the time we are spending in trying to figure out where the market is headed. There is very little discussion on what are companies doing and unfortunately, in media we cannot discuss so many individual company stuff. But basically, I am focusing still on the companies, 99 percent time we focus on companies and there are enough companies which are doing well. Of course, economy is a little slow, so the focus on the companies are more than focus on the markets.

Latha: Exactly the point. Very good auto sales numbers. Some consumption stocks and some non-banking finance company (NBFC) stocks are doing brilliantly well. But do you have enough faith in these green shoots to believe that you can expand the universe, that earnings itself for the market will grow?

A: Yes, that is how slowly things start in the sense that if your auto numbers are strong and we are hearing that current month, September, it is going to be even stronger. Last month was a blast, this month again it is stronger. Of course, the festivals are pre-poned this year, but in general, the trading conditions, the business conditions in automotive is very good.

I spoke the few cement companies for the housing and what is happening there. They are saying that prices are a little down, but volumes are very good. They are almost supporting at 80-90 percent. So, things are selectively picking up. Whether it will become a widespread pickup because now, bulk of the disruptions after demonetisation and goods and services tax (GST), it is all over and monsoon is also kind of behind. So I hope in the next 8-10 months it will pick up.

Anuj: There is just one niggling worry. A lot of people think that maybe the auto sales that we are seeing right now could be the post-GST restocking and one off because a lot of people wanted to pre-pone their buying knowing that prices could again go up. Is that risk intact? Should we not be cheering too much of these auto sales?

A: Yes, clearly as analysts, you have to moderate, you have to look at year-to-date, you have to look at month-on-month (M-o-M), you have to look at quarter and what are the plans, how things are shaping up, because quite a few auto companies are running short of production capacity. So, you have to make adjustments for that. When the new capacity comes in, you suddenly see growth coming in. so, you cannot ignore anything.

What I am saying is trading conditions are normal and 10-15 percent growth, double digit growths have come back. We have to focus on companies. This is not a boom time at least on the company earnings side. It is not across. Very broad-based, earnings are still not there. That is very clear. But investing is all about finding your stock, buy at your comfortable price what you understand and wait for your days to come.

Nimesh: I know you look at individual stocks rather than the markets and that is the core reason why your fund has given 30 percent compounded annual growth rate (CAGR) over the last, since inception, your Focus 35. It is a very concentrated portfolio that you manage. From a finance and NBFC point of view, I know you are very bullish on that space, even at your conference it is largely dominated by the financial companies, so to speak on day on and day two.

A: Out of 18-20, there are 7-8, we have commodities, we have refineries, we have all sorts of guys.

Nimesh: Essentially from a finance point of view, what is your take? Are they in a sweet spot and will they continue to deliver because constantly, there are some feedbacks of AU Small Finance Bank trading at eight times, RBL Bank trading at six times, expensive valuations. How do you justify those kind of valuations for the financials?

A: I cannot justify. What is expensive is expensive. It is expensive for me as well as for anybody. If 10 guys are saying it is expensive, you have to presume it is expensive. The issue is that why you have to buy that company only which is expensive? You buy something which you understand and which you find is reasonable. There are enough companies, because you need 20 companies in your portfolio. So you will find 20 companies which are reasonably priced, which you understand. Understanding is a very crazy thing. You are understanding for the next two years. I may be bullish for 20 years.

So, the moment you longevate the growth for any company, you suddenly look at very different valuations. So look at globally what is happening, look at Amazon, they are trading at crazy multiples, why? Because their current visible earnings are very modest where market caps are very large. So obviously, they are counting on the very long-term picture of these companies. So, it all depends on the buyer or investor, how much faith he has in the future of that particular company.

Nimesh: Is that the strategy because if I look at your top holding in that fund, you have got the best of the sector stocks in your portfolio, whether it is oil and gas, you have Hindustan Petroleum Corporation (HPCL), Bharat Petroleum Corporation (BPCL), both, in the auto space you have the two best companies, Maruti and Eicher. Is that going to be the strategy for you in terms of picking stocks that identify the best stocks and just bet on it for a longer period of time?

A: We are looking at quality and growth and longevity. As I said, my framework is set, QGLP. So it has to, quality of business, quality of management, growth, longevity of growth and quality and then it should be available at a reasonable price. So value and price, both should be in sync.

Nimesh: Are you identifying any sector or any theme that you think which fits into your QGLP and is likely to deliver over a longer period of time?

