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Last Updated : Nov 25, 2017 04:19 PM IST | Source: CNBC-TV18

Here's Ayaz Motiwala's take on midcaps & why he likes L&T Infotech, Vinati Organics

We are essentially looking at more domestic opportunities which in some sense are the branded consumer generics pharmaceutical companies like FMCG product-like but nature being basically pharma, said Ayaz Motiwala, Senior Fund Manager, Nivalis Partners.

CNBC TV18 @moneycontrolcom

There are lot of fund managers who focus on midcaps and smallcaps, Ayaz Motiwala, Senior Fund Manager, Nivalis Partners is one of them. He manages Amala Emerging Asia Fund and is a specialist in investing in that space.

Below is the transcript of the interview.

Q: How has it been last few months with midcaps and smallcaps valuation going through the roof , how have you approached it as a fund manager?

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A: It has been a rough ride but there have been pockets of value and one has made the attempt of going beyond the conventional visible high quality stocks and made an attempt to try and ferret out some of these smaller midsize companies, which make sense more from a  medium-term perspective, looking out 18-24 months.

Q: Is it possible to find companies which are growing at 12-13 percent, as opposed to the 7-8 percent, that the industry has ground down to the larger companies. You own a stock like Larsen & Toubro Infotech, what tis the kind of thinking – are you just playing out bombed out valuations in the sector or do you think L &T Infotech presents a slightly higher growth paradigm than some of the larger IT names?

A: We indeed own this stock. The premise earlier has been that midcap IT per se, and rightly proven has really not stacked up against what the four or five largecaps have done in past. So, essentially it has always been this valuation game you talk about and we have seen that catch up trade playout between 2013 and 2015 for a player, which has made it like Mindtree.

Here, we are at a crossroad of opportunity and there is this company which has largely through organic fashion over the last 15-20 years, part of division of L&T and then moved on has become a billion dollar revenue run rate Company. It is on the cusp of change because the industry is changing and we digital transformation projects being a large constituent of the new RFPs, which are going on in the industry. So for this to actually make an investment case on a medium-term basis, it actually has to deliver plain old earnings growth, with profitability being maintained and intact.

So the investment case is back to saying that this company in a relative sense is more nimble and smarter.

It is going to get incremental market share, more than what exists in its base and thus grow in this 12-15 percent kind of range to be able to attract incremental investors beyond what we owned up. Because these investors are currently naysayers, who are not excited by the prospects of IT in general and in some sense are saying show me the growth.

So these companies, the way out is indeed going to be able to participate and capture incremental growth in the industry and thus make worthy sense.

Q: What is true of IT, is it also true in your book of pharmaceuticals and are you able to spot midcap ideas in pharmaceuticals given the mayhem which is going on – some bad news come in Divi's or Lupin etc and stocks tank 20-25 percent. Are you brave enough to wade through there and try and pick out one midcap pharma, which can deliver the goods?

A: In pharma, it has become newsy and very event driven and in some odd sense, the timing of the event is uncontrollable where you suddenly get these 483 etc and the stocks take a beating.

Pharma as a field is much-more broad based versus especially the past of the IT services business, where you have support services, packaging solution etc, so more vanilla and simple businesses.

You have the whole gamut of pharma companies in India from an extreme of addressing domestic branded generics business to doing contract research organisation (CRO) and then you have mix of all the international companies – the large pharma names such as Lupin, Aurobindo etc.

So, our attempt right now is to try and see what the downside is, which we are always focused on and basically, see if business is going to be affected by externalities such as an announcement on a process or how the research is conducted etc., Which is completely and uncontrollable factor both from our perspective but also from the company’s perspective for the way they have operated over the last 15-20 years.

To put a concrete wrapper around what we are talking, we are essentially looking at more domestic opportunities which in some sense are the branded consumer generics pharmaceutical companies like FMCG product-like but nature being basically pharma.

This was the nature of the multinational companies such as Glaxo, who operated in India in that capacity. So we are going back to that kind of aspect of the business that is Aventus etc., where we feel there could be relative opportunity to this para IV challengers, the generic growth opportunity, complex generics etc.

Our understanding of that is currently limited, we are working on that. However, what we focused on in the near-term is the domestic opportunity.

Q: Sticking with exporters, I know you track chemicals – what about names like Vinati Organics, which you had in your fund because the recent numbers in many of these chemical exporters like SRF, Vinati Organics have been a bit underwhelming, perhaps because the global speciality chemicals market is not firing yet . So, should one be patient out here or are you disappointed with the kind of progress you are seeing there?

A: We continue to own that stock and our excitement has been the long range delivery of this company where revenues and profits have compounded upwards of 25 percent and in the last two-three years there is one big aspect of their cost, and that is revenue profile, which is linked to crude oil prices, which came down from USD 100 per barrel to USD 40-50/bbl. So the nominal revenue growth has been affected by that aspect of the business for revenue growth to show up.

The other is the nature of the business, which is where they are on to these new chemical entities or new molecules and then they sort of seed the market -- there is project acceptance and then there is a ramp-up which happens.

They have the existing business which is delivering the kind of numbers you talked about and in the very near-term on expectation basis, the numbers could have been better as we would ask as an investor but one shouldn’t forget that the market gives the valuations, the company is delivering its economic performance and this is the same stock which was in the Rs 300-400 price range about two years ago, which has taken 2.5 times and thus the valuation is in the 25-30 times earnings, where the growth is pedestrian so to speak in the 10-12 percent range.

So, there is indeed a mismatch where market participants have got excited and taken it to a level, which now looking back is not justifying its delivery of earnings and we talked about the entire aspect of why these earnings have a step-up function. So, it needs time and we are going to give it time for what it has achieved over two decades of existence.

Q: As a fund manager, your job is not just to buy stocks but also to sell stocks when they have gone up a lot and maybe ahead of earnings delivery. In the last six months, have you taken profits out of some of these midcaps because of the kind of performance they have seen? Have you exited any stock completely?

A: One stock that we have owned and we have part exited is Siyaram Silk Mills, which we owned for the entire two and half years of this new fund. There was a point in time, even after demonetisation, the stock was close to a purchase price of Rs 950-1000, the stock has had a 5 for 1 stock split now.

So this stock from Rs 200 is now at Rs 500 and the entire magic has happened in the last 9-10 months. So if you were to talk about Vinati, this earnings aren’t going to come in higher than 15-20 percent, where the stock has bene rerated massively as you would appreciate and has gone nearly 3X of our purchase price.

We have taken money of the table on Siyaram, we have also sold part holding in CARE Ratings and an auto-part company called Minda Corp.

So, each of these names essentially, last six months of year to date basis have arguably gone up between 50-150 percent and I don’t think the valuations or the growth aspects or the story ahead justifies some of these names.

We are hopefully taking a prudent view and taking some money of the table out here as well.

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First Published on Nov 25, 2017 04:14 pm
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