In an interview to CNBC-TV18's Ekta Batra and Prashant Nair, Sachin Shah of Emkay Investment Managers shares his readings and outlook on the fundamental side of the market, specific stocks and sectors.Below is the verbatim transcript of Sachin Shah’s interview to Ekta Batra & Prashant Nair. Ekta: Asian Paints, up 6.5 odd percent and still trading at 40 times FY17 price to earnings ratio (P/E). Too expensive but there is double digit volume growth this quarter. How would you approach it?
A: Asian Paints continues to surprise in terms of the results. The number delivery has been very strong. The kind of volume growth as you mentioned in terms of good double digit and even the profit growth has been quite strong. However, keeping in background the context that the rural economy has not been doing so well, most of the other consumer businesses have actually delivered very muted volume growth as you would have seen, be it Dabur India, be it Hindustan Unilever or be it Bajaj Corp, all of them have had probably almost nil to maybe low single digit volume growth. So, in that context, Asian Paints has delivered very good results, probably trading at about 40-45 times March, 2017.
Therefore, the way to approach it is that if you are taking maybe a 10-15 year long horizon, these stocks will actually do a great compounding machine for you, but if somebody is thinking that over the next two-three years, can it deliver 25 percent compounded. I am not very sure, because with this kind of high multiple, it is always possible that maybe in a couple of years, you might not get great returns.
Prashant: Just an alternate theory, not backed by data, and maybe not true in the case of Asian Paints, but in the case of a lot of other companies where if you are a fund, you own a substantial chunk of the company, you are getting all this money every month, everyday and the month is closing. Could this be, in the case of a lot of companies, not maybe Asian Paints, a case of trying to boost your net asset value (NAV) as well by the end of the month? Buy a few thousand shares, there are lakh sellers anyway and you look good by the end of the month. Is it possible?
A: I am not sure about if somebody is trying to prop up their NAV and that is why you are seeing some of these things, but technically speaking, what you are saying is possible in the sense that if a lot of money from the retail investors is actually going into the midcap and smallcap funds and the fund manager actually, by constitution, has to deploy that money into the midcap and the smallcap stocks and not only has to deploy in those stocks, but has to deploy that money as soon as he gets the money, maybe on day one, day two, day three.
However, as we know that the liquidity anyway in the midcap and the smallcap stocks is quite low. And also, in this kind of buoyant markets, we always see a withdrawal of sellers. So, then even a little bit of buying in some of these stocks, you see the stock prices actually jumping up quite a bit.
Ekta: Tomorrow, we have a heavy day in terms of numbers. We have Larsen and Toubro as well as ICICI Bank releasing their Q1 numbers. What is your expectation from ICICI?
A: ICICI Bank, the last quarter's results were quite bad, so from that perspective there is a good possibility that this quarter results might be much better because after seeing the last quarter results, it probably looked like the worst is behind them in terms of the asset quality. Most of the other parameters, they have always been delivering very good numbers quarter after quarter for almost three years. The only issue has been the asset quality and that too on the corporate side. We have also seen a few developments on the corporate side with some of the large corporate hiving off some of their large assets and where ICICI is a big banker to some of these companies. So my sense is there could be some bit of positive elements and at least that is what I am hoping for because we own a fairly large amount of holdings in our portfolio as far as ICICI Bank is concerned.
Prashant: Any other ideas that you would want to put out that you are in on or you are contemplating researching or you like at this point?
A: We are in the midst of the earnings season and some of the results which have come out, of that one of the businesses where we had invested in the last quarter itself was L&T Finance Holdings and the management had clearly articulated in the analyst meet of the last quarter where they are trying to transform the entire business and they are trying to focus on very few businesses where the return on equities (RoE) for them is far higher. After seeing this first quarter FY17 results also looks like that company is on track because they have clearly shown that the focus businesses have grown upwards of 20 percent plus. The ROEs are now in the range of 13-14 percent for the focus businesses. Overall businesses might still be lower because some of the businesses that they are trying to exit, they will have to incur some losses. But, now they have nearly 75-80 percent of the book or maybe 85 percent of the book coming from the focus business, so maybe a couple of more quarters of pain and probably we will see a major turnaround in that business, the way the numbers have delivered in Q1.
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