A: Whatever we identify, it is all visible in the portfolio and we do not make everyday changes. You can literally, what is there today, if you just replicate the portfolio, without paying the fee, you can get the same performance for 3-4 months. But, there will be some changes in the allocation because investing is not about only selection of stocks. I would say it is one third. One third is selection, one third is allocation and one third is monitoring. We have very strong monitoring mechanisms because we have only 20 stocks. We cannot afford to go wrong.

You have to be absolutely on top of how much you have bought. You cannot afford to buy more, you cannot afford to buy very low and you cannot have too many duds in your portfolio because allocations are very chunky. So all three have a major role to play. So there will be changes in the allocation looking at the price movements.

Nimesh: I was looking at your portfolio. It is very easy to look at it and see what your stance is. It does not include any of the IT stocks or so to speak even the pharmaceutical names in the top-10. Both have underperformed, both have got their own challenges in terms of headwinds. Do you think now, they have reached a stage where valuations are attractive and from a longer point of view, you can look at betting on. It is one of the few companies in that space.

A: Companies are great. Quality wise, you cannot doubt. They are fantastic businesses, scaled up businesses, they have great future, they have terrific management set and that is why they have come so far. Clearly, growth in both these segments, have become invisible or it is not looking very high for people like us because our belief is that if you want to make 25 percent kind of return, you will need growth at least upwards of 20 percent because we can get some from the dividend and re-rating, but I do not see those kind of possibilities. Maybe for one year, one quarter here and there, but, on a 3-5 year basis, I do not see that kind of a possibility.

In pharmaceuticals it will come back much faster. My sense is that the once the beating down of the margins and earnings happen then some of the smaller companies or newer companies, they will find their way to attack new markets, new molecules and I think they will come back.

Nimesh: I know you have been very bullish on the private banks. You have HDFC Bank, IndusInd Bank, all sorts of private banks. A work on the PSU banks given that now the government is serious about solving some non-performing asset (NPA) issues. 12 companies are with Insolvency and Bankruptcy Code (IBC), more 40 are going to join them. Any opportunity do you see in the PSU bank stocks or do you think because of the losing market share, it is a no win game for them?

A: See, we are open to buy anything. Whenever the sky clears, when we think that yes, they have got their legs back, they are open for business, the bankers are raring to go to find new customers and write the checks. The stocks are available at throwaway prices, all the companies, all the banks. So, it is some time away for sure. We are closely looking at, we have Mr Jayakumar of Bank of Baroda, he is presenting on future of PSU banks. I will be a very keen listener. In investing, we are continuously looking for opportunity. I do not have any religion, any permanent nose.

Latha: Actually I want to ask you about NBFCs. There is another giant who has listed, Aditya Birla Capital and all their businesses are kind of underperforming. Their insurance is not as good as the other insurance companies. It is ranking in the top-five, but probably fifth. Do you think that is one NBFC perhaps which can come into its own, bug competition in the space?

A: This is a very large listing and now, Ajay Srinivasan is heading it on behalf of Birlas. He is a fantastic guy and he has a terrific reputation and I am quite sure he will do a wonderful job. So he is also coming and presenting, today or tomorrow he is presenting. So now, research work will start because it is a combination of mutual fund, insurance, everything is there in that, so we have to look at piece by piece and see how they are going to do. He is a very dynamic guy and I am quite sure he can deliver some wonderful results.

Nimesh: One thing which I want to ask you is the housing finance space. The reason why I am asking is because you yourself have a subsidiary which has done phenomenally well over the last couple of years. Do you think that is the reason why you have been bullish on some of the housing finance companies because I see PNB Housing Finance is one of the big stocks that you own in your Focus 35.

A: I was bullish on housing for so many years, almost a decade and so much so that we thought of building one housing finance company so that we can have a little more on our plate. But building any business is not that easy. The current conditions in demonetisation and GST and all, it has at least the affordable segment has some challenges in recovery and things like that. But, housing, even in the Prime Minister's agenda, it is very high on the agenda. So clearly business opportunity is massive and PNB Housing has done wonderfully well after listing. It is just about a year I think. So Sanjay is also presenting here.

Latha: What you and Nimesh discussed about the PSU banks, the corporate lenders and the fact that the NPA issue may be resulting in an end game, are you looking at any of the defaulters? Jhunjhunwala is backing Jaiprakash Associates. There will be buyers for the others, there could be turnaround cases, is that a set of stocks you are looking at?

A: Not in my scheme of things. Please let me just clarify. There are many ways of making money. We are aligned to QGLP and we are managing public money. So we are not looking at buying these kind of companies, but if we get something really quality and because of some external things, the valuations are depressed, we are open to buying turnaround cases also.
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